<PAGE>
As filed with the Securities and Exchange Commission
Registration No. 333-____________________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------
THE L. L. KNICKERBOCKER CO., INC.
(Exact name of registrant as specified in its charter)
California 33-0230641
(State or jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
25800 Commercentre Drive
Lake Forest, California 92630
(714) 595-7900
(Address and telephone number of Registrant's principal executive offices and
principal place of business)
----------------------------------------------
Gerald A. Margolis, Esq.
9595 Wilshire Boulevard, Suite 900
Beverly Hills, California 90212
(310) 550-0555
(Name, address and telephone number of agent for service)
Copies of communications to:
William R. Black, Esq.
25800 Commercentre Drive
Lake Forest, California 92630
(714) 595-7900
Approximate date of proposed sale to the public ............ From time to
time following the effective date of this Registration Statement
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering [_] _____________
If this Form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [_] _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================
Title of each class Amount to be Proposed maximum Proposed maximum Amount of
of securities to be registered offering price per aggregate offering registration fee
registered Share(1) price(1)
<S> <C> <C> <C> <C>
Common Stock(2) 1,121,000(4) $8.00 $8,968,000 $2,718.33
Common Stock(3) 119,000(4) $8.00 $ 952,000 $ 288.67
Total registration
fee $3,007.00
======================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Shares issuable upon conversion of 6% Convertible Debentures.
(3) Shares issuable upon exercise of Stock Purchase Warrants.
(4) Pursuant to Rule 416 of the Securities Act, Selling Stockholders may also
offer and sell shares of Common Stock issued with respect to the
Convertible Debentures and the Stock Purchase Warrants as a result of stock
splits, stock dividends and anti-dilution provisions (including by reason
of changes in the conversion price of the Convertible Debentures in
accordance with the terms thereof).
<PAGE>
Prospectus
Subject to completion
Dated September ___, 1997
THE L. L. KNICKERBOCKER CO., INC.
1,240,000 Shares of Common Stock
This Prospectus relates to the offer and sale by the selling stockholders
named herein (the "Selling Stockholders"), from time to time, of up to 1,240,000
shares (the "Shares") of common stock, no par value ("Common Stock"), of The
L. L. Knickerbocker Co., Inc., a California corporation (the "Company"). The
Shares are issuable by the Company upon conversion by the Selling Stockholders
of 6% convertible debentures, due September 7, 2000, in the aggregate principal
amount of $5,000,000 (the "Convertible Debentures") and upon exercise by the
Selling Stockholders of warrants to acquire shares of Common Stock (the " Stock
Purchase Warrants"). This Prospectus also covers, pursuant to Rule 416 of the
Securities Act of 1933, as amended (the "Act"), the offer and sale by the
Selling Stockholders of any and all shares of Common Stock issued with respect
to the Convertible Debentures and the Stock Purchase Warrants as a result of
stock splits, stock dividends and anti-dilution provisions (including by reason
of changes in the conversion price of the Convertible Debentures in accordance
with the terms thereof). The shares of Common Stock covered under the
Registration Statement of which this Prospectus is a part (the "Offered Shares")
may be offered for sale from time to time by or for the account of such Selling
Stockholders in the open market, on the NASDAQ National Market System, in
privately negotiated transactions, in an underwritten offering, or in a
combination of such methods, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, or at negotiated prices. The
Offered Shares are intended to be sold through one or more broker-dealers or
directly to purchasers. Such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the Selling Stockholders
and/or the purchasers of the Offered Shares for whom such broker-dealers may act
as agent or to whom they may sell as principal, or both (which compensation as
to a particular broker-dealer may be in excess of customary commissions). The
Selling Stockholders and any broker-dealers acting in connection with the sale
of the Offered Shares hereunder may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Act, and any commissions received by them and
any profit realized by them on the resale of the Offered Shares as principals
may be deemed underwriting compensation under the Act. See "Selling
Stockholders" and "Plan of Distribution."
The Common Stock of the Company is currently trading on the NASDAQ National
Market System under the symbol "KNIC." On September 29, 1997, the closing price
per share of the Company's Common Stock was $7.38.
The Company will not receive any of the proceeds from the sale of the
Offered Shares pursuant to this Prospectus. However, the Company will receive
proceeds from the exercise of the Stock Purchase Warrants if the Stock Purchase
Warrants are exercised. The Company has agreed to bear the expenses with
respect to the offering and sale of the Offered Shares to the public, including
the costs associated with the registration of the Offered Shares under the Act
and preparing and printing this Prospectus. Normal underwriting commissions and
broker fees, however, as well as any applicable transfer taxes, are payable
individually by the Selling Stockholders.
-----------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK WHICH INVESTORS
SHOULD CAREFULLY CONSIDER. SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES ADMINISTRATOR NOR HAS THE COMMISSION
OR ANY STATE SECURITIES ADMINISTRATOR PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sales of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of such state.
* * * * * * * * * * * * * * * * * * * * * * * * * * *
The date of this Prospectus is ________________, 1997
<PAGE>
AVAILABLE INFORMATION
The Registrant is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by the Company with the Commission may be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, DC 20549, and at the following regional offices of the
Commission: 75 Park Place, New York, NY 10007; and the Northwest Atrium Center,
500 West Madison Street, Suite 1400, Chicago, IL 60621; and copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W. Judiciary Plaza, Washington, DC 20549 at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
informational statements electronically filed with the Commission. The address
of such site is http://www.sec.gov.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Act with respect to the Offered Shares. This
Prospectus is part of the Registration Statement and does not contain all the
information set forth in the Registration Statement, certain portions of which
have been omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement and the documents incorporated herein by reference and
attached hereto. Such additional information may be obtained from the
Commission's principal office in Washington, DC.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents have been filed by the Company with the Securities
and Exchange Commission, and are specifically incorporated by reference into
this Prospectus:
(a) the Company's annual report on Form 10-KSB, amended by Form 10-KSB/A,
for the fiscal year ended December 31, 1996,
(b) all other reports filed by the Company pursuant to Section 13(a) or
13(d) or 15(d) of the Exchange Act after the fiscal year ended
December 31, 1996, and
(c) the description of the Company's Common Stock contained in the
registration statement filed by the Company pursuant to Section 12 of
the Exchange Act.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the filing of a post-effective amendment which indicates
that all securities offered have been sold or which deregisters all securities
then remaining unsold shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes
of this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which is also incorporated or deemed to be
incorporated herein modifies or supersedes such statement. Any such statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any or all of the
documents referred to above which have been incorporated into this Prospectus by
reference (other than exhibits to such documents). Requests for such copies
should be directed to Ms. Peggy Vicioso, Executive Vice President, The L.L.
Knickerbocker Co.,Inc., 25800 Commercentre Drive, Lake Forest, CA 92630,
telephone (714) 595-7900.
<PAGE>
THE COMPANY
The L. L. Knickerbocker Co., Inc., a California corporation (the "Company")
was formed in 1985 under the name International Beauty Supply, Ltd. In 1993,
the articles of incorporation were amended, changing the name of the corporation
to the Company's current name, "The L. L. Knickerbocker Co., Inc." The Company
completed an initial public offering of common stock and warrants on January 25,
1995. On August 30, 1995, the Board of Directors approved a five for one split
of the Company's common stock and the increase of the number of authorized
shares of its common stock to 100,000,000.
The Company markets a variety of branded consumer items ("Brands"),
including collectibles, costume and fine jewelry, fashion accessories, patented
consumer products and consumables. The Company strives to deliver value to the
consumer through product design and quality, together with a fair price. The
goal is to create and build each Brand to the point where the Brand can be
marketed through a variety of distribution channels.
The manufacturing of non-jewelry items is out-sourced to a variety of
manufacturers that consistently deliver high-quality products. Jewelry
operations are vertically integrated, and most of the design, stone sourcing,
advanced stone cutting, and jewelry manufacturing is performed by in-house
personnel. The Brands are marketed domestically and internationally through
diverse channels of distribution, including but not limited to, the television
shopping industry, direct response print advertisements, direct mail, catalog,
retail outlets and the Internet. Celebrity spokespersons contribute to many of
the marketing efforts. These celebrities are chosen carefully on the basis of
name recognition, communications ability and a personal commitment to
participate in the programs.
The Company's current Brands include: Marie Osmond Fine Porcelain Collector
Dolls, Annette Funicello Collectible Bears, The Knickerbocker Collectible Toy
Company, Bob Mackie Legendary Beauties, The Georgetown Collection, The Magic
Attic Catalog, The Magic Attic Press, Barbara Mandrell Costume Jewelry, Nolan
Miller Costume Jewelry, Kenneth Jay Lane Costume Jewelry, Pilar Crespi Costume
Jewelry, Harlyn International Fine Jewelry, Mary McFadden Fashion Accessories,
Dennis Basso Fashion Accessories, Framm Accessories, ECT Ionizer, Fit & Firm(TM)
by Florence Griffith Joyner, Life Time of Skincare Facial Steamer, and Anushka
Body Contouring Spa System.
During 1996, the Company vertically integrated and expanded its Brands and
distribution channels through (i) the acquisition of Grant King International
Co., Ltd., a jewelry design and development company; Harlyn International
Company, Ltd., a fine jewelry company with international distribution; and
S.L.S. Trading Co., Ltd., a cutting and gemstone business, all located in
Bangkok Thailand; (ii) acquisition of Krasner Group, Inc., with costume jewelry
and accessories manufacturing and marketing operations based in New York;
(iii) merger of the operations of Grant King International Co., Ltd. and S.L.S.
Trading Co., Ltd. into a Thai corporation which was acquired and renamed The
L.L. Knickerbocker (Thai) Company, Ltd.; and (iv) acquisition of approximately
82% of the outstanding stock of Georgetown Collection, Inc., a collectible doll
company with operations in Portland, Maine, and its wholly owned subsidiary,
Magic Attic Press, Inc., a book publishing company with operations in Portland,
Maine.
The Company also invests in companies whose innovative ideas have potential
to make a significant contribution to the Company's own financial success. These
investments include a 38.3% equity interest in Pure Energy Corporation, which is
developing an alternative fuel, and a 25% equity interest in Ontro, Inc.
(formerly Self Heating Container Corporation of California) and Insta-Heat,
Inc., which develop self-heating containers for a variety of food products.
The Company's general 5 year growth plan consists of expanding the current
Brands by introducing new product categories into the existing Brands, expanding
distribution of the Brands internationally, exploring acquisition opportunities
that provide complementary Brands for current distribution channels and
additional distribution channels, and continuing to review new products and
develop new Brands. There can be no assurance, however, that any of these
products or investments will prove successful.
The mailing address, street address and telephone number for the principal
executive offices of the Company are 25800 Commercentre Drive, Lake Forest,
California 92630 (714) 595-7900.
1
<PAGE>
RISK FACTORS
An investment in the shares being offered by this Prospectus involves a
high degree of risk. In addition, this Prospectus contains forward-looking
statements within the meaning of the safe harbor provisions of Section 27A of
the Securities Act and Section 21E of the Exchange Act that involve risk and
uncertainties. The Company's actual results could differ materially from those
anticipated in such forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus. Accordingly, prospective investors should consider carefully the
following risk factors, in addition to the other information contained in this
Prospectus and the documents incorporated by reference in this Prospectus
concerning the Company and its business, before purchasing the shares offered
hereby.
Dependence on Significant Customers
During the fiscal year ended December 31, 1996 and the six months ended
June 30, 1997, two of the Company's customers, QVC Network and HSN, cable
shopping networks which run programs to market the Company's products, accounted
for approximately 43.0% of the Company's revenues. In addition, QVC Network
provides a direct or transferrable letter of credit with its purchase orders and
the Company is materially dependent on this production financing in order to
fill its orders. The Company may continue to be dependent on this or other
significant customers, the loss of which could adversely affect the Company's
business.
Dependence on Key Product Line
During the fiscal year ended December 31, 1996 and the six months ended
June 30, 1997, one key product line, the Marie Osmond Collectibles, accounted
for approximately 21.4% of the Company's sales. The Company has been marketing
this product line through QVC and the Walt Disney Company since 1991, and the
Company has a contract with Marie, Inc. to develop and promote the product line
for five years, with a five year renewal option. The contract for development
and promotion of the product is dependent on minimum royalties being paid to
Marie, Inc., however, and the continuing sales of the product line is dependent
on the continued acceptance of the product line by QVC. There can be no
assurance that the Company will be able to maintain the present volume of sales
of the Marie Osmond Collectibles product line, the loss of which could
adversely affect the Company's business.
Dependence on Key Personnel
The Company is dependent on its executive officers, the loss of any one of
whom would have an adverse effect on the Company. While the Company has
employment agreements with its President, Executive Vice President, Chief
Financial Officer and Vice President for a term of five years beginning July 1,
1996, with an option exercisable by the Company to extend the agreements for an
additional five years, unforeseen circumstances could cause these persons to no
longer be able to render their services to the Company. The Company maintains
key-man life insurance on the life of Mr. Louis L. Knickerbocker in the amount
of $1,000,000.
Dependence on New Products
The Company's future growth will be dependent on its ability to identify
and develop products which can be sold through the home shopping industry and
infomercials at acceptable profit margins, to acquire necessary rights to market
and distribute such products, and to enter into arrangements with third-party
manufacturers to produce the products. There can be no assurance that the
Company will be successful in identifying and developing quality products that
may be successfully marketed through the home shopping industry and
infomercials, in acquiring the rights to such products, or in obtaining adequate
supplies of such products from third-party manufacturers. A failure to identify
and develop new products for marketing through the home shopping industry or
infomercials would have a detrimental impact on the Company's future
performance.
Dependence on Independent Contractor Artists and Celebrities
The Company relies on independent contractor artists to provide design work
in the development of products and programs. Additionally, a significant factor
in the Company's ability to market its products and programs to its customers is
the Company's ability to secure contracts with celebrities who will become
involved in the development of products and act as spokespersons for those
products. The contracts with celebrities and others are further contingent upon
the Company meeting its minimum royalty obligations under those contracts. The
continued success of the Company is dependent on its ability to attract and
retain such independent contractor artists and celebrity spokespersons. There
can be no assurance that the Company will be able to recruit and retain such
personnel.
2
<PAGE>
Industry Trends
The Company's historical growth has been based in part on both the
evolution of consumer tastes and preferences toward the Company's products and
the emergence of the direct marketing home shopping and infomercial segments.
While the Company is planning expansion into other direct marketing segments
such as mail order and catalogs, the viability among consumers of the home
shopping and infomercial marketing segments will remain key to the Company's
future operations. A change in consumer tastes and preferences regarding the
Company's products and the home shopping and infomercial marketing segments may
have an adverse effect on the Company's results of operations. There can be no
assurance that consumer tastes and preferences will continue to favor the
Company's products and marketing segments.
Competition
The growth of the home shopping and infomercial industries has given rise
to fierce competition among product merchandisers for sales of products and
programs through the home shopping networks. The home shopping channels are
finite in number and have only 24 hours per day to air products. Air time
during the "prime time" viewing hours is especially limited. As a result, the
buyers for home shopping channels choose products which they feel are most
likely to provide them the highest response and return. The continued growth of
the Company is dependent on its ability to compete effectively with other
companies for the limited air time and purchasing decisions of the home shopping
channels. While the barriers to entry in the home shopping market are
significant due to the selectiveness of the buyers for the home shopping
channels, the competitive efforts of other large, well financed merchandisers
may have an adverse effect on the Company's results from operations.
Risks of Foreign Manufacturing
The Company maintains operations in Bangkok, Thailand and contracts for the
manufacture of its products in Thailand, Hong Kong, Taiwan, China and other
foreign countries. As such, the Company is subject to the following risks
inherent in foreign manufacturing: fluctuations in currency exchange rates;
economic and political instability; transportation delays; restrictive actions
by foreign governments; nationalizations; the laws and policies of the United
States affecting the importation of goods (including duties, quotas and taxes);
and trade and foreign tax laws. In particular, the Company's costs could be
affected adversely on a short term basis if the currency of any country in which
the Company conducts business appreciated significantly relative to the United
States dollar.
Substantially all of the Company's products are subject to United States
customs duties and regulations pertaining to the importation of goods. The
United States and the countries in which the Company's goods are manufactured
may, from time to time, impose new duties, tariffs, quotas or other charges or
restrictions, or adjust presently prevailing quotas, duties or tariff levels,
which could adversely the Company's financial condition or results from
operations or its ability to continue to import products at current or increased
levels. The Company cannot predict what regulatory changes may occur or the
type or amount of any financial impact on the Company which those changes may
have in the future.
Product Liability and Other Claims
The Company faces an inherent business risk of exposure to product
liability costs in the event that claims arise out of problems associated with
the use of the Company's products. The Company has not experienced any material
product liability costs or claims, however, the Company carries a policy of
product liability insurance against such contingencies. While the Company will
continue to attempt to take appropriate precautions, there can be no assurance
that it will avoid significant product liability exposure or that there will not
be a product liability claim in the future. The Company seeks to obligate
clients and suppliers of products to maintain product liability insurance
coverage for the benefit of the Company and to indemnify the Company against
such product liability. There can be no assurance, however, that such
arrangements can be made, or if made, will be effective to insulate the Company
from such claims. The Company may also be subject to other legal claims, such as
unfair competition and trademark infringement. Any legal claims, if brought,
could materially adversely affect the business or financial condition of the
Company. The Company maintains a policy of advertiser's liability insurance and
a policy of director's and officer's liability insurance. There can be no
assurance, however, that the liability insurance policies maintained by the
Company will be effective to insulate the Company from all covered claims.
Control by Existing Shareholders
The Common Stock currently owned beneficially by the President and a Vice
President of the Company represents approximately 38.46% of the outstanding
Common Stock. Accordingly, such persons will be able to control the Board of
Directors of the Company and to direct the Company's affairs. The Company's
Articles of Incorporation and by-laws do permit cumulative voting, however the
founding shareholders of the Company will continue to exercise control over the
Company's business and affairs.
3
<PAGE>
Common Stock Eligible for Future Sale
Approximately 36.8% of the Company's outstanding shares of Common Stock
are "restricted securities" and may in the future be sold in compliance with
Rule 144 adopted under the Act. Rule 144 generally provides that beneficial
owners of Common Stock who have held such Common Stock for two years may sell
within a three-month period a number of shares not exceeding 1% of the total
outstanding shares or the average trading volume of the shares during the four
calendar weeks preceding such sale. Future sales of restricted Common Stock
under Rule 144 could negatively impact the market price of the Common Stock.
Absence of Dividends
The Company has never paid any cash dividends on its Common Stock and does
not anticipate that it will pay dividends in the foreseeable future. Instead,
the Company intends to apply any earnings to the expansion and development of
its business.
Future Capital Requirements
In order to realize its objectives, the Company may have need for
additional capital in the future. If so, the Company intends to seek such
capital through public or private borrowing or equity financings. Any
additional equity financings may be dilutive to shareholders and debt financing,
if available, may involve restrictions on Common Stock dividends. Adequate
funds, whether through financial markets or other arrangements with corporate
partners or from other sources, may not be available when needed or on terms
acceptable to the Company. Insufficient funds may require the Company to delay,
scale back or eliminate some or all of its product development, market
development and corporate development programs with an adverse effect on the
Company's future performance.
Investments in Other Lines of Business
The Company has invested in several startup companies with innovative
products under development but who have no historical operational or financial
results. These investments include a 38.3% equity interest in Pure Energy
Corporation, which is developing a proprietary, patented alternative fuel, and a
25% equity interest in Ontro, Inc. (formerly Self Heating Container Corporation
of California) and Intsa-Heat, Inc., which develop self-heating containers for a
variety of food products. If successful, these equity investments could
contribute to the financial success of the Company. If unsuccessful, the
Company could lose the value of its investment in these companies, approximately
$2.5 million. There can be no assurance that these products investments will
prove successful.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Offered
Shares by the Selling Stockholders. The Company will receive proceeds from the
exercise of the Stock Purchase Warrants, and will use such proceeds for general
corporate purposes and working capital.
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders (the
"Selling Stockholders"), the number of shares of Common Stock beneficially owned
by such Selling Stockholders as of September 29, 1997 and the number of Offered
Shares which may be offered for sale pursuant to this Prospectus by each Selling
Stockholder. None of the Selling Stockholders has held any position, office or
other material relationship with the Company or any of its affiliates within the
last three years other than as a result of his or its ownership of shares of
Common Stock. The Offered Shares may be offered from time to time by the
Selling Stockholders named below. However, such Selling Stockholders are under
no obligation to sell all or any portion of such Offered Shares, nor are such
Selling Stockholders obligated to sell any such Offered Shares immediately under
this Prospectus. All information with respect to share ownership has been
furnished by the Selling Stockholders. Because the Selling Stockholders may
sell all or part of their Offered Shares, no estimates can be given as to the
number of shares of Common Stock that will be held by any Selling Stockholder
upon termination of any offering made hereby.
Pursuant to Rule 416 of the Act, Selling Stockholders may also offer and
sell shares of Common Stock issued with respect to the Convertible Debentures
and the Stock Purchase Warrants as a result of stock splits, stock dividends and
anti-dilution provisions (including by reason of changes in the conversion price
of the Convertible Debentures in accordance with the terms thereof).
4
<PAGE>
<TABLE>
<CAPTION>
Beneficial Maximum Beneficial
ownership of number of shares ownership and percentage
Common Stock at of Common Stock of Common Stock after sale
Name September 29, 1997 approved for sale Number Percent
---- ------------------ ----------------- ------ -------
<S> <C> <C> <C> <C>
Capital Ventures International 1,240,000(1) 1,240,000(1) 0(2) 0(2)
Total 1,240,000 1,240,000 0 0
- ---------------------------------------
</TABLE>
(1) Includes shares of Common Stock which may be acquired through conversion
of Convertible Debentures and shares of Common Stock which may be acquired
upon exercise of Stock Purchase Warrants. Pursuant to a Securities
Purchase Agreement dated September 8, 1997, between Capital Ventures
International and the Company, Capital Ventures International purchased the
Convertible Debentures and Stock Purchase Warrants for $5,000,000. The
Convertible Debentures accrue interest at the rate of 6% per annum, and
provide for the principal and accrued interest to be convertible into
shares of the Company's Common Stock at a fixed conversion price of $8.51
for six months following September 8, 1997, and thereafter at the lower of
the fixed conversion rate or a variable conversion rate based on a discount
to the average price of the Company's Common Stock for a trading period
preceding the conversion. The Stock Purchase Warrants provide for the
purchase of shares of the Company's Common Stock at an exercise price of
$9.99 per share. Except under certain circumstances, none of the Selling
Stockholders is entitled to convert the Convertible Debentures or exercise
the Stock Purchase Warrants to the extent that such exercise or conversion
would cause the Selling Stockholder to beneficially own more than 4.99% of
the total outstanding Common Stock of the Company. Therefore, the number of
shares set forth herein and which a Selling Stockholder may sell pursuant
to this Prospectus may exceed the number of shares such Selling Stockholder
may beneficially own as determined pursuant to Section 13(d) of the
Exchange Act. Moreover, pursuant to the regulations of the National
Association of Securities Dealers, in the absence of stockholder approval,
the aggregate number of shares of Common Stock issuable to the Selling
Stockholders at a discount from market prices upon the conversion of the
Convertible Debentures may not exceed 19.99% of the outstanding shares of
Common Stock on September 8, 1997. Unless stockholder approval is obtained
to issue shares of Common Stock in excess of the maximum amount set forth
above, none of the Selling Stockholders will be entitled to acquire more
than its proportionate share of such maximum amount. Any Convertible
Debentures which may not be converted and any Stock Purchase Warrants which
may not be exercised because of such limitation must be redeemed by the
Company.
(2) Assumes the sale of all Offered Shares covered by this Prospectus. There
is no assurance, however, that any of the Selling Stockholders will sell
any or all of the Offered Shares registered hereunder.
PLAN OF DISTRIBUTION
The Offered Shares may be sold or distributed from time to time by the
Selling Stockholders, or by pledgees, donees or transferees of, or successors in
interest to, the Selling Stockholders, directly to one or more purchasers
(including pledgees) or through brokers, dealers or underwriters who may act
solely as agents or may acquire Offered Shares as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices or at fixed prices, which may be changed. The
distribution of the Offered Shares may be effected in one or more of the
following methods: (i) ordinary brokers' transactions, which may include long or
short sales, (ii) transactions involving cross or block trades or otherwise on
the NASDAQ National Market System, (iii) purchases by brokers, dealers or
underwriters as principal and resale by such purchasers for their own accounts
pursuant to this Prospectus, (iv) "at the market" to or through market makers or
into an existing market for the Common Stock, (v) in other ways not involving
market makers or established trading markets, including direct sales to
purchasers or sales effected through agents, (vi) through transactions in
options, swaps or other derivatives (whether exchange listed or otherwise), or
(vii) any combination of the foregoing, or by any other legally available means.
In addition, the Selling Stockholders or their successors in interest may enter
into hedging transactions with broker-dealers who may engage in short sales of
Offered Shares in the course of hedging the positions they assume with the
Selling Stockholders. The Selling Stockholders or their successors in interest
may also enter into option or other transactions with broker-dealers that
require the delivery by such broker-dealers of the Offered Shares, which Offered
Shares may be resold thereafter pursuant to this Prospectus.
Brokers, dealers, underwriters or agents participating in the distribution
of the Offered Shares may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders and/or the purchasers
of Offered Shares for whom such broker-dealers may act as agent or to whom they
may sell as principal, or both (which compensation as to a particular broker-
dealer may be in excess of customary commissions). The Selling Stockholders and
any broker-dealers acting in connection with the sale of the Offered Shares
hereunder may be deemed to be "underwriters" within the meaning of Section 2(11)
of the Act, and any commissions received by them and any profit
5
<PAGE>
realized by them on the resale of Offered Shares as principals may be deemed
underwriting compensation under the Act. Neither the Company, nor any Selling
Stockholder can presently estimate the amount of such compensation. The Company
knows of no existing arrangements between any Selling Stockholder and any other
stockholder, broker, dealer, underwriter or agent relating to the sale or
distribution of the Offered Shares.
Except for the exercise price of the Stock Purchase Warrants, the Company
will not receive any proceeds from the sale of the Offered Shares pursuant to
this Prospectus. The Company has agreed to bear the expenses of the
registration of the shares, including legal and accounting fees, and such
expenses are estimated to be $50,000.
The Company has informed the Selling Stockholders that certain anti-
manipulative rules contained in Regulation M under the Exchange Act may apply to
their sales in the market and has furnished each Selling Stockholder with a copy
of such Rule and has informed them of the need for delivery of copies of this
Prospectus.
Selling Stockholders may also use Rule 144 under the Act to sell the shares
if they meet the criteria and conform to the requirements of such Rule.
EXPERTS
The financial statements incorporated in this Prospectus by reference from
the Company's Annual Report on Form 10-KSB, as amended, for the year ended
December 31, 1996 have been audited by Deloitte & Touche LLP, independent
auditors as stated in their report which is incorporated herein by reference,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters in connection with the legality of the securities
offered hereby will be passed upon for the Company by Mr. William R. Black. Mr.
Black is a member of the Board of Directors of the Company and owns beneficially
290,000 shares of the Company's Common Stock. None of the shares owned by Mr.
Black are included in the shares to be offered hereby.
MATERIAL CHANGES
There have been no material changes in the Company's affairs which have
occurred since the end of the latest fiscal year for which certified financial
statements were included in the latest annual report to securities holders and
which have not been described in the report on Form 10-KSB/A filed August 5,
1997 under the Exchange Act.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The By-Laws of the Company provide that the Company may indemnify any
director, officer, agent or employee as specified in Section 317 of the
California Corporations Code. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors, officers
or persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is therefore unenforceable.
6
<PAGE>
THE L. L. KNICKERBOCKER CO., INC.
1,240,000 Shares of Common Stock
No person is authorized to give any information or to make any
representations, other than those contained or incorporated by reference in this
Prospectus, in connection with the offering contemplated hereby, and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company or the Selling Stockholders. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the registered securities to which it relates. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the date hereof or that the information contained or incorporated
by reference herein is correct as of any time subsequent to its date.
7
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses payable in connection with the distribution of the securities
being registered (estimated except for the registration fee), all of which will
be borne by the Company, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Registration Fee $ 3,007.00
Legal Fees and Expenses $25,000.00
Accounting fees $10,000.00
Miscellaneous Expenses $11,993.00
----------
Total $50,000.00
==========
</TABLE>
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The By-Laws of the Company provide that the Company may indemnify any
Director, Officer, agent or employee as specified in Section 317 of the
California Corporations Code (the "Code"). Specifically, Article X 4. of the
Company's Amended By-Laws provides as follows:
The corporation may indemnify any Director, Officer, agent or employee as
to those liabilities and on those terms and conditions as are specified in
Sec. 317 of the Code. In any event, the corporation shall have the right to
purchase and maintain insurance on behalf of any such persons whether or
not the corporation would have the power to indemnify such person against
the liability insured against.
Section 317 of the California Corporations Code provides that a corporation
shall have power to indemnify any person who was or is a party or is threatened
to be made a party to any civil, criminal, administrative or investigative
proceeding (other than an action by or in the right of the corporation to
procure a judgment in its favor) by reason of the fact that the person is or was
a director, officer, employee or other agent of the corporation, against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with the proceeding if that person acted in
good faith and in a manner the person reasonably believed to be in the best
interests of the corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of the person was unlawful.
No indemnification shall be made under Section 317 in the event that: (i)
the person seeking indemnification shall have been adjudged to be liable to the
corporation and its shareholders, unless, and only to the extent that the court
before which the proceeding was pending shall determine, in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity to the extent that the court determines; (ii) the person seeks
indemnity for amounts paid in settling or otherwise disposing of a pending
action without court approval; or (iii) the person seeks indemnity for expenses
incurred in defending a pending action which is settled or otherwise disposed of
without court approval.
Section 317 provides that indemnification under that section shall be made
by the corporation only if authorized in the specific case, upon determination
that indemnification is proper because the person has met the applicable
standards of conduct set forth in subdivision 317(b) or 317(c), by (i) a
majority vote of a quorum of directors who are not parties to the proceeding;
(ii) if such a quorum is not obtainable, by independent legal counsel in a
written opinion; (iii) approval of the shareholders, with the shares owned by
the person to be indemnified not entitled to vote thereon; or (iv) the court in
which the proceeding is or was pending upon application made by the corporation
II-1
<PAGE>
or the person or the attorney or other person rendering services in connection
with the defense, whether or not the application by the person or the attorney
or other person rendering services in connection with the defense is opposed by
the corporation.
The indemnification provided for in Section 317 for acts, omissions or
transactions while acting in the capacity of or while serving as, a director or
officer of the corporation but not involving breach of duty to the corporation
and its shareholders shall not be deemed exclusive of any other rights to which
those seeking indemnification may be entitled under any bylaw, agreement, vote
of shareholders or disinterested directors, or otherwise, to the extent the
additional rights to indemnification are authorized in the articles of
incorporation. Additionally, Section 317 provides that the corporation shall
have the power to purchase and maintain insurance on behalf of any agent of the
corporation against any liability asserted against or incurred by the agent in
that capacity or arising out of the agent's status as such whether or not the
corporation would have the power to indemnify the agent against that liability
under Section 317.
The Registrant's Articles of Incorporation do not provide for additional
rights to indemnification of directors, officers, employees or other agents,
however the board of directors of the Registrant, by resolution has provided for
the purchase and maintenance of liability insurance to cover the directors of
the Registrant.
Reference is hereby made to Item 17 entitled "Undertakings" of this
Registration Statement for the Company's undertaking with respect to submitting
claims for indemnification to a court of appropriate jurisdiction to determine
the question of whether such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended.
Item 16. EXHIBITS*
<TABLE>
<S> <C>
3.1 Amended Articles of Incorporation of the Registrant**
3.2 Amended By-Laws of the Registrant**
4.1 Securities Purchase Agreement dated September 8, 1997***
4.2 Form of 6% Convertible Debenture***
4.3 Form of Stock Purchase Warrant***
4.4 Registration Rights Agreement***
5. Opinion of William R. Black ***
23.1 Consent of William R. Black (included in Exhibit 5).***
23.2 Consent of Deloitte & Touche, LLP***
</TABLE>
- -------------------
* Exhibits 2, 8, 12, 15, 25, 26, 27, 28 and 99 have been omitted because they
are not applicable.
** Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 33-85230-LA).
*** Filed herewith.
II-2
<PAGE>
Item 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
registration statement;
provided, however, that paragraphs (a)(i) and (ii) do not apply if the
-------- -------
information required to be included in a post-effective amendment by
those paragraphs is contained in the periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act
that are incorporated by reference in the registration statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(d) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934
that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the indemnification provisions described under Item 15,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is. therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Lake Forest, State of California on September 29,
1997.
THE L. L. KNICKERBOCKER CO., INC.
(Registrant)
By: /s/ Louis L. Knickerbocker
----------------------------------------------
Name: Louis L. Knickerbocker
Title: President, Chief Executive Officer and
Chairman
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Louis L. Knickerbocker President, Chief Executive 9/29/97
------------------------------- -----------
Louis L. Knickerbocker Officer and Chairman
/s/ Anthony P. Shutts Chief Financial Officer 9/29/97
------------------------------- -----------
Anthony P. Shutts and Director
/s/ Gerald Margolis Director 9/29/97
------------------------------- -----------
Gerald Margolis
/s/ Farrah Fawcett Director 9/29/97
------------------------------- -----------
Farrah Fawcett
/s/ William R. Black Director 9/29/97
------------------------------- -----------
William R. Black
/s/ F. Rene Alvarez, Jr. Director 9/29/97
------------------------------- -----------
F. Rene Alvarez, Jr.
II-4
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
3.1 Amended Articles of Incorporation of the Registrant**
3.2 Amended By-Laws of the Registrant**
4.1 Securities Purchase Agreement dated September 8, 1997***
4.2 Form of 6% Convertible Debenture***
4.3 Form of Stock Purchase Warrant***
4.4 Registration Rights Agreement***
5. Opinion of William R. Black***
23.1 Consent of William R. Black (included in Exhibit 5).***
23.2 Consent of Deloitte & Touche, LLP***
</TABLE>
- --------------------
* Exhibits 2, 8, 12, 15, 25, 26, 27, 28 and 99 have been omitted because they
are not applicable.
** Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 33-85230-LA).
*** Filed herewith.
II-5
<PAGE>
EXHIBIT 4.1
<PAGE>
SECURITIES PURCHASE AGREEMENT
-----------------------------
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of September 8,
1997, by and among THE L.L. KNICKERBOCKER CO., INC., a corporation organized
under the laws of the State of California (the "Company"), with headquarters
located at 25800 Commercenter Drive, Lake Forest, CA 92630, and the purchaser
(the "Purchaser") set forth on the execution page hereof (the "Execution Page").
WHEREAS:
A. The Company and the Purchaser are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by the provisions of Regulation D ("Regulation D"), as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "Securities Act");
B. The Purchaser desires to purchase, upon the terms and conditions
stated in this Agreement, (i) convertible debentures in the aggregate principal
amount of Five Million Dollars ($5,000,000) of the Company, in the form attached
hereto as Exhibit A (the "Debentures"), convertible into shares of the Company's
---------
common stock, no par value per share (the "Common Stock"), and (ii) warrants
(the "Warrants"), in the form attached hereto as Exhibit B, to acquire such
---------
number of shares of Common Stock as is equal to seven hundred fifty thousand
(750,000) divided by the Fixed Conversion Price set forth in the Debentures.
The shares of Common Stock issuable upon conversion of or otherwise pursuant to
the Debentures are referred to herein as the "Conversion Shares" and the shares
of Common Stock issuable upon exercise of or otherwise pursuant to the Warrants
are referred to herein as the "Warrant Shares." The Debentures, the Warrants,
the Conversion Shares and the Warrant Shares are collectively referred to herein
as the "Securities."
C. Contemporaneous with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement, in
the form attached hereto as Exhibit C (the "Registration Rights Agreement"),
---------
pursuant to which the Company has agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated thereunder,
and applicable state securities laws;
NOW, THEREFORE, the Company and the Purchaser hereby agree as follows:
1. PURCHASE AND SALE OF UNITS
--------------------------
a. Purchase of Units. On the Closing Date (as defined below), subject to
-----------------
the satisfaction (or waiver) of the conditions set forth in Section 6 and
Section 7 below, the Company shall issue and
<PAGE>
sell to the Purchaser, and the Purchaser agrees to purchase from the Company,
the Debentures and the Warrants for an aggregate purchase price (the "Purchase
Price") equal to Five Million Dollars ($5,000,000).
b. Form of Payment. On the Closing Date, the Purchaser shall pay the
---------------
aggregate Purchase Price hereunder by wire transfer to the Company, in
accordance with the Company's written wiring instructions, against delivery of
duly executed Debentures and Warrants and the Company shall deliver such
Debentures and Warrants against delivery of such aggregate Purchase Price.
c. Closing Date. Subject to the satisfaction (or waiver) of the
------------
conditions thereto set forth in Section 6 and Section 7 below, the date and time
of the issuance and sale of the Debentures and the Warrants pursuant to this
Agreement (the "Closing") shall be 12:00 noon Eastern Daylight Savings Time on
September 8, 1997, subject to a two (2) business day grace period at either
party's option, but in no event later than September 10, 1997, or such other
time as may be mutually agreed upon by the Company and the Purchaser (the
"Closing Date"). The Closing shall occur at the offices of Klehr, Harrison,
Harvey, Branzburg & Ellers, 1401 Walnut Street, Philadelphia, Pennsylvania
19102.
2. PURCHASER'S REPRESENTATIONS AND WARRANTIES
------------------------------------------
The Purchaser represents and warrants to the Company as follows:
a. Investment Purpose. The Purchaser is purchasing the Securities for
------------------
the Purchaser's own account for investment purposes and not with a present view
towards the public sale or distribution thereof, except pursuant to sales that
are exempt from the registration requirements of the Securities Act and/or sales
registered under the Securities Act. The Purchaser understands that the
Purchaser must bear the economic risk of this investment indefinitely, unless
the Securities are registered pursuant to the Securities Act and any applicable
state securities or blue sky laws or an exemption from such registration is
available, and that the Company has no present intention of registering any such
Securities other than as contemplated by the Registration Rights Agreement.
Notwithstanding anything in this Section 2(a) to the contrary, by making the
representations herein, the Purchaser does not agree to hold the Securities for
any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the Securities Act.
b. Accredited Investor Status. The Purchaser is an "Accredited Investor"
--------------------------
as that term is defined in Rule 501(a) of Regulation D.
c. Reliance on Exemptions. The Purchaser understands that the Securities
----------------------
are being offered and sold to the Purchaser in reliance upon specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying upon the truth and accuracy of, and the
Purchaser's compliance with, the representations, warranties,
-2-
<PAGE>
agreements, acknowledgments and understandings of the Purchaser set forth herein
in order to determine the availability of such exemptions and the eligibility of
the Purchaser to acquire the Securities.
d. Information. The Purchaser and its counsel have been furnished all
-----------
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Securities which have been
specifically requested by the Purchaser or its counsel. The Purchaser and its
counsel have been afforded the opportunity to ask questions of the Company and
have received what the Purchaser believes to be satisfactory answers to any such
inquiries. Neither such inquiries nor any other due diligence investigation
conducted by the Purchaser or its counsel or any of its representatives shall
modify, amend or affect the Purchaser's right to rely on the Company's
representations and warranties contained in Section 3 below. The Purchaser
understands that Purchaser's investment in the Securities involves a high degree
of risk.
e. Governmental Review. The Purchaser understands that no United States
-------------------
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.
f. Transfer or Resale. The Purchaser understands that (i) except as
------------------
provided in the Registration Rights Agreement, the Securities have not been and
are not being registered under the Securities Act or any state securities laws,
and may not be transferred unless (a) subsequently registered thereunder, or (b)
the Purchaser shall have delivered to the Company an opinion of counsel (which
opinion shall be in form, substance and scope customary for opinions of counsel
in comparable transactions) to the effect that the Securities to be sold or
transferred may be sold or transferred under an exemption from such
registration, or (c) sold under Rule 144 promulgated under the Securities Act
(or a successor rule) ("Rule 144"), or (d) sold or transferred to an affiliate
of the Purchaser; and (ii) neither the Company nor any other person is under any
obligation to register such Securities under the Securities Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder (in each case, other than pursuant to the Registration Rights
Agreement).
g. Legends. The Purchaser understands that the Debentures and the
-------
Warrants and, until such time as the Conversion Shares and Warrant Shares have
been registered under the Securities Act (including registration pursuant to
Rule 416 thereunder) as contemplated by the Registration Rights Agreement or
otherwise may be sold by the Purchaser under Rule 144, the certificates for the
Conversion Shares and Warrant Shares may bear a restrictive legend in
substantially the following form:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or the securities laws of any
state of the United States. The securities represented hereby may not be
offered or sold in the absence of an effective registration statement for
the securities under applicable securities
<PAGE>
laws unless offered, sold or transferred under an available exemption from
the registration requirements of those laws.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of any Security upon which it is
stamped, if, unless otherwise required by state securities laws, (a) the sale of
such Security is registered under the Securities Act (including registration
pursuant to Rule 416 thereunder), or (b) such holder provides the Company with
an opinion of counsel, in form, substance and scope customary for opinions of
counsel in comparable transactions, to the effect that a public sale or transfer
of such Security may be made without registration under the Securities Act or
(c) such holder provides the Company with reasonable assurances that such
Security can be sold under Rule 144. The Purchaser agrees to sell all
Securities, including those represented by a certificate(s) from which the
legend has been removed, pursuant to an effective registration statement or
under an exemption from the registration requirements of the Securities Act. In
the event the above legend is removed from any Security and thereafter the
effectiveness of a registration statement covering such Security is suspended or
the Company determines that a supplement or amendment thereto is required by
applicable securities laws, then upon reasonable advance notice to the Purchaser
the Company may require that the above legend be placed on any such Security and
the Purchaser shall cooperate in the prompt replacement of such legend. Such
legend shall be removed when such Security may be sold pursuant to an effective
registration statement or sold under Rule 144.
h. Authorization; Enforcement. This Agreement and the Registration
--------------------------
Rights Agreement have been duly and validly authorized, executed and delivered
on behalf of the Purchaser and are valid and binding agreements of the Purchaser
enforceable in accordance with their terms.
i. Residency. The Purchaser is a resident of the jurisdiction set forth
---------
under the Purchaser's name on the Execution Page hereto executed by the
Purchaser.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company represents and warrants to the Purchaser as follows:
a. Organization and Qualification. The Company and each of its
------------------------------
subsidiaries is a corporation duly organized and existing in good standing under
the laws of the jurisdiction in which it is incorporated, and has the requisite
corporate power to own its properties and to carry on its business as now being
conducted. The Company and each of its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary and where the failure so to qualify would have a Material Adverse
Effect. "Material Adverse Effect" means any material adverse effect on (i) the
Securities, (ii) the ability of the Company to perform its obligations hereunder
and under the Debentures, the Warrants or the Registration Rights Agreement or
(iii) the business, operations, properties, prospects or financial condition of
the Company and its subsidiaries, taken as a whole.
-4-
<PAGE>
b. Authorization; Enforcement. (i) The Company has the requisite
--------------------------
corporate power and authority to enter into and perform its obligations under
this Agreement, the Debentures, the Warrants and the Registration Rights
Agreement, to issue and sell the Debentures and Warrants in accordance with the
terms hereof, to issue the Conversion Shares upon conversion of the Debentures
in accordance with the terms thereof and to issue the Warrant Shares upon
exercise of the Warrants in accordance with the terms thereof; (ii) the
execution, delivery and performance of this Agreement, the Debentures, the
Warrants and the Registration Rights Agreement by the Company and the
consummation by it of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Debentures and the Warrants,
and the issuance and reservation for issuance of the Conversion Shares and the
Warrant Shares) have been duly authorized by the Company's Board of Directors
and no further consent or authorization of the Company, its Board or Directors
or its stockholders is required (under Rule 4460(i) promulgated by the National
Association of Securities Dealers ("NASD") or otherwise); (iii) this Agreement
has been duly executed and delivered by the Company; and (iv) this Agreement
constitutes, and, upon execution and delivery by the Company of the Registration
Rights Agreement, the Debentures and the Warrants, such agreements will
constitute, valid and binding obligations of the Company enforceable against the
Company in accordance with their terms.
c. Capitalization. The capitalization of the Company as of the date
--------------
hereof, including the authorized capital stock, the number of shares issued and
outstanding, the number of shares issuable and reserved for issuance pursuant to
the Company's stock option plans, the number of shares issuable and reserved for
issuance pursuant to securities (other than the Debentures and the Warrants)
exercisable for, or convertible into or exchangeable for any shares of capital
stock and the number of shares to be reserved for issuance upon conversion of
the Debentures and exercise of the Warrants is set forth on Schedule 3(c). All
-------------
of such outstanding shares of capital stock have been, or upon issuance will be,
validly issued, fully paid and nonassessable. No shares of capital stock of the
Company (including the Conversion Shares and the Warrant Shares) are subject to
preemptive rights or any other similar rights of the stockholders of the Company
or any liens or encumbrances. Except for the Securities and as disclosed in
Schedule 3(c), as of the date of this Agreement, (i) there are no outstanding
- -------------
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into or
exercisable or exchangeable for, any shares of capital stock of the Company or
any of its subsidiaries, or arrangements by which the Company or any of its
subsidiaries is or may become bound to issue additional shares of capital stock
of the Company or any of its subsidiaries, and (ii) there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of its or their securities under the Securities Act
(except the Registration Rights Agreement). Except as set forth on Schedule
--------
3(c), there are no securities or instruments containing antidilution or similar
- ----
provisions that will be triggered by the issuance of the Securities in
accordance with the terms of this Agreement, the Debentures or the Warrants.
The Company has furnished to the Purchaser true and correct copies of the
Company's Certificate of Incorporation as in effect on the date hereof
("Certificate of Incorporation"), the Company's By-laws as in effect on the date
hereof (the "By-laws"), and all other instruments and agreements governing
securities convertible into or exercisable or exchangeable for capital stock of
the Company.
-5-
<PAGE>
d. Issuance of Shares. The Conversion Shares and Warrant Shares are duly
------------------
authorized and reserved for issuance, and, upon conversion of the Debentures and
exercise of the Warrants in accordance with the terms thereof, will be validly
issued, fully paid and non-assessable, and free from all taxes, liens, claims
and encumbrances and will not be subject to preemptive rights or other similar
rights of stockholders of the Company and will not impose personal liability
upon the holder thereof.
e. No Conflicts. The execution, delivery and performance of this
------------
Agreement, the Registration Rights Agreement, the Debentures and the Warrants by
the Company, and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the issuance and
reservation for issuance, as applicable, of the Debentures, the Warrants, the
Conversion Shares and the Warrant Shares) will not (i) result in a violation of
the Certificate of Incorporation or By-laws or (ii) conflict with, or constitute
a default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its subsidiaries is a party, or result in a violation of
any law, rule, regulation, order, judgment or decree (including U.S. federal and
state securities laws and regulations) applicable to the Company or any of its
subsidiaries or by which any property or asset of the Company or any of its
subsidiaries is bound or affected (except, with respect to clause (ii), for such
conflicts, defaults, terminations, amendments, accelerations, cancellations and
violations as would not, individually or in the aggregate, have a Material
Adverse Effect). Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation, By-laws or other organizational
documents and neither the Company nor any of its subsidiaries is in default (and
no event has occurred which, with notice or lapse of time or both, would put the
Company or any of its subsidiaries in default) under, nor has there occurred any
event giving others (with notice or lapse of time or both) any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its subsidiaries is a
party, except for actual or possible violations, defaults or rights as would
not, individually or in the aggregate, have a Material Adverse Effect. The
businesses of the Company and its subsidiaries are not being conducted, and
shall not be conducted so long as the Purchaser owns any of the Securities, in
violation of any law, ordinance or regulation of any governmental entity, except
for actual or possible violations, if any, the sanctions for which either singly
or in the aggregate would not have a Material Adverse Effect. Except as
specifically contemplated by this Agreement and as required under the Securities
Act and any applicable state securities laws, the Company is not required to
obtain any consent, approval, authorization or order of, or make any filing or
registration with, any court or governmental agency or any regulatory or self
regulatory agency in order for it to execute, deliver or perform any of its
obligations under this Agreement, the Registration Rights Agreement, the
Debentures or the Warrants, in each case in accordance with the terms hereof or
thereof. The Company is not in violation of the listing requirements of the
Nasdaq National Market ("NASDAQ") and does not reasonably anticipate that the
Common Stock will be delisted by NASDAQ for the foreseeable future.
-6-
<PAGE>
f. SEC Documents, Financial Statements. Since January 26, 1995, the date
-----------------------------------
on which the Company consummated its initial public offering (the "IPO Date"),
the Company has timely filed all reports, schedules, forms, statements and other
documents required to be filed by it with the United States Securities and
Exchange Commission ("SEC") pursuant to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (all of the
foregoing filed prior to the date hereof and after the IPO Date, and all
exhibits included therein and financial statements and schedules thereto and
documents incorporated by reference therein, being hereinafter referred to
herein as the "SEC Documents"). The Company has delivered to the Purchaser true
and complete copies of the SEC Documents, except for the exhibits and schedules
thereto and the documents incorporated therein. As of their respective dates,
the SEC Documents complied in all material respects with the requirements of the
Exchange Act or the Securities Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of the statements made in any such SEC Documents is, or has
been, required to be updated or amended under applicable law. As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
applicable with respect thereto. Such financial statements have been prepared
in accordance with U.S. generally accepted accounting principles, consistently
applied, during the periods involved (except (i) as may be otherwise indicated
in such financial statements or the notes thereto, or (ii) in the case of
unaudited interim statements, to the extent they may not include footnotes or
may be condensed or summary statements) and fairly present in all material
respects the consolidated financial position of the Company and its consolidated
subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to immaterial year-end audit adjustments). Except as set
forth in the financial statements of the Company included in the SEC Documents
filed prior to the date hereof, the Company has no liabilities, contingent or
otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to the date of such financial statements and (ii)
obligations under contracts and commitments incurred in the ordinary course of
business and not required under generally accepted accounting principles to be
reflected in such financial statements, which liabilities and obligations
referred to in clauses (i) and (ii), individually or in the aggregate, are not
material to the financial condition or operating results of the Company.
g. Absence of Certain Changes. Since December 31, 1996, there has been
--------------------------
no material adverse change and no material adverse development in the business,
properties, operations, financial condition, results of operations or prospects
of the Company, except as disclosed in Schedule 3(g) or in the SEC Documents
-------------
filed prior to the date hereof.
h. Absence of Litigation. Except as disclosed in the SEC Documents filed
---------------------
prior to the date hereof, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency, self-
regulatory organization or body pending or, to the knowledge
-7-
<PAGE>
of the Company or any of its subsidiaries, threatened against or affecting the
Company, any of its subsidiaries, or any of their respective directors or
officers in their capacities as such which will have a Material Adverse Effect.
There are no facts which, if known by a potential claimant or governmental
authority, could give rise to a claim or proceeding which, if asserted or
conducted with results unfavorable to the Company or any of its subsidiaries,
could have a Material Adverse Effect.
i. Intellectual Property. Each of the Company and its subsidiaries owns
---------------------
or is licensed to use all patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, copyright applications,
licenses, permits, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures) and
other similar rights and proprietary knowledge (collectively, "Intangibles")
necessary for the conduct of its business as now being conducted and as
described in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996. To the best knowledge of the Company, neither the Company
nor any subsidiary of the Company infringes or is in conflict with any right of
any other person with respect to any Intangibles which, individually or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a Material Adverse Effect. Neither the Company nor any of its subsidiaries
has received written notice of any pending conflict with or infringement upon
such third party Intangibles. Neither the Company nor any of its subsidiaries
has entered into any consent, indemnification, forbearance to sue or settlement
agreements with respect to the validity of the Company's or its subsidiaries'
ownership or right to use its Intangibles and, to the best knowledge of the
Company, there is no reasonable basis for any such claim to be successful. The
Intangibles are valid and enforceable and no registration relating thereto has
lapsed, expired or been abandoned or canceled or is the subject of cancellation
or other adversarial proceedings, and all applications therefor are pending and
in good standing. The Company and its subsidiaries have complied, in all
material respects, with their respective contractual obligations relating to the
protection of the Intangibles used pursuant to licenses. To the best knowledge
of the Company, no person is infringing on or violating the Intangibles owned or
used by the Company of its subsidiaries.
j. Foreign Corrupt Practices. Neither the Company, nor any of its
-------------------------
subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any subsidiary has, in the course of his actions
for, or on behalf of, the Company, used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds; violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977;
or made any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee.
k. Disclosure. All information relating to or concerning the Company set
----------
forth in this Agreement or provided to the Purchaser pursuant to Section 2(d)
hereof and otherwise in connection with the transactions contemplated hereby is
true and correct in all material respects and the Company has not omitted to
state any material fact necessary in order to make the statements made herein or
therein, in light of the circumstances under which they were made, not
misleading. No
-8-
<PAGE>
event or circumstance has occurred or exists with respect to the Company or its
subsidiaries or their respective businesses, properties, prospects, operations
or financial conditions, which has not been publicly disclosed but, under
applicable law, rule or regulation, would be required to be disclosed by the
Company in a registration statement filed on the date hereof by the Company
under the Securities Act with respect to a primary issuance of the Company's
securities.
l. Acknowledgment Regarding the Purchaser's Purchase of the Securities.
-------------------------------------------------------------------
The Company acknowledges and agrees that the Purchaser is not acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with
respect to this Agreement or the transactions contemplated hereby, and the
relationship between the Company and the Purchaser is "arms length" and that any
statement made by the Purchaser or any of its representatives or agents in
connection with this Agreement and the transactions contemplated hereby is not
advice or a recommendation and is merely incidental to the Purchaser's purchase
of Securities and has not been relied upon by the Company, its officers or
directors in any way. The Company further represents to the Purchaser that the
Company's decision to enter into this Agreement has been based solely on an
independent evaluation by the Company and its representatives.
m. Form S-3 Eligibility. The Company is currently eligible to register
--------------------
the resale of its Common Stock on a registration statement on Form S-3 under the
Securities Act. There exist no facts or circumstances that would prohibit or
delay the preparation and filing of a registration statement on Form S-3 with
respect to the Registrable Securities (as defined in the Registration Rights
Agreement).
n. No General Solicitation. Neither the Company nor any distributor
-----------------------
participating on the Company's behalf in the transactions contemplated hereby
(if any) nor any person acting for the Company, or any such distributor, has
conducted any "general solicitation," as such term is defined in Regulation D,
with respect to any of the Securities being offered hereby.
o. No Integrated Offering. Neither the Company, nor any of its
----------------------
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offerers to
buy any security under circumstances that would require registration of the
Securities being offered hereby under the Securities Act or cause this offering
of Securities to be integrated with any prior offering of securities of the
Company for purposes of the Securities Act or any applicable stockholder
approval provisions.
p. No Brokers. The Company has taken no action which would give rise to
----------
any claim by any person for brokerage commissions, finder's fees or similar
payments by the Purchaser relating to this Agreement or the transactions
contemplated hereby, except for dealings with The Shemano Group, whose
commissions and fees will be paid by the Company.
q. Acknowledgment of Dilution. The number of Conversion Shares issuable
--------------------------
upon conversion of the Debentures may increase substantially in certain
circumstances, including the circumstance wherein the trading price of the
Common Stock declines. The Company's executive
-9-
<PAGE>
officers have studied and fully understand the nature of the Securities being
sold hereunder. The Company acknowledges that its obligation to issue Conversion
Shares upon conversion of the Debentures in accordance with the terms of the
Debentures is absolute and unconditional, regardless of the dilution that such
issuance may have on the ownership interests of other stockholders. Taking the
foregoing into account, the Company's Board of Directors has determined in its
good faith business judgment that the issuance of the Debentures and the
Warrants hereunder and the consummation of the other transactions contemplated
hereby are in the best interests of the Company and its stockholders.
r. Tax Status. Except as set forth in the SEC Documents filed prior to
----------
the date hereof or on Schedule 3(r), the Company and each of its subsidiaries
-------------
has made or filed all federal, state and local income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject
(unless and only to the extent that the Company and each of its subsidiaries has
set aside on its books provisions reasonably adequate for the payment of all
unpaid and unreported taxes) and has paid all taxes and other governmental
assessments and charges that are material in amount, shown or determined to be
due on such returns, reports and declarations, except those being contested in
good faith and has set aside on its books provisions reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply. There are no unpaid taxes in any
material amount claimed to be due by the taxing authority of any jurisdiction,
and the officers of the Company know of no basis for any such claim. The
Company has not executed a waiver with respect to any statute of limitations
relating to the assessment or collection of any federal, state or local tax.
None of the Company's tax returns has been or is being audited by any taxing
authority.
s. Title. The Company and its subsidiaries have good and marketable
-----
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the Company
and its subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in Schedule 3(s) or such as do not
-------------
materially affect the value of such property and do not materially interfere
with the use made and proposed to be made of such property by the Company and
its subsidiaries. Any real property and facilities held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
materially interfere with the use made and proposed to be made of such property
and buildings by the Company and its subsidiaries.
4. COVENANTS.
---------
a. Best Efforts. The parties shall use their best efforts timely to
------------
satisfy each of the conditions described in Section 6 and Section 7 of this
Agreement.
b. Form D; Blue Sky Laws. The Company agrees to file a Form D with
---------------------
respect to the Securities as required under Regulation D and to provide a copy
thereof to the Purchaser promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the
-10-
<PAGE>
Company shall reasonably determine is necessary to qualify the Securities for
sale to the Purchaser pursuant to this Agreement under applicable securities or
"blue sky" laws of the states of the United States or obtain exemption
therefrom, and shall provide evidence of any such action so taken to the
Purchaser on or prior to the Closing Date.
c. Reporting Status. So long as the Purchaser beneficially owns any of
----------------
the Securities, the Company shall timely file all reports required to be filed
with the SEC pursuant to the Exchange Act, and the Company shall not terminate
its status as an issuer required to file reports under the Exchange Act even if
the Exchange Act or the rules and regulations thereunder would permit such
termination.
d. Use of Proceeds. The Company shall use the proceeds from the sale of
---------------
the Debenture and the Warrant as set forth on Schedule 4(d).
-------------
e. Additional Equity Capital; Right of First Offer. The Company agrees
-----------------------------------------------
that during the period beginning on the date hereof and ending on the date which
is 240 days following the Closing Date (the "Lock-Up Period"), the Company will
not, without the prior written consent of the Purchaser, contract with any party
to obtain additional financing in which any equity or equity-linked securities
are issued (including any debt financing with an equity component) ("Future
Offerings"). In addition, the Company will not conduct any Future Offering
during the period beginning on the date hereof and ending 120 days following the
expiration of the Lock-Up Period, unless it shall have first delivered to the
Purchaser, at least ten (10) business days prior to the closing of such Future
Offering, written notice describing the proposed Future Offering, including the
terms and conditions thereof, and providing the Purchaser and its affiliates an
option during the ten (10) business day period following delivery of such notice
to purchase all of the securities being offered in the Future Offering on the
same terms as contemplated by such Future Offering (the limitations referred to
in this and the immediately preceding sentence are collectively referred to as
the "Capital Raising Limitations"). The Capital Raising Limitations shall not
apply to any transaction involving issuances of securities as consideration in a
merger, consolidation or acquisition of assets, or in connection with any
strategic partnership or joint venture (the primary purpose of which is not to
raise equity capital), or as consideration for the acquisition of a business,
product or license by the Company. The Capital Raising Limitations also shall
not apply to (i) the issuance of securities pursuant to an underwritten public
offering, (ii) the issuance of securities upon exercise or conversion of the
Company's options, warrants or other convertible securities outstanding as of
the date hereof or (iii) the grant of additional options or warrants, or the
issuance of additional securities, under any duly authorized Company stock
option or restricted stock plan for the benefit of the Company's employees or
directors.
f. Expenses. The Company shall pay to the Purchaser, or at its
--------
direction, at the Closing, reimbursement for the expenses reasonably incurred by
the Purchaser and its affiliates and advisors in connection with the
negotiation, preparation, execution and delivery of this Agreement and the other
agreements to be executed in connection herewith, including, without limitation,
such Purchaser's and its affiliates' and advisors' reasonable due diligence and
attorneys' fees and expenses
-11-
<PAGE>
(the "Expenses"). In addition, from time to time thereafter, upon the
Purchaser's written request, the Company shall pay to the Purchaser such
additional Expenses, if any, not covered by such payment, in each case to the
extent reasonably incurred by the Purchaser in connection with the negotiation,
preparation, execution and delivery of this Agreement and the other agreements
to be executed in connection herewith. Notwithstanding the foregoing, the
Company shall not be obligated to reimburse the Purchaser for more than $35,000
pursuant to this Section 4(f).
g. Financial Information. The Company agrees to send the following
---------------------
reports to the Purchaser until the Purchaser transfers, assigns or sells all of
its Securities: (i) within ten (10) days after the filing with the SEC, a copy
of its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, its proxy
statements and any Current Reports on Form 8-K; and (ii) within one (1) day
after release, copies of all press releases issued by the Company or any of its
subsidiaries.
h. Reservation of Shares. The Company shall at all times have authorized
---------------------
and reserved for the purpose of issuance a sufficient number of shares of Common
Stock to provide for the full conversion of the Debentures and issuance of the
Conversion Shares in connection therewith and the full exercise of the Warrants
and the issuance of the Warrant Shares in connection therewith and as otherwise
required by the Debentures and the Warrants. In that regard, a "sufficient
number of shares" with respect to the Debentures shall be deemed to be equal to
the number of shares of Common Stock required to be reserved for issuance by the
Company pursuant to Article V of the Debentures. The Company shall not reduce
the number of shares reserved for issuance upon conversion of the Debentures and
the full exercise of the Warrants (except as a result of any such conversion or
exercise) without the consent of the Purchaser.
i. Listing. The Company shall promptly secure the listing of the
-------
Conversion Shares and Warrant Shares upon each national securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all
Conversion Shares from time to time issuable upon conversion of the Debentures
and all Warrant Shares from time to time issuable upon exercise of the Warrants.
The Company will take all action necessary to continue the listing and trading
of its Common Stock on the NASDAQ, the New York Stock Exchange ("NYSE") or the
American Stock Exchange ("AMEX") and will comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the NASD and such exchanges, as applicable. In the event the Common Stock is
not eligible to be traded on any of the NASDAQ, NYSE or AMEX and the Common
Stock is not eligible for listing on any such exchange or system, the Company
shall use its best efforts to cause the Common Stock to be eligible for trading
on the over-the-counter bulletin board at the earliest practicable date and
remain eligible for trading while any Conversion Shares and Warrant Shares are
outstanding. The Company shall promptly provide to the holders of the
Debentures copies of any notices it receives regarding the continued eligibility
of the Common Stock for trading in the over-the-counter market or, if
applicable, any securities exchange (including the NASDAQ) on which securities
of the same class or series issued by the Company are then listed or quoted, if
any.
-12-
<PAGE>
j. Corporate Existence. So long as the Purchaser beneficially owns any
-------------------
Debentures or any Warrants, the Company shall maintain its corporate existence,
except in the event of a merger, consolidation or sale of all or substantially
all of the Company's assets, as long as the surviving or successor entity in
such transaction (i) assumes the Company's obligations hereunder and under the
Debentures and the Warrants and the agreements and instruments entered into in
connection herewith regardless of whether or not the Company would have had a
sufficient number of shares of Common Stock authorized and available for
issuance in order to effect the conversion of all Debentures and the exercise in
full of all Warrants outstanding as of the date of such transaction and (ii) is
a publicly traded corporation whose common stock is listed for trading on the
NASDAQ, NYSE or AMEX. Notwithstanding the foregoing, the Company covenants and
agrees that it will not engage in a merger, consolidation or sale of all or
substantially all of its assets at any time prior to the 181st day following the
Issue Date (as defined in the Debentures) without providing the Purchaser with
written notice of such transaction at least sixty (60) days prior to the
consummation of the transaction.
k. No Integrated Offerings. The Company shall not make any offers or
------------------------
sales of any security (other than the Securities) under circumstances that would
require registration of the Securities being offered or sold hereunder under the
Securities Act or cause this offering of Securities to be integrated with any
other offering of securities by the Company for purposes of any stockholder
approval provision applicable to the Company or its securities.
l. Redemptions and Dividends. So long as the Purchaser beneficially owns
-------------------------
any Debentures, the Company shall not, without first obtaining the written
approval of the Purchaser, redeem, or declare or pay any cash dividend or
distribution on, any shares of capital stock of the Company.
5. TRANSFER AGENT INSTRUCTIONS.
---------------------------
a. The Company shall instruct its transfer agent to issue certificates,
registered in the name of the Purchaser or its nominee, for the Conversion
Shares and the Warrant Shares in such amounts as specified from time to time by
such Purchaser to the Company upon conversion of the Debentures or exercise of
the Warrants, as applicable. To the extent and during the periods provided in
Section 2(f) and Section 2(g) of this Agreement, all such certificates shall
bear the restrictive legend specified in Section 2(g) of this Agreement.
b. The Company warrants that no instruction other than such instructions
referred to in this Section 5, and stop transfer instructions to give effect to
Section 2(f) hereof in the case of the transfer of the Conversion Shares and the
Warrant Shares prior to registration of the Conversion Shares and the Warrant
Shares under the Securities Act or without an exemption therefrom, will be given
by the Company to its transfer agent and that the Securities shall otherwise be
freely transferable on the books and records of the Company as and to the extent
provided in this Agreement and the Registration Rights Agreement. Nothing in
this Section shall affect in any way
-13-
<PAGE>
the Purchaser's obligations and agreement set forth in Section 2(g) hereof to
resell the Securities pursuant to an effective registration statement or under
an exemption from the registration requirements of applicable securities law.
c. If the Purchaser provides the Company with an opinion of counsel,
which opinion of counsel shall be in form, substance and scope customary for
opinions of counsel in comparable transactions, to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption from registration, or the Purchaser provides the Company with
reasonable assurances that such Securities may be sold under Rule 144, the
Company shall permit the transfer, and, in the case of the Conversion Shares and
Warrant Shares, promptly instruct its transfer agent to issue one or more
certificates in such name and in such denominations as specified by the
Purchaser.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
----------------------------------------------
The obligation of the Company hereunder to issue and sell the Debentures
and the Warrants to the Purchaser hereunder is subject to the satisfaction, at
or before the Closing Date, of each of the following conditions thereto,
provided that these conditions are for the Company's sole benefit and may be
waived by the Company at any time in its sole discretion.
a. The Purchaser shall have executed the signature page to this Agreement
and the Registration Rights Agreement, and delivered the same to the Company.
b. The Purchaser shall have delivered the Purchase Price in accordance
with Section 1(b) above.
c. The representations and warranties of the Purchaser shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date, which representations and warranties shall be true and correct as of such
date), and the Purchaser shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Purchaser at or
prior to the Closing Date.
d. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
-14-
<PAGE>
7. CONDITIONS TO THE PURCHASER'S OBLIGATION TO PURCHASE.
----------------------------------------------------
The obligation of the Purchaser hereunder to purchase the Debentures and
the Warrants hereunder is subject to the satisfaction, at or before the Closing
Date, of each of the following conditions, provided that these conditions are
for the Purchaser's sole benefit and may be waived by the Purchaser at any time
in the Purchaser's sole discretion:
a. The Company shall have executed the signature page to this Agreement
and the Registration Rights Agreement, and delivered the same to the Purchaser.
b. The Company shall have delivered to the Purchaser the duly executed
Debentures and Warrants (in such denominations as such Purchaser shall request)
in accordance with Section 1(b) above.
c. The Common Stock shall be authorized for quotation on NASDAQ and
trading in the Common Stock (or NASDAQ generally) shall not have been suspended
by the SEC or NASDAQ.
d. The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date, which representations and warranties shall be true and correct as of such
date) and the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or prior
to the Closing Date. The Purchaser shall have received a certificate, executed
by the Chief Executive Officer of the Company, dated as of the Closing Date, to
the foregoing effect and as to such other matters as may be reasonably requested
by the Purchaser.
e. No statute, rule, regulation, executive order, decree, ruling,
injunction, action or proceeding shall have been enacted, entered, promulgated
or endorsed by any court or governmental authority of competent jurisdiction or
any self-regulatory organization having authority over the matters contemplated
hereby which questions the validity of, or challenges or prohibits the
consummation of, any of the transactions contemplated by this Agreement.
f. The Purchaser shall have received an opinion of the Company's counsel,
dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to the Purchaser and in substantially the form of Exhibit D
---------
attached hereto.
g. The Company shall have delivered evidence reasonably satisfactory to
the Purchaser that the Company's transfer agent has agreed to act in accordance
with irrevocable instructions in the form attached hereto as Exhibit E.
---------
-15-
<PAGE>
h. No material adverse change or development in the business, operations,
properties, prospects, financial condition, or results of operations of the
Company shall have occurred since the date hereof.
8. GOVERNING LAW; MISCELLANEOUS.
----------------------------
a. Governing Law; Jurisdiction. This Agreement shall be governed by and
---------------------------
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed in the State of New York. The Company
irrevocably consents to the jurisdiction of the United States federal courts and
the state courts located in San Francisco, California in any suit or proceeding
based on or arising under this Agreement and irrevocably agrees that all claims
in respect of such suit or proceeding may be determined in such courts. The
Company irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding. The Company further agrees that service
of process upon the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceeding. Nothing herein shall affect the right of the Purchaser to serve
process in any other manner permitted by law. The Company agrees that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
b. Counterparts. This Agreement may be executed in two or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party. This Agreement, once executed by a party, may be
delivered to the other parties hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
In the event any signature is delivered by facsimile transmission, the party
using such means of delivery shall cause the manually executed Execution Page(s)
hereof to be physically delivered to the other party within five (5) days of the
execution hereof.
c. Headings. The headings of this Agreement are for convenience of
--------
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be invalid or
------------
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement and the instruments
----------------------------
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor the Purchaser make any
representation, warranty, covenant or undertaking with respect to such matters.
No provision of this Agreement may be waived other than by an instrument in
writing signed by the
-16-
<PAGE>
party to be charged with enforcement and no provision of this Agreement may be
amended other than by an instrument in writing signed by the Company and the
Purchaser.
f. Notices. Any notices required or permitted to be given under the
-------
terms of this Agreement shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier or confirmed telecopy, in each case addressed to a party. The addresses
for such communications shall be:
If to the Company:
The L.L. Knickerbocker Co., Inc.
25800 Commercenter Drive
Lake Forest, CA 92630
Telecopy: (714) 595-7913
Attention: Anthony P. Shutts, CFO
with a copy to:
William R. Black, Esq.
29 Summitcrest
Dove Canyon, CA 92679
Telecopy: (714) 888-7700
If to the Purchaser, to the address set forth under the Purchaser's name on
the signature page hereto executed by the Purchaser.
Each party shall provide notice to the other parties of any change in
address.
g. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties and their successors and assigns. Except as
provided herein, neither the Company nor the Purchaser shall assign this
Agreement or any rights or obligations hereunder. Notwithstanding the foregoing,
the Purchaser may assign its rights hereunder to any of its "affiliates," as
that term is defined under the Exchange Act, without the consent of the Company
or to any other person or entity with the consent of the Company. This
provision shall not limit the Purchaser's right to transfer the Securities
pursuant to the terms of this Agreement, the Debentures, the Warrants or the
Registration Rights Agreement or to assign the Purchaser's rights hereunder
and/or thereunder to any such transferee.
h. Third Party Beneficiaries. This Agreement is intended for the benefit
-------------------------
of the parties hereto and their respective permitted successors and assigns, and
is not for the benefit of, nor may any provision hereof be enforced by, any
other person.
-17-
<PAGE>
i. Survival. The representations and warranties of the Company and the
--------
agreements and covenants set forth in Sections 3, 4, 5 and 8 shall survive the
Closing hereunder notwithstanding any due diligence investigation conducted by
or on behalf of the Purchaser. Moreover, none of the representations and
warranties made by the Company herein shall act as a waiver of any rights or
remedies the Purchaser may have under applicable federal or state securities
laws. The Company agrees to indemnify and hold harmless the Purchaser and each
of the Purchaser's officers, directors, employees, partners, members, agents and
affiliates for loss or damage arising as a result of or related to any breach or
alleged breach by the Company of any of its representations or covenants set
forth herein, including advancement of expenses as they are incurred.
j. Publicity. The Company and the Purchaser shall have the right to
---------
approve before issuance any press releases, SEC, NASDAQ or NASD filings, or any
other public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of the Purchaser, to make any press release or SEC, NASDAQ or NASD
filings with respect to such transactions as is required by applicable law and
regulations (although the Purchaser shall be consulted by the Company in
connection with any such press release prior to its release and shall be
provided with a copy thereof).
k. Further Assurances. Each party shall do and perform, or cause to be
------------------
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Closing Date shall not have
-----------
occurred on or before September 10, 1997, unless the parties agree otherwise,
this Agreement shall terminate at the close of business on such date.
Notwithstanding any termination of this Agreement, any party not in breach of
this Agreement shall preserve all rights and remedies it may have against
another party hereto for a breach of this Agreement prior to or relating to the
termination hereof.
m. Joint Participation in Drafting. Each party to this Agreement has
-------------------------------
participated in the negotiation and drafting of this Agreement, the Debentures,
the Warrants and the Registration Rights Agreement. As such, the language used
herein and therein shall be deemed to be the language chosen by the parties
hereto to express their mutual intent, and no rule of strict construction will
be applied against any party to this Agreement.
n. Equitable Relief. The Company acknowledges that a breach by it of its
----------------
obligations hereunder will cause irreparable harm to the Purchaser by vitiating
the intent and purpose of the transactions contemplated hereby. Accordingly,
the Company acknowledges that the remedy at law for a breach of its obligations
hereunder (including, but not limited to, its obligations pursuant to Section 5
hereof) will be inadequate and agrees, in the event of a breach or threatened
breach by the Company of the provisions of this Agreement (including, but not
limited to, its obligations pursuant to Section 5 hereof), that the Purchaser
shall be entitled, in addition to all other available remedies,
-18-
<PAGE>
to an injunction restraining any breach and requiring immediate issuance and
transfer, without the necessity of showing economic loss and without any bond or
other security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-19-
<PAGE>
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused
this Agreement to be duly executed as of the date first above written.
THE L.L. KNICKERBOCKER CO., INC.
By:
------------------------------------------------
Name:
----------------------------------------------
Title:
---------------------------------------------
PURCHASER:
CAPITAL VENTURES INTERNATIONAL
By: Heights Capital Management, its authorized agent
By:
-----------------------------------------------
Name:
---------------------------------------------
Title:
--------------------------------------------
RESIDENCE: Cayman Islands
ADDRESS:
c/o Heights Capital Management
425 California, Suite 1100
San Francisco, CA 94104
Telecopy: (415) 403-6525
Attention: Andrew Frost
with copies of all notices to:
Klehr, Harrison, Harvey, Branzburg & Ellers
1401 Walnut Street
Philadelphia, PA 19102
Telecopy: (215) 568-6603
Attention: Stephen T. Burdumy, Esquire
<PAGE>
EXHIBIT 4.2
<PAGE>
EXHIBIT A
to
Securities
Purchase
Agreement
THIS CONVERTIBLE TERM DEBENTURE AND THE SECURITIES ISSUABLE UPON CONVERSION
HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS THE
SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS, OR ANY SUCH OFFER, SALE OR TRANSFER IS MADE UNDER AN AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
CONVERTIBLE TERM DEBENTURE
--------------------------
September 8, 1997 $250,000
FOR VALUE RECEIVED, THE L.L. KNICKERBOCKER CO., INC., a corporation
organized under the laws of the State of California (hereinafter called the
"Borrower" or the "Corporation") hereby promises to pay to the order of CAPITAL
VENTURES INTERNATIONAL or registered assigns (the "Holder") the sum of Two
Hundred Fifty Thousand Dollars ($250,000) on September 7, 2000 (the "Scheduled
Maturity Date"), and to pay interest on the unpaid principal balance hereof at
the rate of six percent (6%) per annum from the date hereof (the "Issue Date")
until the same becomes due and payable (which interest shall accrue on a daily
basis), whether at maturity or upon acceleration or otherwise. Any amount of
principal of or interest on this Debenture which is not paid when due shall bear
interest at the rate of fifteen percent (15%) per annum from the due date
thereof until the same is paid. Interest shall be calculated based on a 360 day
year and shall commence accruing on the Issue Date and, to the extent not
converted in accordance with the provisions hereof, shall be payable in arrears
at such time as the outstanding principal balance hereof with respect to which
such interest has accrued becomes due and payable hereunder. All payments of
principal and interest (to the extent not converted in accordance with the terms
hereof) shall be made in, and all references herein to monetary denominations
shall refer to, lawful money of the United States of America. All payments
shall be made at such address as the Holder shall hereafter give to the Borrower
by written notice made in accordance with the provisions of this Debenture.
<PAGE>
This Debenture is being issued by the Borrower along with similar
convertible term debentures (the "Other Debentures" and, together with this
Debenture, the "Debentures") pursuant to that certain Securities Purchase
Agreement, dated as of the date hereof, by and among the Borrower and the Holder
(the "Securities Purchase Agreement").
ARTICLE I
PREPAYMENT
A. Limited Right to Prepay. Upon the occurrence of an Event of Default
-----------------------
(as defined herein), this Debenture shall be prepaid by the Borrower in
accordance with the provisions of Article VIII hereof. Except as provided in
Paragraph B of this Article I, this Debenture may not be prepaid at the option
of Borrower without the prior written consent of the Holder.
B. Prepayment at Borrower's Option.
-------------------------------
(i) Upon Borrower's receipt of a Notice of Conversion (as defined
in Article III.B below) effected at a Conversion Price (as defined in Article
III.E below) determined by the Variable Conversion Price (as defined in Article
III.G below) then in effect, so long as no Event of Default shall have occurred
and the Borrower is not in material violation of any of its obligations under
the Securities Purchase Agreement or that certain Registration Rights Agreement,
dated as of the date hereof, by and among the Borrower, the Holder and the other
signatories thereto (the "Registration Rights Agreement"), then the Borrower
shall have the right to prepay ("Prepayment at Borrower's Election") the entire
portion of this Debenture which is the subject of the Notice of Conversion for
the Optional Prepayment Amount (as defined below) by delivering written notice
(the "Optional Prepayment Notice") to the Holder via facsimile within one (1)
business day after the Conversion Date (as defined in Article III.C below)
specified in the Notice of Conversion.
(ii) The "Optional Prepayment Amount" with respect to any portion of
this Debenture means an amount, in cash, equal to the product of (x) the Closing
Bid Price (as defined in Article III.A below) of the Common Stock on the
Conversion Date specified in the Notice of Conversion and (y) the quotient
arrived at by dividing (I) the Conversion Amount (as defined in Article III.B
below) by (II) the Conversion Price in effect on the Conversion Date specified
in the Notice of Conversion. The Optional Prepayment Amount shall be paid to the
Holder on or before the date (the "Optional Prepayment Date") which is three (3)
business days after the date on which the Borrower delivers the Optional
Prepayment Notice to the Holder; provided, however, that the Borrower shall not
be obligated to deliver any portion of the Optional Prepayment Amount until
either the Debenture being prepaid is delivered to the office of the Borrower or
its transfer agent, or the Holder notifies the Borrower or its transfer agent
that such Debenture has been lost, stolen or destroyed and delivers the
documentation required in accordance with Article X.H hereof.
2
<PAGE>
(iii) If the Borrower fails to deliver the Optional Prepayment Amount
to the Holder on or before the Optional Prepayment Date (an "Optional Prepayment
Default"), the Borrower shall pay to Holder an amount equal to:
(.24) x (D/365) x (Optional Prepayment Amount)
where:
"D" means the number of days from the Optional Prepayment Date through and
including the date on which the Borrower delivers the Optional Prepayment Amount
to the Holder.
The payments to which Holder shall be entitled pursuant to this
subparagraph (iii) are referred to herein as "Prepayment Default Payments."
Holder may elect to receive accrued Prepayment Default Payments in cash or to
convert all or any portion of such accrued Prepayment Default Payments, at any
time, into Common Stock at the lowest Conversion Price in effect during the
period beginning on the date of the Optional Prepayment Default through the
Conversion Date for such conversion. In the event Holder elects to receive any
Prepayment Default Payments in cash, it shall so notify the Corporation in
writing. Such payment shall be made in accordance with and be subject to the
provisions of Article X.J. In the event Holder elects to convert all or any
portion of the Prepayment Default Payments into Common Stock, Holder shall
indicate on a Notice of Conversion such portion of the Prepayment Default
Payments which Holder elects to so convert and such conversion shall otherwise
be effected in accordance with the provisions of Article IV.
(iv) In the event of an Optional Prepayment Default, the Holder
shall have the right, at any time prior to the Borrower's delivery of the
Optional Prepayment Amount to the Holder, to convert the Optional Prepayment
Amount into Common Stock in accordance with the procedures set forth in Article
IV hereof at the lowest Conversion Price in effect during the period beginning
on, and including, the Conversion Date specified in the Notice of Conversion
which triggered the Borrower's rights pursuant to Paragraph B(i) above through
and including the day such shares of Common Stock are delivered to the Holder.
(v) In the event of an Optional Prepayment Default hereunder or
under any Other Debenture, the Borrower shall forever forfeit its rights to
affect a Prepayment at Borrower's Election pursuant to this Article I.B.
ARTICLE II
[INTENTIONALLY OMITTED]
3
<PAGE>
ARTICLE III
CERTAIN DEFINITIONS
The following terms shall have the following meanings:
A. "Closing Bid Price" means, for any security as of any date, the
closing bid price of such security on the principal United States securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg Financial Markets (or a comparable reporting service of national
reputation selected by the Corporation and reasonably acceptable to holders of a
majority of the aggregate principal amount represented by the then outstanding
Debentures ("Majority Holders") if Bloomberg Financial Markets is not then
reporting closing bid prices of such security) (collectively, "Bloomberg"), or
if the foregoing does not apply, the last reported sale price of such security
in the over-the-counter market on the electronic bulletin board for such
security as reported by Bloomberg, or, if no sale price is reported for such
security by Bloomberg, the average of the bid prices of any market makers for
such security as reported in the "pink sheets" by the National Quotation Bureau,
Inc., in each case for such date or, if such date was not a trading date for
such security, on the next preceding date which was a trading date. If the
Closing Bid Price cannot be calculated for such security as of either of such
dates on any of the foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as reasonably determined by an
investment banking firm selected by the Corporation and reasonably acceptable to
the Majority Holders, with the costs of such appraisal to be borne by the
Corporation.
B. "Conversion Amount" means the portion of the principal amount of this
Debenture being converted plus any accrued and unpaid interest thereon through
the Conversion Date and any Conversion Default Payments and Prepayment Default
Payments payable with respect thereto, each as specified in the notice of
conversion in the form attached hereto (the "Notice of Conversion").
C. "Conversion Date" means, for any Optional Conversion (as defined
below), the date specified in the Notice of Conversion so long as the copy of
the Notice of Conversion is faxed (or delivered by other means resulting in
notice) to the Corporation at or before 11:59 p.m., New York City time, on the
Conversion Date indicated in the Notice of Conversion; provided, however, that
if the Notice of Conversion is not so faxed or otherwise delivered before such
time, then the Conversion Date shall be the date the holder faxes or otherwise
delivers the Notice of Conversion to the Corporation.
D. "Conversion Percentage" shall have the following meaning and shall be
subject to adjustment as provided herein:
<TABLE>
<CAPTION>
If the Conversion Date is: Then the Conversion Percentage is:
------------------------- ---------------------------------
<S> <C>
Prior to the 181st day 100%
following the Issue Date
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
On or after the 181st day following 97%
the Issue Date and Prior to the
271st day following the Issue Date
On or after the 271st day following 94.5%
the Issue Date and Prior to the
366th day following the Issue Date
On or after the 366th day following 92%
the Issue Date and Prior to the
731st day following the Issue Date
On or after the 731st day following 90%
the Issue Date
</TABLE>
E. "Conversion Price" means (i) prior to the earlier of (a) the 181st
day following the Issue Date, (b) the occurrence of an Event of Default, (c) the
occurrence of an event specified in Article IX.B hereof, and (d) the delivery by
the Corporation of the notice specified in Section 4(j) of the Securities
Purchase Agreement, the Fixed Conversion Price; and (ii) thereafter, the lower
of the Variable Conversion Price and the Fixed Conversion Price, each in effect
as of such date and subject to adjustment as provided herein.
F. "Fixed Conversion Price" means $8.51, and shall be subject to
adjustment as provided herein.
G. "Variable Conversion Price" means, as of any date of determination,
the amount obtained by multiplying the Conversion Percentage then in effect by
the average of the lowest Closing Bid Prices for the Corporation's common stock,
no par value per share ("Common Stock"), for any seven (7) trading days during
the thirty (30) consecutive trading days ending on the trading day immediately
preceding such date of determination (subject to equitable adjustment for any
stock splits, stock dividends, reclassifications or similar events during such
thirty (30) trading day period), and shall be subject to adjustment as provided
herein. For the avoidance of doubt, the trading day immediately preceding any
Conversion Date is the last calendar day that is a trading day and which is
immediately preceding the Conversion Date.
H. "business day" and "trading day" means any day on which the New York
Stock Exchange is open for trading.
5
<PAGE>
ARTICLE IV
CONVERSION
A. Conversion at the Option of the Holder. (i) Subject to the
--------------------------------------
limitations on conversions contained in Paragraph C of this Article IV, the
Holder may, at any time and from time to time on or after the Issue Date,
convert (an "Optional Conversion") all or any part of the outstanding principal
amount of this Debenture, plus all accrued interest thereon through the
Conversion Date, into a number of fully paid and nonassessable shares of Common
Stock determined in accordance with the following formula:
Conversion Amount
-----------------
Conversion Price
B. Mechanics of Conversion. In order to effect an Optional Conversion,
-----------------------
Holder shall: (x) fax (or otherwise deliver) a copy of the fully executed Notice
of Conversion to the Corporation and (y) surrender or cause to be surrendered
this Debenture, duly endorsed, along with a copy of the Notice of Conversion as
soon as practicable thereafter to the Corporation. Upon receipt by the
Corporation of a facsimile copy of a Notice of Conversion from Holder, the
Corporation shall immediately send, via facsimile, a confirmation to Holder
stating that the Notice of Conversion has been received, the date upon which the
Corporation expects to deliver the Common Stock issuable upon such conversion
and the name and telephone number of a contact person at the Corporation
regarding the conversion. The Corporation shall not be obligated to issue
shares of Common Stock upon a conversion unless either this Debenture is
delivered to the Corporation as provided above, or Holder notifies the
Corporation that this Debenture has been lost, stolen or destroyed (subject to
the requirements of Article X.H).
(i) Delivery of Common Stock Upon Conversion. The Corporation
----------------------------------------
shall, on or before the later of (a) the second business day following the
Conversion Date and (b) the business day following the date of the Corporation's
receipt of this Debenture (or, if this Debenture is lost, stolen or destroyed,
the date on which indemnity pursuant to Article X.H is provided) (the "Delivery
Period"), issue and deliver to the Holder or its nominee (x) that number of
shares of Common Stock issuable upon conversion of the portion of this Debenture
being converted and (y) a new Debenture in the form hereof representing the
balance of the principal amount hereof not being converted, if any. If the
Corporation's transfer agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer program, and so long as the
certificates therefor are not required to bear a legend, the Corporation shall
cause its transfer agent to electronically transmit the Common Stock issuable
upon conversion to the Holder by crediting the account of Holder or its nominee
with DTC through its Deposit Withdrawal Agent Commission system ("DTC
Transfer"). If the aforementioned conditions to a DTC Transfer are not
satisfied, the Corporation shall deliver to Holder physical certificates
representing the Common Stock issuable upon conversion. Further, Holder may
instruct the Corporation to deliver to Holder physical certificates representing
the Common Stock issuable upon conversion in lieu of delivering such shares by
way of DTC Transfer.
6
<PAGE>
(ii) Taxes. The Corporation shall pay any and all taxes which may be
-----
imposed upon it with respect to the issuance and delivery of the shares of
Common Stock upon the conversion of this Debenture.
(iii) No Fractional Shares. If any conversion of this Debenture would
--------------------
result in the issuance of a fractional share of Common Stock, such fractional
share shall be disregarded and the number of shares of Common Stock issuable
upon conversion of this Debenture shall be the nearest whole number of shares.
(iv) Conversion Disputes. In the case of any dispute with respect to
-------------------
a conversion, the Corporation shall promptly issue such number of shares of
Common Stock as are not disputed in accordance with subparagraph (i) above. The
Corporation and the Holder shall seek to resolve any such dispute in good faith.
If any such dispute involving the calculation of the Conversion Price has not
been resolved by mutual agreement of the Corporation and the Holder within three
(3) business days after the Corporation's receipt of the Notice of Conversion,
the Corporation shall immediately submit the disputed calculations to an
independent outside accountant of national reputation via facsimile. The
accountant, at the Corporation's sole expense, shall audit the calculations and
notify the Corporation and Holder of the results no later than two (2) business
days from the date it receives the disputed calculations. The accountant's
calculation shall be deemed conclusive, absent manifest error. The Corporation
shall then issue the appropriate number of shares of Common Stock in accordance
with subparagraph (i) above.
C. Limitations on Conversions. The Conversions of this Debenture shall
--------------------------
be subject to the following limitations (each of which limitations shall be
applied independently):
(i) Cap Amount. Unless permitted by the applicable rules and
----------
regulations of the principal securities market on which the Common Stock is
listed or traded, in no event shall the total number of shares of Common Stock
issued upon conversion of this Debenture and the Other Debentures exceed the
maximum number of shares of Common Stock that the Corporation can so issue
pursuant to any rule of the principal United States securities market on which
the Common Stock trades (including Rule 4460(i) of the Nasdaq National Market
("Nasdaq") or any successor rule thereto) (the "Cap Amount"), which, as of the
Issue Date, shall be 3,712,931 shares. The initial Cap Amount shall be
allocated among the Debentures (including this Debenture) pro rata based on the
original principal amount of each Debenture compared to the aggregate original
principal amount of all of the Debentures and shall be subject to adjustment as
provided in Article X.D. Any increase to the Cap Amount shall be allocated
among the Debentures (including this Debenture) pro rata based on the
outstanding principal amount of each Debenture at the time of such increase
compared to the outstanding principal amount of all Debentures at the time of
such increase. In the event the Corporation is prohibited from issuing shares
of Common Stock as a result of the operation of this subparagraph (i), the
Corporation shall comply with Article VII.
7
<PAGE>
(ii) No Five Percent Holders. In no event shall Holder be entitled
-----------------------
to receive shares of Common Stock upon a conversion to the extent that the sum
of (x) the number of shares of Common Stock beneficially owned by Holder and its
affiliates (exclusive of shares issuable upon conversion of the unconverted
portion of any Debentures or the unexercised or unconverted portion of any other
securities of the Corporation subject to a limitation on conversion or exercise
analogous to the limitations contained herein) and (y) the number of shares of
Common Stock issuable upon the conversion of the portion of this Debenture with
respect to which the determination of this subparagraph is being made, would
result in beneficial ownership by Holder and its affiliates of more than 4.99%
of the outstanding shares of Common Stock. For purposes of this subparagraph,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13 D-G thereunder,
except as otherwise provided in clause (x) above. The restriction contained in
this subparagraph (iii) shall not be altered, amended, deleted or changed in any
manner whatsoever unless the holders of a majority of the Common Stock and the
Holder shall approve such alteration, amendment, deletion or change.
ARTICLE V
RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. On the Issue Date, the Corporation shall have
---------------
reserved 1,657,000 authorized but unissued shares of Common Stock for issuance
upon conversion of this Debenture and thereafter the number of authorized but
unissued shares of Common Stock so reserved (the "Reserved Amount") shall not
be decreased and shall at all times be sufficient to provide for the conversion
of the outstanding principal amount of this Debenture (and accrued interest
thereon) at the then current Conversion Price.
B. Increases to Reserved Amount. If the Reserved Amount for any three
----------------------------
(3) consecutive trading days (the last of such three (3) trading days being the
"Authorization Trigger Date") shall be less than 135% of the number of shares of
Common Stock issuable upon conversion of this Debenture on such trading days,
the Corporation shall immediately notify Holder of such occurrence and shall
take immediate action (including, if necessary, seeking shareholder approval to
authorize the issuance of additional shares of Common Stock) to increase the
Reserved Amount to 200% of the number of shares of Common Stock then issuable
upon conversion of this Debenture. In the event the Corporation fails to so
increase the Reserved Amount within ninety (90) days after an Authorization
Trigger Date, Holder shall thereafter have the option, exercisable in whole or
in part at any time and from time to time by delivery of a Default Notice (as
defined in Article VIII.C) to the Corporation, to require the Corporation to
prepay for cash, at the Default Amount (as defined in Article VIII.B), a portion
of the principal amount of this Debenture (plus accrued interest thereon) such
that, after giving effect to such prepayment, the Reserved Amount exceeds 135%
of the total number of shares of Common Stock issuable to Holder upon conversion
of this Debenture on the date of the Default Notice. If the Corporation fails
to pay such Default Amount within five (5)
8
<PAGE>
business days after its receipt of a Default Notice, then Holder shall be
entitled to the remedies provided in Article VIII.C.
ARTICLE VI
FAILURE TO SATISFY CONVERSIONS
A. Conversion Default Payments. If, at any time, (x) Holder submits a
---------------------------
Notice of Conversion and the Corporation fails for any reason (other than
because such issuance would exceed Holder's Reserved Amount or allocated portion
of the Cap Amount, for which failures Holder shall have the remedies set forth
in Articles V and VII) to deliver, on or prior to the fourth business day
following the expiration of the Delivery Period for such conversion, such number
of freely tradeable shares of Common Stock to which Holder is entitled upon such
conversion, or (y) the Corporation provides notice to any holder of Debentures
(together with all other holders of Debentures and the Holder referred to
herein, the "Holders") at any time of its intention not to issue freely
tradeable shares of Common Stock upon exercise by any Holder of its conversion
rights in accordance with the terms of the Debentures (other than because such
issuance would exceed such Holder's Reserved Amount or allocated portion of the
Cap Amount) (each of (x) and (y) being a "Conversion Default"), then the
Corporation shall pay to Holder, in the case of a Conversion Default described
in clause (x) above, and to all Holders, in the case of a Conversion Default
described in clause (y) above, an amount equal to:
(.24) x (D/365) x (Conversion Default Amount)
where:
"D" means the number of days after the expiration of the Delivery Period
through and including the Default Cure Date;
"Conversion Default Amount" means the principal amount of all Debentures
held by Holder plus the aggregate accrued interest as of the first day of the
Conversion Default on all Debentures held by Holder; and
"Default Cure Date" means (i) with respect to a Conversion Default
described in clause (x) of its definition, the date the Corporation effects the
conversion of the portion of this Debenture submitted for conversion and (ii)
with respect to a Conversion Default described in clause (y) of its definition,
the date the Corporation begins to issue freely tradeable Common Stock in
satisfaction of all conversions of Debentures in accordance with their terms.
The payments to which Holder shall be entitled pursuant to this Paragraph A
are referred to herein as "Conversion Default Payments." Holder may elect to
receive accrued Conversion Default Payments in cash or to convert all or any
portion of such accrued Conversion Default Payments, at any time, into Common
Stock at the lowest Conversion Price in effect during the
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period beginning on the date of the Conversion Default through the Conversion
Date for such conversion. In the event Holder elects to receive any Conversion
Default Payments in cash, it shall so notify the Corporation in writing. Such
payment shall be made in accordance with and be subject to the provisions of
Article X.J. In the event Holder elects to convert all or any portion of the
Conversion Default Payments into Common Stock, Holder shall indicate on a Notice
of Conversion such portion of the Conversion Default Payments which Holder
elects to so convert and such conversion shall otherwise be effected in
accordance with the provisions of Article IV.
B. Adjustment to Conversion Price. If Holder has not received
------------------------------
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to a conversion of
any portion of any of Holder's Debentures for any reason (other than because
such issuance would exceed Holder's Reserved Amount or allocated portion of the
Cap Amount, for which failures Holder shall have the remedies set forth in
Articles V and VII), then the Fixed Conversion Price in respect of all
Debentures held by Holder (including any Debentures or portions thereof
submitted to the Corporation for conversion, but for which shares of Common
Stock have not been issued to Holder) shall thereafter be the lesser of (i) the
Fixed Conversion Price on the Conversion Date specified in the Notice of
Conversion which resulted in the Conversion Default and (ii) the lowest
Conversion Price in effect during the period beginning on, and including, such
Conversion Date through and including the day such shares of Common Stock are
delivered to the Holder. If there shall occur a Conversion Default of the type
described in clause (y) of Article VI.A, then the Fixed Conversion Price with
respect to any conversion thereafter shall be the lowest Conversion Price in
effect at any time during the period beginning on, and including, the date of
the occurrence of such Conversion Default through and including the Default Cure
Date. The Fixed Conversion Price shall thereafter be subject to further
adjustment for any events described in Article IX.
C. Buy-In Cure. Unless the Corporation has notified Holder in writing
-----------
prior to the delivery by Holder of a Notice of Conversion that the Corporation
is unable to honor conversions, if (i) (a) the Corporation fails for any reason
to deliver during the Delivery Period shares of Common Stock to Holder upon a
conversion of this Debenture or (b) there shall occur a Legend Removal Failure
(as defined in Article VIII.A(iv) below) and (ii) thereafter, Holder purchases
(in an open market transaction or otherwise) shares of Common Stock to make
delivery in satisfaction of a sale by Holder of the unlegended shares of Common
Stock (the "Sold Shares") which Holder anticipated receiving upon such
conversion (a "Buy-In"), the Corporation shall pay Holder (in addition to any
other remedies available to Holder) the amount by which (x) Holder's total
purchase price (including brokerage commissions, if any) for the unlegended
shares of Common Stock so purchased exceeds (y) the net proceeds received by
Holder from the sale of the Sold Shares. For example, if Holder purchases
unlegended shares of Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to shares of Common Stock it sold for $10,000, the
Corporation will be required to pay Holder $1,000. Holder shall provide the
Corporation written notification indicating any amounts payable to Holder
pursuant to this Paragraph C. The Corporation shall make any payments required
pursuant to this Paragraph C in accordance with and subject to the provisions of
Article X.J.
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D. Right to Require Prepayment. If the Corporation fails, and such
---------------------------
failure continues uncured for five (5) business days after the Corporation has
been notified thereof in writing by Holder, for any reason (other than because
such issuance would exceed Holder's Reserved Amount or its allocated portion of
the Cap Amount, for which failures Holder shall have the remedies set forth in
Articles V and VII) to issue shares of Common Stock within ten (10) business
days after the expiration of the Delivery Period with respect to any conversion
of this Debenture, then Holder may elect at any time and from time to time prior
to the Default Cure Date for such Conversion Default, by delivery of a Default
Notice (as defined in Article VIII.C) to the Corporation, to have all or any
portion of Holder's outstanding Debentures prepaid by the Corporation for cash
at the Default Amount (as defined in Article VIII.B). If the Corporation fails
to pay such Default Amount within five (5) business days after its receipt of a
Default Notice, then Holder shall be entitled to the remedies provided in
Article VIII.C.
ARTICLE VII
INABILITY TO CONVERT DUE TO CAP AMOUNT
A. Obligation to Cure. If at any time the then unissued portion of any
------------------
Holder's Cap Amount is less than 135% of the number of shares of Common Stock
then issuable upon conversion of its Debenture (a "Trading Market Trigger
Event"), the Corporation shall immediately notify the Holders of such
occurrence and shall take immediate action (including, if necessary, seeking the
approval of its shareholders to authorize the issuance of the full number of
shares of Common Stock which would be issuable upon the conversion of this
Debenture but for the Cap Amount) to eliminate any prohibitions under applicable
law or the rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization with jurisdiction over the
Corporation or any of its securities on the Corporation's ability to issue
shares of Common Stock in excess of the Cap Amount. In the event the
Corporation fails to eliminate all such prohibitions within ninety (90) days
after the Trading Market Trigger Event, Holder shall thereafter have the option,
exercisable in whole or in part at any time and from time to time until such
date that all such prohibitions are eliminated, by delivery of a Default Notice
(as defined in Article VIII.C) to the Corporation, to require the Corporation to
pay for cash, at the Default Amount, a portion of the principal amount of this
Debenture (and accrued and unpaid interest thereon) such that, after giving
effect to such prepayment, Holder's allocated portion of the Cap Amount exceeds
135% of the total number of shares of Common Stock issuable to Holder upon
conversion of this Debenture on the date of such Default Notice. Additionally,
if at any time and from time to time the then unissued portion of Holder's Cap
Amount is less than the number of shares of Common Stock then issuable upon
conversion of this Debenture, Holder shall thereafter have the option,
exercisable in whole or in part at any time and from time to time by delivery of
a Default Notice (as defined in Article VIII.C) to the Corporation, to require
the Corporation to pay for cash, at the Default Amount, a portion of the
principal amount of this Debenture (and accrued and unpaid interest thereon)
such that, after giving effect to such prepayment, Holder's allocated portion of
the Cap Amount exceeds 135% of the total number of shares of Common Stock
issuable to Holder upon conversion of this Debenture on the
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<PAGE>
date of such Default Notice. If the Corporation fails to pay the Default Amount
within five (5) business days after its receipt of a Default Notice, then Holder
shall be entitled to the remedies provided in Article VIII.C.
B. Remedies. If the Corporation fails to eliminate the applicable
--------
prohibitions within the ninety (90) day cure period referred to in Paragraph A
of this Article VII and thereafter the Corporation is prohibited, at any time,
from issuing shares of Common Stock upon conversion of this Debenture because
such issuance would exceed Holder's allocated portion of the Cap Amount because
of applicable rules or regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization with jurisdiction over the
Corporation or its securities, Holder may elect either or both of the following
additional remedies:
(i) to require, with the consent of the Majority Holders, the
Corporation to terminate the listing of its Common Stock on Nasdaq (or any other
stock exchange, interdealer quotation system or trading market) and to cause its
Common Stock to be eligible for trading on the over-the-counter electronic
bulletin board, at the option of Holder; or
(ii) to require the Corporation to issue shares of Common Stock in
accordance with Holder's Notice of Conversion at a conversion price equal to the
average of the Closing Bid Prices of the Common Stock for the five (5)
consecutive trading days (subject to equitable adjustment for any stock splits,
stock dividends, reclassifications or similar events during such five (5)
trading day period) preceding the date of Holder's written notice to the
Corporation of its election to receive shares of Common Stock pursuant to this
subparagraph (ii).
ARTICLE VII
EVENTS OF DEFAULT
A. Events of Default. If any of the following events of default (each,
-----------------
an "Event of Default") shall occur:
(i) the Corporation fails (i) to pay the principal hereof when due,
whether at maturity, upon acceleration or otherwise or (ii) to pay any
installment of interest hereon when due and such failure continues for a period
of five (5) business days after the due date thereof;
(ii) the Common Stock (including any of the shares of Common Stock
issuable upon conversion of this Debenture) is suspended from trading on any of,
or is not listed (and authorized) for trading on at least one of, the New York
Stock Exchange, the American Stock Exchange or Nasdaq for an aggregate of ten
(10) trading days in any nine (9) month period;
(iii) the Registration Statement required to be filed by the
Corporation pursuant to Section 2(a) of the Registration Rights Agreement has
not been declared effective by the 180th
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day following the Issue Date or such Registration Statement, after being
declared effective, cannot be utilized by Holder for the resale of all of its
Registrable Securities (as defined in the Registration Rights Agreement) for an
aggregate of more than thirty (30) days;
(iv) the Corporation fails to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the Holder upon conversion
of any Debenture as and when required by the Debentures, the Securities Purchase
Agreement or the Registration Rights Agreement (a "Legend Removal Failure"), and
any such failure continues uncured for five (5) business days after the
Corporation has been notified thereof in writing by the Holder;
(v) the Corporation provides notice to any of the Holders,
including by way of public announcement, at any time, of its intention not to
issue shares of Common Stock to any of the Holders upon conversion in accordance
with the terms of the Debentures (other than due to the circumstances
contemplated by Articles V or VII for which the Holders shall have the remedies
set forth in such Articles);
(vi) the Corporation shall:
(a) sell, convey or dispose of all or substantially all of
its assets; or
(b) merge, consolidate or engage in any other business
combination with any other entity (other than pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of incorporation of
the Corporation); or
(c) have fifty percent (50%) or more of the voting power of
its capital stock owned beneficially by one person, entity or "group" (as such
term is used under Section 13(d) of the Securities Exchange Act of 1934, as
amended);
(vii) the Corporation breaches any material covenant or other
material term or condition of this Debenture (other than as specifically
provided in subparagraphs (i)-(vi) of this Paragraph A), the Securities Purchase
Agreement or the Registration Rights Agreement;
(viii) any representation or warranty of the Corporation made herein
or in any agreement, statement or certificate given in writing pursuant hereto
or in connection herewith (including, without limitation, the Securities
Purchase Agreement and the Registration Rights Agreement), shall be false or
misleading in any material respect when made and the breach of which would have
a material adverse effect on the Corporation or the prospects of the Corporation
or a material adverse effect on the Corporation or the rights of the Corporation
with respect to any of the Debentures or the shares of Common Stock issuable
upon conversion of the Debentures;
(ix) the Corporation or any subsidiary of the Corporation shall make
an assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or
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trustee for it or for a substantial part of its property or business; or such a
receiver or trustee shall otherwise be appointed; or
(x) bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Corporation or
any subsidiary of the Corporation;
then, upon the occurrence and during the continuation of any Event of Default
specified in subparagraphs (i)-(viii) of this Paragraph A, at the option of
Holder, and upon the occurrence of an Event of Default specified in
subparagraphs (ix) or (x) of this Paragraph A, the Corporation shall pay Holder,
in satisfaction of its obligation to pay the outstanding principal amount of
this Debenture and accrued and unpaid interest thereon, an amount equal to the
Default Amount and such Default Amount, together with all other ancillary
amounts payable hereunder, shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly waived,
together with all costs, including, without limitation, legal fees and expenses
of collection, and Holder shall be entitled to exercise all other rights and
remedies available at law or in equity. For the avoidance of doubt, the
occurrence of any event described in clauses (ii), (iii), (v), (vi), (vii),
(viii), (ix) or (x) above shall immediately constitute an Event of Default and
there shall be no cure period.
B. Definition of Default Amount. The "Default Amount" with respect to
----------------------------
any portion of this Debenture means an amount equal to the greater of:
(i) A X M
----------------------------------
C P
and
(ii) the sum of 111% of the principal amount of this Debenture being
paid plus all accrued and unpaid interest thereon and Conversion Default
Payments through the payment date.
where:
"A" means the principal amount of this Debenture being paid plus all
accrued and unpaid interest thereon and any Conversion Default Payments and
Prepayment Default Payments through the payment date;
"CP" means the Conversion Price in effect on the date of the Default
Notice; and
"M" means the highest Closing Bid Price of the Corporation's Common Stock
during the period beginning on the date of the Default Notice and ending on the
date prior to the date of payment, as reported on the principal securities
exchange or trading market on which the Common Stock is traded.
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<PAGE>
C. Failure to Pay Default Amount. If the Corporation fails to pay the
-----------------------------
Default Amount within five (5) business days of its receipt of a notice
requiring such payment (a "Default Notice"), then the Holder (i) shall be
entitled to interest on the Default Amount at a per annum rate equal to the
lower of twenty-four percent (24%) and the highest interest rate permitted by
applicable law from the date of the Default Notice until the date of payment
hereunder, and (ii) shall have the right, at any time and from time to time, to
require the Corporation, upon written notice, to immediately convert (in
accordance with the terms of Paragraph A of Article IV) all or any portion of
the Default Amount, plus interest as aforesaid, into shares of Common Stock at
the lowest Conversion Price in effect during the period beginning on the date of
the Default Notice and ending on the Conversion Date with respect to the
conversion of such Default Amount. In the event the Corporation is not able to
pay all amounts due and payable with respect to all Debentures subject to
Default Notices, the Corporation shall pay the Holders of such Debentures which
are the subject of Default Notices such amounts pro rata, based on the total
amounts payable to each such Holder relative to the total amounts payable to all
such Holders.
ARTICLE IX
ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price shall be subject to adjustment from time to time as
follows:
A. Stock Splits, Stock Dividends, Etc. If at any time on or after the
-----------------------------------
Issue Date, the number of outstanding shares of Common Stock is increased by a
stock split, stock dividend, combination, reclassification or other similar
event, the Fixed Conversion Price shall be proportionately reduced, or if the
number of outstanding shares of Common Stock is decreased by a reverse stock
split, combination or reclassification of shares, or other similar event, the
Fixed Conversion Price shall be proportionately increased. In such event, the
Corporation shall notify the Corporation's transfer agent for the Common Stock
of such change on or before the effective date thereof.
B. Adjustment Due to Major Announcement. In the event the Corporation at
------------------------------------
any time on or after the Issue Date (i) makes a public announcement that it
intends to consolidate or merge with any other entity (other than a merger in
which the Corporation is the surviving or continuing entity and its capital
stock is unchanged) or to sell or transfer all or substantially all of the
assets of the Corporation or (ii) any person, group or entity (including the
Corporation) publicly announces a tender offer, exchange offer or another
transaction to purchase 50% or more of the Corporation's Common Stock (the date
of the announcement referred to in clause (i) or (ii) of this Paragraph B is
hereinafter referred to as the "Announcement Date"), then the Conversion Price
shall, effective upon the Announcement Date and continuing through the earlier
of the consummation of the proposed transaction or tender offer, exchange offer
or other transaction or the Abandonment Date (as defined below), be equal to the
lower of (x) the Conversion Price which would have been applicable for an
Optional Conversion occurring on the Announcement Date and (y) the Conversion
Price determined in accordance with Article III.E on the Conversion Date set
forth in the Notice of
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<PAGE>
Conversion for the Optional Conversion. From and after the consummation of the
proposed transaction or tender offer, exchange offer or other transaction or the
Abandonment Date, the Conversion Price shall be determined as set forth in
Article III.E. "Abandonment Date" means with respect to any proposed transaction
or tender offer, exchange offer or other transaction for which a public
announcement as contemplated by this Paragraph B has been made, the date upon
which the Corporation (in the case of clause (i) above) or the person, group or
entity (in the case of clause (ii) above) publicly announces the termination or
abandonment of the proposed transaction or tender offer, exchange offer or other
transaction which caused this Paragraph B to become operative.
C. Adjustment Due to Merger, Consolidation, Etc. If at any time on or
---------------------------------------------
after the Issue Date there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged), (iii)
any sale or transfer of all or substantially all of the assets of the
Corporation or (iv) any share exchange pursuant to which all of the outstanding
shares of Common Stock are converted into other securities or property (each of
(i)-(iv) above being a "Corporate Change"), then the Holder shall thereafter
have the right to receive upon conversion, in lieu of the shares of Common Stock
immediately theretofore issuable, such shares of stock, securities, cash and/or
other property as may be issued or payable in such Corporate Change with respect
to or in exchange for the number of shares of Common Stock which would have been
issuable upon conversion (without giving effect to the limitations contained in
Article IV.C ) had such Corporate Change not taken place, and in any such case,
appropriate provisions shall be made with respect to the rights and interests of
the Holder to the end that the provisions hereof (including, without limitation,
provisions for adjustment of the Conversion Price and of the number of shares of
Common Stock issuable upon conversion of this Debenture) shall, if relevant,
thereafter be applicable, as nearly as may be practicable in relation to any
shares of stock or securities thereafter deliverable upon the conversion
thereof. The Corporation shall not effect any transaction described in this
Paragraph C unless (i) the Holder has received written notice of such
transaction at least thirty (30) days prior thereto, but in no event later than
ten (10) days prior to the record date for the determination of shareholders
entitled to vote with respect thereto, and (ii) the resulting successor or
acquiring entity (if not the Corporation) assumes (or agrees to assume) by
written instrument the obligations of this Debenture. The above provisions
shall apply regardless of whether or not there would have been a sufficient
number of shares of Common Stock authorized and available for issuance upon
conversion of the Debentures outstanding as of the date of such transaction, and
shall similarly apply to successive reclassifications, consolidations, mergers,
sales, transfers or share exchanges.
D. Adjustment Due to Distribution. If at any time on or after the Issue
------------------------------
Date the Corporation shall declare or make any distribution of its assets (or
rights to acquire its assets) to holders of Common Stock as a partial
liquidating dividend, by way of return of capital or otherwise (including any
dividend or distribution to the Corporation's shareholders in cash or shares (or
rights to acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a
"Distribution"), then the Holder
16
<PAGE>
shall be entitled, upon any conversion of this Debenture after the date of
record for determining shareholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the Holder with
respect to the shares of Common Stock issuable upon such conversion (without
giving effect to the limitations contained in Article IV.C) had Holder been the
holder of such shares of Common Stock on the record date for the determination
of shareholders entitled to such Distribution.
E. Issuance of Other Securities With Variable Conversion Price. If at
-----------------------------------------------------------
any time on or after the Issue Date the Corporation shall issue any securities
which are convertible into or exchangeable for Common Stock ("Convertible
Securities") at a conversion or exchange rate based on a discount to the market
price of the Common Stock at the time of conversion or exercise, then the
Conversion Percentage in respect of any conversion of any portion of this
Debenture after such issuance shall be calculated utilizing the higher of the
greatest discount applicable to any such Convertible Securities and the discount
then in effect in calculating the Variable Conversion Price.
F. Purchase Rights. If at any time on or after the Issue Date the
---------------
Corporation issues any Convertible Securities or rights to purchase stock,
warrants, securities or other property (the "Purchase Rights") pro rata to the
record holders of any class of Common Stock, then the Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Debenture (without giving effect to the limitations contained in Article IV.C)
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
G. Notice of Adjustments. Upon the occurrence of each adjustment or
---------------------
readjustment of the Conversion Price pursuant to this Article IX, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to Holder a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of Holder, furnish to Holder a like certificate setting
forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time
in effect and (iii) the number of shares of Common Stock and the amount, if any,
of other securities or property which at the time would be received upon
conversion of this Debenture.
ARTICLE X
MISCELLANEOUS
A. Failure or Indulgency Not Waiver. No failure or delay on the part of
--------------------------------
the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise
17
<PAGE>
thereof or of any other right, power or privilege.
B. Notices. Any notice herein required or permitted to be given shall be
-------
in writing and may be personally served or delivered by courier and shall be
deemed to have been given upon receipt (which shall include telephone line
facsimile transmission). The addresses for such communications shall be:
If to the Company:
The L.L. Knickerbocker Co., Inc.
25800 Commercenter Drive
Lake Forest, CA 92630
Telecopy: (714) 595-7913
Attention: Anthony P. Shutts, CFO
with a copy to:
William R. Black, Esq.
29 Summitcrest
Dove Canyon, CA 92679
Telecopy: (714) 888-7700
If to the Holder:
Capital Ventures International
c/o Heights Capital Management
425 California, Suite 1100
San Francisco, CA 94104
Telecopy: (415) 403-6525
Attention: Andrew Frost
with a copy to:
Klehr, Harrison, Harvey, Branzburg & Ellers
1401 Walnut Street
Philadelphia, PA 19102
Telecopy: (215) 568-6603
Attention: Stephen T. Burdumy, Esquire
C. Amendment Provision. This Debenture and any provision hereof may only
-------------------
be amended by an instrument in writing signed by the Corporation and the
Majority Holders. The term "Debenture" and all references thereto, as used
throughout this instrument, shall mean this
18
<PAGE>
instrument as originally executed, or if later amended or supplemented, then as
so amended or supplemented.
D. Assignability. This Debenture shall be binding upon the Corporation
--------------
and its successors and assigns and shall inure to the benefit of the Holder and
its successors and assigns. In the event the Holder shall sell or otherwise
transfer any portion of this Debenture, each transferee shall be allocated a pro
rata portion of such transferor's Cap Amount and Reserved Amount. Any portion
of the Cap Amount or Reserved Amount which remains allocated to any person or
entity which does not hold any Debentures shall be allocated to the remaining
Holders of Debentures, pro rata based on the total principal amount of
Debentures then held by such Holders.
E. Cost of Collection. If default is made in the payment of this
------------------
Debenture, the Corporation shall pay the Holder hereof costs of collection,
including reasonable attorneys' fees.
F. Governing Law. This Debenture shall be governed by and construed in
-------------
accordance with the laws of the State of New York applicable to contracts made
and to be performed in the State of New York. The Company irrevocably consents
to the jurisdiction of the United States federal courts and state courts located
in San Francisco, California in any suit or proceeding based on or arising under
this Debenture and irrevocably agrees that all claims in respect of such suit or
proceeding may be determined in such courts. The Company irrevocably waives the
defense of an inconvenient forum to the maintenance of such suit or proceeding.
The Company further agrees that service of process upon the Company mailed by
first class mail shall be deemed in every respect effective service of process
upon the Company in any such suit or proceeding. Nothing herein shall affect
Holder's right to serve process in any other manner permitted by law. The
Company agrees that a final non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.
G. Denominations. At the request of Holder, upon surrender of this
-------------
Debenture, the Corporation shall promptly issue new Debentures in the aggregate
outstanding principal amount hereof, in the form hereof, in such denominations
of at least $25,000 as Holder shall request.
H. Lost or Stolen Debentures. Upon receipt by the Corporation of (i)
-------------------------
evidence of the loss, theft, destruction or mutilation of this Debenture and
(ii) (y) in the case of loss, theft or destruction, of indemnity reasonably
satisfactory to the Corporation, or (z) in the case of mutilation, upon
surrender and cancellation of this Debenture, the Corporation shall execute and
deliver new Debentures, in the form hereof, in such denominations of at least
$25,000 as Holder may request. However, the Corporation shall not be obligated
to reissue such lost or stolen Debentures if Holder contemporaneously requests
the Corporation to convert this Debenture.
I. Quarterly Statements of Available Shares. The Corporation shall
----------------------------------------
deliver (or cause its transfer agent to deliver) to Holder a written report
notifying Holder of any occurrence which prohibits the Corporation from issuing
Common Stock upon any conversion of Debentures. The Corporation (or its
transfer agent) shall also provide, within fifteen (15) days after delivery to
the
19
<PAGE>
Corporation of a written request by any Holder, any of the following information
as of the date of such request: (i) the total outstanding principal amount of
all Debentures, (ii) the total number of shares of Common Stock issued upon all
conversions of all Debentures prior to such date, (iii) the total number of
shares of Common Stock which are reserved for issuance upon conversion of the
Debentures which are then outstanding, and (iv) the total number of shares of
Common Stock which may thereafter be issued by the Corporation upon conversion
of the Debentures before the Corporation would exceed the Cap Amount and the
Reserved Amount.
J. Payment of Cash; Defaults. Whenever the Corporation is required to
-------------------------
make any cash payment to Holder under this Debenture (as a Conversion Default
Payment, as a prepayment or otherwise), such cash payment shall be made to
Holder within five (5) business days after delivery by Holder of a notice
specifying that Holder elects to receive such payment in cash and the method
(e.g., by check, wire transfer) in which such payment should be made. If such
payment is not delivered within such five (5) business day period, Holder shall
thereafter be entitled to interest on the unpaid amount at a per annum rate
equal to the lower of twenty-four percent (24%) and the highest interest rate
permitted by applicable law until such amount is paid in full to Holder.
K. Restrictions on Shares. The shares of Common Stock issuable upon
----------------------
conversion of this Debenture may not be sold or transferred unless (i) they
first shall have been registered under the Securities Act and applicable state
securities laws, (ii) the Corporation shall have been furnished with an opinion
of legal counsel (in form, substance and scope customary for opinions in such
circumstances) to the effect that such sale or transfer is exempt from the
registration requirements of the Securities Act or (iii) they are sold under
Rule 144 under the Act. Except as otherwise provided in the Securities Purchase
Agreement, each certificate for shares of Common Stock issuable upon conversion
of this Debenture that have not been so registered and that have not been sold
under an exemption that permits removal of the legend, shall bear a legend
substantially in the following form, as appropriate:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE
SECURITIES LAWS UNLESS OFFERED, SOLD OR TRANSFERRED UNDER AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
Upon the request of a holder of a certificate representing any shares of Common
Stock issuable upon conversion of this Debenture, the Corporation shall remove
the foregoing legend from the certificate and issue to such holder a new
certificate therefor free of any transfer legend, if (i) with such request, the
Corporation shall have received either (A) an opinion of counsel, in form,
substance and scope customary
20
<PAGE>
for opinions in such circumstances, to the effect that any such legend may be
removed from such certificate, or (B) satisfactory representations from Holder
that Holder is eligible to sell such security under Rule 144 or (ii) a
registration statement under the Securities Act covering the resale of such
securities is in effect. Nothing in this Debenture shall (i) limit the
Corporation's obligation under the Registration Rights Agreement, or (ii) affect
in any way Holder's obligations to comply with applicable securities laws upon
the resale of the securities referred to herein.
L. Status as Debentureholder. Upon submission of a Notice of Conversion
-------------------------
by Holder, the principal amount of this Debenture and the interest thereon
covered thereby (other than any portion of this Debenture, if any, which cannot
be converted because the conversion thereof would exceed Holder's allocated
portion of the Cap Amount or Holder's Reserved Amount) shall be deemed converted
into shares of Common Stock as of the Conversion Date and Holder's rights as a
holder of this Debenture shall cease and terminate, excepting only the right to
receive certificates for such shares of Common Stock and to any remedies
provided herein or otherwise available at law or in equity to Holder because of
a failure by the Corporation to comply with the terms of this Debenture.
Notwithstanding the foregoing, if Holder has not received certificates for all
shares of Common Stock prior to the tenth (10th) business day after the
expiration of the Delivery Period with respect to a conversion for any reason,
then (unless Holder otherwise elects to retain its status as a holder of Common
Stock by so notifying the Corporation) the portion of the principal amount and
interest thereon subject to such conversion shall be deemed outstanding under
this Debenture and the Corporation shall, as soon as practicable, return this
Debenture to Holder. In all cases, Holder shall retain all of its rights and
remedies (including, without limitation, (i) the right to receive Conversion
Default Payments pursuant to Article VI.A to the extent required thereby for
such Conversion Default and any subsequent Conversion Default and (ii) the right
to have the Conversion Price with respect to subsequent conversions determined
in accordance with Article VI.B) for the Corporation's failure to convert this
Debenture.
M. Remedies Cumulative. The remedies provided in this Debenture shall be
-------------------
cumulative and in addition to all other remedies available under this Debenture,
at law or in equity (including a decree of specific performance and/or other
injunctive relief), no remedy contained herein shall be deemed a waiver of
compliance giving rise to such remedy and nothing herein shall limit Holder's
right to pursue actual damages for any failure by the Corporation to comply with
the terms of this Debenture. The Corporation acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened breach, the Holder shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
21
<PAGE>
IN WITNESS WHEREOF, Borrower has caused this Debenture to be signed
in its name by its duly authorized officer this 8th day of September, 1997.
THE L.L. KNICKERBOCKER CO., INC.
By:
------------------------------------
Name:
Title:
<PAGE>
Exhibit 1
---------
NOTICE OF CONVERSION
To: The L.L. Knickerbocker Co., Inc.
25800 Commercenter Drive
Lake Forest, CA 92630
Telecopy: (714) 595-7913
Attention: Anthony P. Shutts, CFO
The undersigned hereby irrevocably elects to convert $____________ principal
amount of the Debenture (the "Conversion"), into shares of common stock ("Common
Stock") of The L.L. Knickerbocker Co., Inc. (the "Corporation") according to the
conditions of the Convertible Term Debenture dated September 8, 1997 (the
"Debenture"), as of the date written below. If securities are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. No fee will be charged to the
holder for any conversion, except for transfer taxes, if any. A copy of the
Debenture is attached hereto (or evidence of loss, theft or destruction
thereof).
If the Corporation's transfer agent is participating in the Depository Trust
Company ("DTC") Fast Automated Securities Transfer program, the Corporation
shall electronically transmit the Common Stock issuable pursuant to this Notice
of Conversion to the account of the undersigned or its nominee (which is
________________) with DTC through its Deposit Withdrawal Agent Commission
System ("DTC Transfer"). If the Corporation's transfer agent does not
participate in the DTC program as aforementioned, or if Holder checks the box
set forth below, the Corporation shall deliver to Holder physical certificates
representing the Common Stock issuable upon conversion.
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of
this Debenture shall be made pursuant to registration of the Common Stock under
the Securities Act or pursuant to an exemption from registration under the Act.
In the event of partial exercise, please reissue an appropriate Debenture(s) for
the principal balance which shall not have been converted.
Check Box if Applicable:
[_] In lieu of receiving the shares of Common Stock issuable pursuant to this
Notice of Conversion by way of DTC Transfer, the undersigned hereby
requests that the Corporation issue and deliver to the undersigned physical
certificates representing such shares of Common Stock.
Date of Conversion:
--------------------------------
Applicable Conversion Price:
-----------------------
Amount of Accrued and Unpaid Interest
on the Principal Amount to be
converted, if any:
---------------------------------
Amount of Conversion Default Payments or
Prepayment Default Payments to be
converted, if any:
---------------------------------
Number of Shares of
Common Stock to be Issued:
-------------------------
Signature:
-----------------------------------------
Name:
----------------------------------------------
Address:
-------------------------------------------
<PAGE>
EXHIBIT 4.3
<PAGE>
EXHIBIT B
to
Securities
Purchase
Agreement
VOID AFTER 5:00 P.M. NEW YORK CITY
TIME ON SEPTEMBER 8, 2002
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED UNLESS
THE SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS, OR ANY SUCH OFFER, SALE OR TRANSFER IS MADE UNDER AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
Right to Purchase 88,132 Shares of
Common Stock, no par value per share
Date: September 8, 1997
THE L.L. KNICKERBOCKER CO., INC.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, CAPITAL VENTURES INTERNATIONAL, or
its registered assigns, is entitled to purchase from THE L.L. KNICKERBOCKER CO.,
INC., a corporation organized under the laws of the State of California (the
"Company"), at any time or from time to time during the period specified in
Section 2 hereof, Eighty-Eight Thousand One Hundred Thirty-Two (88,132) fully
paid and nonassessable shares of the Company's common stock, no par value per
share (the "Common Stock"), at an exercise price per share (the "Exercise
Price") equal to $9.99. The number of shares of Common Stock purchasable
hereunder (the "Warrant Shares") and the Exercise Price are subject to
adjustment as provided in Section 4 hereof. The term "Warrants" means this
Warrant and the other warrants of the Company issued pursuant to that certain
Securities Purchase Agreement, dated as of the date hereof, by and among the
Company and the other signatories thereto (the "Securities Purchase
Agreement"). All monetary denominations set forth herein shall refer to the
lawful currency of the United States of America.
<PAGE>
This Warrant is subject to the following terms, provisions, and conditions:
1. Manner of Exercise; Issuance of Certificates; Payment for Shares.
----------------------------------------------------------------
Subject to the provisions hereof, including, without limitation, the limitations
contained in Section 7 hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "Exercise
Agreement"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in cash, by certified or official bank check or by wire
transfer for the account of the Company, of the Exercise Price for the Warrant
Shares specified in the Exercise Agreement or (ii) if the holder is permitted to
effect a Cashless Exercise (as defined in Section 11(c) hereof) pursuant to
Section 11(c) hereof, delivery to the Company of a written notice of an election
to effect a Cashless Exercise for the Warrant Shares specified in the Exercise
Agreement. The Warrant Shares so purchased shall be deemed to be issued to the
holder hereof or such holder's designee, as the record owner of such shares, as
of the close of business on the date on which this Warrant shall have been
surrendered, the completed Exercise Agreement shall have been delivered, and
payment shall have been made for such shares as set forth above or, if such date
is not a business day, on the next succeeding business day. Certificates for
the Warrant Shares so purchased, representing the aggregate number of shares
specified in the Exercise Agreement, shall be delivered to the holder hereof
within a reasonable time, not exceeding two (2) business days, after this
Warrant shall have been so exercised (the "Delivery Period"). The certificates
so delivered shall be in such denominations as may be requested by the holder
hereof and shall be registered in the name of such holder or such other name as
shall be designated by such holder. If this Warrant shall have been exercised
only in part, then, unless this Warrant has expired, the Company shall, at its
expense, at the time of delivery of such certificates, deliver to the holder a
new Warrant representing the number of shares with respect to which this Warrant
shall not then have been exercised.
If, at any time, a holder of this Warrant submits this Warrant, an Exercise
Agreement and payment to the Company of the Exercise Price for each of the
Warrant Shares specified in the Exercise Agreement, and the Company fails for
any reason to deliver, on or prior to the fourth business day following the
expiration of the Delivery Period for such exercise, the number of shares of
Common Stock to which the holder is entitled upon such exercise (an "Exercise
Default"), then the Company shall pay to the holder payments ("Exercise Default
Payments") for an Exercise Default in the amount of (a) (N/365), multiplied by
(b) the difference between the Market Price (as defined in Section 4(l) below)
on the date the Exercise Agreement giving rise to the Exercise Default is
transmitted in accordance with Section 1 (the "Exercise Default Date") less the
Exercise Price, multiplied by (c) the number of shares of Common Stock the
Company failed to so deliver in such Exercise Default, multiplied by (d) .24,
where N = the number of days from the Exercise Default Date to the date that the
Company effects the full exercise of this Warrant which gave rise to the
Exercise Default. The accrued Exercise Default Payment for each calendar month
shall be paid in cash or shall be convertible into Common Stock at the Exercise
Price, at the holder's option, as follows:
2
<PAGE>
(a) In the event holder elects to take such payment in cash, cash
payment shall be made to holder by the fifth (5th) day of the month following
the month in which it has accrued; and
(b) In the event holder elects to take such payment in Common Stock,
the holder may convert such payment amount into Common Stock (in accordance with
the terms contained in Article VI of the Debentures of the Company issued
pursuant to the Securities Purchase Agreement (the "Debentures")) at the lower
of the Exercise Price or the Market Price (as in effect at the time of
conversion) at any time after the fifth (5th) day of the month following the
month in which it has accrued.
Nothing herein shall limit the holder's right to pursue actual damages
for the Company's failure to maintain a sufficient number of authorized shares
of Common Stock as required pursuant to the terms of Section 3(b) or to
otherwise issue shares of Common Stock upon exercise of this Warrant in
accordance with the terms hereof, and each holder shall have the right to pursue
all remedies available at law or in equity (including a decree of specific
performance and/or injunctive relief).
2. Period of Exercise. This Warrant is immediately exercisable, at any
------------------
time or from time to time on or after the date of initial issuance hereof (the
"Issue Date") and before 5:00 p.m., New York City time on the fifth anniversary
of the original date of issuance of this Warrant (the "Exercise Period").
3. Certain Agreements of the Company. The Company hereby covenants and
---------------------------------
agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon issuance
-----------------------
in accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, claims and encumbrances.
(b) Reservation of Shares. During the Exercise Period, the Company
---------------------
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise in full of this Warrant (without giving effect to the
limitations on exercise set forth in Section 7(g) hereof).
(c) Listing. The Company shall promptly secure the listing of the
-------
shares of Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system, if any, upon which shares of
Common Stock are then listed or become listed (subject to official notice of
issuance upon exercise of this Warrant) and shall maintain, so long as any other
shares of Common Stock shall be so listed, such listing of all shares of Common
Stock from time to time issuable upon the exercise of this Warrant; and the
Company shall so list on each national securities exchange or automated
quotation system, as the case may be, and shall maintain such listing of, any
other shares of capital stock of the Company issuable upon the exercise of this
3
<PAGE>
Warrant if and so long as any shares of the same class shall be listed on such
national securities exchange or automated quotation system.
(d) Certain Actions Prohibited. The Company will not, by amendment
--------------------------
of its charter 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 to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company
(i) will not increase the par value of any shares of Common Stock receivable
upon the exercise of this Warrant above the Exercise Price then in effect, and
(ii) will take all such actions as may be necessary or appropriate in order that
the Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
(e) Successors and Assigns. This Warrant will be binding upon any
----------------------
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all of the Company's assets.
4. Antidilution Provisions. During the Exercise Period, the Exercise
-----------------------
Price and the number of Warrant Shares issuable hereunder shall be subject to
adjustment from time to time as provided in this Section 4.
In the event that any adjustment of the Exercise Price as required herein
results in a fraction of a cent, such Exercise Price shall be rounded up or down
to the nearest cent.
(a) Adjustment of Exercise Price. Except as otherwise provided in
----------------------------
Sections 4(c) and 4(e) hereof, if and whenever during the Exercise Period the
Company issues or sells, or in accordance with Section 4(b) hereof is deemed to
have issued or sold, any shares of Common Stock for no consideration or for a
consideration per share less than the Market Price (as hereinafter defined) on
the date of issuance (a "Dilutive Issuance"), then effective immediately upon
the Dilutive Issuance, the Exercise Price will be adjusted in accordance with
the following formula:
E' = E x O + P/M
---------------------
CSDO
4
<PAGE>
where:
E' = the adjusted Exercise Price;
E = the then current Exercise Price;
M = the then current Market Price (as defined in Section
4(1));
O = the number of shares of Common Stock outstanding
immediately prior to the Dilutive Issuance;
P = the aggregate consideration, calculated as set forth in
Section 4(b) hereof, received by the Company upon such
Dilutive Issuance; and
CSDO = the total number of shares of Common Stock Deemed
Outstanding (as defined in Section 4(1)) immediately after
the Dilutive Issuance.
(b) Effect on Exercise Price of Certain Events. For purposes of
------------------------------------------
determining the adjusted Exercise Price under Section 4(a) hereof, the following
will be applicable:
(i) Issuance of Rights or Options. If the Company in any
-----------------------------
manner issues or grants any warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to purchase Common Stock or other
securities exercisable, convertible into or exchangeable for Common Stock
("Convertible Securities") (such warrants, rights and options to purchase Common
Stock or Convertible Securities are hereinafter referred to as "Options") and
the price per share for which Common Stock is issuable upon the exercise of such
Options is less than the Market Price on the date of issuance ("Below Market
Options"), then the maximum total number of shares of Common Stock issuable upon
the exercise of all such Below Market Options (assuming full exercise,
conversion or exchange of Convertible Securities, if applicable) will, as of the
date of the issuance or grant of such Below Market Options, be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share. For purposes of the preceding sentence, the "price per share for which
Common Stock is issuable upon the exercise of such Below Market Options" is
determined by dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the issuance or granting of all such Below
Market Options, plus the minimum aggregate amount of additional consideration,
if any, payable to the Company upon the exercise of all such Below Market
Options, plus, in the case of Convertible Securities issuable upon the exercise
of such Below Market Options, the minimum aggregate amount of additional
consideration payable upon the exercise, conversion or exchange thereof at the
time such Convertible Securities first become exercisable, convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the exercise of all such Below Market Options (assuming full
conversion of Convertible Securities, if applicable). No further adjustment to
the Exercise Price will be made upon the actual issuance of such Common Stock
upon the exercise of such Below Market Options or upon the exercise, conversion
or exchange of Convertible Securities issuable upon exercise of such Below
Market Options.
5
<PAGE>
(ii) Issuance of Convertible Securities.
----------------------------------
(A) If the Company in any manner issues or sells any
Convertible Securities, whether or not immediately convertible (other than where
the same are issuable upon the exercise of Options) and the price per share for
which Common Stock is issuable upon such exercise, conversion or exchange (as
determined pursuant to Section 4(b)(ii)(B) if applicable) is less than the
Market Price on the date of issuance, then the maximum total number of shares of
Common Stock issuable upon the exercise, conversion or exchange of all such
Convertible Securities will, as of the date of the issuance of such Convertible
Securities, be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of the preceding sentence,
the "price per share for which Common Stock is issuable upon such exercise,
conversion or exchange" is determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the issuance or sale
of all such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the exercise,
conversion or exchange thereof at the time such Convertible Securities first
become exercisable, convertible or exchangeable, by (ii) the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of all such Convertible Securities. No further adjustment to the
Exercise Price will be made upon the actual issuance of such Common Stock upon
exercise, conversion or exchange of such Convertible Securities.
(B) If the Company in any manner issues or sells any
Convertible Securities with a fluctuating conversion or exercise price or
exchange ratio (a "Variable Rate Convertible Security"), then the price per
share for which Common Stock is issuable upon such exercise, conversion or
exchange for purposes of the calculation contemplated by Section 4(b)(ii)(A)
shall be deemed to be the lowest price per share which would be applicable
(assuming all holding period and other conditions to any discounts contained in
such Convertible Security have been satisfied) if the Market Price on the date
of issuance of such Convertible Security was 75% of the Market Price on such
date (the "Assumed Variable Market Price"). Further, if the Market Price at any
time or times thereafter is less than or equal to the Assumed Variable Market
Price last used for making any adjustment under this Section 4 with respect to
any Variable Rate Convertible Security, the Exercise Price in effect at such
time shall be readjusted to equal the Exercise Price which would have resulted
if the Assumed Variable Market Price at the time of issuance of the Variable
Rate Convertible Security had been 75% of the Market Price existing at the time
of the adjustment required by this sentence.
(iii) Change in Option Price or Conversion Rate. If there is a
-----------------------------------------
change at any time in (i) the amount of additional consideration payable to the
Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the exercise, conversion or
exchange of any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock
(other than under or by reason of provisions designed to protect against
dilution), the Exercise Price in effect at the time of such change will be
readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional
6
<PAGE>
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold.
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. If, in any case, the total number of shares of Common Stock issuable
- ----------
upon exercise of any Option or upon exercise, conversion or exchange of any
Convertible Securities is not, in fact, issued and the rights to exercise such
Option or to exercise, convert or exchange such Convertible Securities shall
have expired or terminated, the Exercise Price then in effect will be readjusted
to the Exercise Price which would have been in effect at the time of such
expiration or termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination (other
than in respect of the actual number of shares of Common Stock issued upon
exercise or conversion thereof), never been issued.
(v) Calculation of Consideration Received. If any Common
-------------------------------------
Stock, Options or Convertible Securities are issued, granted or sold for cash,
the consideration received therefor for purposes of this Warrant will be the
amount received by the Company therefor, before deduction of reasonable
commissions, underwriting discounts or allowances or other reasonable expenses
paid or incurred by the Company in connection with such issuance, grant or sale.
In case any Common Stock, Options or Convertible Securities are issued or sold
for a consideration part or all of which shall be other than cash, the amount of
the consideration other than cash received by the Company will be the fair
market value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Market Price thereof as of the date of receipt. In case any Common
Stock, Options or Convertible Securities are issued in connection with any
merger or consolidation in which the Company is the surviving corporation, the
amount of consideration therefor will be deemed to be the fair market value of
such portion of the net assets and business of the non-surviving corporation as
is attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair market value of any consideration other than cash or
securities will be determined in good faith by an investment banker or other
appropriate expert of national reputation selected by the Company and reasonably
acceptable to the holder hereof, with the costs of such appraisal to be borne by
the Company.
(vi) Exceptions to Adjustment of Exercise Price. No
------------------------------------------
adjustment to the Exercise Price will be made (i) upon the exercise of any
warrants, options or convertible securities issued and outstanding on the Issue
Date and set forth on Schedule 3(c) of the Securities Purchase Agreement in
accordance with the terms of such securities as of such date; (ii) upon the
grant or exercise of any stock or options which may hereafter be granted or
exercised under any employee benefit plan of the Company now existing or to be
implemented in the future, so long as the issuance of such stock or options is
approved by a majority of the non-employee members of the Board of Directors of
the Company or a majority of the members of a committee of non-employee
directors established for such purpose; (iii) upon the issuance of any
Debentures or Warrants in accordance with terms of the Securities Purchase
Agreement; or (iv) upon conversion of the Debentures or exercise of the
Warrants.
7
<PAGE>
(c) Subdivision or Combination of Common Stock. If the Company, at
------------------------------------------
any time during the Exercise Period, subdivides (by any stock split, stock
dividend, recapitalization, reorganization, reclassification or otherwise) its
shares of Common Stock into a greater number of shares, then, after the date of
record for effecting such subdivision, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced. If the Company, at
any time during the Exercise Period, combines (by reverse stock split,
recapitalization, reorganization, reclassification or otherwise) its shares of
Common Stock into a smaller number of shares, then, after the date of record for
effecting such combination, the Exercise Price in effect immediately prior to
such combination will be proportionately increased.
(d) Adjustment in Number of Shares. Upon each adjustment of the
------------------------------
Exercise Price pursuant to the provisions of this Section 4, the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Exercise Price.
(e) Consolidation, Merger or Sale. In case of any consolidation of
-----------------------------
the Company with, or merger of the Company into any other corporation, or in
case of any sale or conveyance of all or substantially all of the assets of the
Company other than in connection with a plan of complete liquidation of the
Company at any time during the Exercise Period, then as a condition of such
consolidation, merger or sale or conveyance, adequate provision will be made
whereby the holder of this Warrant will have the right to acquire and receive
upon exercise of this Warrant in lieu of the shares of Common Stock immediately
theretofore acquirable upon the exercise of this Warrant, such shares of stock,
securities, cash or assets as were issued or payable with respect to or in
exchange for the number of shares of Common Stock immediately theretofore
acquirable and receivable upon exercise of this Warrant had such consolidation,
merger or sale or conveyance not taken place. In any such case, the Company will
make appropriate provision to insure that the provisions of this Section 4
hereof will thereafter be applicable as nearly as may be in relation to any
shares of stock or securities thereafter deliverable upon the exercise of this
Warrant. The Company will not effect any consolidation, merger or sale or
conveyance unless prior to the consummation thereof, the successor corporation
(if other than the Company) assumes by written instrument the obligations under
this Section 4 and the obligations to deliver to the holder of this Warrant such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, the holder may be entitled to acquire.
(f) Distribution of Assets. In case the Company shall declare or
----------------------
make any distribution of its assets (or rights to acquire its assets) to holders
of Common Stock as a partial liquidating dividend, stock repurchase, by way of
return of capital or otherwise (including any dividend or distribution to the
Company's shareholders of cash or shares (or rights to acquire shares) of
capital stock of a subsidiary) (a "Distribution"), at any time during the
Exercise Period, then the holder of this Warrant shall be entitled upon exercise
of this Warrant for the purchase of any or all of the shares of Common Stock
subject hereto, to receive the amount of such assets (or rights) which
8
<PAGE>
would have been payable to the holder had such holder been the holder of such
shares of Common Stock on the record date for the determination of shareholders
entitled to such Distribution.
(g) Notice of Adjustment. Upon the occurrence of any event which
--------------------
requires any adjustment of the Exercise Price, then, and in each such case, the
Company shall give notice thereof to the holder of this Warrant, which notice
shall state the Exercise Price resulting from such adjustment and the increase
or decrease in the number of Warrant Shares purchasable at such price upon
exercise, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based. Such calculation shall be certified
by the chief financial officer of the Company.
(h) Minimum Adjustment of Exercise Price. No adjustment of the
------------------------------------
Exercise Price shall be made in an amount of less than 1% of the Exercise Price
in effect at the time such adjustment is otherwise required to be made, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 1% of such
Exercise Price.
(i) No Fractional Shares. No fractional shares of Common Stock are
--------------------
to be issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock on the date of such exercise.
(j) Other Notices. In case at any time:
-------------
(i) the Company shall declare any dividend upon the Common
Stock payable in shares of stock of any class or make any other distribution
(other than dividends or distributions payable in cash out of retained earnings
consistent with the Company's past practices with respect to declaring dividends
and making distributions) to the holders of the Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or other
rights;
(iii) there shall be any capital reorganization of the Company,
or reclassification of the Common Stock, or consolidation or merger of the
Company with or into, or sale of all or substantially all of its assets to,
another corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date or estimated date on which the books of the Company shall
close or a record shall be taken for determining the holders of Common Stock
entitled to receive any such dividend, distribution, or subscription rights or
for determining the holders of Common Stock entitled to vote in respect of any
9
<PAGE>
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up and (b) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, notice of the date (or, if not then known, a reasonable estimate
thereof by the Company) when the same shall take place. Such notice shall also
specify the date, if known, on which the holders of Common Stock shall be
entitled to receive such dividend, distribution, or subscription rights or to
exchange their Common Stock for stock or other securities or property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation, or winding-up, as the case may be. Such notice
shall be given at least 30 days prior to the record date or the date on which
the Company's books are closed in respect thereto. Failure to give any such
notice or any defect therein shall not affect the validity of the proceedings
referred to in clauses (i), (ii), (iii) and (iv) above.
(k) Certain Events. If, at any time during the Exercise Period, any
--------------
event occurs of the type contemplated by the adjustment provisions of this
Section 4 but not expressly provided for by such provisions, the Company will
give notice of such event as provided in Section 4(g) hereof, and the Company's
Board of Directors will make an appropriate adjustment in the Exercise Price and
the number of shares of Common Stock acquirable upon exercise of this Warrant so
that the rights of the holder shall be neither enhanced nor diminished by such
event.
(l) Certain Definitions.
-------------------
(i) "Common Stock Deemed Outstanding" shall mean the number of
shares of Common Stock actually outstanding (not including shares of Common
Stock held in the treasury of the Company), plus (x) in the case of any
adjustment required by Section 4(a) resulting from the issuance of any Options,
the maximum total number of shares of Common Stock issuable upon the exercise of
the Options for which the adjustment is required (including any Common Stock
issuable upon the conversion of Convertible Securities issuable upon the
exercise of such Options), and (y) in the case of any adjustment required by
Section 4(a) resulting from the issuance of any Convertible Securities, the
maximum total number of shares of Common Stock issuable upon the exercise,
conversion or exchange of the Convertible Securities for which the adjustment is
required, as of the date of issuance of such Convertible Securities, if any.
(ii) "Market Price," as of any date, (i) means the average of
the closing bid prices for the shares of Common Stock as reported on the Nasdaq
National Market for the five (5) trading days immediately preceding such date,
or (ii) if the Nasdaq National Market is not the principal trading market for
the shares of Common Stock, the average of the last reported bid prices on the
principal trading market for the Common Stock for the five (5) trading days
immediately preceding such date or, if there is no bid price for such period,
the last reported sales price for such period, or (iii) if market value cannot
be calculated as of such date on any of the foregoing bases, the Market Price
shall be the average fair market value as reasonably determined by an investment
banking firm selected by the Company and reasonably acceptable to the holder,
with the costs of the appraisal to be borne by the Company. The manner of
determining the Market Price of the Common
10
<PAGE>
Stock set forth in the foregoing definition shall apply with respect to any
other security in respect of which a determination as to market value must be
made hereunder.
(iii) "Common Stock," for purposes of this Section 4, includes
the Common Stock and any additional class of stock of the Company having no
preference as to dividends or distributions on liquidation, provided that the
shares purchasable pursuant to this Warrant shall include only Common Stock in
respect of which this Warrant is exercisable, or shares resulting from any
subdivision or combination of such Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Section 4(e) hereof, the stock or other securities or
property provided for in such Section.
5. Issue Tax. The issuance of certificates for Warrant Shares upon the
---------
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.
6. No Rights or Liabilities as a Shareholder. This Warrant shall not
-----------------------------------------
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
7. Transfer, Exchange, Redemption and Replacement of Warrant.
---------------------------------------------------------
(a) Restriction on Transfer. This Warrant and the rights granted to
-----------------------
the holder hereof are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Section 7(e)
below, provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Section 7(f) and (g) hereof and to the provisions of
Sections 2(f) and 2(g) of the Securities Purchase Agreement. Until due
presentment for registration of transfer on the books of the Company, the
Company may treat the registered holder hereof as the owner and holder hereof
for all purposes, and the Company shall not be affected by any notice to the
contrary. Notwithstanding anything to the contrary contained herein, the
registration rights described in Section 8 hereof are assignable only in
accordance with the provisions of that certain Registration Rights Agreement,
dated as of the date hereof, by and among the Company and the other signatories
thereto (the "Registration Rights Agreement").
(b) Warrant Exchangeable for Different Denominations. This Warrant
------------------------------------------------
is exchangeable, upon the surrender hereof by the holder hereof at the office or
agency of the Company referred to in Section 7(e) below, for new Warrants of
like tenor of different denominations representing in the aggregate the right to
purchase the number of shares of Common Stock which
11
<PAGE>
may be purchased hereunder, each of such new Warrants to represent the right to
purchase such number of shares as shall be designated by the holder hereof at
the time of such surrender.
(c) Replacement of Warrant. Upon receipt of evidence reasonably
----------------------
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(d) Cancellation; Payment of Expenses. Upon the surrender of this
---------------------------------
Warrant in connection with any transfer, exchange, or replacement as provided in
this Section 7, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Section 7. The Company shall
indemnify and reimburse the holder of this Warrant for all costs and expenses
(including legal fees) incurred by such holder in connection with the
enforcement of its rights hereunder.
(e) Warrant Register. The Company shall maintain, at its principal
----------------
executive offices (or such other office or agency of the Company as it may
designate by notice to the holder hereof), a register for this Warrant, in which
the Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(f) Exercise or Transfer Without Registration. If, at the time of
-----------------------------------------
the surrender of this Warrant in connection with any exercise, transfer, or
exchange of this Warrant, this Warrant (or, in the case of any exercise, the
Warrant Shares issuable hereunder), shall not be registered under the Securities
Act and under applicable state securities or blue sky laws, the Company may
require, as a condition of allowing such exercise, transfer, or exchange,
(i) that the holder or transferee of this Warrant, as the case may be, furnish
to the Company a written opinion of counsel (which opinion shall be in form,
substance and scope customary for opinions of counsel in comparable
transactions) to the effect that such exercise, transfer, or exchange may be
made without registration under the Securities Act and under applicable state
securities or blue sky laws, (ii) that the holder or transferee execute and
deliver to the Company an investment letter in form and substance acceptable to
the Company and (iii) that the transferee be an "accredited investor" as defined
in Rule 501(a) promulgated under the Securities Act; provided that no such
opinion, letter, status as an "accredited investor" shall be required in
connection with a transfer pursuant to Rule 144 under the Securities Act.
(g) Additional Restrictions on Exercise or Transfer.
-----------------------------------------------
Notwithstanding anything contained herein to the contrary, in no event shall the
holder hereof exercise Warrants to the extent that (a) the number of shares of
Common Stock beneficially owned by such holder and its affiliates
12
<PAGE>
(other than shares of Common Stock which may be deemed beneficially owned
through the ownership of the unexercised portion of the Warrants or the
unexercised or unconverted portion of any other securities of the Company
subject to a limitation on conversion or exercise analogous to the limitation
contained herein) and (b) the number of shares of Common Stock issuable upon
exercise of the Warrants (or portion thereof) with respect to which the
determination described herein is being made, would result in beneficial
ownership by such holder and its affiliates of more than 4.99% of the
outstanding shares of Common Stock. For purposes of the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13D-G
thereunder, except as otherwise provided in clause (a) hereof. The restrictions
contained in this Section 7(g) may not be amended without the consent of the
holder of this Warrant and the holders of a majority of the Company's then
outstanding Common Stock.
8. Registration Rights. The initial holder of this Warrant (and certain
-------------------
assignees thereof) is entitled to the benefit of such registration rights in
respect of the Warrant Shares as are set forth in the Registration Rights
Agreement, including the right to assign such rights to certain assignees as set
forth therein.
9. Notices. Any notices required or permitted to be given under the
-------
terms of this Warrant shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier or by confirmed telecopy, in each case addressed to a party. The
addresses for such communications shall be:
If to the Company:
The L.L. Knickerbocker Co., Inc.
25800 Commercenter Drive
Lake Forest, CA 92630
Telecopy: (714) 595-7913
Attention: Anthony P. Shutts, CFO
with a copy to:
William R. Black, Esq.
29 Summitcrest
Dove Canyon, CA 92679
Telecopy: (714) 888-7700
13
<PAGE>
If to the Holder:
Capital Ventures International
c/o Heights Capital Management
425 California, Suite 1100
San Francisco, CA 94104
Telecopy: (415) 403-6525
Attention: Andrew Frost
with a copy to:
Klehr, Harrison, Harvey, Branzburg & Ellers
1401 Walnut Street
Philadelphia, PA 19102
Telecopy: (215) 568-6603
Attention: Stephen T. Burdumy, Esquire
10. Governing Law; Jurisdiction. This Warrant shall be governed by and
---------------------------
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed in the State of New York. The Company
irrevocably consents to the jurisdiction of the United States federal courts and
state courts located in San Francisco, California in any suit or proceeding
based on or arising under this Warrant and irrevocably agrees that all claims in
respect of such suit or proceeding may be determined in such courts. The Company
irrevocably waives the defense of an inconvenient forum to the maintenance of
such suit or proceeding. The Company further agrees that service of process upon
the Company mailed by first class mail shall be deemed in every respect
effective service of process upon the Company in any such suit or proceeding.
Nothing herein shall affect the holder's right to serve process in any other
manner permitted by law. The Company agrees that a final non-appealable
judgment in any such suit or proceeding shall be conclusive and may be enforced
in other jurisdictions by suit on such judgment or in any other lawful manner.
11. Miscellaneous.
-------------
(a) Amendments. This Warrant and any provision hereof may only be
----------
amended by an instrument in writing signed by the Company and the holder hereof.
(b) Descriptive Headings. The descriptive headings of the several
--------------------
Sections of this Warrant are inserted for purposes of reference only, and shall
not affect the meaning or construction of any of the provisions hereof.
(c) Cashless Exercise. Notwithstanding anything to the contrary
-----------------
contained in this Warrant, if the resale of the Warrant Shares by the holder is
not then registered pursuant to an effective registration statement under the
Securities Act, this Warrant may be exercised at any time after the first
anniversary of the Issue Date until the end of the Exercise Period, by
presentation and
14
<PAGE>
surrender of this Warrant to the Company at its principal executive offices with
a written notice of the holder's intention to effect a cashless exercise,
including a calculation of the number of shares of Common Stock to be issued
upon such exercise in accordance with the terms hereof (a "Cashless Exercise").
In the event of a Cashless Exercise, in lieu of paying the Exercise Price in
cash, the holder shall surrender this Warrant for that number of shares of
Common Stock determined by multiplying the number of Warrant Shares to which it
would otherwise be entitled by a fraction, the numerator of which shall be the
difference between the last reported sale price per share of the Common Stock on
the date of exercise (as reported on the Nasdaq National Market, or if not so
reported, as reported on the principle United States securities market on which
the Common Stock is then traded) and the Exercise Price, and the denominator of
which shall be such last reported sale price per share of Common Stock.
(d) Business Day. For purposes of this Warrant, the term "business
------------
day" means any day other than a Saturday or Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law,
regulation or executive order to close.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
15
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
THE L.L. KNICKERBOCKER CO., INC.
By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE>
FORM OF EXERCISE AGREEMENT
(To be Executed by the Holder in order to Exercise the Warrant)
To: The L.L. Knickerbocker Co., Inc.
25800 Commercenter Drive
Lake Forest, CA 92630
Telecopy: (714) 595-7913
Attention: Anthony P. Shutts, CFO
The undersigned hereby irrevocably exercises the right to purchase
_____________ shares of the Common Stock of The L.L. Knickerbocker Co., Inc., a
corporation organized under the laws of the State of California (the "Company"),
evidenced by the attached Warrant, and herewith makes payment of the Exercise
Price with respect to such shares in full, all in accordance with the conditions
and provisions of said Warrant.
i. The undersigned agrees not to offer, sell, transfer or otherwise
dispose of any Common Stock obtained on exercise of the Warrant, except under
circumstances that will not result in a violation of the Securities Act of 1933,
as amended, or any state securities laws, and agrees that the following legend
may be affixed to the stock certificate for the Common Stock hereby subscribed
for if resale of such Common Stock is not registered or if an exemption from
registration is unavailable:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES
REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE
SECURITIES LAWS UNLESS OFFERED, SOLD OR TRANSFERRED UNDER AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
ii. The undersigned requests that stock certificates for such shares be
issued, and a Warrant representing any unexercised portion hereof be issued,
pursuant to the Warrant in the name of the Holder and delivered to the
undersigned at the address set forth below:
Dated:
------------------- -------------------------------------
Signature of Holder
-------------------------------------
Name of Holder (Print)
Address:
-------------------------------------
-------------------------------------
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
all the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:
Name of Assignee Address No of Shares
- ---------------- ------- ------------
, and hereby irrevocably constitutes and appoints ____________________________
as agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.
Dated: _____________________, ____,
In the presence of
- -----------------------
Name:
-------------------------------------------
Signature:
--------------------------------
Title of Signing Officer or Agent (if any):
--------------------------------
Address:
--------------------------------
--------------------------------
Note: The above signature should
correspond exactly with the name on
the face of the within Warrant.
<PAGE>
EXHIBIT 4.4
<PAGE>
EXHIBIT C
to
Securities
Purchase
Agreement
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of September 8,
1997, by and among THE L. L. KNICKERBOCKER CO., INC., a corporation organized
under the laws of the State of California, with headquarters located at 25800
Commercenter Drive, Lake Forest, CA 92630 (the "Company"), and the undersigned
(together with affiliates, the "Initial Investor").
WHEREAS:
A. In connection with the Securities Purchase Agreement of even date
herewith by and between the Company and the Initial Investor (the "Securities
Purchase Agreement"), the Company has agreed, upon the terms and subject to the
conditions contained therein, to issue and sell to the Initial Investor (i)
convertible debentures ("Debentures") in the aggregate principal amount of Five
Million Dollars ($5,000,000) due September 7, 2000, which are convertible into
shares of the Company's common stock, no par value per share (the "Common
Stock"), and (ii) warrants (the "Warrants") to acquire an aggregate of 88,132
shares of Common Stock. The shares of Common Stock issuable upon conversion of
or otherwise pursuant to the Debentures are referred to herein as the
"Conversion Shares" and the shares of Common Stock issuable upon exercise of or
otherwise pursuant to the Warrants are referred to herein as the "Warrant
Shares."
B. To induce the Initial Investor to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Initial
Investor hereby agree as follows:
1. DEFINITIONS.
-----------
a. As used in this Agreement, the following terms shall have the
following meanings:
<PAGE>
(i) "Investors" means the Initial Investor and any transferees
or assignees who agree to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(ii) "register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iii) "Registrable Securities" means (i) the Conversion Shares,
(ii) the Warrant Shares and (iii) any shares of capital stock issued or
issuable, from time to time (with any adjustments), as a distribution on or in
exchange for or otherwise with respect to any of the foregoing.
(iv) "Registration Statement" means a registration statement of
the Company under the Securities Act.
b. Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Securities Purchase
Agreement.
2. REGISTRATION.
------------
a. Mandatory Registration. The Company shall prepare and use its
----------------------
best efforts to file with the United States Securities and Exchange Commission
("SEC"), on or prior to the date (the "Filing Date") which is twenty (20) days
after the Issue Date (as defined in the Debentures), a Registration Statement on
Form S-3 (or, if Form S-3 is not then available, on such form of Registration
Statement as is then available to effect a registration of all of the
Registrable Securities, subject to the consent of the Initial Investor (as
determined pursuant to Section 11(j) hereof)) covering the resale of at least
1,240,000 Registrable Securities, which Registration Statement, to the extent
allowable under the Securities Act and the Rules promulgated thereunder
(including Rule 416), shall state that such Registration Statement also covers
such indeterminate number of additional shares of Common Stock as may become
issuable upon conversion of the Debentures and exercise of the Warrants (i) to
prevent dilution resulting from stock splits, stock dividends or similar
transactions or (ii) by reason of reductions in the Conversion Price of the
Debentures or the Exercise Price of the Warrants in accordance with the terms
thereof, including, but not limited to, the terms which cause the Variable
Conversion Price of the Debentures to decrease to the extent the bid price of
the Common Stock decreases. The Registrable Securities included in the
Registration Statement shall be allocated to the Investors as set forth in
Section 11(k) hereof. The Registration Statement (and each amendment or
supplement thereto, and each request for acceleration of effectiveness thereof)
shall be provided to (and subject to the approval of) the Initial Investor and
its counsel prior to its filing or other submission.
-2-
<PAGE>
b. Underwritten Offering. If any offering pursuant to a
---------------------
Registration Statement pursuant to Section 2(a) hereof involves an underwritten
offering, the Investors who hold a majority in interest of the Registrable
Securities subject to such underwritten offering, with the consent of the
Initial Investor, shall have the right to select one legal counsel to represent
the Investors and an investment banker or bankers and manager or managers to
administer the offering, which investment banker or bankers or manager or
managers shall be reasonably satisfactory to the Company. In the event that any
Investors elect not to participate in such underwritten offering, the
Registration Statement covering all of the Registrable Securities shall contain
appropriate plans of distribution reasonably satisfactory to the Investors
participating in such underwritten offering and the Investors electing not to
participate in such underwritten offering (including, without limitation, the
ability of nonparticipating Investors to sell from time to time and at any time
during the effectiveness of such Registration Statement).
c. Payments by the Company. The Company shall use its best efforts
-----------------------
to cause the Registration Statement required to be filed pursuant to Section
2(a) hereof to become effective as soon as practicable, but in no event later
than the ninetieth (90th) day after the Issue Date (the "Registration
Deadline"). If (i) the Registration Statement(s) covering the Registrable
Securities required to be filed by the Company pursuant to Section 2(a) hereof
is not filed with the SEC by the Filing Date or declared effective by the SEC on
or before the Registration Deadline or if, after the Registration Statement has
been declared effective by the SEC, sales of all the Registrable Securities
(including any Registrable Securities required to be registered pursuant to
Section 3(b) hereof) cannot be made pursuant to the Registration Statement (by
reason of a stop order or the Company's failure to update the Registration
Statement or any other reason outside the control of the Investors) or (ii) the
Common Stock is not listed or included for quotation on the Nasdaq National
Market (the "NNM"), the New York Stock Exchange (the "NYSE") or the American
Stock Exchange (the "AMEX") at any time after the Registration Deadline, then
the Company will make payments to the Investors in such amounts and at such
times as shall be determined pursuant to this Section 2(c) as partial relief for
the damages to the Investors by reason of any such delay in or reduction of
their ability to sell the Registrable Securities (which remedy shall not be
exclusive of any other remedies available at law or in equity). The Company
shall pay to each Investor an amount equal to the product of (i) the aggregate
principal amount of the Debentures held by such Investor (including, without
limitation, Debentures that have been converted into Conversion Shares then held
by such Investor) (the "Aggregate Principal Amount"), multiplied by (ii) two
percent (2.0%), multiplied by (iii) the sum of (x) the number of months (pro
rated for partial months) after the Filing Date and prior to the date the
Registration Statement required to be filed pursuant to Section 2(a) is filed
with the SEC, plus (y) the number of months (pro rated for partial months) after
the Registration Deadline and prior to the date the Registration Statement filed
pursuant to Section 2(a) is declared effective by the SEC, plus (z) the number
of additional months (prorated for partial months) that sales of any Registrable
Securities cannot be made pursuant to the Registration Statement after the
Registration Statement has been declared effective or the Common Stock is not
listed or included for quotation on the NNM, the NYSE or AMEX; provided,
however, that there shall be excluded from each such period any delays which are
solely attributable to changes (other than corrections of Company mistakes with
respect to information previously provided by the Investors) required by the
Investors
-3-
<PAGE>
in the Registration Statement with respect to information relating to
the Investors, including, without limitation, changes to the plan of
distribution. For example, if the Registration Statement is not effective by
the Registration Deadline, the Company would pay $20,000 per month for each
$1,000,000 of Aggregate Principal Amount until the Registration Statement
becomes effective. Such amounts shall be paid in cash or, at each Investor's
option, may be convertible into Common Stock at the "Conversion Price" (as
defined in the Debentures). Any shares of Common Stock issued upon conversion
of such amounts shall be Registrable Securities. If the Investor desires to
convert the amounts due hereunder into Registrable Securities, it shall so
notify the Company in writing within two (2) business days of the date on which
such amounts are first payable in cash and such amounts shall be so convertible
(pursuant to the mechanics set forth under Article IV of the Debentures),
beginning on the last day upon which the cash amount would otherwise be due in
accordance with the following sentence. Payments of cash pursuant hereto shall
be made within five (5) days after the end of each period that gives rise to
such obligation, provided that, if any such period extends for more than thirty
(30) days, interim payments shall be made for each such thirty (30) day period.
d. Piggy-Back Registrations. If at any time prior to the expiration
------------------------
of the Registration Period (as hereinafter defined) the Company shall file with
the SEC a Registration Statement relating to an offering for its own account or
the account of others under the Securities Act of any of its equity securities
(other than on Form S-4 or Form S-8 or their then equivalents relating to equity
securities to be issued solely in connection with any acquisition of any entity
or business or equity securities issuable in connection with stock option or
other employee benefit plans) and the Company is not prohibited from including
such Registrable Securities on such Registration Statement, the Company shall
send to each Investor who is entitled to registration rights under this Section
2(d) written notice of such determination and, if within fifteen (15) days after
the date of such notice, such Investor shall so request in writing, the Company
shall include in such Registration Statement all or any part of the Registrable
Securities such Investor requests to be registered, except that if, in
connection with any underwritten public offering for the account of the Company
the managing underwriter(s) thereof shall impose a limitation on the number of
shares of Common Stock which may be included in the Registration Statement
because, in such underwriter(s)' judgment, marketing or other factors dictate
such limitation is necessary to facilitate public distribution, then the Company
shall be obligated to include in such Registration Statement only such limited
portion of the Registrable Securities with respect to which such Investor has
requested inclusion hereunder as the underwriter shall permit. Any exclusion of
Registrable Securities shall be made pro rata among the Investors seeking to
include Registrable Securities, in proportion to the number of Registrable
Securities sought to be included by such Investors; provided, however, that the
Company shall not exclude any Registrable Securities unless the Company has
first excluded all outstanding securities, the holders of which are not entitled
to inclusion of such securities in such Registration Statement or are not
entitled to pro rata inclusion with the Registrable Securities; and provided,
further, however, that, after giving effect to the immediately preceding
proviso, any exclusion of Registrable Securities shall be made pro rata with
holders of other securities having the right to include such securities in the
Registration Statement other than holders of securities entitled to inclusion of
their securities in such Registration Statement by reason of
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demand registration rights (except to the extent any existing agreements
otherwise provide). No right to registration of Registrable Securities under
this Section 2(d) shall be construed to limit any registration required under
Section 2(a) hereof. If an offering in connection with which an Investor is
entitled to registration under this Section 2(d) is an underwritten offering,
then each Investor whose Registrable Securities are included in such
Registration Statement shall, unless otherwise agreed by the Company, offer and
sell such Registrable Securities in an underwritten offering using the same
underwriter or underwriters and, subject to the provisions of this Agreement, on
the same terms and conditions as other shares of Common Stock included in such
underwritten offering.
e. Eligibility for Form S-3. The Company represents and warrants
------------------------
that it meets the requirements for the use of Form S-3 for registration of the
sale by the Initial Investor and any other Investor of the Registrable
Securities and the Company shall file all reports required to be filed by the
Company with the SEC in a timely manner so as to maintain such eligibility for
the use of Form S-3.
f. Rule 416. The Company and the Investors each acknowledge that an
--------
indeterminate number of Registrable Securities shall be registered pursuant to
Rule 416 under the Securities Act so as to include in such Registration
Statement any and all Registrable Securities which may become issuable (i) to
prevent dilution resulting from stock splits, stock dividends or similar
transactions and (ii) by reason of reductions in the Conversion Price of the
Debentures in accordance with the terms thereof, including, but not limited to,
the terms which cause the Variable Conversion Price to decrease to the extent
the bid price of the Common Stock decreases (collectively, the "Rule 416
Securities"). In this regard, the Company agrees to take all steps necessary to
ensure that the maximum number of Registrable Securities which may be registered
pursuant to Rule 416 under the Securities Act are covered by the Registration
Statement and, absent guidance from the SEC or other definitive authority to the
contrary, the Company shall affirmatively support and not take any action
adverse to the position that the Registration Statements filed hereunder cover
all of the Rule 416 Securities. If the Company determines that the Registration
Statements filed hereunder do not cover all of the Rule 416 Securities, the
Company shall immediately provide to each Investor written notice (a "Rule 416
Notice") setting forth the basis for the Company's position and the authority
therefor.
3. OBLIGATIONS OF THE COMPANY.
--------------------------
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
a. The Company shall prepare promptly and use its best efforts to
file with the SEC the Registration Statement required by Section 2(a) as soon as
practicable after the Issue Date (but in no event later than the Filing Date),
and cause such Registration Statement relating to Registrable Securities to
become effective as soon as practicable after such filing (but in no event later
than the Registration Deadline), and keep the Registration Statement effective
pursuant to Rule 415 at all times until such date as is the earlier of (i) the
date on which all of the Registrable
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Securities have been sold and (ii) the date on which all of the Registrable
Securities (in the reasonable opinion of counsel to the Initial Investor) may be
immediately sold to the public without registration or restriction pursuant to
Rule 144(k) under the Securities Act (the "Registration Period"), which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein and all documents incorporated by reference
therein) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein not misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statement and the prospectus used in connection with the Registration Statement
as may be necessary to keep the Registration Statement effective at all times
during the Registration Period, and, during such period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement. In the event (i) the
Company delivers a Rule 416 Notice to the Investors or the Investors who hold a
majority in interest of the Registrable Securities shall reasonably determine,
or the SEC shall state formally or informally, that Rule 416 under the
Securities Act does not permit a registration statement to cover securities
which may become issuable upon conversion or exercise of convertible or
exercisable securities by reason of reductions in the conversion or exercise
price of such securities and (ii) the number of shares available under a
Registration Statement filed pursuant to this Agreement is, for any three (3)
consecutive trading days (the last of such three (3) trading days being the
"Registration Trigger Date"), insufficient to cover one hundred thirty-five
percent (135%) of the Registrable Securities issued or issuable upon conversion
of the Debentures and exercise of the Warrants (without giving effect to any
limitations on conversion or exercise contained in Article IV.C of the
Debentures or Section 7(g) of the Warrants), the Company shall amend the
Registration Statement, or file a new Registration Statement (on the short form
available therefor, if applicable), or both, so as to cover two hundred percent
(200%) of the Registrable Securities so issued or issuable (without giving
effect to any limitations on conversion or exercise contained in Article IV.C of
the Debentures or Section 7(g) of the Warrants) as of the Registration Trigger
Date, in each case, as soon as practicable, but in any event within fifteen (15)
days after the Registration Trigger Date (based on the market price of the
Common Stock and other relevant factors on which the Company reasonably elects
to rely). The Company shall cause such amendment and/or new Registration
Statement to become effective as soon as practicable following the filing
thereof. In the event the Company fails to obtain the effectiveness of any such
Registration Statement within sixty (60) days after a Registration Trigger Date,
each Investor shall thereafter have the option, exercisable in whole or in part
at any time and from time to time by delivery of a written notice to the Company
(a "Redemption Notice"), to require the Company to purchase for cash, at an
amount per share equal to the Default Amount (as defined in Article VIII of the
Debentures), a portion of the Investor's Debentures such that the total number
of Registrable Securities included on the Registration Statement for resale by
such Investor exceeds 135% of the Registrable Securities issued or issuable upon
conversion of such Investor's Debentures and exercise of such Investor's
Warrants (without
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<PAGE>
giving effect to any limitations on conversion or exercise contained in Article
IV.C of the Debentures or Section 7(g) of the Warrants). If the Company fails to
purchase any of such Debentures within five (5) business days after its receipt
of a Redemption Notice, then such Investor shall be entitled to the remedies
provided in Article VIII.C of the Debentures.
c. The Company shall furnish to each Investor whose Registrable
Securities are included in the Registration Statement and its legal counsel (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one copy of the Registration Statement and any
amendment thereto, each preliminary prospectus and prospectus and each amendment
or supplement thereto, and, in the case of the Registration Statement referred
to in Section 2(a), each letter written by or on behalf of the Company to the
SEC or the staff of the SEC (including, without limitation, any request to
accelerate the effectiveness of any Registration Statement or amendment
thereto), and each item of correspondence from the SEC or the staff of the SEC,
in each case relating to such Registration Statement (other than any portion, if
any, thereof which contains information for which the Company has sought
confidential treatment), (ii) on the date of effectiveness of the Registration
Statement or any amendment thereto, a notice stating that the Registration
Statement or amendment has been declared effective, and (iii) such number of
copies of a prospectus, including a preliminary prospectus, and all amendments
and supplements thereto and such other documents as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor.
d. The Company shall use its best efforts to (i) register and
qualify the Registrable Securities covered by the Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as each Investor who holds Registrable Securities being offered
reasonably requests, (ii) prepare and file in those jurisdictions such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to (a) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(d), (b) subject itself to general taxation in any such
jurisdiction, (c) file a general consent to service of process in any such
jurisdiction, (d) provide any undertakings that cause the Company undue expense
or burden, or (e) make any change in its charter or bylaws, which in each case
the Board of Directors of the Company determines to be contrary to the best
interests of the Company and its stockholders.
e. In the event the Investors who hold a majority in interest of the
Registrable Securities being offered in an offering select underwriters for the
offering, the Company shall enter into and perform its obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriters of such offering.
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<PAGE>
f. As promptly as practicable after becoming aware of such event,
the Company shall notify each Investor of the happening of any event, of which
the Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and use its best
efforts promptly to prepare a supplement or amendment to the Registration
Statement to correct such untrue statement or omission, and deliver such number
of copies of such supplement or amendment to each Investor as such Investor may
reasonably request.
g. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
and, if such an order is issued, to obtain the withdrawal of such order at the
earliest practicable moment (including in each case by amending or supplementing
such Registration Statement) and to notify each Investor who holds Registrable
Securities being sold (or, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof
(and if such Registration Statement is supplemented or amended, deliver such
number of copies of such supplement or amendment to each Investor as such
Investor may reasonably request).
h. The Company shall permit a single firm of counsel designated by
the Initial Investor to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time prior to their filing with the
SEC, and not file any document in a form to which such counsel reasonably
objects.
i. The Company shall make generally available to its security
holders as soon as practical, but not later than ninety (90) days after the
close of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 under the Securities Act) covering a twelve-
month period beginning not later than the first day of the Company's fiscal
quarter next following the effective date of the Registration Statement.
j. At the request of any Investor, the Company shall furnish, on the
date of effectiveness of the Registration Statement (i) an opinion, dated as of
such date, from counsel representing the Company addressed to the Investors and
in form, scope and substances as is customarily given in an underwritten public
offering and (ii) in the case of an underwriting, a letter, dated such date,
from the Company's independent certified public accountants in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and the Investors.
k. The Company shall make available for inspection by (i) any
Investor, (ii) any underwriter participating in any disposition pursuant to the
Registration Statement, (iii) one firm of attorneys and one firm of accountants
or other agents retained by the Investors, and (iv) one firm of attorneys
retained by all such underwriters (collectively, the "Inspectors") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "Records"), as shall be reasonably deemed
necessary by each Inspector to enable each Inspector to
-8-
<PAGE>
exercise its due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information which any Inspector may
reasonably request for purposes of such due diligence; provided, however, that
each Inspector shall hold in confidence and shall not make any disclosure
(except to an Investor) of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement, (b) the release of such Records is ordered pursuant to a subpoena or
other order from a court or government body of competent jurisdiction, or (c)
the information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement. The
Company shall not be required to disclose any confidential information in such
Records to any Inspector until and unless such Inspector shall have entered into
confidentiality agreements (in form and substance satisfactory to the Company)
with the Company with respect thereto, substantially in the form of this Section
3(k). Each Investor agrees that it shall, upon learning that disclosure of such
Records is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to the Company and allow
the Company, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, the Records deemed
confidential. Nothing herein shall be deemed to limit the Investors' ability to
sell Registrable Securities in a manner which is otherwise consistent with
applicable laws and regulations.
l. The Company shall hold in confidence and not make any disclosure
of information concerning an Investor provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement, or (v) such Investor
consents to the form and content of any such disclosure. The Company agrees
that it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor prior
to making such disclosure, and allow the Investor, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
m. The Company shall use its best efforts to promptly either (i)
cause all the Registrable Securities covered by the Registration Statement to be
listed on the NYSE or the AMEX or another national securities exchange and on
each additional national securities exchange on which securities of the same
class or series issued by the Company are then listed, if any, if the listing of
such Registrable Securities is then permitted under the rules of such exchange,
or (ii) secure the designation and quotation, of all the Registrable Securities
covered by the Registration Statement on the NNM and, without limiting the
generality of the foregoing, to arrange for or maintain at least two market
makers to register with the National Association of Securities Dealers ("NASD")
as such with respect to such Registrable Securities.
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<PAGE>
n. The Company shall provide a transfer agent and registrar, which
may be a single entity, for the Registrable Securities not later than the
effective date of the Registration Statement.
o. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registrable
Securities to be offered pursuant to the Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as the
managing underwriter or underwriters, if any, or the Investors may reasonably
request and registered in such names as the managing underwriter or
underwriters, if any, or the Investors may request, and, within three (3)
business days after a Registration Statement which includes Registrable
Securities is ordered effective by the SEC, the Company shall deliver, and shall
cause legal counsel selected by the Company to deliver, to the transfer agent
for the Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such Registration Statement) an opinion of such
counsel in the form attached hereto as Exhibit 1.
p. At the request of any Investor, the Company shall prepare and
file with the SEC such amendments (including post-effective amendments) and
supplements to a Registration Statement and the prospectus used in connection
with the Registration Statement as may be necessary in order to change the plan
of distribution set forth in such Registration Statement.
q. The Company shall comply with all applicable laws related to a
Registration Statement and offering and sale of securities and all applicable
rules and regulations of governmental authorities in connection therewith
(including without limitation the Securities Act and the Securities Exchange Act
of 1934, as amended, and the rules and regulations promulgated by the SEC).
r. The Company shall take all such other actions as any Investor or
the underwriters, if any, reasonably request in order to expedite or facilitate
the disposition of such Registrable Securities.
s. From and after the date of this Agreement, the Company shall not,
and shall not agree to, allow the holders of any securities of the Company to
include any of their securities in any Registration Statement under Section 2(a)
hereof or any amendment or supplement thereto under Section 3(b) hereof without
the consent of the holders of a majority in interest of the Registrable
Securities.
4. OBLIGATIONS OF THE INVESTORS.
----------------------------
In connection with the registration of the Registrable Securities, the
Investors shall have the following obligations:
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a. It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. At least five (5)
business days prior to the first anticipated filing date of the Registration
Statement, the Company shall notify each Investor of the information the Company
requires from each such Investor.
b. Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement.
c. In the event Investors holding a majority in interest of the
Registrable Securities being offered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the underwriter(s) of such offering and the Company and take
such other actions as are reasonably required in order to expedite or facilitate
the disposition of the Registrable Securities, unless such Investor has notified
the Company in writing of such Investor's election not to participate in such
underwritten distribution.
d. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
e. No Investor may participate in any underwritten distribution
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements in usual and
customary form entered into by the Company, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, and (iii) agrees to pay its pro rata share of all underwriting
discounts and commissions and any expenses in excess of those payable by the
Company pursuant to Section 5 below.
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5. EXPENSES OF REGISTRATION.
------------------------
All reasonable expenses incurred by the Company or the Investors in
connection with registrations, filings or qualifications pursuant to Sections 2
and 3 above, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, the fees and disbursements of
counsel for the Company, the fees and disbursements of one counsel selected by
the Investors, and underwriting discounts and commissions shall be borne by the
Company. In addition, the Company shall pay all of the Investors' costs and
expenses (including legal fees) incurred in connection with the enforcement of
the rights of the Investors hereunder.
6. INDEMNIFICATION.
---------------
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) each Investor who holds such Registrable Securities, and
(ii) the directors, officers, partners, members, employees and agents of such
Investor and each person who controls any Investor within the meaning of Section
15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), if any, (each, an "Indemnified Person"),
against any joint or several losses, claims, damages, liabilities or expenses
(collectively, together with actions, proceedings or inquiries by any regulatory
or self-regulatory organization, whether commenced or threatened, in respect
thereof, "Claims") to which any of them may become subject insofar as such
Claims arise out of or are based upon: (i) any untrue statement or alleged
untrue statement of a material fact in a Registration Statement or the omission
or alleged omission to state therein a material fact required to be stated or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any other law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities (the matters in the foregoing clauses (i) through (iii) being,
collectively, "Violations"). Subject to the restrictions set forth in Section
6(c) with respect to the number of legal counsel, the Company shall reimburse
the Investors and each other Indemnified Person, promptly as such expenses are
incurred and are due and payable, for any reasonable legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (i) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by such Indemnified Person expressly for use in the Registration
Statement or any such amendment
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<PAGE>
thereof or supplement thereto; (ii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld; and
(iii) with respect to any preliminary prospectus, shall not inure to the benefit
of any Indemnified Person if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the
prospectus, as then amended or supplemented, if such corrected prospectus was
timely made available by the Company pursuant to Section 3(c) hereof, and the
Indemnified Person was promptly advised in writing not to use the incorrect
prospectus prior to the use giving rise to a Violation and such Indemnified
Person, notwithstanding such advice, used it. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
the Indemnified Person and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees severally and not jointly
to indemnify, hold harmless and defend, to the same extent and in the same
manner set forth in Section 6(a), the Company, each of its directors, each of
its officers who signs the Registration Statement, its employees, agents and
each person, if any, who controls the Company within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act, and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "Indemnified Party"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by such Investor expressly for use in
connection with such Registration Statement; and subject to Section 6(c) such
Investor will reimburse any legal or other expenses (promptly as such expenses
are incurred and are due and payable) reasonably incurred by them in connection
with investigating or defending any such Claim; provided, however, that the
indemnity agreement contained in this Section 6(b) shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the prior
written consent of such Investor, which consent shall not be unreasonably
withheld; provided, further, however, that the Investor shall be liable under
this Agreement (including this Section 6(b) and Section 7) for only that amount
as does not exceed the net proceeds actually received by such Investor as a
result of the sale of Registrable Securities pursuant to such Registration
Statement. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9. Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented, and the Indemnified Party failed to utilize such
corrected prospectus.
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c. Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to made against any indemnifying
party under this Section 6, deliver to the indemnifying party a written notice
of the commencement thereof, and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be; provided,
however, that such indemnifying party shall not be entitled to assume such
defense and an Indemnified Person or Indemnified Party shall have the right to
retain its own counsel with the fees and expenses to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the indemnifying
party, the representation by such counsel of the Indemnified Person or
Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential conflicts of interest between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding or the actual or potential defendants in, or targets of, any such
action include both the Indemnified Person or the Indemnified Party and the
indemnifying party and any such Indemnified Person or Indemnified Party
reasonably determines that there may be legal defenses available to such
Indemnified Person or Indemnified Party which are in conflict with those
available to such indemnifying party. The indemnifying party shall pay for only
one separate legal counsel for the Indemnified Persons or the Indemnified
Parties, as applicable, and such legal counsel shall be selected by Investors
holding a majority-in-interest of the Registrable Securities included in the
Registration Statement to which the Claim relates (with the approval of the
Initial Investor if it holds Registrable Securities included in such
Registration Statement), if the Investors are entitled to indemnification
hereunder, or by the Company, if the Company is entitled to indemnification
hereunder, as applicable. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is actually prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. CONTRIBUTION.
------------
To the extent any indemnification by an indemnifying party is prohibited or
limited by law, the indemnifying party agrees to make the maximum contribution
with respect to any amounts for which it would otherwise be liable under Section
6 to the fullest extent permitted by law; provided, however, that (i) no
contribution shall be made under circumstances where the maker would not have
been liable for indemnification under the fault standards set forth in Section
6, (ii) no person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
seller of Registrable Securities who was not guilty of such fraudulent
misrepresentation, and (iii) contribution (together with any indemnification or
other
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obligations under this Agreement) by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
8. REPORTS UNDER THE EXCHANGE ACT.
------------------------------
With a view to making available to the Investors the benefits of Rule 144
promulgated under the Securities Act or any other similar rule or regulation of
the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:
a. file with the SEC in a timely manner and make and keep available all
reports and other documents required of the Company under the Securities Act and
the Exchange Act so long as the Company remains subject to such requirements (it
being understood that nothing herein shall limit the Company's obligations under
Section 4(c) of the Securities Purchase Agreement) and the filing and
availability of such reports and other documents is required for the applicable
provisions of Rule 144; and
b. furnish to each Investor so long as such Investor owns Debentures,
Warrants or Registrable Securities, promptly upon request, (i) a written
statement by the Company that it has complied with the reporting requirements of
Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested to permit the Investors to sell such securities pursuant to
Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
---------------------------------
The rights of the Investors hereunder, including the right to have the
Company register Registrable Securities pursuant to this Agreement, shall be
automatically assignable by each Investor to any transferee of all or any
portion of the Debentures, the Warrants or the Registrable Securities if: (i)
the Investor agrees in writing with the transferee or assignee to assign such
rights, and a copy of such agreement is furnished to the Company after such
assignment, (ii) the Company is furnished with written notice of (a) the name
and address of such transferee or assignee and (b) the securities with respect
to which such registration rights are being transferred or assigned, (iii)
following such transfer or assignment, the further disposition of such
securities by the transferee or assignee is restricted under the Securities Act
and applicable state securities laws, (iv) the transferee or assignee agrees in
writing with the Company to be bound by all of the provisions contained herein,
and (v) such transfer shall have been made in accordance with the applicable
requirements of the Securities Purchase Agreement.
10. AMENDMENT OF REGISTRATION RIGHTS.
--------------------------------
Provisions of this Agreement may be amended and the observance thereof may
be waived (either generally or in a particular instance and either retroactively
or prospectively), only with
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<PAGE>
written consent of the Company, the Initial Investor (to the extent the Initial
Investor still owns Debentures, Warrants or Registrable Securities) and
Investors who hold a majority in interest of the Registrable Securities or, in
the case of a waiver, with the written consent of the party charged with the
enforcement of any such provision. Any amendment or waiver effected in
accordance with this Section 10 shall be binding upon each Investor and the
Company.
11. MISCELLANEOUS.
-------------
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices required or permitted to be given under the terms of
this Agreement shall be sent by certified or registered mail (return receipt
requested) or delivered personally or by courier or by confirmed telecopy, and
shall be effective five (5) days after being placed in the mail, if mailed, or
upon receipt or refusal of receipt, if delivered personally or by courier or
confirmed telecopy, in each case addressed to a party. The addresses for such
communications shall be:
If to the Company:
The L.L. Knickerbocker Co., Inc.
25800 Commercenter Drive
Lake Forest, CA 92630
Telecopy: (714) 595-7913
Attention: Anthony P. Shutts, CFO
with a copy to:
William R. Black, Esq.
29 Summitcrest
Dove Canyon, CA 92679
Telecopy: (714) 888-7700
If to an Investor, at such address as such Investor shall have
provided in writing to the Company or such other address as such Investor
furnishes by notice given in accordance with this Section 11(b).
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<PAGE>
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. Governing Law; Jurisdiction. This Agreement shall be governed by
---------------------------
and construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed in the State of New York. The Company
irrevocably consents to the jurisdiction of the United States federal courts and
state courts located in San Francisco, California in any suit or proceeding
based on or arising under this Agreement and irrevocably agrees that all claims
in respect of such suit or proceeding may be determined in such courts. The
Company irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding. The Company further agrees that service
of process upon the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceeding. Nothing herein shall affect an Investor's right to serve process in
any other manner permitted by law. The Company agrees that a final non-
appealable judgment in any such suit or proceeding shall be conclusive and may
be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.
e. This Agreement, the Securities Purchase Agreement, the Debentures
and the Warrants (including all schedules and exhibits thereto) constitute the
entire agreement among the parties hereto with respect to the subject matter
hereof and thereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein and therein. This
Agreement, the Securities Purchase Agreement, the Debentures and the Warrants
supersede all prior agreements and understandings among the parties hereto and
thereto with respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
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<PAGE>
j. All consents, approvals and other determinations to be made by
the Investors or the Initial Investor pursuant to this Agreement shall be made
by the Investors holding a majority in interest of the Registrable Securities
(determined as if all Debentures and Warrants then outstanding had been
converted into or exercised for Registrable Securities) then held by all
Investors or by the Initial Investor, as the case may be.
k. The initial number of Registrable Securities included on any
Registration Statement and each increase to the number of Registrable Securities
included thereon shall be allocated pro rata among the Investors based on the
number of Registrable Securities held by each Investor at the time of such
establishment or increase, as the case may be. In the event an Investor shall
sell or otherwise transfer any of such holder's Registrable Securities, each
transferee shall be allocated a pro rata portion of the number of Registrable
Securities included on a Registration Statement for such transferor. Any shares
of Common Stock included on a Registration Statement and which remain allocated
to any person or entity which does not hold any Registrable Securities shall be
allocated to the remaining Investors, pro rata based on the number of shares of
Registrable Securities then held by such Investors. For the avoidance of doubt,
the number of Registrable Securities held by an Investor shall be determined as
if all Debentures and Warrants then outstanding and held by an Investor were
converted into or exercised for Registrable Securities.
l. For purposes of this Agreement, the term "business day" means any
day other than a Saturday or Sunday or a day on which banking institutions in
the State of New York are authorized or obligated by law, regulation or
executive order to close.
[Remainder of Page Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
THE L.L. KNICKERBOCKER CO., INC.
By:
---------------------------------
Name:
-------------------------------
Its:
--------------------------------
Initial Investor:
CAPITAL VENTURES INTERNATIONAL
By: Heights Capital Management, its authorized agent
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
<PAGE>
EXHIBIT 5.
<PAGE>
WILLIAM R. BLACK
ATTORNEY AT LAW
29 SUMMITCREST, DOVE CANYON, CALIFORNIA 92679
(714) 858-1089 TELEPHONE
(714) 888-7700 FACSIMILE
September 30, 1997
Board of Directors
The L. L. Knickerbocker Company, Inc.
25800 Commercentre Drive
Lake Forest, California 92630
Re: Registration Statement on Form S-3,
The L. L. Knickerbocker Co., Inc.
Ladies and Gentlemen:
I have acted as counsel to The L. L. Knickerbocker Company, Inc. (the
"Company") in connection with the Registration Statement on Form S-3 (the
"Registration Statement") to be filed by the Company pursuant to the Securities
Act of 1933, as amended, on or about October 1, 1997, with respect to 1,240,000
shares of the Company's Common Stock (no par value) (the "Common Stock") which
are being offered by the Company upon the conversion of Certain Convertible
Debentures and exercise of Stock Purchase Warrants by the Selling Stockholders
named in the Registration Statement.
As counsel for the Company in connection with the preparation and
filing of such Registration Statement, I have examined, among other things, the
originals, or copies properly certified or otherwise identified to my
satisfaction as being in the form of the originals, of the following:
A. the corporate proceedings relating to the organization and
present existence of the Company, including its Registered Certificate of
Incorporation and all amendments thereto, and all acts of incorporators,
shareholders and directors in connection therewith;
B. the By-Laws of the Company as amended and as in effect at
relevant dates;
<PAGE>
Board of Directors
The L.L. Knickerbocker Company, Inc.
September 30, 1997
Page 2
C. the Registration Statement as filed on form SB-2 pursuant to
the provisions of the Securities Act of 1933, as amended;
D. the annual report on form 10-KSB filed pursuant to Section 13(a)
of the Securities Exchange Act of 1934 (the "Exchange Act") on April 15, 1997;
E. the amended annual report on form 10-KSB/A filed pursuant to
Section 13(a) of the Exchange Act on August 5, 1997; and
F. all reports filed on behalf of the Company pursuant to Section
13(a) or 13(d) or 15(d) of the Exchange Act.
Based upon my examination of the foregoing and of other data and
evidence deemed by me necessary in rendering this opinion, and upon
consideration of applicable law, I am of the opinion that:
1. the Company is a corporation validly organized and existing under
the laws of the State of California and is qualified to transact business in
that state;
2. the Shares, when issued and sold in accordance with the offering
described in the Registration Statement, will be legally issued, fully paid, and
nonassessable.
I hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to Part II of the Registration Statement and
to the references made to me in the Registration Statement.
Very truly yours,
/s/ William R. Black
-------------------------------
William R. Black
<PAGE>
EXHIBIT 23.2
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
The L.L. Knickerbocker Co., Inc. on Form S-3 of our report dated April 14, 1997,
appearing in the Annual Report on Form 10-KSB of The L.L. Knickerbocker Co.,
Inc. for the year ended December 31, 1996.
/s/ Deloitte & Touche, LLP
Costa Mesa, California
September 29, 1997
