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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c)
or Section 240.14a-12
THE L.L. KNICKERBOCKER CO., INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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THE L.L. KNICKERBOCKER CO., INC.
25800 COMMERCENTRE DRIVE
LAKE FOREST, CALIFORNIA 92630
(949) 595-7900
November 18, 1998
Shareholders of The L.L. Knickerbocker Co., Inc.
Dear valued shareholders:
Enclosed in this package is a proxy statement containing proposals for which the
Company requests your approval. Your approval is executed by casting your vote
in favor of the proposals and mailing the information in the envelope provided.
We apologize for the amount of pages it took to complete the proxy and hope that
it is not ignored due to its sheer size.
There are two proposals included in the proxy statement. The first proposal
authorizes the Company to issue a new class of stock, preferred stock. The
primary reasons the Company wants preferred stock authorized is to refinance
certain convertible debentures and to provide greater flexibility in future
financing endeavors, should they be necessary. Refinancing the convertible
debentures into preferred stock will provide more favorable accounting treatment
than what the convertible debentures afford.
The second proposal approves the June 8, 1998 convertible debenture offering
and, under the terms of the debenture agreement and as required by the NASD,
authorizes the Company to issue the number of shares required should the
investors in the debenture offering convert the principal amount of the
debenture into common stock of the Company.
We believe the proposals contained in the proxy statement are in the best
interests of the Company and encourage you to vote in favor of the proposals.
Your vote is needed before December 8, 1998.
Very truly yours,
/s/ Anthony P. Shutts
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Anthony P. Shutts
Chief Financial Officer
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THE L.L. KNICKERBOCKER CO., INC.
25800 COMMERCENTRE DRIVE
LAKE FOREST, CALIFORNIA 92630
(949) 595-7900
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 8, 1998
TO THE SHAREHOLDERS OF THE L.L. KNICKERBOCKER CO., INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of The
L.L. Knickerbocker Co., Inc., a California corporation (the "Company"), will be
held at the Company's principal executive offices at 25800 Commercentre Drive,
Lake Forest, California 92630 on December 8, 1998 at 10:00 a.m., local time, for
the following purposes:
1. To consider and vote upon a proposal to approve a proposed
amendment to the Company's articles of incorporation to
authorize the issuance of 10,000,000 shares of preferred stock.
2. To consider and vote upon a proposal to approve the transactions
contemplated by that certain Securities Purchase Agreement dated
as of June 8, 1998 among the Company and certain investors named
therein, including the issuance by the Company of convertible
term debentures in the original principal amount of $7,000,000
(the "Debentures"), stock purchase warrants (the "Warrants") to
purchase shares of common stock ("Common Stock") of the Company,
shares of Series A Convertible Preferred Stock (the "Series A
Stock") of the Company, and shares of Common Stock of the
Company upon the conversion of the Debentures and shares of
Series A Stock and the exercise of the Warrants.
3. To transact such other business as may properly come before the
meeting, including any motion to adjourn to a later date to
permit further solicitation of proxies, if necessary, or before
any adjournments thereof.
The foregoing items of business are more fully described in the Proxy
Statement and the appendices thereto accompanying this Notice. Any action may be
taken on any of the foregoing proposals at the meeting on the date specified
above or any date to which the meeting may be properly adjourned.
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Only shareholders of record at the close of business on November 11,
1998 are entitled to notice of, and to vote at, the meeting, or at any
adjournments thereof.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ WILLIAM R. BLACK
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William R. Black
Secretary
Lake Forest, California
Dated: November 18, 1998
WHETHER OR NOT YOU CURRENTLY PLAN TO ATTEND THE SPECIAL MEETING IN PERSON,
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS
POSSIBLE. YOU MAY REVOKE YOUR PROXY IF YOU DECIDE TO ATTEND THE SPECIAL MEETING
AND WISH TO VOTE YOUR SHARES IN PERSON.
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THE L.L. KNICKERBOCKER CO., INC.
25800 COMMERCENTRE DRIVE
LAKE FOREST, CALIFORNIA 92630
(949) 595-7900
PROXY STATEMENT
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This Proxy Statement is furnished to the shareholders of The L.L.
Knickerbocker Co., Inc., a California corporation (the "Company"), in connection
with the solicitation of proxies by the Board of Directors of the Company (the
"Board" or "Board of Directors") for use at a Special Meeting of Shareholders to
be held at the Company's principal executive offices at 25800 Commercentre
Drive, Lake Forest, California 92630 on December 8, 1998 at 10:00 a.m., local
time, and at any adjournments thereof (the "Special Meeting").
These proxy solicitation materials will be mailed on or about November
19, 1998 to all shareholders entitled to vote at the Special Meeting.
VOTING RIGHTS AND SOLICITATION OF PROXIES
The Board of Directors has fixed the close of business on November 11,
1998, as the record date (the "Record Date") for the determination of
shareholders entitled to receive notice of, and to vote at, the Special Meeting.
The only outstanding class of stock of the Company is its common stock, no par
value ("Common Stock"), and, at the Record Date, 19,994,126 shares were issued
and outstanding. Each share of Common Stock entitles the record holder on the
Record Date to one vote on all matters.
If the enclosed proxy is properly executed and returned in time and not
revoked, all shares represented thereby will be voted in accordance with the
shareholder's instructions. If no such instructions are specified, the proxies
will be voted FOR the approval of the proposed amendment to the Company's
articles of incorporation to authorize the issuance of 10,000,000 shares of
preferred stock and FOR the approval of the transactions contemplated by that
certain Securities Purchase Agreement dated as of June 8, 1998 (the "Securities
Purchase Agreement") among the Company and certain investors (the "Investors")
named therein, including the issuance by the Company of convertible term
debentures in the original principal amount of $7,000,000 (the "Debentures"),
stock purchase warrants (the "Warrants") to purchase shares of Common Stock of
the Company, shares of Series A Convertible Preferred Stock (the "Series A
Stock") of the Company, and shares of Common Stock of the Company upon the
conversion of the Debentures and shares of Series A Stock and the exercise of
the Warrants.
The required quorum for the transaction of business at the Special
Meeting is a majority of the shares of the Common Stock of the Company
outstanding as of the Record Date. Abstentions and broker non-votes each will be
included in determining the number of shares present and voting at the Special
Meeting for the purpose of determining the presence of a quorum. Because the
approval of each of Proposals 1 and 2 requires the affirmative vote of the
holders of a majority of the outstanding shares of Common Stock of the Company
entitled to vote at the Special Meeting, abstentions and broker non-votes will
have the same effect as votes against approval of the Proposals. A broker
non-vote may occur when a nominee holding shares of Common Stock for a
beneficial owner
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does not vote on a proposal because such nominee does not have discretionary
voting power and has not received instructions from the beneficial owner.
THE ACTIONS PROPOSED IN THIS PROXY STATEMENT ARE NOT MATTERS THAT CAN BE
VOTED ON BY BROKERS HOLDING SHARES FOR BENEFICIAL OWNERS WITHOUT THE OWNERS'
SPECIFIC INSTRUCTIONS. ACCORDINGLY, ALL BENEFICIAL OWNERS OF COMMON STOCK OF THE
COMPANY ARE URGED TO RETURN THE ENCLOSED PROXY CARD MARKED TO INDICATE THEIR
VOTES.
A shareholder giving a proxy may revoke it at any time before it is
voted by delivery to the Company of a subsequently executed proxy or a written
notice of revocation. In addition, returning your completed proxy will not
prevent you from voting in person at the Special Meeting should you be present
and wish to do so.
The cost of soliciting proxies will be paid by the Company. American
Securities Transfer, Inc. has been retained to solicit proxies by mail at an
anticipated cost of $2,000 plus expenses. The Company has also arranged for
reimbursement, at the rate suggested by The Nasdaq Stock Market, Inc., of
brokerage houses, nominees, custodians and fiduciaries for the forwarding of
proxy materials to the beneficial owners of shares held of record. Proxies may
also be solicited by directors, officers and employees of the Company, but such
persons will not be specially compensated for such services.
PROPOSAL 1
AMENDMENT TO ARTICLES OF INCORPORATION
TO AUTHORIZE 10,000,000 SHARES OF PREFERRED STOCK
BACKGROUND
The Company's Board of Directors has approved, and the shareholders are
now asked to approve, an amendment to the Company's Articles of Incorporation,
as amended (the "Articles of Incorporation"), to provide therein for the
creation of 10,000,000 shares of preferred stock, no par value ("Preferred
Stock"), in one or more series with voting and other rights as determined by the
Board of Directors. After such amendment, the Company's authorized capital stock
would consist of 100,000,000 shares of Common Stock, and 10,000,000 shares of
Preferred Stock.
The authorized capital stock of the Company currently consists of
100,000,000 shares of Common Stock of which, as of October 9, 1998, 19,843,751
shares were issued and outstanding.
REASONS FOR THE BOARD RECOMMENDATION; LIMITATIONS AND RESTRICTIONS OF PREFERRED
STOCK
The Board of Directors believes the authorization of the creation of the
Preferred Stock is desirable to enhance the Company's flexibility in connection
with refinancing and restructuring existing debt and equity instruments and
other possible future actions, such as public or private offerings of shares for
cash, corporate mergers and acquisitions, and dividends payable in stock of the
Company whether in connection with the possible implementation of a shareholder
rights plan or otherwise. Having such authorized shares available for issuance
in the future would allow shares of Preferred Stock to be issued without the
expense and delay of a special meeting of shareholders. The designations,
preferences, conversion rights, cumulative, participating, optional or other
rights, including voting rights, qualifications, limitations or restrictions of
the Preferred Stock (collectively, the "Limitations and Restrictions") will be
determined by the Board of Directors. Thus, the Board of Directors will, in
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the event of the approval of this proposal by the Company's shareholders, be
entitled to authorize the creation and issuance of 10,000,000 shares of
Preferred Stock in one or more series with such Limitations and Restrictions as
may be determined in the Board's sole discretion, including, without limitation,
shares of Series A Stock with the Limitations and Restrictions described in
Proposal 2 of this Proxy Statement, with no further authorization by the
shareholders or other security holders of the Company required under the General
Corporation Law of the State of California for the creation and issuance
thereof. However, even if the shareholders of the Company approve this Proposal
1, the approval of the shareholders of the Company of certain Limitations and
Restrictions of shares of Preferred Stock may be required under other laws,
rules or regulations, including, without limitation, rules of the Nasdaq
National Market, which may be applicable to the Company or the issuance of
securities of the Company. See "PROPOSAL 2--APPROVAL OF PRIVATE PLACEMENT AND
ISSUANCES OF SECURITIES--Nasdaq Listing Obligation."
In the event of the approval of this proposal by the Company's
shareholders, the Board of Directors will be required to make any determination
to designate, reserve for issuance or issue shares of Preferred Stock based on
its judgment as to the best interests of the shareholders and the Company. The
issuance of shares of Preferred Stock could, depending on the terms of such
series, make more difficult or discourage an attempt to obtain control of the
Company by means of a merger, tender offer, proxy contest or other means. Such
shares could be used to create voting or other impediments or to discourage
persons seeking to gain control of the Company and could also be privately
placed with purchasers favorable to the Board of Directors in opposing such
action. In addition, the Board of Directors could authorize holders of a series
of Preferred Stock to vote either separately as a class, or with the holders of
the Company's currently outstanding Common Stock, on any merger, sale or
exchange of assets by the Company or any other extraordinary corporate
transaction. The mere existence of the additional authorized shares could have
the effect of discouraging unsolicited takeover attempts. The issuance of new
shares also could have a dilutive effect on the voting power of existing holders
of Common Stock and on earnings per share and could be used to dilute the stock
ownership of a person or entity seeking to obtain control of the Company should
the Board of Directors consider the action of such entity or person not to be in
the best interest of the shareholders and the Company.
PROPOSED AMENDMENT TO ARTICLES OF INCORPORATION
Under this Proposal I, Article IV of the Articles of Incorporation would
be amended to read as follows:
"This corporation is authorized to issue two classes of stock,
to be designated, respectively, "Common Stock" and "Preferred Stock".
The total number of shares which the corporation is authorized to issue
is One Hundred Ten Million (110,000,000) shares. One Hundred Million
(100,000,000) shares shall be Common Stock and Ten Million (10,000,000)
shares shall be Preferred Stock.
The Preferred Stock may be issued from time to time in one or
more series as the board of directors (the "Board of Directors") of this
corporation may determine. The Board of Directors is authorized to
determine and alter the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of Preferred
Stock, and to fix the number of shares of any series of Preferred Stock
and the designation of any such series of Preferred Stock. The Board of
Directors, within the limits and restrictions stated in any resolution
or resolutions of the Board of Directors originally fixing the number of
shares constituting any series, may increase or decrease (but not below
the number of shares of such series then outstanding) the number of
shares of any series subsequent to the issue of shares of that series.
In case the number of shares of any series shall be so decreased, the
shares constituting such decrease shall resume the status that they had
prior to the adoption of the resolution originally fixing the number of
shares of such series."
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RELATIONSHIP OF PROPOSAL 1 AND PROPOSAL 2
Pursuant to this Proxy Statement, the Board of Directors is soliciting
proxies from the shareholders of the Company approving a proposed amendment to
the Company's Articles of Incorporation to authorize the issuance of 10,000,000
shares of Preferred Stock of the Company (Proposal 1) and the private placement
of certain securities of the Company including the proposed issuance of Series A
Stock of the Company (Proposal 2). See "PROPOSAL 2 -- APPROVAL OF PRIVATE
PLACEMENT AND ISSUANCES OF SECURITIES." While both Proposal 1 and Proposal 2
relate to the issuance of Preferred Stock of the Company, the approval of either
of these Proposals is not contingent upon the approval of the other Proposal.
Accordingly, a shareholder of the Company may vote in favor of, or against,
either or both of the Proposals contained in this Proxy Statement, and the Board
of Directors will have the authority to issue Preferred Stock in the manner and
under the circumstances described in Proposal 1 and/or Proposal 2 only if the
shareholders approve the applicable Proposal.
VOTE REQUIRED; BOARD RECOMMENDATION
Approval of this Proposal 1 requires the affirmative vote of the holders
of a majority of the outstanding shares of Common Stock entitled to vote at the
Special Meeting. If approved by the shareholders, the amendment to the Articles
of Incorporation described in this Proposal 1 will become effective upon filing
with the Secretary of State of the State of California (the "California
Secretary of State"), a Certificate of Amendment to the Company's Articles of
Incorporation, which filing is expected to take place shortly after the Special
Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR THE APPROVAL OF THE PROPOSED AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION TO AUTHORIZE THE ISSUANCE OF 10,000,000 SHARES OF PREFERRED STOCK
OF THE COMPANY.
PROPOSAL 2
APPROVAL OF PRIVATE PLACEMENT
AND ISSUANCES OF SECURITIES
At the Special Meeting, the Company's shareholders will consider and
vote upon a proposal to approve the transactions contemplated by the Securities
Purchase Agreement. By voting in favor of this Proposal 2, the Company's
shareholders will be deemed to have approved the following matters (the
"Proposal 2 Matters"): (i) the Securities Purchase Agreement, the Debentures,
the Warrants, the Registration Rights Agreement dated as of June 8, 1998 among
the Company and the Investors (the "Registration Rights Agreement"), the Waiver
dated as of September 4, 1998 among the Company and the Investors (the
"Waiver"), the Stockholders' Agreement dated as of September 18, 1998 among the
Company and the Investors (the "Stockholders' Agreement") and the Certificate of
Determination of Series A Convertible Preferred Stock of the Company attached as
Annex II to this Proxy Statement (the "Certificate"), (ii) the amendment of the
Articles of Incorporation of the Company to create the Series A Stock, (iii) the
authorization and issuance by the Company to the Investors of shares of the
Series A Stock of the Company, including in exchange for the cancellation of the
Debentures, (iv) the transactions contemplated by the Securities Purchase
Agreement, Debentures, Warrants, Registration Rights Agreement, Waiver and
Stockholders' Agreement (collectively, the "Transaction Documents") and (v) the
issuance by the Company, in accordance with the terms of the Transaction
Documents, of the Debentures, Warrants, shares of the Series A Stock of the
Company, and shares of the Common Stock of the Company in connection with the
conversion of the Debentures and shares of Series A Stock and the exercise of
the Warrants.
All references in this Proxy Statement to the Securities Purchase
Agreement, Debentures, Warrants and Registration Rights Agreement shall mean and
be such documents as their respective terms have been waived, extended and
amended by the Waiver.
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BACKGROUND
THE DESCRIPTION OF THE PRIVATE PLACEMENT (AS DEFINED BELOW), TRANSACTION
DOCUMENTS AND SERIES A STOCK CONTAINED IN THIS PROPOSAL 2 DOES NOT PURPORT TO BE
A COMPLETE DESCRIPTION OF ALL TERMS RELATED THERETO, AND THE DESCRIPTION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE TRANSACTION DOCUMENTS, COPIES OF
WHICH ARE ATTACHED AS ANNEX I TO THIS PROXY STATEMENT, AND THE CERTIFICATE, A
COPY OF WHICH IS ATTACHED AS ANNEX II TO THIS PROXY STATEMENT, AND WHICH ARE
INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS OF THE COMPANY ARE URGED TO READ
CAREFULLY THE DOCUMENTS ATTACHED AS ANNEX I AND ANNEX II HERETO IN THEIR
ENTIRETY FOR A MORE COMPLETE DESCRIPTION OF THE PRIVATE PLACEMENT, TRANSACTION
DOCUMENTS AND SERIES A STOCK AND THE RIGHTS OF THE SHAREHOLDERS OF THE COMPANY
AND HOLDERS OF THE DEBENTURES AND WARRANTS THEREUNDER.
On June 8, 1998, the Company and the Investors entered into the
Securities Purchase Agreement pursuant to which the Company agreed to consummate
a private placement (the "Private Placement") of the following securities: (i)
at a closing consummated on June 8, 1998 (the "First Closing"), the Company
issued Debentures in the original principal amount of $7,000,000 and Warrants to
purchase 261,195 shares of Common Stock at an exercise price of $4.72 per share,
in exchange for the payment by the Investors of a purchase price of $7,000,000,
(ii) at a closing to be consummated at a subsequent date (the "Exchange
Closing"), the Company agreed to issue shares of Series A Stock of the Company
with a stated value equal to the outstanding principal balance of the
Debentures, which shares will be issued in exchange for the cancellation of the
Debentures and (iii) at a closing to be consummated at a subsequent date (the
"Second Closing"), the Company agreed to issue shares of Series A Stock of the
Company with a stated value of $3,000,000 and Warrants to purchase 111,940
shares of Common Stock at an exercise price of $4.72 per share, in exchange for
the payment by the Investors of a purchase price of $3,000,000. At the First
Closing, the Company received gross proceeds of $7,000,000 from the issuance of
the Debentures, and net proceeds of approximately $6,650,000, after the payment
of costs and expenses related to the Private Placement, including $350,000 paid
to The Shemano Group as compensation for placement services rendered in
connection with the Private Placement. The issuance of the securities to the
Investors under the Private Placement is being conducted as a private offering
pursuant to Regulation D under the Securities Act of 1933, as amended.
The Company sold securities in the Private Placement in order to obtain
funds to meet its seasonal cash flow requirements, to fund inventory purchases
for the 1998 fall season and to meet short-term purchase and other obligations.
The Company agreed to exchange the Debentures for shares of Series A Stock in
order to capitalize its short-term debt into equity and thereby strengthen its
financial position.
WHY THE COMPANY IS REQUESTING SHAREHOLDER APPROVAL OF THE PROPOSAL 2 MATTERS
The Company is requesting that its shareholders approve the Proposal 2
Matters because the terms of the Securities Purchase Agreement require such
approval. See "-- Securities Purchase Agreement." In addition, certain rules of
the Nasdaq National Market ("Nasdaq") applicable to the Company require that the
Company obtain the approval of its shareholders before the issuance at a price
per share below the greater of market or book value of the Common Stock (or
securities convertible into Common Stock) of the Company having voting power
equal to or greater than 20% or more of the outstanding Common Stock of the
Company. In connection with the conversion of the Debentures and the Series A
Stock and the exercise of the Warrants, shares of the Common Stock of the
Company may be issued at a price per share below the greater of market or book
value of such Common Stock and the voting power of such shares may exceed 20% of
the outstanding Common Stock of the Company. Accordingly, the Company is
required under the Nasdaq rules to obtain the approval of its shareholders of
such issuances of securities. See "-- Nasdaq Listing Obligation." Also, certain
provisions of the General Corporation Law of the State of California require
that the shareholders of the Company consent to the amendment of the Articles of
Incorporation of the Company to provide for the issuance of the Series A Stock.
A failure to obtain the approval of the shareholders of the Company of the
Proposal 2 Matters could have certain adverse consequences, including
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requiring that the Company repay from time to time portions of the Debentures at
the Default Amount (as defined below) in order to comply with the requirements
regarding the Stock Limitation (as defined below) contained in the Debentures
and that the Company repay the outstanding balance of the Debentures at their
December 28, 1998 maturity date. See "--Debentures--Conversion" and "--
Consequences if Shareholder Approval is not Obtained."
SECURITIES PURCHASE AGREEMENT
Pursuant to the terms of the Securities Purchase Agreement: (i) the
Company issued to the Investors at the First Closing, Debentures in the original
principal amount of $7,000,000 and Warrants to purchase 261,195 shares of Common
Stock at an exercise price of $4.72 per share, (ii) the Company agreed to issue
to the Investors at the Exchange Closing shares of Series A Stock of the Company
with a stated value equal to the outstanding principal balance of the
Debentures, which shares shall be issued in exchange for the cancellation of the
Debentures and (iii) the Company agreed to issue to the Investors at the Second
Closing, shares of Series A Stock of the Company with a stated value of
$3,000,000 and Warrants to purchase 111,940 shares of Common Stock at an
exercise price of $4.72 per share. If the shareholders of the Company approve
the Proposal 2 Matters, at the Exchange Closing, the Company will issue to the
Investors an aggregate of 7,000 shares of Series A Stock (or a lesser number of
shares, if necessary to reflect Debentures converted into shares of Common Stock
prior to the Exchange Closing), each share having a face value of $1,000 and all
such shares having an aggregate face value of $7,000,000, in exchange for the
cancellation of the Debentures. In addition, accrued and unpaid interest under
the Debentures will be converted at the Exchange Closing into a premium on the
Series A Stock. See "--Series A Stock--Dividends and Premium."
In connection with the sale and issuance of the Company's securities
pursuant to the Securities Purchase Agreement, the Company agreed to file with
the U.S. Securities and Exchange Commission (the "SEC") registration statements
on Form S-3 (the "Registration Statements") to permit the public sale of shares
of Common Stock of the Company issuable upon the conversion of the Debentures
and the Series A Stock and the exercise of the Warrants. In addition, the
Company agreed to hold a special meeting of its shareholders for the purpose of
voting upon a proposal to approve the Proposal 2 Matters. Also, the provisions
of the Securities Purchase Agreement restrict the ability of the Company to
issue equity securities in financing transactions during the one year period
following the First Closing.
The Exchange Closing will take place on or before the fifth day
following the satisfaction of certain conditions, including (i) the approval of
the shareholders of the Company of the Proposal 2 Matters shall have been
obtained, (ii) an Amendment to the Articles of Incorporation of the Company
containing Article VII in the form attached as Exhibit C to the Stockholders'
Agreement attached as part of Annex I to this Proxy Statement shall have been
filed with the California Secretary of State and (iii) a Registration Statement
(the "First Registration Statement") covering the resale of 4,245,000 shares of
Common Stock of the Company issuable upon the conversion of the Debentures and
the exercise of the Warrants issued at the First Closing shall have been
declared effective by the SEC and shall be effective and available for use. The
Second Closing will take place on the fifth trading day following the
satisfaction of certain conditions, including (i) the approval of the
shareholders of the Company of the Proposal 2 Matters shall have been obtained,
(ii) the First Registration Statement shall have been declared effective by the
SEC and shall be effective and available for use, (iii) the Exchange Closing
shall have occurred or will occur simultaneously with the Second Closing, (iv)
the Second Closing shall take place at least 90 days after the First Closing and
no more than 1 year after the First Closing and (v) the closing bid price of the
Common Stock of the Company for 20 of the 30 consecutive trading days
immediately preceding the Second Closing shall be $7.50 or more per share. No
assurances can be made that these conditions will be met or that the Exchange
Closing and the Second Closing will be consummated. If the Exchange Closing is
not consummated on or prior to December 28, 1998, the Company will be required
to repay the Debentures on such date. If the Second Closing is not consummated
within 1 year of the First Closing, then the Company will not issue shares of
Series A
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Stock and Warrants at the Second Closing and will not receive the $3,000,000 of
proceeds for such securities. See "--Consequences if Shareholder Approval is not
Obtained."
DEBENTURES
Repayment and Exchange
The maturity date of the Debentures is December 28, 1998. The Debentures
accrue interest at the rate of 6% per annum. Principal and interest payments
under the Debentures are not required until maturity or upon the acceleration of
the payment of the Debentures. The principal amount of and accrued and unpaid
interest under the Debentures may be converted into shares of Common Stock at
any time at the option of the holders of the Debentures. The default interest
rate under the Debentures is 15% per annum. The Company's rights to prepay the
Debentures are limited. The Investors have agreed that upon the satisfaction of
certain conditions specified in the Securities Purchase Agreement, the Investors
will exchange the Debentures for shares of Series A Stock at the Exchange
Closing. See "-- Securities Purchase Agreement" and "-- Series A Stock."
Events of Default (as defined below) have occurred under the Debentures.
However, the Company believes that the Company has, through its discussions with
the Investors, received from the Investors what constitutes an implied waiver of
defaults. If in fact the Company has not received from the Investors a waiver of
the defaults, the Investors would have the right to accelerate the repayment by
the Company of the Debentures. In addition, the occurrence of an Event of
Default under the Debentures which has not been waived by the Investors would be
an event of default under the Senior Loan Agreement (defined below), which would
give BankBoston, N.A. the right to accelerate the payment of obligations under
such agreement. See "--Debentures--Events of Default" and
"--Debentures--Defaults Under Debentures."
Prepayment
The Company may prepay the Debentures only if the Company delivers a
prepayment notice to the Investors within 5 days prior to the month in which the
Company desires to effect such prepayment, and the amount of the Debentures
which the Company may prepay during such month will be limited to the amount of
the Debentures for which the Investors deliver a conversion notice for such
month. The Debentures will be prepaid at the "Optional Prepayment Amount" which
shall be equal to the product of (i) the closing bid price of the Common Stock
on the conversion date specified in the conversion notice delivered by the
Investor to the Company and (ii) the quotient arrived at by dividing (a) the
portion of the principal amount of the Debenture being converted plus accrued
and unpaid interest thereon by (b) the Conversion Price (as defined below) in
effect on the applicable conversion date. The Company's prepayment rights will
not be available if the Company is in default under the terms of the Debentures,
the Securities Purchase Agreement or the Registration Rights Agreement or if a
Registration Statement (after being declared effective by the SEC) is not
effective and available for use. If the Company fails to pay any prepayment
amounts within three business days of the Company's receipt of an applicable
conversion notice, then the Company will lose its prepayment rights under all of
the Debentures and the Company will be required to pay to the Investor to which
the prepayment amount is due an annual default payment of 24%, prorated for the
number of days for which the payment is late.
Conversion
During the initial 180 days that the Debentures are outstanding, the
Debentures are convertible at the option of the holder into shares of the
Company's Common Stock at an initial conversion price of $4.02 per share, which
conversion price will be adjusted upwards and downwards upon the occurrence of
certain events. See "--Debentures--Adjustment of Conversion Price." Unless and
until the shareholders of the Company approve the
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<PAGE> 12
Proposal 2 Matters, the Nasdaq rules limit the number of shares of Common Stock
which the Company may issue to the Investors in connection with the conversion
of the Debentures and Series A Stock and the exercise of the Warrants to less
than 20% of the voting power of outstanding shares of Common Stock of the
Company (the "Stock Limitation"). See "--Nasdaq Listing Obligation." The terms
of the Transaction Documents contain provisions which limit the number of shares
of Common Stock that may be issued to the Investors to the Stock Limitation
until the shareholders approve the Proposal 2 Matters. In the event that the
shareholders do not approve the Proposal 2 Matters and the Stock Limitation is
less than 135% of the number of shares then issuable upon the conversion of the
Debentures, then the Investors can deliver notice ("Repayment Notice") to the
Company requiring it to repay at the Default Amount (as defined below) that
portion of the principal amount of the Debentures such that after giving effect
to such repayment the Stock Limitation exceeds 135% of the number of shares then
issuable upon the conversion of the Debentures. If the Company fails to pay the
Default Amount within 5 business days of its receipt of the Repayment Notice,
then the holders of at least 50% of the aggregate outstanding principal amount
of the Debentures can require the Company to terminate its listing of the Common
Stock on the Nasdaq National Market and cause the Common Stock to be traded on
the over-the-counter electronic bulletin board and, in addition, the Company
will be required to pay to the Investors interest on the Default Amount at the
rate equal to the lower of 24% or the highest rate permitted by applicable law.
The "Default Amount" shall mean the greater of: (i) the product of (A)
the quotient of (1) the sum of the principal amount of the Debentures being paid
plus interest thereon plus any outstanding prepayment default amounts, divided
by (2) the conversion price of the Debentures in effect at such time and (B) the
highest closing bid price of the Common Stock during the default period or, if
larger and if the default relates to the sale of Company assets or stock, merger
of the Company or an acquisition of more than 50% of the stock of the Company,
the fair market value of the consideration payable to a holder of one share of
Common Stock pursuant to the triggering transaction or (ii) the product of (X)
the sum of the principal amount of the Debentures being paid plus interest
thereon plus any outstanding prepayment default amounts and (Y) 111%.
The terms of the Debentures provide that no holder thereof may receive
shares of Common Stock upon a conversion of the Debentures to the extent that
the sum of shares of Common Stock beneficially owned by the holder and its
affiliates (other than shares which may be acquired in connection with the
conversion of the Debentures) and the number of shares of Common Stock issuable
upon the portion of the Debentures then being converted, would result in the
holder's beneficial ownership of shares of Common Stock in excess of 4.99% of
the shares of Common Stock of the Company then outstanding.
Adjustment of Conversion Price
The initial conversion price of the Debentures is $4.02 per share (the
"Fixed Conversion Price"). Following the earliest of (i) the 181st day following
the date of issuance of the Debentures (the "Issue Date"), (ii) the date of
announcement of a merger, consolidation, or sale of substantially all of the
assets of the Company or of the acquisition by a person or group of 50% or more
of the stock of the Company or (iii) the date on which the Company delivers
notice to the Investors of a merger, consolidation or sale of substantially all
of the assets of the Company (such earliest date being referred to as the "First
Variable Conversion Date"), the conversion price (the "Conversion Price") of the
Debentures shall be the lower of the Fixed Conversion Price or the Variable
Conversion Price (as defined below). The "Variable Conversion Price" shall be
the amount which results from multiplying the Conversion Percentage (as defined
below) and the average of the lowest closing bid prices for the Common Stock for
any 7 trading days during the 30 consecutive trading days ending on the trading
day immediately preceding the date of determination. The "Conversion Percentage"
is 100% during the 180 day period following the Issue Date, 97% on or after the
181st day following the Issue Date and prior to the 271st day following the
Issue Date, 94.5% on or after the 271st day following the Issue Date and prior
to the 366th day following the Issue Date, 92% on or after the 366th day
following the Issue Date and prior to the 731st day following the Issue Date and
90% on or after the 731st day following the Issue Date. The Debentures contain
provisions pursuant to which the Fixed Conversion
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<PAGE> 13
Price will be adjusted upon the occurrence of certain events, including the
failure by the Company to convert the Debentures into shares of Common Stock at
the request of the holders of the Debentures. In addition, if the Company shall
issue any securities convertible into or exchangeable for shares of Common Stock
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 after such issuance shall be the higher of the greatest discount
applicable to the convertible securities issued or the Conversion Percentage
then in effect in calculating the Variable Conversion Price.
Reservation of Shares of Common Stock
If the number of shares of Common Stock reserved for issuance upon the
conversion of the Debentures (the "Reserved Amount") is less than 135% of the
number of shares of Common Stock issuable upon the conversion of the Debentures
for any 3 consecutive trading days, then the Company is required to take action
to increase the Reserved Amount to 200% of the number of shares of Common Stock
then issuable upon the conversion of the Debentures. In the event that the
Company fails to increase the Reserved Amount as required, then the Investors
can deliver a Repayment Notice to the Company requiring it to repay at the
Default Amount that portion of the principal amount of the Debentures such that
after giving effect to such repayment the Reserved Amount exceeds 135% of the
number of shares then issuable upon the conversion of the Debentures. If the
Company fails to pay the Default Amount within 5 business days of its receipt of
the Repayment Notice, then the Company shall be required to pay to the Investors
interest on the Default Amount at the rate equal to the lower of 24% or the
highest rate permitted by applicable law.
Events of Default
If the Company fails to issue and deliver shares of Common Stock in
connection with the conversion of the Debentures (other than because such
issuance would exceed the Reserved Amount or the Stock Limitation) within the
applicable delivery period or upon the occurrence of an Event of Default (as
defined below) under the Debentures, the holders of the Debentures may elect to
have all or any portion of the Debentures prepaid by the Company for cash at the
Default Amount. If the Company fails to pay the Default Amount within the
applicable payment period, then the Company shall be required to pay to the
holders of the Debentures interest on the Default Amount at the rate equal to
the lower of 24% or the highest rate permitted by applicable law. The following
are "Events of Default" under the Debentures, as amended by the Waiver: (i) the
failure to pay principal and/or interest when due, (ii) the Common Stock is not
listed or quoted for trading on the Nasdaq National Market, New York Stock
Exchange or American Stock Exchange for an aggregate of 10 trading days in any 9
month period, (iii) the First Registration Statement has not been declared
effective by the SEC by October 2, 1998, or, after being declared effective, the
First Registration Statement cannot be utilized for an aggregate of more than 30
days, (iv) the Company fails to remove a restrictive legend from a stock
certificate issued to a Debenture holder in violation of the terms of the
Transaction Documents, (v) the Company fails to issue, or notifies a Debenture
holder that it will not issue, shares of Common Stock upon conversion of the
Debentures (other than in connection with the limitations related to the Stock
Limitation or the Reserved Amount), (vi) the sale of substantially all of the
assets of the Company, the combination of the Company with or into another
entity or the acquisition by a person or group of more than 50% of the voting
power of the capital stock of the Company, (vii) the Company breaches any
material term of the Debentures, the Securities Purchase Agreement or the
Registration Rights Agreement, (viii) the Company shall make an assignment for
the benefit of creditors or other bankruptcy or insolvency proceedings involving
the Company shall have been instituted, (ix) the Company shall fail to file this
Proxy Statement with the SEC by October 7, 1998, (x) if this Proxy Statement is
not reviewed by the SEC, the Company shall fail to hold the shareholders meeting
(the "Shareholders Meeting") related to this Proxy Statement by November 13,
1998, (xi) if this Proxy Statement is reviewed by the SEC, the Company shall
fail to hold the Shareholders Meeting by December 18, 1998, (xii) the Company
shall fail to hold the Exchange Closing within five days after the date of the
Shareholders Meeting, (xiii) the Company shall fail to file with the SEC within
one business day after the Exchange
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<PAGE> 14
Closing a Registration Statement covering the resale of shares of Common Stock
of the Company issuable upon the conversion of the shares of Series A Stock of
the Company to be issued at the Exchange Closing (the "Second Registration
Statement"), (xiv) the Second Registration Statement shall not be declared
effective by the SEC by the twentieth day following the date of its filing with
the SEC or (xv) the Company shall fail to register under Registration Statements
by December 28, 1998 shares of Common Stock in an amount at least equal to the
sum of (A) 200% of the shares of Common Stock issued or issuable upon conversion
of the Debentures or the shares of Series A Stock outstanding on such date
computed at the Variable Conversion Price and (B) 100% of the shares of Common
Stock issued or issuable upon exercise of the Warrants outstanding on such date
and the Warrant dated August 19, 1998 (the "August Warrant") issued by the
Company to Capital Ventures International (an Investor in the Debentures), in
the form of the Warrants and for the purchase of 213,132 shares of Common Stock
at an exercise price of $3.00 per share (without giving effect to limitations on
conversion or exercise contained in such Debentures, terms of Series A Stock,
Warrants or August Warrant).
Defaults Under Debentures
Events of Default under the Debentures have occurred with respect to the
following matters: (i) the First Registration Statement was not declared
effective by the SEC by October 2, 1998, (ii) this Proxy Statement was not filed
with the SEC by October 7, 1998 and (iii) the Company did not hold the
Shareholders Meeting by November 13, 1998. No assurances can be made that
additional Events of Default will not occur in the future. However, the Company
believes that the Company has, through its discussions with the Investors,
received from the Investors what constitutes an implied waiver of defaults. If
in fact the Company has not received from the Investors a waiver of the
defaults, (a) the Investors will have the right to deliver a default notice
("Default Notice") to the Company demanding that all or any portion of the
Debentures be prepaid by the Company for cash at the Default Amount and (b) the
Company's prepayment rights with respect to the Debentures will not be
available. See " --Debentures-- Prepayment." In addition, pursuant to the terms
of the Company's Loan and Security Agreement dated as of July 16, 1997 (the
"Senior Loan Agreement") with BankBoston, N.A., the occurrence of an Event of
Default under the Debentures which has not been waived by the Investors also is
an Event of Default under the Senior Loan Agreement. Pursuant to the terms of
the Senior Loan Agreement, upon the occurrence of an Event of Default under such
agreement, BankBoston, N.A. has the right to decline to make any further loans
to the Company under such agreement and to accelerate the payment of all
obligations outstanding under such agreement. For purposes of example only, if a
waiver of defaults had not been obtained by the Company from the Investors, as
of October 28, 1998, the holders of the Debentures would have the right to
demand that the Company pay to such holders Default Amounts of approximately
$7,925,400 and BankBoston, N.A. would have the right to demand that the Company
pay outstanding obligations under the Senior Loan Agreement of approximately
$6,800,000. However, as of the date of the Proxy Statement, neither the
Investors nor BankBoston, N.A. have demanded payment of such amounts, although
no assurances can be made that such payment rights will not be asserted in the
future. The Company currently does not have sufficient funds to pay the
above-described amounts to the holders of the Debentures and BankBoston, N.A.
and no assurances can be made that the Company will have sufficient funds to pay
such amounts if payment is demanded in the future.
WARRANTS
Pursuant to the terms of the Securities Purchase Agreement, the Company
issued to the Investors at the First Closing, Warrants to purchase 261,195
shares of Common Stock at an exercise price of $4.72 per share and the Company
agreed to issue to the Investors at the Second Closing, Warrants to purchase
111,940 shares of Common
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<PAGE> 15
Stock at an exercise price of $4.72 per share. The Warrants may be exercised at
any time during the 5 year period following the date of issuance. The Warrants
are transferable subject to compliance with applicable securities laws. The
terms of the Warrants provide that no holder thereof may receive shares of
Common Stock upon the exercise of the Warrants to the extent that the sum of
shares of Common Stock beneficially owned by the holder and its affiliates
(other than shares which may be acquired in connection with the conversion of
Debentures and exercise of Warrants) and the number of shares of Common Stock
issuable upon the Warrants then being exercised, would result in the holder's
beneficial ownership of shares of Common Stock in excess of 4.99% of the shares
of Common Stock of the Company then outstanding. The Warrants contain provisions
pursuant to which the exercise price of the Warrants will be adjusted using a
weighted average antidilution calculation in the event that the Company issues
Common Stock or securities convertible into or exercisable for Common Stock at a
price below the average closing bid prices for shares of the Common Stock for
the 5 trading days immediately preceding the transaction date.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the terms of the Registration Rights Agreement, as amended
by the Waiver, the Company agreed to file with the SEC Registration Statements
covering the shares of Common Stock issuable upon the conversion of the
Debentures and Series A Stock and upon the exercise of the Warrants
(collectively, the "Registrable Securities"). The Company agreed that it would
be subject to penalties in the event that (i) the First Registration Statement
is not declared effective by the SEC by October 2, 1998, (ii) the Second
Registration Statement is not filed with the SEC within one business day after
the Exchange Closing, (iii) the Second Registration Statement is not declared
effective by the SEC by the twentieth day following the date of its filing with
the SEC, (iv) if, after a Registration Statement has been declared effective by
the SEC, sales of Registrable Securities cannot be made pursuant to the
Registration Statement (for a reason outside of the control of the Investors) or
(v) the Common Stock is not listed or included for quotation on the Nasdaq
National Market, the New York Stock Exchange or the American Stock Exchange at
any time after the above-described effective dates for the Registration
Statements. The penalty to be paid by the Company to the Investors in the event
of each such default, which shall be paid for each month (subject to proration
for partial months) that the default is outstanding, will be calculated by
multiplying 2% and the outstanding principal amount of the Debentures (including
Debentures which have been converted). The penalties shall be paid in cash
unless the Investors elect to receive such payments in shares of Common Stock of
the Company.
Because the First Registration Statement was not declared effective by
the SEC until October 26, 1998, the Company is subject to the penalties provided
in the Registration Rights Agreement for the 24 day delay in effectiveness. To
date, the Investors have not asserted any claims pursuant to the applicable
penalty provisions of the Registration Rights Agreement, although there can be
no assurances that such rights will not be asserted at a later date. In
addition, there can be no assurances made that the Company will not incur
additional penalties under the terms of the Registration Rights Agreement.
SERIES A STOCK
Pursuant to the terms of the Securities Purchase Agreement, the Company
and the Investors have agreed that (i) at the Exchange Closing, the Company will
issue to the Investors shares of Series A Stock of the Company with a stated
value equal to the outstanding principal balance of the Debentures, which shares
will be issued in exchange for the cancellation of the Debentures and (ii) at
the Second Closing, the Company will issue to the Investors shares of Series A
Stock with a stated value equal to $3,000,000 and Warrants to purchase 111,940
shares of Common Stock of the Company at an exercise price of $4.72 per share,
in exchange for the payment by the Investors to the Company of a purchase price
of $3,000,000. Attached to this Proxy Statement as part of Annex I is the
Stockholders' Agreement and attached as Annex II is the Certificate, which the
shareholders of the Company are being asked to approve as part of the Proposal 2
Matters. The shareholders of the Company are urged to review the Stockholders'
Agreement and the Certificate for a more complete description of the terms of
the Series A Stock.
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<PAGE> 16
The terms of the Series A Stock are substantially similar to the terms of the
Debentures. Certain of the terms of the Series A Stock are described below.
Face Value, Dividends and Premium
The face value ("Face Value") of the Series A Stock will be $1,000 per
share. The Series A Stock will not bear dividends but will earn a premium (the
"Premium") in the annual amount of 6% of the Face Value. In addition, at the
Exchange Closing, accrued and unpaid interest under the Debentures will be
converted into Premium on the Series A Stock. The Premium will be converted into
Common Stock at the time of the conversion of the Series A Stock or will be paid
at the time that the Series A Stock is redeemed. Calculations regarding the
conversion and redemption of the Series A Stock are substantially the same as
the calculations for the conversion and repayment of the Debentures except that
the Face Value and the Premium will be paid for the Series A Stock in lieu of
principal and interest payments required under the terms of the Debentures. See
"--Debentures."
Optional Redemption by Company
The Company's rights to elect to redeem the shares of Series A Stock are
limited. The Company will be allowed to elect to redeem the Series A Stock on
substantially the same terms that the Company is allowed to prepay the
Debentures. See "--Debentures --Prepayment." The Company's redemption rights
will not be available if (i) a Redemption Event (as hereinafter defined), or any
event which with the passage of time would become a Redemption Event, shall have
occurred, (ii) the Company is in material violation of any of its obligations
under the Securities Purchase Agreement, Registration Rights Agreement or
Waiver, or (iii) a Registration Statement (after being declared effective by the
SEC) is not effective and available for use. If the Company fails to pay any
redemption amounts within three business days of the Company's receipt of an
applicable conversion notice with respect to shares of Series A Stock, then the
Company will lose its redemption rights with respect to all of the shares of
Series A Stock and the Company will be required to pay to the Investor to which
the redemption amount is due an annual default payment of 24% prorated for the
number of days for which the payment is late.
Conversion
Shares of Series A Stock and the accrued Premium thereon may be
converted into shares of Common Stock at any time at the option of the holders
thereof on substantially the same terms and subject to substantially the same
conditions that the Debentures and accrued interest thereon may be converted
into shares of Common Stock. See "--Debentures --Conversion." Because the Series
A Stock will be issued only if the shareholders of the Company approve the
Proposal 2 Matters in accordance with the Nasdaq rules, the number of shares of
Common Stock which may be issued in connection with the conversion of the Series
A Stock will not be limited by the Stock Limitation. See "--Debentures
- --Conversion" and "--Nasdaq Listing Obligation." However, pursuant to the terms
of the Series A Stock, no holder thereof may receive shares of Common Stock upon
a conversion of shares of Series A Stock to the extent that the sum of shares of
Common Stock beneficially owned by the holder and its affiliates (other than
shares which may be acquired in connection with the conversion of the Series A
Stock) and the number of shares of Common Stock issuable upon the Series A Stock
then being converted, would result in the holder's beneficial ownership of
shares of Common Stock in excess of 4.99% of the shares of Common Stock of the
Company then outstanding (the "4.99% Limitation").
The Conversion Price of the Series A Stock will be calculated and
adjusted in substantially the same manner that the Conversion Price of the
Debentures is calculated and adjusted. See "--Debentures--Conversion" and
"--Debentures--Adjustment of Conversion Price." The Fixed Conversion Price of
shares of Series A Stock issued at the Exchange Closing is $4.02 per share, and
the Fixed Conversion Price of shares of Series A Stock issued at the Second
Closing will be the amount which results from multiplying the average of the
closing bid prices of the Common Stock of the Company on the five trading days
immediately preceding the Second Closing by
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<PAGE> 17
115%. The Issue Date for shares of Series A Stock issued at the Exchange Closing
will be June 8, 1998, and the Issue Date for shares of Series A Stock issued at
the Second Closing will be the date of the Second Closing. The Variable
Conversion Price of the Series A Stock will fluctuate based on the market price
of the Common Stock, and there is no Conversion Price floor. Because the number
of shares of Common Stock to be issued in connection with the conversion of the
Series A Stock will vary inversely with the market price of the Common Stock
from time to time, the number of shares of Common Stock to be issued on
conversion of the Series A Stock cannot be determined until the time of
conversion of such shares of Series A Stock. Conversion of the Series A Stock
will result in at least modest dilution to the existing shareholders of the
Company and may result in substantial dilution. See "--Debentures --Conversion"
and "--Debentures --Adjustment of Conversion Price" and "--Possible
Disadvantages of Approving the Proposal 2 Matters-- Potential for Increased
Dilution of Common Shareholders."
Mandatory Conversion
Outstanding shares of Series A Stock and the accrued Premium thereon
automatically will be converted into shares of Common Stock on the three year
anniversary of the Issue Date for such shares provided that: (i) a sufficient
number of shares of Common Stock have been authorized and reserved for issuance,
(ii) the Common Stock to be issued is covered by a Registration Statement which
is effective and available for use and (iii) the Common Stock is listed or
quoted for trading on the Nasdaq National Market, the New York Stock Exchange or
the American Stock Exchange. If outstanding shares of Series A Stock are not
automatically converted into shares of Common Stock on the three year
anniversary of the Issue Date for such shares, then the holders of such shares
of Series A Stock shall have the option to require the Company to redeem such
shares of Series A Stock at the "Redemption Amount" (which shall be calculated
in the same manner that the Default Amount is calculated for the Debentures and
which shall be subject to the same payment terms as the Default Amount). See
"--Debentures --Conversion."
Reservation of Shares of Common Stock
The terms of the Series A Stock subject the Company to the same
requirements regarding the reservation of shares of Common Stock for conversion
that the Company is subject to in connection with the Debentures. See
"--Debentures --Reservation of Shares of Common Stock."
Redemption Events
The events which will require the Company to redeem the Series A Stock
("Redemption Events") are: (i) the Common Stock is not listed or quoted for
trading on the Nasdaq National Market, New York Stock Exchange or American Stock
Exchange for an aggregate of 10 trading days in any 9 month period, (ii) the
Second Registration Statement is not filed with the SEC within one business day
following the Exchange Closing or is not declared effective by the SEC by the
twentieth day following the day it is filed with the SEC, (iii) the Company
fails to remove a restrictive legend from a stock certificate issued to a holder
of Series A Stock upon conversion of shares of Series A Stock in violation of
the terms of the Transaction Documents, (iv) the Company fails to issue, or
notifies a holder of shares of Series A Stock that it will not issue, shares of
Common Stock upon conversion of shares of Series A Stock in accordance with the
terms of the Certificate (other than in connection with the limitations related
to the Reserved Amount), (v) the sale of substantially all of the assets of the
Company, the combination of the Company with or into another entity or the
acquisition by a person or group of more than 50% of the voting power of the
capital stock of the Company or (vi) the Company breaches any material term of
the Stockholders' Agreement, Certificate, Securities Purchase Agreement or
Registration Rights Agreement. Upon the occurrence of a Redemption Event, the
rights of the holders of shares of Series A Stock shall be similar to the rights
held by the holders of Debentures upon the occurrence of an Event of Default.
See "--Debentures --Events of Default."
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<PAGE> 18
Rank and Liquidation Preference
The Series A Stock shall rank prior to the Common Stock and all other
classes and series of capital stock of the Company (unless the holders of the
Series A Stock agree otherwise) as to the distribution of assets upon
liquidation, dissolution or winding up of the Company. Upon the occurrence of
any such event, the holders of the Series A Stock shall receive a liquidation
preference with respect to each share of Series A Stock equal to the $1,000 Face
Amount thereof plus the accrued Premium thereon and such liquidation preference
shall be paid by the Company prior to making distributions to any holders of
capital stock of the Company other than the holders of Series A Stock.
Voting Rights
The holders of Series A Stock shall not have any voting rights except as
otherwise required by law. Notwithstanding the foregoing, the Company may not
carry out any of the following actions without first obtaining the consent of
the holders of a majority of the then outstanding shares of Series A Stock: (i)
alter or change the rights, preferences or privileges (collectively, "Rights")
of the Series A Stock, (ii) alter or change any Rights of any capital stock of
the Company so as to affect adversely the Series A Stock, (iii) create a class
of capital stock which is senior or pari passu with the Series A Stock, (iv)
increase the authorized number of shares of Series A Stock, (v) issue shares of
capital stock which are senior or pari passu to the Series A Stock, (vi) issue
shares of Series A Stock other than pursuant to the Securities Purchase
Agreement, or (vii) redeem or make distributions on capital stock of the Company
which is junior to the Series A Stock.
Amendment of Articles of Incorporation
The Certificate attached as Annex II to this Proxy Statement has been
prepared based on the assumptions that the shareholders of the Company will
approve Proposals 1 and 2 of this Proxy Statement. However, the approval of
either of these Proposals is not contingent upon the approval of the other
Proposal. See "--Relationship of Proposal 1 and Proposal 2." If the shareholders
of the Company approve Proposals 1 and 2 of this Proxy Statement, the
Certificate of Amendment to Articles of Incorporation described in Proposal 1
will be revised to include the provisions regarding the 4.99% Limitation in the
form set forth in Exhibit C to the Stockholder's Agreement attached as part of
Annex I to this Proxy Statement. See "PROPOSAL 1 -- AMENDMENT TO ARTICLES OF
INCORPORATION TO AUTHORIZE 10,000,000 SHARES OF PREFERRED STOCK --Vote Required;
Board Recommendation." The revised Certificate of Amendment to Articles of
Incorporation will be filed with the California Secretary of State prior to the
time of filing the Certificate with the California Secretary of State. If the
shareholders of the Company do not approve Proposal 1 but do approve Proposal 2,
then the Company will revise the Certificate so that it is in the form of a
Certificate of Amendment to Articles of Incorporation (rather than its current
Certificate of Determination form) and the Company will add to the revised
document the above-described provisions regarding the 4.99% Limitation, and then
the revised document will be filed with the California Secretary of State in
order to authorize the issuance of the Series A Stock in accordance with the
Proposal 2 Matters approved by the shareholders of the Company.
NASDAQ LISTING OBLIGATION
The Company's listing agreement regarding the trading of the Common
Stock on the Nasdaq National Market requires the Company to comply with certain
"non-quantitative designation criteria." These criteria include the requirement
that, with certain exceptions, issuers whose securities are listed on the Nasdaq
National Market obtain shareholder approval before the issuance at a price per
share below the greater of market or book value of Common Stock (or securities
convertible into Common Stock) having voting power equal to or greater than 20%
or more of the outstanding Common Stock. Shareholder approval is also required
for transactions which result in a "change in control." Although the Company
does not believe that the securities issuances by the Company in the
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<PAGE> 19
Private Placement constitute a "change in control" under the Nasdaq rules, if
the transactions were to be so construed, the approval sought hereby would also
be effective to satisfy the shareholder vote required thereby. The Company's
belief regarding the "change in control" issue is based on the facts that (i) no
voting rights were granted to holders of the Debentures and only limited voting
rights were granted to the holders of Series A Stock as such, (ii) such holders
do not have any contractual right to elect a director or otherwise influence
management of the Company, (iii) as of the date of this Proxy Statement, there
has been no change in the Company's Chairman of the Board or its President and
Chief Executive Officer, and (iv) no holder of Debentures or Series A Stock can
convert its securities to the extent that such conversion would increase its
beneficial ownership of Common Stock to more than 4.99%. See "--Debentures
- --Conversion" and "--Series A Stock--Conversion" and "--Series A Stock --Voting
Rights."
To assure continued compliance with the listing rules of the Nasdaq
National Market, the terms of the Debentures expressly provide that no more than
3,813,503 shares of Common Stock (slightly less than 20.0% of the shares of
Common Stock outstanding on the date of the First Closing) may be issued in
connection therewith unless and until the approval sought hereby is obtained.
See "-- Debentures -- Conversion." In addition, if the shareholders of the
Company do not approve the Proposal 2 Matters, the Series A Stock will not be
issued by the Company. See "--Consequences if Shareholder Approval is not
Obtained."
The approval of the Proposal 2 Matters by the Company's shareholders
would result in the approval of the issuance by the Company of shares of Common
Stock in satisfaction of its obligations under the securities issued in the
Private Placement as described in this Proxy Statement and would free the
Company from the 20% limit under the Nasdaq rules. No further shareholder vote
or approval related to the Private Placement will be sought or required, unless
a decline in the market price of the Common Stock were to cause the Company's
reserve of authorized but unissued shares of Common Stock reserved for issuance
in connection with the conversion of the Debentures and Series A Stock and the
exercise of the Warrants, to amount to less than 135% of the amount of shares
then issuable based on current market prices of the Common Stock, in which case
the Company would be required to obtain shareholder approval of an amendment to
its Articles of Incorporation to increase the number of authorized shares of
Common Stock to the extent necessary to allow the Company to increase the
Reserved Amount to 200% of the number of shares of Common Stock then issuable
upon the conversion of the Debentures or Series A Stock, as applicable. See
"--Debentures -- Reservation of Shares of Common Stock."
POSSIBLE DISADVANTAGES OF APPROVING THE PROPOSAL 2 MATTERS
Potential for Increased Dilution of Common Shareholders.
If the Company's shareholders approve the Proposal 2 Matters, the number
of shares of Common Stock that ultimately may be issued upon the conversion of
the Series A Stock and the exercise of the Warrants may be significantly greater
than the maximum of 3,813,503 shares of Common Stock currently permitted to be
issued in connection with the conversion of the Debentures and the exercise of
Warrants issued at the First Closing. See "--Nasdaq Listing Obligation." For
example, the following table illustrates the effect of various Conversion Prices
on the number of shares of Common Stock that may be issued in connection with
the conversion of Series A Stock and the exercise of the Warrants, assuming (i)
the Company's shareholders approve the Proposal 2 Matters, (ii) the Debentures
are exchanged for 7,000 shares of Series A Stock at the Exchange Closing, (iii)
3,000 shares of Series A Stock and Warrants to purchase 111,940 shares of Common
Stock are issued by the Company at the Second Closing and (iv) all shares of
Series A Stock are converted at the following Conversion Prices (without
calculating the number of shares of Common Stock that may be issuable in
connection with accrued and unpaid Premium amounts) and concurrent with such
conversion all Warrants are exercised:
-15-
<PAGE> 20
<TABLE>
<CAPTION>
Number of Shares Percent of
of Common Stock Issuable Upon Outstanding Shares of Common
the Conversion of Stock Issued in Connection With
Assumed Conversion Series A Stock the Conversion of Series A Stock
Price of Series A Stock (1) and Exercise of the Warrants(2) and Exercise of the Warrants(3)
--------------------------- ------------------------------- -------------------------------
<S> <C> <C>
$ 4.02 2,860,698 12.60%
$ 3.00 3,706,468 15.74%
$ 2.00 5,373,135 21.31%
$ 1.00 10,373,135 34.33%
$ 0.50 20,373,135 50.66%
</TABLE>
- --------------------------------
(1) Generally, the Conversion Price is the lower of the Fixed Conversion
Price ($4.02 per share in the case of shares of Series A Stock issued at
the Exchange Closing, and which cannot be determined for shares of
Series A Stock issuable at the Second Closing until such date of
issuance) or the Variable Conversion Price. Therefore, there is no
minimum Conversion Price, and, unless the number of outstanding shares
of Common Stock is reduced by a reverse stock split or other capital
stock reducing event, the Conversion Price will not exceed $4.02 per
share. See "--Series A Stock --Conversion."
(2) Calculated by (i) dividing (a) the $10,000,000 aggregate Face Value of
the Series A Stock assumed to be issued by the Company at the Exchange
and Second Closings by (b) the Assumed Conversion Price (Column 1 of
this table) and then (ii) adding to such amount the 373,135 shares of
Common Stock issuable upon exercise of the Warrants. The actual number
of shares which may be issued from time to time may be limited by the
4.99% Limitation. See "--Series A Stock--Conversion."
(3) Assumes that the number of shares of Common Stock outstanding after the
issuance of the number of shares set forth in Column 2 of this table is
the sum of 19,843,751 shares outstanding as of October 9, 1998 and the
number of shares set forth in Column 2 of this table.
Potential for Increased Number of Shares Available for Sale
The approval of the Proposal 2 Matters could result in a greater number
of shares of Common Stock becoming eligible for sale into the public market. The
Company is required to keep in effect Registration Statements which allow the
public sale of all of the shares of Common Stock issued upon the conversion of
the Debentures and the Series A Stock and the exercise of the Warrants. Such
sales, or the possibility of such sales, could depress the market price of the
Common Stock.
Potential Effects on the Company's Ability to Obtain Future Equity Capital
The approval of the Proposal 2 Matters may impede the Company's ability
to obtain additional equity capital in the future because of the factors noted
above under "--Possible Disadvantages of Approving the Proposal 2 Matters --
Potential for Increased Dilution of Common Shareholders and -- Potential for
Increased Number of Shares Available for Sale" and the restrictions regarding
financing transactions of the Company described in "--Securities Purchase
Agreement."
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<PAGE> 21
Potential for a Change of Control
The approval of the Proposal 2 Matters could, depending on the market
prices of the Common Stock during the periods prior to the conversion of the
Debentures and Series A Stock, result in the issuance of a large number of
shares of Common Stock, thereby possibly resulting in a change of control of the
Company if the converting holders were to retain such shares of Common Stock
rather than sell them. Under the terms of the Debentures and Series A Stock, no
holder can convert into Common Stock to the extent that such conversion would
result in it being the beneficial owner of more than 4.99% of the Common Stock
that would be outstanding after giving effect to such conversion. However, the
terms of the Debentures allow this restriction to be amended or terminated by
the vote of the holders of a majority of the outstanding principal amount of the
Debentures and the holders of a majority of the outstanding shares of Common
Stock, and the terms of the Series A Stock allow this restriction to be amended
or terminated by the vote of holders of a majority of the outstanding shares of
Series A Stock and the holders of a majority of the outstanding shares of Common
Stock.
Potential for Discouraging Certain Changes of Control
The potential for the issuance of a larger number of shares of Common
Stock following shareholder approval of the Proposal 2 Matters might tend to
have the effect of delaying, deferring or preventing a change in control of the
Company or discouraging tender offers for the Company.
The Board of Directors considered these disadvantages and concluded that
they are outweighed by the advantages available to the Company by raising the
proceeds in the Private Placement. The Board of Directors considered the
financing alternatives available to the Company and determined that the terms of
the Private Placement were the most favorable available to the Company within
the requisite time period. The proceeds were needed to fund the Company's
immediate needs: seasonal cash flow requirements, inventory purchases for the
1998 fall season and short-term purchase and other obligations. In addition, the
Board of Directors believed that the reputation and financial resources of the
Investors made the Private Placement an attractive financing vehicle, and by
entering into the Private Placement, the Company could begin to develop a
business relationship with the Investors.
CONSEQUENCES IF SHAREHOLDER APPROVAL IS NOT OBTAINED
If the Company's shareholders do not approve the Proposal 2 Matters, (i)
the terms of the Debentures and the Nasdaq rules will prohibit the Company from
issuing more than 3,813,503 shares of Common Stock (slightly less than 20% of
the shares of Common Stock outstanding immediately prior to the consummation of
the First Closing) upon the conversion of the Debentures and the exercise of the
Warrants issued at the First Closing, (ii) the Articles of Incorporation of the
Company will not be amended to provide for the authorization and issuance of the
Series A Stock, (iii) the Exchange Closing will not take place and the
Debentures will not be exchanged for shares of Series A Stock, (iv) the Second
Closing will not take place and shares of Series A Stock and Warrants will not
be issued to the Investors at such Closing and the Company will not receive the
$3,000,000 purchase price for such securities, (v) the Company may be required
from time to time to repay portions of the Debentures at the Default Amount in
order to comply with the Stock Limitation requirements contained in the
Debentures, and (vi) the Company will be required to repay the Debentures on
December 28, 1998.
The Company does not now have sufficient financial resources to satisfy
the contingent obligation to repay the Debentures and there can be no assurance
that the Company will have such resources on December 28, 1998, the maturity
date of the Debentures.
-17-
<PAGE> 22
INTERESTS OF CERTAIN PERSONS
None of the Investors was or is an executive officer or director of the
Company or, to the Company's knowledge, an affiliate or associate of any such
officer or director. To the Company's knowledge, none of the Investors
beneficially owns 5% or more of the Common Stock of the Company as of the date
of this Proxy Statement. On September 8, 1997, Capital Ventures International
("CVI"), an Investor in the Debentures, acquired from the Company convertible
term debentures (the "Original Convertible Debentures") in the original
principal amount of $5,000,000. The Original Convertible Debentures are
convertible into shares of Common Stock at a conversion price which is
calculated substantially in the same manner that the Conversion Price is
calculated for the Debentures. See "--Debentures --Conversion" and "--Debentures
- --Adjustment of Conversion Price." To the Company's knowledge, as of October 9,
1998, CVI holds Original Convertible Debentures in the principal amount of
$3,000,000, Debentures in the principal amount of $2,000,000 and stock purchase
warrants to acquire 287,759 shares of Common Stock of the Company, and all of
such securities contain provisions similar to the 4.99% Limitation which limit
the number of shares of Common Stock of the Company which may be acquired from
time to time in connection with the conversion or exercise of such securities.
NO APPRAISAL OR DISSENTERS' RIGHTS; NO PREEMPTIVE RIGHTS
Under applicable California Law, shareholders are not entitled to any
statutory dissenters' rights or appraisal of their shares of Common Stock in
connection with the Private Placement. Existing shareholders have no preemptive
rights in respect of any of the securities to be issued in the Private
Placement.
RELATIONSHIP OF PROPOSAL 1 AND PROPOSAL 2
Pursuant to this Proxy Statement, the Board of Directors is soliciting
proxies from the shareholders of the Company approving a proposed amendment to
the Company's Articles of Incorporation to authorize the issuance of 10,000,000
shares of Preferred Stock of the Company (Proposal 1) and the private placement
of certain securities of the Company including the proposed issuance of Series A
Stock of the Company (Proposal 2). While both Proposal 1 and Proposal 2 relate
to the issuance of Preferred Stock of the Company, the approval of either of
these Proposals is not contingent upon the approval of the other Proposal.
Accordingly, a shareholder of the Company may vote in favor of, or against,
either or both of the Proposals contained in this Proxy Statement, and the Board
of Directors will have the authority to issue Preferred Stock in the manner and
under the circumstances described in Proposal 1 and/or Proposal 2 only if the
shareholders approve the applicable Proposal.
IRREVOCABLE PROXIES BY CERTAIN SHAREHOLDERS
Louis L. Knickerbocker, Tamara Knickerbocker, Anthony P. Shutts, Gerald
Margolis and William R. Black, all of whom are directors and/or officers of the
Company, have executed Irrevocable Proxies designating and appointing the Chief
Executive Officer and the Chief Financial Officer of the Company as their
proxies to vote all shares of Common Stock held by such individuals in favor of
the Proposal 2 Matters. As of October 9, 1998, such Irrevocable Proxies cover
7,277,582 shares of Common Stock, representing approximately 36.7% of the shares
of Common Stock outstanding on such date.
VOTE REQUIRED; BOARD RECOMMENDATION
Approval of this Proposal 2 requires the affirmative vote of the holders
of a majority of the outstanding shares of Common Stock entitled to vote at the
Special Meeting. If approved by the shareholders, the Certificate described in
this Proposal 2 will become effective upon filing with the California Secretary
of State, which filing is expected to take place shortly after the Special
Meeting. See "-- Series A Stock -- Amendment of Articles of Incorporation."
-18-
<PAGE> 23
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR THE APPROVAL OF THE PROPOSAL TO APPROVE THE TRANSACTIONS CONTEMPLATED BY THE
SECURITIES PURCHASE AGREEMENT, INCLUDING THE ISSUANCE OF THE DEBENTURES, THE
WARRANTS, SHARES OF THE SERIES A STOCK OF THE COMPANY, AND SHARES OF THE COMMON
STOCK OF THE COMPANY UPON THE CONVERSION OF THE DEBENTURES AND SHARES OF SERIES
A STOCK AND THE EXERCISE OF THE WARRANTS.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table contains certain information as of October 9, 1998
regarding all persons who, to the knowledge of the Company, were the beneficial
owners of more than 5% of the outstanding shares of Common Stock, each of the
directors of the Company, the Chief Executive Officer ("CEO") of the Company,
the Company's four most highly compensated executive officers other than the CEO
who were serving as executive officers at the end of the fiscal year ended
December 31, 1997, and all directors and executive officers of the Company as a
group. The persons named hold sole voting and investment power with respect to
the shares shown opposite their respective names, unless otherwise indicated.
The information with respect to each person specified is as supplied or
confirmed by such person or based upon statements filed with the SEC.
-19-
<PAGE> 24
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
NAME Ownership(1) Class(1)(2)
---- ------------ -----------
<S> <C> <C>
Louis L. Knickerbocker(3)(4) ................ 4,292,392 20.7%
Tamara Knickerbocker(3)(5) .................. 3,446,979 16.6%
Anthony P. Shutts(6) ........................ 205,400 1.0%
Gerald A. Margolis(7) ....................... 220,000 1.1%
F. Rene Alvarez, Jr.(8) ..................... 20,000 *
William R. Black(9) ......................... 290,000 1.4%
All Directors and Executive Officers
as a Group (6 persons)(10) ................ 8,474,771 40.9%
</TABLE>
- ------------------
* The percentage of shares of Common Stock beneficially owned does not
exceed one percent of the outstanding shares of Common Stock.
(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares of Common Stock which such
person has the right to acquire within 60 days following October 9,
1998.
(2) For purposes of computing the percentage of outstanding shares of Common
Stock held by each person or group of persons named above, any security
which such person or persons has or have the right to acquire within 60
days following October 9, 1998 is deemed to be outstanding, but is not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
(3) The mailing address of such shareholder is c/o The L.L. Knickerbocker
Co., Inc., 25800 Commercentre Drive, Lake Forest, California 92630.
(4) Louis L. Knickerbocker currently owns 3,592,392 shares of Common Stock,
and options to acquire 700,000 shares of the Company's Common Stock
which will have vested within 60 days of October 9, 1998. Excludes
3,446,979 shares of Common Stock beneficially owned by Tamara
Knickerbocker.
(5) Tamara Knickerbocker currently owns 3,432,392 shares of Common Stock,
and options to acquire 14,587 shares of the Company's Common Stock which
will have vested within 60 days of October 9, 1998. Excludes 3,992,392
shares of Common Stock beneficially owned by Louis L. Knickerbocker.
(6) Anthony P. Shutts currently owns 400 shares of Common Stock, and options
to acquire 205,000 of the Company's Common Stock which will have vested
within 60 days of October 9, 1998.
(7) Gerald A. Margolis currently owns 150,000 shares of Common Stock, and
options to acquire 70,000 shares of the Company's Common Stock which
will have vested within 60 days of October 9, 1998.
(8) F. Rene Alvarez currently owns 10,000 shares of Common Stock, and
options to acquire 10,000 shares of the Company's Common Stock which
will have vested within 60 days of October 9, 1998.
(9) William R. Black currently owns 102,398 shares of Common Stock, and
options to acquire 187,602 shares of the Company's Common Stock which
will have vested within 60 days of October 9, 1998.
(10) The directors and executive officers as a group own 7,287,582 shares of
Common Stock, and options to acquire 1,187,189 shares of the Company's
Common Stock which will have vested within 60 days of October 9, 1998.
-20-
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion may contain forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in such forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed below
in "Forward-Looking Statements." The Company undertakes no obligation to release
publicly the results of any revisions to these forward-looking statements to
reflect events or circumstances arising after the date hereof.
The following discussion should be read in conjunction with the
financial statements and the notes thereto beginning on page F-1 of this Proxy
Statement.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET SALES
Net sales increased to $15,769,000 for the three months ended September 30, 1998
from $14,112,000 for the three months ended September 30, 1997, an increase of
$1,657,000, or 11.7%. The $1,657,000 increase in quarterly net sales was
comprised of a $2,294,000 increase in net sales in the Company's
celebrity-driven collectible doll program, a $1,081,000 increase in the
Company's fine jewelry program, a $442,000 increase in the Company's
celebrity-driven fashion jewelry program, offset by a decrease in net sales of
$2,160,000 attributed to the Company's non-celebrity collectible doll programs.
The increase in net sales from celebrity-driven collectible doll programs
related primarily to new product introductions to the Company's major customer
in the home shopping industry and an increase in volume through the Company's
retail distribution channel. The increase in fine jewelry sales related to an
expanded customer base established by the Company in 1998. The increase in net
sales from the Company's fashion jewelry sales was primarily attributed to a
higher number of new product introductions at the Company's major customer in
the home shopping industry, the primary distribution channel for the Company's
fashion jewelry. The decrease in non-celebrity collectible doll revenues was
primarily attributed to lower than expected response from the Company's direct
response advertisement campaigns. The Company continues to assess the potential
of sales expansion of existing products through new distribution channels, as
well as continuing to develop new product categories.
GROSS PROFIT
Gross profit increased to $8,064,000 for the three months ended September 30,
1998 from $7,635,000 for the three months ended September 30, 1997, an increase
of $429,000 or 5.6%. As a percentage of net sales, gross profit for the quarter
decreased to 51.2% in 1998 from 54.1% in 1997. The decrease in the gross profit
percentage in 1998 from 1997 is due primarily to decreased volume in the
Company's non-celebrity collectible doll programs where products are sold
directly to the customer, through catalog mailings and print advertisements,
that generate higher gross margins than the Company's wholesale sales. In the
quarter ended September 30, 1998, 23.7% of the Company's revenues were generated
from direct response distribution, versus 41.7% in the corresponding quarter of
1997. Partially mitigating the gross profit impact of the decline in direct
response sales in 1998 was an increase in the gross margin of the Company's
fashion jewelry program, which generated an increase in gross profit percentage
in 1998 to 44% from 33% in 1997. The increase in gross margin in the Company's
fashion jewelry program is due to obtaining lower manufacturing costs on the
Company's products, accomplished partially by outsourcing the manufacturing of
certain products and by aggressive cost cutting measures.
ADVERTISING EXPENSE
Advertising expense increased to $2,124,000 for the three months ended September
30, 1998 from $1,869,000 for the three months ended September 30, 1997, due
primarily to the Company's expansion of its direct response advertising
campaigns among a greater number of collectible brands in 1998 and its attempt,
in early 1998, to aggressively prospect for new customers for its Georgetown
Collection non-celebrity collectible doll brand. Additionally, the Company is
incurring higher advertising costs in 1998 due to the expansion into retail
distribution for the Company's products. Included in advertising expense
-21-
<PAGE> 26
are advertisement printing costs, catalog printing costs, media space in
magazines, and advertisement creative and development costs.
SELLING EXPENSE
Selling expense increased to $2,026,000 for the three months ended September 30,
1998 from $1,579,000 for the three months ended September 30, 1997, an increase
of $447,000, or 28.3%. As a percentage of net revenues, selling expense
increased from 11.2% in 1997 to 12.8% in 1998. The increase in selling expense
is due primarily to higher variable royalty expense attributable to higher
revenues in 1998, and to increases in trade show and commission expenses related
to the Company's expansion of its retail distribution channel. Selling expenses
include royalty expense, commission expense, trade show expenses, and other
sales promotion expenses.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased to $5,159,000 for the three months
ended September 30, 1998 from $4,731,000 for the three months ended September
30, 1997, an increase of $428,000, or 9.0%. The percentage of revenues
represented by these expenses decreased from 33.5% in 1997 to 32.7% in 1998, due
primarily to the increased sales volume in 1998. The increase in overall levels
of general and administrative expenses was due primarily to legal fees and other
litigation costs of approximately $550,000 in the third quarter of 1998.
Additionally, the Company is consolidating a major direct response division and
is incurring costs related to moving the operations, computer and fulfillment
planning and set up, and personnel costs. The Company is focusing on
aggressively reducing its general and administrative expense levels.
LOSS FROM EQUITY METHOD INVESTMENTS
Loss from equity method investments decreased to $167,000 for the three months
ended September 30, 1998 from $468,000 for the three months ended September 30,
1997. The major component of the 1998 loss from equity method investments stems
from the Company's 50% interest in Arkenol Asia, LLC. Included in the September
30, 1997 loss from equity method investments are losses incurred from
independent, development-stage corporations of which the Company owns a
substantial interest, in most cases greater than 19.9%. Under the equity method
of accounting, the Company must report its percentage ownership of losses
incurred by the development-stage corporations. During the three months ended
September 30, 1998, the Company did not account for investments in Pure Energy
Corporation and Ontro, Inc. under the equity method due to reductions in
ownership interest.
OTHER (INCOME) EXPENSE
Other income decreased to $421,000 for the three months ended September 30, 1998
from $762,000 for the three months ended September 30, 1997, a decrease of
$341,000, or 44.8%. The decrease relates primarily to foreign currency losses
realized by Thailand-based subsidiaries as a result of foreign currency
fluctuations and expense related to the issuance of common stock and common
stock purchase warrants in 1998, offset by a $769,000 gain on sale of investment
in the third quarter of 1998.
INTEREST EXPENSE
Interest expense increased to $893,000 for the three months ended September 30,
1998 from $471,000 for the three months ended September 30, 1997, an increase of
$422,000, or 89.6%. The increase occurred primarily as a result of increased
interest charges from the issuance of convertible debentures totaling $5,000,000
and $7,000,000 in September 1997 and June 1998, respectively. Included in
interest expense for the three months ended September 30, 1998 and 1997, are
noncash charges of $354,000 and $19,000, respectively, that are classified as
interest expense.
-22-
<PAGE> 27
NET LOSS
As a result of the foregoing factors, net loss increased to $1,690,000 for the
three months ended September 30, 1998 from net loss of $586,000 for the three
months ended September 30, 1997, an increase in net loss of $1,104,000.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET SALES
Net sales decreased to $40,685,000 for the nine months ended September 30, 1998
from $45,162,000 for the nine months ended September 30, 1997, a decrease of
$4,477,000, or 9.9%. The $4,477,000 decrease in year to date net sales was
comprised of a $3,279,000 decrease in the Company's non-celebrity collectible
doll program, a $1,319,000 decrease in the Company's fashion jewelry program, a
$350,000 decrease in the Company's celebrity-driven collectible doll program,
offset by an increase in net sales of $471,000 in the Company's fine jewelry
program. The decrease in non-celebrity collectible doll revenues was primarily
attributed to lower than expected response from the Company's direct response
advertisement campaigns. The decrease in net sales from the Company's fashion
jewelry program was primarily attributed to lower dollar amount orders from the
Company's major customer in the home shopping industry, the primary distribution
channel for the Company's fashion jewelry. The decrease in net sales from
celebrity-driven collectible doll programs on a year-to-date basis related
primarily to decreased programming time in the first and second quarters of 1998
for new products by the Company's major customer in the home shopping industry.
The increase in fine jewelry sales related to an expanded customer base
established by the Company in 1998. The Company continues to assess the
potential of sales expansion of existing products through new distribution
channels, as well as continuing to develop new product categories.
GROSS PROFIT
Gross profit decreased to $21,636,000 for the nine months ended September 30,
1998 from $23,518,000 for the nine months ended September 30, 1997, a decrease
of $1,882,000 or 8.0%. As a percentage of net sales, gross profit for the
quarter increased to 53.2% in 1998 from 52.1% in 1997. The increase in the gross
profit percentage in 1998 over 1997 is due primarily to increases in gross
profit margins in the Company's celebrity-driven collectible doll program and
fine and fashion jewelry programs, offset by the impact of lower direct response
sales in 1998. Impacting gross profit margins of the Company is the percentage
of the Company's sales mix that is generated from collectible products sold via
direct response. In the nine months ended September 30, 1998, 36.7% of the
Company's revenues were generated from direct response distribution, versus
40.2% in 1997. Direct response sales are generated by catalog mailings and print
advertisements placed by the Company. Direct response sales, as opposed to
wholesale, business to business sales, generate higher margins to the Company as
the products are sold at retail prices to individual consumers. The remaining
net sales of the Company, other than the portion contributed by direct response
sales, are generated from wholesale sales. Therefore, the Company's gross profit
percentage will vary depending on the volume of direct response sales during the
year. Correspondingly, should the majority of the Company's sales come from fine
and costume jewelry sales in any quarter, the gross profit percentage of the
Company will be lower due to lower historical margins associated with jewelry
production and sales.
ADVERTISING EXPENSE
Advertising expense increased to $7,148,000 for the nine months ended September
30, 1998 from $5,388,000 for the nine months ended September 30, 1997, due
primarily to the Company's expansion of its direct response advertising
campaigns among more collectible brands in 1998 and its attempt, in early 1998,
to aggressively prospect for new customers for its Georgetown Collection
non-celebrity collectible doll brand. Additionally, the Company is incurring
higher advertising costs in 1998 due to the expansion
-23-
<PAGE> 28
of retail distribution for the Company's products. Included in advertising
expense are advertisement printing costs, catalog printing costs, media space in
magazines, and advertisement creative and development costs.
SELLING EXPENSE
Selling expense increased to $4,487,000 for the nine months ended September 30,
1998 from $4,288,000 for the nine months ended September 30, 1997, an increase
of $199,000, or 4.6%. As a percentage of net sales, selling expense increased
from 19.8% in 1997 to 23.6% in 1998. The increase in selling expense is due
primarily to increases in trade show and commission expenses related to the
Company's expansion of its products into retail distribution, offset by lower
royalty expense attributable to lower revenues in 1998. Selling expenses include
royalty expense, commission expense, trade show expenses, and other sales
promotion expenses.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense decreased to $15,324,000 for the nine months
ended September 30, 1998 from $15,527,000 for the nine months ended September
30, 1997, a decrease of $203,000, or 1.3%. The percentage of revenues
represented by these expenses increased from 34.4% in 1997 to 37.7% in 1998. The
increase in general and administrative expenses as a percentage of revenues
resulted primarily from the 9.9% decrease in the revenue base in 1998 from 1997.
The $203,000 decrease in general and administrative expense related primarily to
the Company's aggressive efforts to cut general and administrative expenses
across the Company's diverse product divisions, offset by increased legal costs
related to preparation for two trials, higher personnel costs due to the
addition of members of management, and higher operating costs associated with
the Company's new headquarters in California and its jewelry facility in
Thailand.
LOSS FROM EQUITY METHOD INVESTMENTS
Loss from equity method investments decreased to $982,000 for the nine months
ended September 30, 1998 from $1,344,000 for the nine months ended September 30,
1997. The major components of the 1998 loss from equity method investments stem
from the Company's 50% interest in Arkenol Asia, LLC and its interest in Pure
Energy Corporation, both development-stage corporations. Under the equity method
of accounting, the Company must report its percentage ownership of losses
incurred by the development-stage corporations. Effective April 1, 1998, the
Company discontinued the application of the equity method to its investment in
Pure Energy Corporation due to a reduction in ownership interest during 1998.
OTHER (INCOME) EXPENSE
Other income increased to $3,088,000 for the nine months ended September 30,
1998 from $526,000 for the nine months ended September 30, 1997, an increase of
$2,562,000. The increase relates primarily to the sales of a portion of the
Company's interest in Pure Energy Corporation which occurred in the first and
third quarters of 1998.
INTEREST EXPENSE
Interest expense decreased to $2,176,000 for the nine months ended September 30,
1998 from $3,997,000 for the nine months ended September 30, 1997, a decrease of
$1,821,000, or 45.6%. The decrease occurred primarily as a result of a
$1,899,000 noncash restructuring charge and noncash conversion discounts
incurred in 1997 associated with the Company's 1996 convertible debenture
offering, offset by increased interest charges from the issuance of convertible
debentures totaling $5,000,000 and $7,000,000 in September 1997 and June 1998,
respectively. Included in interest expense for the nine months
-24-
<PAGE> 29
ended September 30, 1998 and 1997, are noncash charges of $713,000 and
$2,667,000, respectively, that are classified as interest expense.
NET LOSS
As a result of the foregoing factors, net loss decreased to $4,131,000 for the
nine months ended September 30, 1998 from net loss of $4,986,000 for the nine
months ended September 30, 1997, a decrease in net loss of $855,000.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997
----- -----
<S> <C> <C>
Revenue ............... 100.0% 100.0%
Cost of revenue ....... 51.0% 45.1%
Gross profit .......... 49.0% 54.9%
Operating expenses .... 39.9% 57.9%
Operating income (loss) 9.1% -3.0%
Other income (expense) -4.5% -4.9%
Net income (loss) ..... 3.3% -6.4%
</TABLE>
Net Sales
Net Sales increased to $68,290,000 for the year ended December 31, 1997
from $42,095,000 for the year ended December 31, 1996, an increase of
$26,195,000, or 62.2%. Of the $26,195,000 increase, $22,463,000 was attributable
to a full twelve months of 1997 net sales generated by the Georgetown Collection
and Magic Attic Club product lines that were acquired in October of 1996. The
comparative 1996 year included approximately two and one-half months of revenues
of the Georgetown Collection and Magic Attic Club lines totaling $12,162,000.
The remaining balance of the increase in sales for 1997 of $3,732,000 consists
of an increase in fashion jewelry sales of $5,902,000, offset by net decreases
in celebrity-driven collectible doll, bear and other consumer products and fine
jewelry sales of $2,094,000 and $76,000, respectively. The increases in fashion
jewelry sales were primarily attributed to the inclusion of a full twelve months
of sales in 1997, versus approximately six months of sales in 1996. The Company
acquired the fashion and fine jewelry subsidiaries in June of 1996.
Gross Profit
Gross profit increased to $37,500,000 for the year ended December 31,
1997 from $20,644,000 for the year ended December 31, 1996, an increase of
$16,856,000, or 81.7%. As a percentage of net sales, gross profit increased to
54.9% in 1997 from 49.0% in 1996. The improvement of 5.9% in gross profit as a
percentage of net sales was primarily attributable to the inclusion in 1997 of a
full year of activity of Georgetown Collection and Magic Attic Club lines. The
gross profit margins generated by the collectible doll sales of Georgetown
Collection and the Magic Attic Club lines were 67.6% during 1997 while the
Company's fashion and fine jewelry lines
-25-
<PAGE> 30
generated gross profit margins of approximately 40% in 1997. The net sales
generated by the Georgetown Collection and Magic Attic Club lines which are
distributed through catalogs, print advertisements and direct mail aimed at
consumers, typically result in higher gross margins than the Company's
historical margins. Approximately one-half of the Company's net sales, excluding
the portion contributed by Georgetown Collection and Magic Attic Club lines,
come from wholesale sales that typically carry lower gross margins than do
retail sales. Therefore, the Company's gross profit percentage will vary
depending on the volume of catalog, print advertisement, and direct response
sales in any particular quarter. Correspondingly, should the majority of the
Company's sales come from fine and costume jewelry sales in any period, the
Company's gross profit percentage will be lower due to lower historical margins
associated with wholesale jewelry sales. In the future, the Company expects its
direct response sales to make up a large percentage of its annual sales.
Advertising Expense
Advertising expense increased to $10,926,000 for the year ended December
31, 1997 from $4,882,000 for the year ended December 31, 1996, an increase of
$6,044,000, or 123.8%. The increase is due primarily to the inclusion in 1997 of
a full year of activity of the Company's direct response lines, Georgetown
Collection and Magic Attic Club. The comparative 1996 year included
approximately two and one-half months of activity from the Georgetown Collection
and Magic Attic Club lines. The Company will continue to incur significant
advertising expense through its direct response business. While the Company
enjoys higher gross margins on direct response sales, substantial advertising
expense is incurred in generating direct response sales. The Company will
continue to focus in 1998 on improving returns from advertising dollars spent.
Included in advertising expense are advertisement printing costs, catalog
printing costs, media space in magazines, postage on mailings, infomercial
costs, and advertisement development costs.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses increased to
$28,616,000 for the year ended December 31, 1997 from $11,912,000 for the year
ended December 31, 1996, an increase of $16,704,000, or 140.2%. The $16,704,000
increase is primarily due to the inclusion of a full year of activity in 1997
from the Company's 1996 acquisitions of the Georgetown Collection and Magic
Attic Club product lines and fashion and fine jewelry lines. All of the
acquisitions were completed in the second half of 1996. Therefore, the 1996
comparative base did not include a full year of activity of the entities which
were included in 1997. As a result of the acquisitions completed in 1996,
$661,000 of goodwill amortization is included in 1997 selling, general and
administrative expenses. Further impacting selling, general, and administrative
expenses were higher variable selling costs for royalties and commissions which
increased proportionately to the increase in net sales from 1997 over 1996. The
Company also experienced increases in overhead costs such as higher personnel
costs, higher legal and public relations costs and higher operating costs
associated with the Company's new headquarters in California and its jewelry
facility in Thailand. In addition, the Company has incurred higher travel and
lodging costs due to its expansion of operations into southeast Asia. The
percentage of revenues represented by selling, general and administrative
expenses increased from 28.3% in 1996 to 41.9% in 1997. The Company also incurs
general and administrative expenses in connection with overseeing its investment
division that includes investments in Pure Energy Corporation, Ontro, Inc., and
Arkenol Asia, Inc.
Equity in Loss of Investee Companies
Equity in loss of investee companies increased to $1,857,000 in 1997
from $629,000 in 1996, an increase of $1,228,000. Equity in loss of investee
companies represents the Company's percentage share of losses, accounted for
under the equity method of accounting, incurred by entities in which the Company
has a greater than 20% percentage ownership, and has the ability to influence
the business decisions of the investee companies.
-26-
<PAGE> 31
Other Income (Expense)
Other income (expense) increased to $3,316,000 for the year ended
December 31, 1997 from $(62,000) for the year ended December 31, 1997, an
increase of $3,378,000. The increase of $3,378,000 is primarily comprised of
$1,280,000 of net gains realized by Thailand-based subsidiaries in foreign
currency exchanges, $1,710,000 gain on the sale of shares in Pure Energy
Corporation, an investment held by the Company, offset by losses on infomercial
marketing joint ventures.
Interest Expense
Interest expense increased to $4,831,000 for the year ended December 31,
1997 from $1,205,000 for the year ended December 31, 1996, an increase of
$3,626,000. Included in the $4,831,000 of 1997 interest expense is $3,099,000 of
noncash charges in the form of noncash conversion discounts associated with the
Company's convertible debenture financings which occurred in September of 1996
and 1997 and a restructuring charge of $1,899,000 in February of 1997 incurred
to refinance the remaining convertible debenture completed in the September 1996
offering. The noncash conversion discount of 10% on conversions of convertible
debt into common stock is charged as interest expense. The total conversion
discount charged as interest expense in 1997 totaled $644,000. The remaining
balance of interest expense includes $1,732,000 of interest on borrowings from
working capital lines of credit, mortgages on buildings owned by the Company,
and interest paid in cash on the remaining balance of the September 1996
convertible debentures.
Net Income (Loss)
As a result of the above, net loss increased to $4,376,000 for the year
ended December 31, 1997 from net income of $1,372,000 for the year ended
December 31, 1996, a decrease of $5,748,000. The Company's Thailand-based fine
jewelry operations enjoy lower operating costs and overhead and thus generate a
higher percentage of operating income relative to sales than do the Company's
domestic operations. The savings in labor pool and overhead is accomplished by
its location in southeast Asia, where labor and operating costs are typically
less expensive than in the United States.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from its existing cash, short-term
borrowings and equity and debt financings. As of September 30, 1998, the Company
had working capital of $9,015,000, versus working capital of $20,798,000 at
September 30, 1997.
Through the third quarter of 1998, the Company has continued to invest most of
its available funds generated from operations and raised in its convertible
debenture financing by capitalizing subsidiaries, purchasing inventory for
seasonal needs and developing new product categories.
The Company has available to use for working capital purposes and to post
letters of credit, a line of credit totaling $20,000,000, subject to certain
limits. The line of credit encompasses The L.L. Knickerbocker Co., Inc. (LLK),
Georgetown Collection, Inc. (GCI) and Krasner Group, Inc. (TKG) and expires in
July 1999. Certain credit limits are established for each company. The credit
limits are $4,000,000 for LLK, $13,000,000 for GCI and $3,000,000 for TKG.
Borrowing availability is determined by an advance rate on eligible accounts
receivable and inventory. The line of credit includes sublimits for letters of
credit and bankers acceptances aggregating $13,000,000, $4,000,000 and
$3,000,000 for GCI, LLK and TKG, respectively. Borrowings bear interest at the
bank's base rate (8.5% at September 30, 1998) plus 2% for GCI and TKG borrowings
and plus 1% for LLK borrowings or, at the Company's option, an adjusted LIBOR
rate. In addition, the Company is charged an Unused Line fee of .25% of the
unused portion of the revolving loans.
At September 30, 1998, the Company had $6,542,000 of cash borrowings
outstanding. Available borrowings under the line of credit aggregated $2,891,000
at September 30, 1998. Borrowings are collateralized by substantially all assets
of the Company. The line of credit agreement contains, among other things,
restrictive financial covenants that require the Company to maintain certain
leverage and current ratios (computed annually and quarterly), an interest
coverage ratio (computed annually) and to achieve certain levels of annual
income. The agreement also limits GCI annual capital expenditures and prohibits
the payment of dividends. At September 30, 1998, the Company was in compliance
with these covenants or had received a waiver from the bank for certain covenant
violations.
The Company is in the process of expanding distribution and product categories
and is limited in its ability to borrow on the $20,000,000 credit facility based
upon current levels of inventory and receivables. As a result of the limitations
on the usage of the $20,000,000 credit facility, the Company has looked to
outside financing to supplement the credit facility, completing a $7,000,000
convertible debenture offering in June 1998.
Cash flow used in operations was $8,653,000 in 1998 compared to $8,510,000 in
1997. The increase in cash used in operations was due primarily to the increase
in accounts receivable during the nine months ended September 30, 1998, offset
by an increase in accounts payable and accrued expenses. Cash flow used in
investing activities was $578,000 for the nine months ended September 30, 1998,
primarily related to acquisitions of property and equipment and advances to
Arkenol Asia, LLC, a joint venture in which the Company has a 50% interest,
offset by proceeds from the sale of investments. Cash flow provided by financing
activities was $8,998,000 in 1998 due primarily to borrowings on the $20,000,000
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<PAGE> 32
credit facility and net proceeds from the convertible debenture offering
completed in June 1998. The current ratio for the Company decreased from 1.98 at
December 31, 1997 to 1.34 at September 30, 1998.
In June 1998, the Company issued Convertible Debentures (the 1998 Debentures)
with a face value of $7,000,000 in a private placement to institutional
investors. The 1998 Debentures are subject to an agreement whereby after
approval by the shareholders of the Company of the issuance of the 1998
Debentures and the creation of a class of Preferred Stock of the Company, the
1998 Debentures will be exchanged for shares of newly created Preferred Stock of
the Company, the terms of which shall be substantially similar to that of the
1998 Debentures. The Preferred Stock will be convertible into shares of common
stock of the Company at the lower of $4.02 or a graduated discounted price
ranging from 97% to 90% of an average of the 7 lowest trading days of the 30
consecutive trading days prior to conversion. The discounted price of 90%
applies if the investor does not convert prior to the two-year anniversary of
the closing date. To the extent the Company is not able to exchange the 1998
Debentures for Preferred Stock, under the terms of the agreements related to the
1998 Debentures (the Agreements), the 1998 Debentures will mature on December
28, 1998. Events of default under the 1998 Debentures have occurred with respect
to meeting filing deadlines as outlined in the Agreements. No assurances can be
made that additional events of default will not occur in the future. However,
management believes that the Company has, through its discussions with the 1998
Debenture Holders, what constitutes an implied waiver of defaults which have
occurred. Remedies of default, if enforced include demanding that all or any
portion of the 1998 Debentures be prepaid by the Company for cash. As a result,
the Company has reflected the 1998 Debentures as a current liability in the
accompanying financial statements. The Company currently does not have
sufficient funds to pay the holders of the 1998 Debentures if such debt were
accelerated, and no assurances can be made that the Company will have sufficient
funds to pay such amounts if payment is demanded in the future.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations. Georgetown
Collection, Inc., which was acquired effective October 18, 1996, has
historically experienced greater sales in the latter portion of the year.
Because of the seasonality of the Company's business, results for any quarter
are not necessarily indicative of the results that may be achieved for the full
fiscal year.
YEAR 2000 MATTERS
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
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<PAGE> 33
The Company has initiated a conversion from existing accounting software
to programs that are year 2000 compliant. Management has determined that the
year 2000 issue will not pose significant operational problems for its computer
systems.
The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
Company anticipates completing the Year 2000 project within one year but not
later than October 31, 1999, which is prior to any anticipated impact on its
operating systems. In the third quarter of 1998, the Company decided to
outsource a key data processing function which reduced the Company's estimate of
the total cost of the Year 2000 project to $200,000, which is being funded
through operating cash flows and lease financing.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, effective for fiscal years beginning after December 15,
1997. This Statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This Statement further requires that an entity display an
amount representing total comprehensive income for the period in that financial
statement. This Statement also requires that an entity classify items of other
comprehensive income by their nature in a financial statement. For example,
other comprehensive income may include foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on certain investments in
debt and equity securities. Reclassification of financial statements for earlier
periods, provided for comparative purposes, is required. Based on current
accounting standards, this Statement is not expected to have a material impact
on the Company's consolidated financial statements. The Company has adopted this
accounting standard effective January 1, 1998, as required.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, effective for fiscal years beginning
after December 15, 1997. This Statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. This Statement requires reporting segment profit or loss, certain
specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profit or loss, total
segment assets, and other amounts disclosed for segments to corresponding
amounts reported in the consolidated financial statements. Restatement of
comparative information for earlier periods presented is required in the initial
year of application, at which time comparative information is required. The
Company has not determined the impact that the adoption of this new accounting
standard will have on its consolidated financial statement disclosures. The
Company has adopted this accounting standard effective January 1, 1998, as
required.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for annual periods
beginning after June 15, 1999. This statement establishes
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<PAGE> 34
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The adoption of this standard is not expected to have a material effect on the
Company's financial condition, results of operations or cash flows. The Company
will adopt this accounting standard effective January 1, 2000, as required.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as awarded (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "SEC"). Reports, proxy statements
and other information filed by the Company may be inspected and copied at the
public reference facilities maintained by the SEC at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's Regional Offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained by mail from the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The SEC
maintains an Internet "website" that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC at http://www.sec.gov. In addition, such material may also be
inspected and copied at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006-1506.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from those contemplated or projected, forecast, estimated
or budgeted in or expressed or implied by such forward-looking statements. Such
factors include, among others, general economic and business conditions;
industry trends; foreign-exchange rates; the loss of major customers or
suppliers; the timing of orders received from customers; cost and availability
of raw materials; changes in business strategy or development plans;
availability and quality of management; and availability, terms and deployment
of capital.
SHAREHOLDER PROPOSALS FOR 1999 MEETING
Proposals of shareholders intended to be presented at the 1999 Annual
Meeting of Shareholders must be received on or before December 4, 1998 for
inclusion in the proxy materials relating to that meeting. Any such proposals
should be sent to the Company at its principal offices and addressed to the
Secretary. Other requirements for inclusion are set forth in Rule 14a-8 under
the Exchange Act.
OTHER MATTERS
Under the By-laws, as amended, of the Company, only such business may be
conducted at a special meeting of shareholders as has been brought before the
meeting pursuant to the Company's notice of meeting. The Board does not intend
to bring any matters before the Special Meeting other than those specifically
set forth in the Notice of Special Meeting of Shareholders. If any incidental
matters should properly come before the Special Meeting, it is the intention of
the persons named in the accompanying proxy to vote such proxy in accordance
with the direction of the Board.
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<PAGE> 35
ADJOURNMENT OF THE SPECIAL MEETING
In the event that there are not sufficient votes to approve and adopt
the Proposals set forth in this Proxy Statement at the time of the Special
Meeting, such Proposals could not be approved unless the Special Meeting were
adjourned in order to permit further solicitation of proxies from the
shareholders of the Company. The proxies that are being solicited by the Board
pursuant to this Proxy Statement grant the discretionary authority to vote for
any such adjournment, if necessary. If it is necessary to adjourn the Special
Meeting and the adjournment is for a period of 44 days or less and no new record
date is fixed, no notice of the time and place of the adjourned meeting is
required to be given to shareholders other than an announcement of such time and
place at the Special Meeting. A majority of the voting power represented and
voting at the Special Meeting is required to approve any such adjournment.
EXPERTS
The consolidated balance sheet of the Company as of December 31, 1997
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1997
included in this Proxy Statement have been so included in reliance on the report
of Deloitte & Touche LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting. It is expected that a member of
Deloitte & Touche LLP will be present at the Special Meeting with the
opportunity to make a statement if so desired and will be available to respond
to appropriate questions.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ William R. Black
-----------------------------------
William R. Black
Secretary
Lake Forest, California
November 18, 1998
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<PAGE> 36
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Statements of Operations
(unaudited) for the Three and Nine Month Periods
Ended September 30, 1998 and September 30, 1997 .............................F-1
Condensed Consolidated Balance Sheets
at September 30, 1998 (unaudited) and December 31, 1997 .....................F-2
Condensed Consolidated Statements of Cash
Flows (unaudited) for the Nine Month
Periods Ended September 30, 1998 and
September 30, 1997 ..........................................................F-4
Notes to Condensed Consolidated Financial Statements ..........................................F-6
Report of Deloitte & Touche LLP ...............................................................F-12
Consolidated Balance Sheet as of December 31, 1997 ............................................F-13
Consolidated Statements of Operations for the
Years Ended December 31, 1997 and 1996 ......................................F-14
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1997 and 1996 ..............................F-15
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1997 and 1996 ..............................F-17
Supplemental Schedule of Noncash Investing and
Financing Activity ..........................................................F-18
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1997 and 1996 ............................................F-19
</TABLE>
-32-
<PAGE> 37
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales, net of returns $ 15,769,000 $ 14,112,000 $ 40,685,000 $ 45,162,000
Cost of sales 7,705,000 6,477,000 19,049,000 21,644,000
------------ ------------ ------------ ------------
Gross profit 8,064,000 7,635,000 21,636,000 23,518,000
Advertising expense 2,124,000 1,869,000 7,148,000 5,388,000
Selling expense 2,026,000 1,579,000 4,487,000 4,288,000
General and administrative expense 5,159,000 4,731,000 15,324,000 15,527,000
------------ ------------ ------------ ------------
Operating loss (1,245,000) (544,000) (5,323,000) (1,685,000)
Loss on equity method investments 167,000 468,000 982,000 1,344,000
Other (income) expense, net (Note 7) (421,000) (762,000) (3,088,000) (526,000)
Interest expense (Note 3) 893,000 471,000 2,176,000 3,997,000
------------ ------------ ------------ ------------
Loss before minority interest and
income tax benefit (1,884,000) (721,000) (5,393,000) (6,500,000)
Minority interest in loss of subsidiary -- -- (274,000) (219,000)
Income tax benefit (194,000) (135,000) (988,000) (1,295,000)
------------ ------------ ------------ ------------
Net loss $ (1,690,000) $ (586,000) $ (4,131,000) $ (4,986,000)
============ ============ ============ ============
Net loss per share:
Basic and diluted $ (0.09) $ (0.03) $ (0.22) $ (0.28)
============ ============ ============ ============
Shares used in computing net loss per share:
Basic and diluted 19,634,624 18,408,572 19,118,538 17,731,737
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-1
<PAGE> 38
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 700,000 $ 92,000
Restricted cash -- 250,000
Accounts Receivable 11,901,000 8,021,000
Receivable from stockholder 1,048,000 1,383,000
Inventories 13,106,000 10,851,000
Prepaid expenses and other current assets 8,436,000 7,486,000
----------- -----------
Total current assets 35,191,000 28,083,000
Property and equipment, net 5,776,000 5,537,000
Notes Receivable 1,800,000 1,800,000
Investments (Note 7) 6,760,000 2,585,000
Deferred income taxes 4,500,000 4,215,000
Other Assets 2,677,000 2,348,000
Goodwill, net of accumulated amortization of $1,539,000 and $971,000
at September 30, 1998 and December 31, 1997, respectively 5,979,000 6,393,000
----------- -----------
$62,683,000 $50,961,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE> 39
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses $ 10,984,000 $ 7,846,000
Commissions and royalties payable 1,179,000 751,000
Notes Payable 6,542,000 3,650,000
Interest payable 428,000 270,000
Income taxes payable 45,000 123,000
Due to former shareholders of Krasner Group, Inc. 513,000 900,000
Loan from stockholder 248,000
Current portion of long-term debt 262,000 242,000
Other current liabilities 186,000 125,000
Deferred income taxes 49,000 49,000
Convertible debentures, net of discounts of $1,012,000
at September 30, 1998 5,988,000
------------ ------------
Total current liabilities 26,176,000 14,204,000
Long-term liabilities:
Long-term debt, less current portion 555,000 661,000
Convertible debentures, net of discounts of $157,000
at September 30, 1998 and $444,000 at December 31, 1997 7,742,000 9,455,000
Deferred gain 1,642,000 1,642,000
------------ ------------
Total long-term liabilities 9,939,000 11,758,000
Minority interest -- 274,000
------------ ------------
Stockholders' equity (Note 8):
Common stock 29,900,000 27,282,000
Additional paid-in capital 6,144,000 3,904,000
Accumulated deficit (5,361,000) (1,230,000)
Foreign currency translation adjustment (4,115,000) (5,231,000)
------------ ------------
Total stockholders' equity 26,568,000 24,725,000
------------ ------------
$ 62,683,000 $ 50,961,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE> 40
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows provided by operating activities:
Net loss $(4,131,000) $(4,986,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,975,000 1,746,000
Debenture inducement 1,899,000
Gain on sale of investment - P.E.C (3,616,000)
Equity in loss of investee companies 982,000 1,344,000
Loss on disposition of fixed assets 18,000
Minority interest (274,000) (219,000)
Amortization of debt discount 445,000 605,000
Expense related to issuance of stock options, warrants
and common stock 491,000
Deferred income taxes (1,000,000) (1,000)
Changes in operating accounts:
Accounts receivable, net (3,880,000) 1,544,000
Receivable from stockholder/officer 185,000 (793,000)
Income tax receivable (400,000)
Inventories (2,255,000) (4,045,000)
Prepaid expenses and other current assets (950,000) (4,880,000)
Other assets (473,000) 5,000
Accounts payable and accrued expenses 3,480,000 (437,000)
Commissions and royalties payable 428,000 (302,000)
Income tax payable (78,000) 461,000
Other long term liabilities (51,000)
----------- -----------
Net cash used in operating activities (8,653,000) (8,510,000)
Cash flows from investing activities:
Acquisitions of property and equipment (846,000) (1,991,000)
Proceeds from sales of property and equipment 21,000
Proceeds from sales of investment 818,000
Investments/advances to investees (571,000) (107,000)
----------- -----------
Net cash used in investing activities (578,000) (2,098,000)
Cash flows from financing activities:
Net borrowings on line of credit 2,892,000 467,000
Payments on long-term debt (264,000) (808,000)
Borrowings on long-term debt 45,000 466,000
Proceeds from exercise of common stock purchase warrants/options 732,000
Net proceeds (repayments) from shareholder loan (248,000) 400,000
Deferred debt issue costs (427,000) (325,000)
Proceeds from issuance of convertible debentures 7,000,000 5,000,000
----------- -----------
Net cash provided by financing activities 8,998,000 5,932,000
Effect of foreign currency translation 591,000 (518,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents 358,000 (5,194,000)
Cash and cash equivalents, beginning of period 342,000 6,747,000
----------- -----------
Cash and cash equivalents, end of period $ 700,000 $ 1,553,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE> 41
THE L.L. KNICKERBOCKER CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
Supplemental Disclosures of Cash Flow Information:
<TABLE>
<S> <C> <C>
Cash paid for interest $ 894,000 $ 782,000
=========== ===========
Cash paid (refunded) for income taxes $ 78,000 $ (946,000)
=========== ===========
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activity:
During the nine months ended September 30, 1998 and 1997, $2,000,000 and
$10,770,000 of convertible debentures and $123,000 and $121,000 of accrued
interest, respectively, was converted to common stock.
During the nine months ended September 30, 1998 and 1997, the Company issued
138,031 and 243,606 shares of common stock in payment of $387,000 and
$1,253,000, respectively, of liability to former Krasner shareholders.
During the nine months ended September 30, 1998, the Company acquired property
and equipment under capital lease obligations totaling $91,000.
During the nine months ended September 30, 1998, the Company recorded a
$1,788,000 increase to investments in connection with the initial public
offering of Ontro, Inc. (Note 7).
During the nine months ended September 30, 1997, the Company issued 150,000
warrants with an ascribed value of $434,000 as commission in connection with the
issuance of the 1997 Debentures (Note 3).
During the nine months ended September 30, 1998, the Company cancelled 200,000
shares of previously issued common stock in settlement of $150,000 receivable
from stockholder.
F-5
<PAGE> 42
THE L.L. KNICKERBOCKER CO., INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The information set forth in these consolidated financial statements is
unaudited except for the December 31, 1997 balance sheet. These statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying condensed consolidated financial statements include the
accounts of The L.L. Knickerbocker Co., Inc.; its wholly-owned subsidiaries The
Krasner Group, Inc., Harlyn International, Ltd., L.L. Knickerbocker (Thai)
Company, Ltd, and S.L.S Trading Co., Ltd.,; and its majority-owned subsidiary
Georgetown Collection, Inc. All intercompany accounts and transactions have been
eliminated.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation have been included. The
results of operations for the three and nine month periods ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. For further information, refer to the financial
statements and notes thereto included in the Company's annual report on Form
10-KSB for the year ended December 31, 1997.
Certain prior period balances have been reclassified to conform with current
presentation.
NOTE 2: EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128), in the fourth quarter of 1997. Shares issuable
upon the exercise of common stock warrants and options and shares issuable upon
the conversion of convertible debentures have been excluded from the three and
nine month periods ended September 30, 1998 and 1997 per share calculation
because their effect is antidilutive.
NOTE 3: CONVERTIBLE DEBENTURES
In June 1998, the Company issued Convertible Debentures (the 1998 Debentures)
with a face value of $7,000,000 in a private placement to institutional
investors. This private placement yielded net proceeds to the Company totaling
$6,573,000 after deducting costs associated with issuing the 1998 Debentures.
The 1998 Debentures accrue interest at the rate of 6% per annum, payable upon
conversion of the related debt. The 1998 Debentures are convertible at the
option of the holder into shares of the Company's common stock at a conversion
price of $4.02. As of September 30, 1998, none of the 1998 Debentures had been
converted.
The 1998 Debentures are subject to an agreement whereby after approval by the
shareholders of the Company of the issuance of the 1998 Debentures and the
creation of a class of Preferred Stock of the Company, the 1998 Debentures will
be exchanged for shares of newly created Preferred Stock of the Company, the
terms of which shall be substantially similar to that of the 1998 Debentures.
The Preferred Stock will be convertible into shares of common stock of the
Company at the lower of $4.02 or a graduated discounted price ranging from 97%
to 90% of an average of the 7 lowest trading days of the 30 consecutive trading
days prior to conversion. The discounted price of 90% applies if the investor
does not convert prior to the two-year anniversary of the closing date. To the
extent the Company is not able to exchange the 1998 Debentures for Preferred
Stock, under the terms of the agreements related to the 1998 Debentures (the
Agreements),
F-6
<PAGE> 43
the 1998 Debentures will mature on December 28, 1998. Events of default under
the 1998 Debentures have occurred with respect to meeting filing deadlines as
outlined in the Agreements. However, management believes that the Company has,
through its discussions with the 1998 Debenture Holders, what constitutes an
implied waiver of defaults which have occurred. Remedies of default, if
enforced include demanding that all or any portion of the 1998 Debentures be
prepaid by the Company for cash. As a result, the Company has reflected the
1998 Debentures as a current liability in the accompanying financial statements.
The conversion of the securities at a maximum of 90% of the closing price of the
Company's common stock resulted in the 1998 Debentures being issued at a
discount (the conversion discount). The Company is recognizing the conversion
discount as non-cash interest expense over the estimated term of the 1998
Debentures (two years) with a corresponding increase to the original principal
amount of the 1998 Debentures. In connection with the issuance of the 1998
Debentures, the Company issued to the investors warrants to purchase 261,194
shares of common stock. The warrants vest as of the grant date with an exercise
price of $4.72 per share, which was equivalent to 135% of the fair market value
of the Company's common stock at the date of grant and are valid for five years
from the date of the grant. The warrants have an ascribed value of $470,000,
which was recorded as debt discount (the warrant discount) and additional
paid-in capital. The Company is recognizing the warrant discount as non-cash
interest expense over the term of the securities (three years). Upon conversion
of the 1998 Debentures any portion of the conversion discount not previously
recognized is recorded as interest expense on the conversion date. During the
nine months ended September 30, 1998, a total of $200,000 of non-cash interest
expense was recorded relating to the 1998 Debentures.
In September 1997, the Company issued Convertible Debentures (the 1997
Debentures) with a face value of $5,000,000 in a private placement to an
institutional investor. This private placement yielded net proceeds to the
Company totaling $4,675,000 after deducting costs associated with issuing the
1997 Debentures. The 1997 Debentures accrue interest at the rate of 6% per
annum, payable upon conversion of the related debt or at debt maturity of
September 7, 2000. Interest is payable in either cash or common stock of the
Company at the option of the Company. The 1997 Debentures are convertible at the
option of the holder into shares of the Company's common stock at a graduated
discounted price ranging from 97% to 90% of an average of the 7 lowest trading
days of the 30 consecutive trading days prior to conversion. The discounted
price of 90% applies if the investor does not convert prior to the two-year
anniversary of the closing date. Through September 30, 1998, the Company issued
a total of 828,663 shares of its common stock in connection with the conversion
of $2,000,000 of the principal amount of the 1997 Debentures, plus interest
accrued through the conversion date.
The conversion of the notes at a maximum of 90% of the closing price of the
Company's common stock resulted in the 1997 Debentures being issued at a
discount (the conversion discount). The Company is recognizing the conversion
discount as non-cash interest expense over the estimated term of the 1997
Debentures (two years) with a corresponding increase to the original principal
amount of the 1997 Debentures. Upon conversion of the 1997 Debentures any
portion of the conversion discount not previously recognized is recorded as
interest expense on the conversion date. During the nine months ended September
30, 1998 and 1997, a total of $432,000 and $19,000, respectively, of non-cash
interest expense was recorded relating to the 1997 Debentures, including
$135,000 in the nine months ended September 30, 1998 relating to the additional
conversion discount recorded upon conversion.
In September 1996, the Company issued Convertible Debentures (the 1996
Debentures) with a face value of $15,500,000 in a private placement to
institutional investors. This private placement yielded net proceeds to the
Company totaling $14,730,000 after deducting costs associated with issuing the
1996 Debentures. The 1996 Debentures accrue interest at the rate of 7% per
annum, payable quarterly. The 1996 Debentures were convertible at the option of
the holder into shares of the Company's common stock at a price equal to 85% of
the closing price of the Company's common stock at the date of conversion,
subject to a minimum and maximum conversion price of $5.25 and $12.00 per share,
at any time through the second anniversary of the original date of issuance.
Through September 30, 1998, the Company issued a total of 1,903,174 shares of
its common stock in connection with the conversion of $12,499,000 of the
original principal amount of the 1996 Debentures, plus interest accrued through
the conversion dates.
F-7
<PAGE> 44
The conversion of the notes at 85% of the closing price of the Company's common
stock resulted in the 1996 Debentures being issued at a discount (the conversion
discount). The conversion discount was being recognized by the Company as
non-cash interest expense over the term of the 1996 Debentures with a
corresponding increase to the original principal amount of the Debentures. Upon
conversion of the 1996 Debentures any portion of the conversion discount not
previously recognized was recorded as interest expense on the conversion date.
During the nine months ended September 30, 1998 and 1997, a total of $81,000 and
$2,648,000, respectively, of non-cash interest expense was recorded relating to
the 1996 Debentures, including $537,000 in the nine months ended September 30,
1997 relating to the additional conversion discount recorded upon conversion. In
January 1997, the Company reached agreement with the 1996 Debenture holders to
tender all outstanding 1996 Debentures to the Company in exchange for new
convertible Debentures (the New Debentures). Under the terms of the agreement,
New Debentures were issued with a face value of 117.5% of the face value of the
tendered debentures. The New Debentures bear interest at 7% per year, payable
quarterly. The New Debentures are convertible at the option of the holder into
shares of the Company's common stock at $8.00 per share. The New Debentures must
be converted by January 1999. As a result of the 17.5% premium given as an
inducement to the Debenture holders to tender the original debentures into New
Debentures, the Company recorded a non-cash charge of $1,899,000 in the first
quarter of 1997.
NOTE 4: BANK FINANCING
The Company has available to use for working capital purposes and to post
letters of credit, a line of credit totaling $20,000,000, subject to certain
limits. The line of credit encompasses The L.L. Knickerbocker Co., Inc. (LLK),
Georgetown Collection, Inc. (GCI) and Krasner Group, Inc. (TKG) and expires in
July 1999. Certain credit limits are established for each company. The credit
limits are $4,000,000 for LLK, $13,000,000 for GCI and $3,000,000 for TKG.
Borrowing availability is determined by an advance rate on eligible accounts
receivable and inventory. The line of credit includes sublimits for letters of
credit and bankers acceptances aggregating $13,000,000, $4,000,000 and
$3,000,000 for GCI, LLK and TKG, respectively. Borrowings bear interest at the
bank's base rate (8.5% at September 30, 1998) plus 2% for GCI and TKG borrowings
and plus 1% for LLK borrowings or, at the Company's option, an adjusted LIBOR
rate. In addition, the Company is charged an Unused Line fee of .25% of the
unused portion of the revolving loans.
At September 30, 1998, the Company had $6,542,000 of cash borrowings
outstanding. Available borrowings under the line of credit aggregated $2,891,000
at September 30, 1998. Borrowings are collateralized by substantially all assets
of the Company. The line of credit agreement contains, among other things,
restrictive financial covenants that require the Company to maintain certain
leverage and current ratios (computed annually and quarterly), an interest
coverage ratio (computed annually) and to achieve certain levels of annual
income. The agreement also limits GCI annual capital expenditures and prohibits
the payment of dividends. At September 30, 1998, the Company was in compliance
with these covenants or had received a waiver from the bank for certain covenant
violations.
S.L.S. Trading Co., Ltd. and Harlyn International, Inc. have available lines of
credit aggregating 72,000,000 Thai baht (approximately $1,823,000 at September
30, 1998). Outstanding borrowings bear interest at rates ranging from 15% to
18.75%.
NOTE 5: CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". This statement requires
that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For example, other
comprehensive earnings may include foreign currency translation
F-8
<PAGE> 45
adjustments and unrealized gains and losses on marketable securities classified
as available-for-sale. Annual financial statements for prior periods will be
reclassified, as required. The Company's total comprehensive loss is as follows:
<TABLE>
<CAPTION>
Nine months ended: September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Net loss $(4,131,000) $(4,986,000)
Foreign currency translation gain (loss) 1,116,000 (1,478,000)
----------- -----------
Total Comprehensive loss $(3,015,000) $(6,464,000)
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Three months ended: September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Net loss $(1,690,000) $ (586,000)
Foreign currency translation gain (loss) 305,000 (1,343,000)
----------- -----------
Total Comprehensive loss $(1,385,000) $(1,929,000)
=========== ===========
</TABLE>
NOTE 6: INVENTORIES
As of September 30, 1998 and December 31, 1997 inventories consisted of the
following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Finished goods $10,536,000 $ 8,968,000
Work-in-progress 864,000 342,000
Raw materials 1,706,000 1,541,000
----------- -----------
$13,106,000 $10,851,000
=========== ===========
</TABLE>
NOTE 7: INVESTMENTS
In September 1998, the Company sold a portion of its investment in Pure Energy
Corporation with a carrying value of $49,000 for net cash proceeds of $818,000.
The sale resulted in a gain to the Company of $769,000, which is included in
other income.
On March 17, 1998, the Company completed a $3,000,000 transaction whereby it
sold 2% of Pure Energy Corporation in exchange for a 6% interest in Phoenix
Environmental, Ltd. a development-stage corporation. The Company received 34,700
shares of Phoenix Environmental, Ltd. in exchange for 1,364 shares of Pure
Energy Corporation. No cash was exchanged in the transaction. The transaction
resulted in a gain to the Company of $2,847,000, which is included in other
income. Phoenix Environmental, Ltd. has developed a patented, proprietary
technology that converts steel mill by-products and other steel-based waste
streams into a marketable industrial product.
In September 1996, the Company purchased an equity interest in Ontro, Inc.
(Ontro). The purchase price consisted of $600,000 in cash for 858,673 common
shares. The investment provided the Company with a 27.8% common equity interest
in Ontro. In May 1998 Ontro successfully completed an initial public offering
whereby Ontro received approximately $15 million and issued 3,400,000 shares of
its common stock. As a result of the sale of previously unissued shares to the
public, the Company's ownership interest in Ontro was reduced to 13.2% and the
Company increased the balance of its investment in Ontro to reflect the enhanced
value of the Company's equity interest in Ontro. The net increase of $1,073,000
was recorded as a capital transaction, resulting in an increase to the Company's
additional paid-in capital account after giving effect to deferred taxes of
$715,000.
F-9
<PAGE> 46
NOTE 8: STOCKHOLDERS' EQUITY
In August 1998, the Company entered into an agreement with the 1997 Debenture
holders whereby the Company had the right, until September 1, 1998, to purchase
up to $3,000,000 of the principal amount of the 1997 Debentures, adjusted for
conversions through September 1, 1998, for a purchase price in cash of 110% of
face value. In connection with the agreement the Company issued warrants to the
Debenture holders to purchase an aggregate of 213,132 shares of common stock.
The warrants have an aggregate ascribed value of $228,000, which was recorded as
other expense in the third quarter of 1998. The Company did not purchase any of
the debentures under the agreement.
NOTE 9: SUBSEQUENT EVENTS
In November 1998, the Company issued 231,487 shares of its common stock in
connection with the conversion of $150,000 of the principal amount of the 1997
Debentures, plus interest accrued through the conversion date.
F-10
<PAGE> 47
F-11
<PAGE> 48
Independent Auditors' Report
To the Shareholders and Board of Directors of
The L.L. Knickerbocker Co., Inc.:
We have audited the accompanying consolidated balance sheet of The L.L.
Knickerbocker Co., Inc. and subsidiaries (the Company) as of December 31, 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The L.L. Knickerbocker Co., Inc.
and subsidiaries as of December 31, 1997, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
March 31, 1998
Costa Mesa, California
F-12
<PAGE> 49
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 92,000
Restricted cash (Note 1) 250,000
Accounts receivable, less allowance for doubtful accounts of $1,147,000 8,021,000
Receivable from stockholder (Note 5) 1,383,000
Inventories (Note 3) 10,851,000
Prepaid expenses and other current assets, including $4,155,000 of prepaid advertising 7,486,000
------------
Total current assets 28,083,000
PROPERTY AND EQUIPMENT, net (Note 4) 5,537,000
NOTES RECEIVABLE (Note 6) 1,800,000
INVESTMENTS (Note 6) 2,585,000
GOODWILL, net of accumulated amortization of $971,000 6,393,000
DEFERRED INCOME TAXES (Note 13) 4,215,000
OTHER ASSETS 2,348,000
------------
$ 50,961,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 5,943,000
Accrued expenses 1,895,000
Notes payable (Note 7) 3,650,000
Acquisition payable (Note 2) 8,000
Commissions and royalties payable 751,000
Interest payable 270,000
Current portion of long-term debt (Note 11) 242,000
Income Taxes Payable 123,000
Loan from stockholder (Note 5) 248,000
Due to shareholders of Krasner Group, Inc. (Note 2) 900,000
Other current liabilities 125,000
Deferred Income Taxes (Note 13) 49,000
------------
Total current liabilities 14,204,000
LONG-TERM LIABILITIES:
Long-term debt, less current portion (Note 11) 661,000
Convertible debentures, net of discount of $444,000 (Note 8) 9,455,000
Deferred gain (Note 6) 1,642,000
------------
Total long-term liabilities 11,758,000
MINORITY INTEREST (Note 1) 274,000
COMMITMENTS AND CONTINGENCIES (Notes 7 and 10)
STOCKHOLDERS' EQUITY (Note 9):
Common stock, no par value-authorized 100,000,000 shares,
issued and outstanding, 18,754,693 shares 27,282,000
Additional paid-in capital 3,904,000
Foreign currency translation adjustment (5,231,000)
Accumulated deficit (1,230,000)
------------
Total stockholders' equity 24,725,000
------------
$ 50,961,000
============
</TABLE>
See Notes to Consolidated Financial Statements
F-13
<PAGE> 50
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 68,290,000 $ 42,095,000
Cost of sales 30,790,000 21,451,000
------------ ------------
Gross profit 37,500,000 20,644,000
Advertising expense 10,926,000 4,882,000
Selling, general and administrative expenses 28,616,000 11,912,000
------------ ------------
Operating income (loss) (2,042,000) 3,850,000
Equity in loss of investee companies (1,857,000) (629,000)
Other income (expense), net 3,316,000 (62,000)
Interest expense (Notes 6 and 12) (4,831,000) (1,205,000)
------------ ------------
Income (loss) before minority interest in income of subsidiary
and Income Tax Expense(Note 1) (5,414,000) 1,954,000
Minority interest in income of subsidiary (Note 1) (10,000) (132,000)
Income tax (expense) benefit 1,047,000 (450,000)
------------ ------------
Net income (loss) $ (4,377,000) $ 1,372,000
============ ============
Net income (loss) per share:
Basic $ (0.24) $ 0.09
============ ============
Diluted $ (0.24) $ 0.09
============ ============
Shares used in computing net income (loss) per share:
Basic 18,052,081 14,713,903
============ ============
Diluted 18,052,081 16,470,624
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-14
<PAGE> 51
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Foreign
Common Stock Additional currency
paid-in Retained translation
Shares Amount capital earnings adjustment Total
---------- ----------- --------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 13,752,285 $ 6,575,000 $ 250,000 $ 1,775,000 $ - $ 8,600,000
Exercise of stock warrants 687,472 1,176,000 1,176,000
Exercise of stock options 885,514 728,000 728,000
Exercise of stock options in connection
with Krasner Group, Inc. purchase 62,090 903,000 (427,000) 476,000
Issuance of common stock pursuant to
Krasner Group, Inc. acquisition (Note 2) 85,162 516,000 516,000
Issuance of common stock in connection
with convertible debentures (Note 8) 282,824 1,505,000 (81,000) 1,424,000
Issuance of stock purchase warrants pursuant to
investment in Pure Energy Corporation (Note 9) 1,875,000 1,875,000
Issuance of stock purchase warrants pursuant to
S.L.S. Trading Co., Ltd. acquisition (Note 2) 405,000 405,000
Issuance of stock purchase warrants pursuant to
Krasner Group, Inc. acquisition (Note 2) 1,674,000 1,674,000
Issuance of common stock pursuant to
Georgetown Collection, Inc. acquisition (Note 2) 196,377 1,679,000 1,679,000
Issuance of stock purchase warrants in connection
with convertible debenture offering (Note 8) 233,000 233,000
Discount on convertible debenture offering 2,735,000 2,735,000
Tax benefit related to exercise of stock options
(Note 13) 1,354,000 1,354,000
Foreign currency translation gain 16,000 16,000
Net income 1,372,000 1,372,000
---------- ------------ ----------- ----------- -------- -----------
BALANCE, December 31, 1996 15,951,724 $ 13,082,000 $ 8,018,000 $ 3,147,000 $ 16,000 $24,263,000
</TABLE>
See Notes to Consolidated Financial Statements
F-15
<PAGE> 52
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Retained Foreign
Common Stock Additional earnings currency
paid-in (Accumulated translation
Shares Amount capital deficit) adjustment Total
---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 15,951,724 $ 13,082,000 $ 8,018,000 $ 3,147,000 $ 16,000 $ 24,263,000
Exercise of stock options 431,250 513,000 -- -- -- 513,000
Exercise of stock warrants 317,237 280,000 -- -- -- 280,000
Issuance of common stock in connection
Krasner Group, Inc. acquisition (Note 2) 243,606 1,253,000 -- -- -- 1,253,000
Issuance of common stock in connection
with convertible debentures (Note 8) 1,620,350 11,262,000 -- -- -- 11,262,000
Exchange of stock warrants for common stock
(Notes 2 and 9) 190,526 892,000 (892,000) -- -- --
Cancellation of stock warrants in connection
with sale of partial interest in Pure Energy
Corporation (Note 6) -- -- (1,874,000) -- -- (1,874,000)
Issuance of stock options in connection with
convertible debenture offering (Note 8) -- -- 434,000 -- -- 434,000
Conversion discount of convertible
debenture (Note 8) -- -- (1,782,000) -- -- (1,782,000)
Foreign currency translation loss -- -- -- -- (5,247,000) (5,247,000)
Net loss -- -- -- (4,377,000) -- (4,377,000)
---------- ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 18,754,693 $ 27,282,000 $ 3,904,000 $ (1,230,000) $ (5,231,000) $ 24,725,000
========== ============ ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-16
<PAGE> 53
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996
------------ ------------
<S> <C> <C>
Net (loss) income $ (4,377,000) $ 1,372,000
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,727,000 833,000
Debenture Inducement 1,899,000 --
Deferred income taxes (1,095,000) (184,000)
Amortization of deferred revenue -- (95,000)
Loss on investment 78,000 238,000
Gain on Sale of Investment - P.E.C (1,710,000) --
Equity in loss of investee companies 1,857,000 629,000
Loss on Disposition of Joint Venture 302,000 --
Minority interest 10,000 132,000
Amortization of debt discount 644,000 391,000
Changes in operating accounts, net of effect of acquisitions:
Accounts receivable, net 5,709,000 (3,612,000)
Receivable from stockholder (787,000) (335,000)
Note receivable -- 150,000
Income tax receivable 733,000 943,000
Inventories (2,377,000) 495,000
Prepaid expenses and other assets (1,823,000) 2,709,000
Other Assets (1,068,000) --
Accounts payable and accrued expenses (3,116,000) (1,889,000)
Commissions and royalties payable (77,000) 121,000
Income taxes payable 123,000 (1,330,000)
Other long term liabilities (51,000) 11,000
------------ ------------
Net cash provided by (used in) operating activities (2,399,000) 579,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and equipment (2,778,000) (2,018,000)
Cash paid for investments (965,000) (3,329,000)
Cash paid for acquisitions, less cash acquired -- (2,902,000)
------------ ------------
Net cash used in investing activities (3,743,000) (8,249,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Payments on line of credit (3,358,000) (5,025,000)
Payments on long-term debt (226,000) (155,000)
Proceeds from borrowing on long-term debt 831,000 --
Proceeds from exercise of stock options and warrants 793,000 2,380,000
Deferred debt issue costs (365,000) (149,000)
Proceeds from issuance of convertible debentures 5,000,000 14,880,000
Proceeds from stockholder loan 1,400,000 --
Payments on stockholder loan (1,152,000) --
------------ ------------
Net cash provided by financing activities 2,923,000 11,931,000
EFFECT OF FOREIGN CURRENCY TRANSLATION (3,186,000) 16,000
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,405,000) 4,277,000
CASH AND CASH EQUIVALENTS, beginning of year 6,747,000 2,470,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 342,000 $ 6,747,000
============ ============
</TABLE>
F-17
<PAGE> 54
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-
1997 1996
----------- -----------
<S> <C> <C>
Cash paid (refunded) during the year for:
Interest $ 1,643,000 $ 899,000
=========== ===========
Income taxes $ (806,000) $ 499,000
=========== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY:
During the year ended December 31, 1997, the Company issued 243,606 shares of
common stock in payment of 1,253,000 of acquisition payable (Note 2).
During the year ended December 31, 1997 the Company sold a portion of its
investment in Pure Energy Corporation with a carrying value of $164,000
in exchange for 397,500 common stock purchase warrants with an ascribed
value of $1,874,000, resulting in a gain of $1,710,000. Also during the
year ended December 31, 1997, the Company recorded a deferred gain of
$1,642,000 in connection with the sale of a portion of its Pure Energy
Corporation investment with a carrying value of $158,000 in exchange
for a note receivable of $1,800,000 (Note 6).
During the year ended December 31, 1996, the Company recorded an increase to
additional paid-in capital of $1,354,000 related to tax benefits
associated with the exercise of non-qualified stock options.
During the year ended December 31, 1996, the Company issued 400,000 warrants
in conjunction with the acquisition of an interest on Pure Energy
Corporation. The warrants have an ascribed value of $1,875,000 (Note
6).
During the years ended December 31, 1997 and 1996, the Company issued 150,000
and 46,971 warrants with an ascribed value of $434,000 and $233,000,
respectively as commission in connection with the convertible debenture
offering (Note 8).
During the years ended December 31, 1997 and 1996, $11,169,000 and $1,330,000
of convertible debentures and $93,000 and $175,000 of accrued interest,
respectively was converted to common stock (Note 8).
During the year ended December 31, 1996, the Company acquired interests in
certain entities as follows (Note 2):
<TABLE>
<S> <C>
Fair value of assets acquired $34,553,000
Cash paid to sellers, acquisition payables and
transaction costs 4,239,000
Value of common stock and stock purchase
warrants issued 4,274,000
-----------
Liabilities assumed $26,040,000
===========
</TABLE>
See Notes to Consolidated Financial Statements
F-18
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Line of Business - The L.L. Knickerbocker Co., Inc. (the Company) is in the
businesses of developing and selling celebrity and non-celebrity products which
include collectible items such as porcelain and vinyl dolls, teddy bears,
figurines, fine and costume jewelry, environmental products, and other consumer
products. The Company's customers include major networks in the home shopping
industry, retail and wholesale distributors, and consumers. The dolls, bears,
and environmental products are manufactured by independent manufacturing
facilities to the Company's specifications. The fine and costume jewelry is
manufactured by the Company. The Company's distribution includes home shopping
channels, catalog mailings, direct mailings from customer lists, retail stores,
wholesale distributors, and the internet.
Consolidation - The financial statements presented herein include the accounts
of the Company's subsidiaries, as follows: Krasner Group, Inc.; Harlyn
International, Ltd.; S.L.S. Trading Co., Ltd.; L.L. Knickerbocker (Thai)
Company, Ltd., and Georgetown Collection, Inc. The financial statements reflect
a minority interest associated with Georgetown Collection, Inc. Intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from these estimates.
Foreign Currency - The Company's primary functional currency is the U.S. dollar,
while the functional currency of the Company's Thailand subsidiaries is the Thai
baht. Assets and liabilities denominated in foreign currencies are translated at
the rate of exchange on the balance sheet date. Revenues and expenses are
translated using the average exchange rate for the period. Gains and losses on
foreign currency transactions are recognized as incurred (Note 12).
Cash and Cash Equivalents - For purposes of the statement of cash flows, the
Company considers all highly liquid instruments with original maturities of
three months or less and with an insignificant interest rate risk to be cash
equivalents.
Restricted Cash - At December 31, 1997 restricted cash represents funds
deposited with a financial institution to serve as collateral for a line of
credit (Note 7).
Inventories - Inventories consist of finished products and related packaging,
work in process, and raw materials, and are stated at the lower of cost
(first-in, first-out basis) or market.
Prepaid Advertising Costs - The Company capitalizes certain direct-response
advertising costs and amortizes such costs over the period during which future
period revenues are expected to be received from each direct-response
advertising campaign, generally 3 to 12 months. The nature of the direct
response advertising costs are primarily production costs associated with media
costs for print advertising, and catalog printing costs.
Property and Equipment - Property and equipment are stated at cost. Depreciation
is being provided on the straight-line method over estimated useful lives of
five to seven years. Depreciation on buildings is being provided on the
straight-line method over an estimated useful life of twenty years.
Intangible Asset - Excess of cost over net assets acquired (goodwill), which
arose from the acquisition of certain entities (Note 2) is being amortized on a
straight-line method over 10 years. The Company evaluates the recoverability of
its goodwill at each balance sheet date. The recoverability of goodwill is
determined by comparing the carrying value of the goodwill to the estimated
operating income of the related entity on an undiscounted cash flow basis. Any
impairment is recorded at the date of determination.
F-19
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (SFAS No. 121). SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and
long-lived assets and certain identifiable intangibles to be disposed of. The
Company adopted SFAS No. 121 in the first interim period of Fiscal 1996, and
such adoption did not impact its financial position or results of operations.
Deferred Debt Issuance Costs - Deferred debt issuance costs which are included
in other assets, relate to the issuance of Convertible Debentures (Note 8).
These costs totaled $1,801,000 at December 31, 1997, and are being amortized
over the estimated life of the debentures. The accumulated amortization at
December 31, 1997 is $1,005,000.
Investments in Investees - Investments in the common stock of unconsolidated
entities (Note 6) in which the Company's interest is in excess of 20% and in
which the Company has an ability to influence the business decisions of the
investee company, are accounted for using the equity method of accounting.
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107 (SFAS No. 107), Disclosures About Fair Value of Financial
Instruments, requires management to disclose the estimated fair value of certain
assets and liabilities defined by SFAS No. 107 as financial instruments.
Financial instruments are generally defined by SFAS No. 107 as cash, evidence of
ownership interest in equity, or a contractual obligation that both conveys to
one entity a right to receive cash or other financial instruments from another
entity and imposes on the other entity the obligation to deliver cash or other
financial instruments to the first entity. At December 31, 1997, management
believes that the carrying amount of cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses and short-term debt approximates
fair value because of the short maturity of these financial instruments.
Revenue Recognition - Revenues from sales of products are recognized when
products are shipped to customers. The Company offers credit to its customers
and performs ongoing credit evaluations of its customers.
Income Taxes - The Company accounts for income taxes using Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which
requires that the Company recognize deferred tax assets and liabilities based on
the differences between the financial statement carrying amounts and the tax
bases of assets and liabilities, using enacted tax rates in effect in the years
in which the differences are expected to reverse. A valuation allowance related
to deferred tax assets is recorded when it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
Net Income (loss) per share - The Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS No. 128), Earnings Per Share, beginning with
the Company's fourth quarter of fiscal 1997. All prior period earnings per
common share data have been restated to conform to the provisions of this
statement. Basic earnings per common share is computed using the weighted
average number of shares outstanding. Diluted earnings per common share assumes
conversion of convertible debentures, elimination of the related interest
expense, and the issuance of common stock for all other potentially dilutive
equivalent shares outstanding.
Stock-Based Compensation - In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123, Accounting for
Stock Based Compensation. The Company has determined that it will not change to
the fair value method and will continue to use Accounting Principles Board
Opinion No. 25 for measurement and recognition of employee stock-based
transactions. See Note 9 for disclosure of the pro forma effect on net income
and net income per share.
F-20
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
Reclassifications - Certain amounts previously reported for 1996 have been
reclassified to conform to the 1997 financial statement presentation.
New Accounting Pronouncements - In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 130 and SFAS No. 131 must be
adopted by the Company beginning with fiscal 1998 and will result in an
additional statement that reports comprehensive income and expanded disclosure
regarding the Company's operations on a segmented basis.
2. ACQUISITIONS
The Company completed a number of acquisitions during 1996. The following
describes the transactions completed during the year ended December 31, 1996.
The funds for the acquisitions were obtained primarily from the proceeds of the
convertible debenture offering described in Note 8, and through the issuance of
the Company's common stock and common stock purchase warrants (Note 9).
Krasner Group, Inc.
Effective June 18, 1996, the Company acquired all of the outstanding capital
stock of Krasner Group, Inc. (TKG) which designs, manufactures, and markets
costume jewelry. The aggregate acquisition cost of $3,205,000 includes the
issuance of the Company's common stock valued at $1,440,000, the issuance of
250,628 stock purchase warrants with an ascribed value of $1,674,000(determined
utilizing the Black-Scholes option-pricing model) and related acquisition costs.
As of December 31, 1997, 328,768 shares of common stock with an intrinsic value
of $1,769,000 had been issued. During the year ended December 31, 1997, the
Company exchanged 70,000 unexercised stock purchase warrants with an intrinsic
value of $240,000 for 50,526 shares of the Company's common stock. The purchase
agreement also provides for the issuance of additional shares (Additional
Shares) of common stock or stock purchase warrants with an intrinsic value equal
to 110% of the proceeds from the liquidation of TKG inventory on hand at the
date of acquisition.
During the year ended December 31, 1997, the Company issued 243,606 shares of
common stock in payment of $1,253,000 of acquisition payable due to the former
shareholders of Krasner Group, Inc., which included $330,000 for additional
shares related to the liquidation of TKG inventory. During the year ended
December 31, 1997, the Company recorded an increase to goodwill of approximately
$900,000 related to the 1997 liquidation of TKG inventory. At December 31, 1997,
this amount is included in due to shareholders of Krasner Group, Inc.
Grant King International, Ltd.
Effective July 1, 1996, the Company acquired the remaining 51% interest in Grant
King International Co., Ltd. (GKI) that the Company did not previously own (Note
9), in exchange for the forgiveness of $414,000 owed by GKI to the Company. This
transaction increased the Company's investment to $664,000. The operations and
assets of GKI have been merged with S.L.S Trading Co., Ltd., a subsidiary of the
Company.
S.L.S. Trading Co., Ltd.
Effective July 1, 1996, the Company acquired certain assets and assumed certain
liabilities of S.L.S. Trading Co., Ltd., (S.L.S.) which sources gemstones and
develops certain proprietary stone cutting technologies. The aggregate
acquisition cost of $555,000 includes $150,000 cash, the issuance of 108,000
warrants to purchase common stock of the Company with an ascribed value of
approximately $405,000 (determined utilizing the Black-Scholes option-pricing
model) and related acquisition costs. During the year ended December 31, 1997,
the Company exchanged 108,000 unexercised stock purchase warrants with an
intrinsic value of $402,000 for 80,000 shares of the Company's common stock.
F-21
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
Harlyn International, Ltd.
Effective July 1, 1996, the Company acquired all of the outstanding capital
stock of Harlyn International, Ltd. (Harlyn) which manufactures and markets fine
jewelry. The aggregate acquisition cost of $2,711,000 includes cash payments to
the former shareholder of $2,358,000 and related acquisition costs. In addition,
the Company repaid $234,000 of Harlyn's bank debt concurrent with consummation
of the purchase transaction.
Georgetown Collection, Inc.
Effective October 18, 1996, the Company acquired approximately 82% of the
outstanding capital stock of Georgetown Collection, Inc. (GCI) which markets
collectible dolls through direct response mediums. The aggregate acquisition
cost of $3,199,000 includes issuance of 196,377 restricted shares of the
Company's common stock with an intrinsic value of $1,679,000 at the acquisition
date plus related acquisition costs. In addition, the Company repaid $1,500,000
of GCI's bank debt concurrent with consummation of the purchase transaction. The
purchase agreement also provides for future consideration in an amount equal to
15% of GCI's pretax earnings during calendar year 1997 and 4.5% of pretax
earnings in each of calendar years 1998 through 2001. Future contingent payments
based on pretax earnings, if payable, will be recorded as additional purchase
price consideration and will increase goodwill recorded in conjunction with this
acquisition. As of December 31, 1997, the Company recorded an increase to
goodwill of $8,000. The Company guaranteed the value of the 196,377 restricted
shares of the Company's common stock issued in conjunction with this acquisition
to be $1,679,000 at the first anniversary of the acquisition. In accordance with
this guarantee an additional 32,735 shares of the Company's common stock are
issuable at December 31, 1997.
Each of the acquisitions was accounted for under the purchase method of
accounting and, accordingly the operating results of each of the subsidiaries
are included in the Company's consolidated financial statements since the
respective acquisition dates.
3. INVENTORIES
As of December 31, 1997 inventories consist of the following:
<TABLE>
<S> <C>
Finished Goods $ 8,968,000
Work-in-process 342,000
Raw materials 1,541,000
-----------
$10,851,000
===========
</TABLE>
F-22
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
4. PROPERTY AND EQUIPMENT
As of December 31, 1997, property and equipment consist of the following:
<TABLE>
<S> <C>
Land, buildings and improvements $ 2,064,000
Computer equipment and software 932,000
Production models, molds, and tools 1,228,000
Autos 194,000
Office furniture and equipment 1,331,000
Machinery and equipment 1,738,000
-----------
7,487,000
Accumulated depreciation (1,950,000)
===========
$ 5,537,000
===========
</TABLE>
5. RECEIVABLE FROM STOCKHOLDER/LOAN FROM STOCKHOLDER
Receivable from stockholder bears interest at the prime rate plus 2.5% and is
repayable to the Company upon demand. Subsequent to December 31, 1997, the
$1,383,000 receivable was repaid to the Company.
Loan from stockholder of $248,000 at December 31, 1997 bears interest at the
prime rate plus 2% and is due on demand.
6. INVESTMENTS
At December 31, 1997, the Company had the following equity investments:
The Company owns 400,000 and 1,000 shares of Tracker Corporation and Camelot
Corporation, respectively, which were received in exchange for marketing
services provided to these companies. The shares represent an ownership interest
of less than 10% in each of these companies and are restricted as to the
Company's ability to sell them. The aggregate estimated carrying value of these
shares at December 31, 1997 is $24,000 which approximates fair value.
During 1996 the Company acquired a 38.3% interest in Pure Energy Corporation
(PEC) in exchange for $2 million in cash and the issuance of stock purchase
warrants with an ascribed value of $1,875,000(determined utilizing the
Black-Scholes option-pricing model). Additionally, the Company agreed to fund up
to $1,000,000 of PEC expenses. Through December 31, 1997 the Company had
fulfilled its funding commitment and funded a total of $507,000, which increased
the Company's investment to $4,382,000.
During the year ended December 31, 1997, the Company sold a portion of its
investment in Pure Energy Corporation with a carrying value of $164,000 in
exchange for 397,500 previously issued Company common stock purchase warrants
with an ascribed value of $1,874,000(determined utilizing the Black-Scholes
option-pricing model). The sale resulted in a gain to the Company of $1,710,000,
which is included in other income. Also during the year ended December 31, 1997,
the Company recorded a deferred gain of $1,642,000 in connection with the sale
of a portion of its investment in Pure Energy Corporation with a carrying value
of $158,000 in exchange for a note receivable of $1,800,000. The note receivable
is secured by the underlying securities sold and accrues interest at 7.5% per
annum. The note receivable and accrued interest are due and payable on December
30, 1999. The resulting gain has been deferred on the accompanying balance sheet
until such time that the note is repaid. As a result of these transactions the
Company's interest in PEC was reduced to 34.6% as of December 31, 1997.
F-23
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
At December 31, 1997 the Company held 27.8% of the outstanding shares of Ontro,
Inc. (formerly Self-Heating Container Corporation) acquired during 1996 for
$650,000 in cash. In connection with the acquisition and a related royalty
agreement, the Company will receive exclusive worldwide distribution rights to
market and distribute celebrity-driven products using certain patents owned by
the corporation.
During 1997 the Company entered into a joint venture, Arkenol Asia, Inc., a
Delaware corporation owned 50% by LLK and 50% by Arkenol Holdings, LLC. The
joint venture acquired an exclusive license to exploit Arkenol Holdings
technology and related intellectual property to produce ethanol and other
chemicals for sale and consumption in Thailand, Cambodia, Burma, Vietnam, Laos,
India, China and Japan, and non-exclusive licenses for Indonesia and California.
Under the terms of the joint venture, Arkenol Holdings serves as the Managing
Venturer, with the primary responsibility for all development activities and
services to the joint venture and the projects, all product development
activities, the selection and management of engineering, procurement and
construction provider and the operation of the project facilities. LLK has the
primary responsibility for securing all credit support instruments and other
financing on behalf of the projects and the joint venture and all product
marketing activities. The day-to-day business of the joint venture is conducted
by agents and contractors engaged by the Managing Venturer. The carrying value
of the investment in this joint venture totaled $231,000 at December 31, 1997.
The Company's investees accounted for under the equity method are each in the
development stage and as of December 31, 1997 have generated no sales. The net
loss of Pure Energy Corporation and for all investees in the aggregate for the
year ended December 31, 1997 was $3,670,000 and $6,099,000, respectively.
7. LINE OF CREDIT AND NOTES PAYABLE
The Company has available to use for working capital purposes and to post
letters of credit, a line of credit totaling $20,000,000, subject to certain
limits. The line of credit encompasses the L.L. Knickerbocker Co., Inc.(LLK),
Georgetown Collection, Inc. (GCI) and Krasner Group, Inc.(TKG) and expires in
July 1999. Certain credit limits are established for each company. The credit
limits are $4,000,000 for LLK, $13,000,000 for GCI and $3,000,000 for TKG.
Borrowing availability is determined by an advance rate on eligible accounts
receivable and inventory. The line of credit includes sublimits for letters of
credit and bankers acceptances aggregating $13,000,000, $4,000,000 and
$3,000,000 for GCI, LLK and TKG, respectively. Borrowings bear interest at the
bank's base rate (8.5% at December 31, 1997) plus 2% for GCI and TKG borrowings
and plus 1% for LLK borrowings or, at the Company's option, an adjusted LIBOR
rate. In addition, the Company is charged an Unused Line fee of .25% of the
unused portion of the revolving loans.
At December 31, 1997, the Company had $3,650,000 of cash borrowings outstanding
and outstanding letters of credit totaling $115,000. Available borrowings under
the line of credit aggregated $4,271,000 at December 31, 1997. Borrowings are
collateralized by substantially all assets of the Company. The line of credit
agreement contains, among other things, restrictive financial covenants which
require the Company to maintain certain leverage and current ratios (computed
annually and quarterly), an interest coverage ratio (computed annually) and to
achieve certain levels of annual income. The agreement also limits GCI annual
capital expenditures and prohibits the payment of dividends. At December 31,
1997, the Company was in compliance with these covenants or had received a
waiver from the bank for certain covenant violations through the next annual or
quarterly measurement date.
S.L.S. and Harlyn have available lines of credit aggregating 72,000,000 Thai
baht (approximately $1,532,000 at December 31, 1997). Outstanding borrowings
bear interest at rates ranging from 15% to 18.75%. One such line of credit is
secured by a $250,000 standby letter of credit.
F-24
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
8. CONVERTIBLE DEBENTURES
In September 1996 the Company issued Convertible Debentures (the Debentures)
with a face value of $15,500,000 in a private placement to institutional
investors. This private placement yielded net proceeds to the Company totaling
$14,731,000 after deducting costs associated with issuing the Debentures. The
Debentures accrued interest of the rate of 7% per year, payable quarterly. The
Debentures were convertible at the option of the holder into shares of the
Company's common stock at a price equal to 85% of the closing price of the
Company's common stock at the date of conversion, subject to a minimum and
maximum conversion price of $5.25 and $12.00 per share, at any time through the
second anniversary of the original date of issuance. Through December 31, 1997,
the Company issued a total of 1,903,174 shares of its common stock in connection
with the conversion of $12,499,000 of the original principal amount of the
Debentures, plus interest accrued through the conversion date of $268,000.
The conversion of the notes at 85% of the closing price of the Company's common
stock resulted in the Debentures being issued at a discount (the conversion
discount). The conversion discount is being recognized by the Company as
non-cash interest expense over the term of the Debentures with a corresponding
increase to the original principal amount of the Debentures. Upon conversion of
the Debentures any portion of the conversion discount not previously recognized
is recorded as interest expense on the conversion date. During the years ended
December 31, 1997 and 1996, a total of $644,000 and $391,000, respectively, of
non-cash interest expense was recorded relating to the Debentures, including
$537,000 and $220,000, respectively, relating to the additional conversion
discount recorded upon conversion.
In January 1997, the Company reached agreement with the debenture holders to
tender all outstanding Debentures to the Company in exchange for new convertible
Debentures (the New Debentures). Under the terms of the agreement, New
Debentures were issued with a face value of 117.5% of the face value of the
tendered debentures. The New Debentures bear interest at 7% per year, payable
quarterly. The New Debentures are convertible at the option of the holder into
shares of the Company's common stock at $8.00 per share. The New Debentures must
be converted by January 1999. As a result of the 17.5% premium given as in
inducement to the Debenture holders to tender the original debentures into New
Debentures, the Company recorded a non-cash charge of $1,899,000 in the first
quarter of 1997.
In September 1997, the Company issued Convertible Debentures (the 1997
Debentures) with a face value of $5,000,000 in a private placement to an
institutional investor. This private placement yielded net proceeds to the
Company totaling $4,675,000 after deducting costs associated with issuing the
1997 Debentures. The 1997 Debentures accrue interest at the rate of 6% per
annum, payable upon conversion of the related debt or at debt maturity,
September 7, 2000. The 1997 Debentures are convertible at the option of the
holder into shares of the Company's common stock at a graduated discounted price
ranging from 97% to 90% of an average of the 7 lowest trading days of the 30
consecutive trading days prior to conversion. The discounted price of 90%
applies if the investor does not convert prior to the two year anniversary of
the closing date. As of December 31, 1997, none of the 1997 Debentures had been
converted.
The conversion of the notes at a maximum of 90% of the closing price of the
Company's common stock resulted in the 1997 Debentures being issued at a
discount (the conversion discount). The conversion discount is being recognized
by the Company as non-cash interest expense over the estimated term of the 1997
Debentures (two years) with a corresponding increase to the original principal
amount of the 1997 Debentures. Upon conversion of the 1997 Debentures any
portion of the conversion discount not previously recognized is recorded as
interest expense on the conversion date. During the 12 months ended December 31,
1997, a total of $188,000 of non-cash interest expense was recorded relating to
the 1997 Debentures.
F-25
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
9. STOCKHOLDERS' EQUITY
Warrants - On November 21, 1995, the Company issued warrants to purchase 200,000
shares of common stock to Shamrock Partners, Ltd., in consideration of financial
and business consulting services to be provided to the Company. The warrants
vest as of the grant date with an exercise price of $5.00 per share, which was
equivalent to the fair market value of the Company's common stock at the date of
grant and are valid for five years from the date of the grant.
On November 28, 1995, the Company entered into an agreement to issue warrants to
purchase 300,000 shares of common stock to Grant G. King in consideration of the
purchase by the Company of 49% of the issued and outstanding capital stock of
Grant King International Co., Ltd. The warrants vest as of the grant date with
an exercise price of $5.50 per share, which was equivalent to the fair market
value of the Company's common stock at the date of grant and are valid for five
years from the date of the grant. The warrants have an ascribed value of
$250,000 (determined utilizing the Black-Scholes option-pricing model), which
was recorded as an investment and additional paid-in capital. During the year
ended December 31, 1997, the company exchanged the 300,000 unexercised warrants
for 60,000 shares of the Company's common stock.
On March 13, 1996, the Company entered into an agreement to issue warrants to
purchase 200,000 shares each of common stock to two individuals in consideration
of the purchase by the Company of 40% of the outstanding capital stock of Pure
Energy Corporation. The warrants vest as of April 30, 1996 with an exercise
price of $8.50 per share (200,000 warrants) and $12.00 per share (200,000
shares). The warrants are valid through April 30, 2001. The warrants have an
ascribed value of $1,875,000, which was recorded as an investment and additional
paid-in-capital. As of December 31, 1997, 2,500 of the warrants were exercised.
During the year ended December 31, 1997, the remaining 397,500 warrants were
cancelled in connection with the sale of a portion of the Company's investment
in PEC (Note 6).
During the years ended December 31, 1997 and 1996, the Company issued 150,000
and 46,971 warrants as commission in connection with the 1997 and 1996
convertible debenture offerings, respectively (Note 8). The 1997 warrants vest
as of the grant date with an exercise price of $5.60, which was equivalent to
the fair market value of the Company's common stock at the date of grant and are
valid for three years from the date of grant. The 1996 warrants vest as of the
grant date with an exercise price of $11.87, which was equivalent to the fair
market value of the Company's common stock at the date of grant and are valid
for five years from the date of grant. The 1997 and 1996 warrants have an
ascribed value, determined utilizing the Black-Scholes option-pricing model, of
$434,000 and $233,000, respectively, which was recorded as deferred debt issue
costs and additional paid-in capital. As of December 31, 1997, none of the
warrants had been exercised.
In conjunction with the acquisitions described in Note 2 the Company issued
stock purchase warrants as part of the consideration paid for these
acquisitions. The following table summarizes the warrants issued:
<TABLE>
<CAPTION>
Exercised as Outstanding
Warrants Exercise of December at December Expiration
Acquisition issued Price 31, 1996 31, 1996 Date
----------- ------ ----- -------- -------- ----
<S> <C> <C> <C> <C> <C>
Krasner Group, Inc. 250,628 $ 7.75 62,090 188,538 April 10, 2004
S.L.S. Trading Co., Ltd. 108,000 $ 7.75 -- 108,000 April 10, 2004
</TABLE>
During 1997, 70,000 and 108,000 warrants issued in conjunction with the TKG and
S.L.S. acquisitions, respectively, were exchanged for shares of the Company's
common stock (Note 2). There were no warrants exercised during 1997.
F-26
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
As more fully discussed in Note 2, in conjunction with certain acquisitions, the
Company may be required to issue additional stock purchase warrants at future
dates.
The L.L. Knickerbocker 1995 Amended and Restated Stock Option Plan - The
shareholders approved and the Company adopted a Stock Option Plan on September
27, 1994 which was amended and restated on June 15, 1995 as the L.L.
Knickerbocker Amended and Restated Stock Option Plan (the Plan). The Plan is
administered by a committee appointed by the Board of Directors and provides
that options may be granted at exercise prices determined by the Board of
Directors at its sole discretion. The Plan is designed as an incentive for
employees, non-employee directors and persons providing services of special
importance to the Company. Unless otherwise specified, the options expire ten
years from the date of grant. The Plan covered an aggregate of 2,000,000 shares
when granted. In 1996 the Board of Directors authorized an increase in the
number of shares covered by the Plan to a total of 5,000,000. Non-employee
directors of the Company are automatically granted options to purchase 10,000
shares of common stock at the fair market value at the date of grant each year
that such person remains a director of the Company.
The L.L. Knickerbocker Stock Incentive Compensation Plan - On March 27, 1997,
the Company's Board of Directors adopted the L.L. Knickerbocker Stock Incentive
Compensation Plan (the ISO Plan). The ISO Plan provides that incentive and
nonstatutory options to purchase a total of 5,000,000 shares of common stock may
be granted thereunder. The ISO Plan permits the granting of options intended to
qualify as "incentive stock options" ("ISO's"), the granting of options that do
not so qualify ("NSO's"), and the granting of stock appreciation rights (SAR's).
The exercise price of any option is established by the Administrator, who is
appointed by the Board of Directors, at the time of grant. The exercise price of
any NSO's or ISO's granted under the Plan may not be less than 100% of the fair
market value of one share of Common Stock on the date of grant. The exercise
price of any ISO granted to an optionee who owns stock possessing more than 10%
of the voting rights of the Company's outstanding shares must be at least 110%
of the fair market value of the shares subject to the option on the date of
grant. Options granted under the ISO Plan have a maximum term of 10 years.
The Board may from time to time, with respect to any shares at the time not
subject to options, suspend or discontinue the ISO Plan or revise or amend it in
any respect whatsoever except that, without the approval of the Company's
shareholders, no such revision or amendment shall increase the number of shares
subject to the ISO Plan or change the classes of persons eligible to receive
options. Options may be granted pursuant to the ISO Plan until the expiration of
the Plan on March 27, 2007.
F-27
<PAGE> 64
Option activity under the plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
SHARES SHARE
<S> <C> <C>
Outstanding, January 1, 1996 2,000,000 $ 0.75
Granted 273,309 7.65
Exercised (885,514) 0.82
Canceled (32,500) 0.75
----------
Outstanding, December 31, 1996 1,355,295 2.10
Granted 1,315,617 4.81
Exercised (431,250) 1.21
Canceled (250) 7.75
----------
Outstanding, December 31, 1997 2,239,412 3.86
==========
</TABLE>
At December 31, 1997 and 1996, 1,692,545 and 652,040 options were exercisable at
a weighted average exercise price of $4.33 and $2.92, respectively.
Additional information regarding options outstanding as of December 31, 1997 is
as follows:
<TABLE>
<CAPTION>
WEIGHTED AVG.
REMAINING WEIGHTED AVG. WEIGHTED AVG.
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.75 710,000 7.03 years $ 0.75 333,750 $ 0.75
$4.62 - $8.00 1,529,412 7.52 years $ 5.30 1,358,795 $ 5.38
------------------------------------------------------------------------------------------
2,239,412 7.36 years $ 3.86 1,692,545 $ 4.47
</TABLE>
At December 31, 1997, 6,443,824 shares were available for future grants under
the Option plans.
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board Opinion No.25, Accounting for Stock Issued to Employees, and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123) requires the disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted
F-28
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
average assumptions: expected life, 10 years; stock volatility, 85 % in 1996 and
68 % in 1997; risk free interest rates, 6.5% in 1996 and 5.5% in 1997; and no
dividends during the expected term. The Company's calculations are based on an
option valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the 1996 and 1997 awards had been amortized to expense
over the vesting period of the awards, pro forma net (loss) income would have
been $335,000 ($.02 per share) in 1996 and ($6,657,000) ($.37 per share) in
1997.
10. COMMITMENTS AND CONTINGENCIES
Leases - The Company is committed under operating lease agreements for
facilities and equipment. The facility leases contain provisions for annual
rental increases.
Minimum annual rental commitments under operating leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $ 522,000
1998 436,000
1999 386,000
2000 329,000
2001 354,000
Thereafter 1,704,000
----------
$3,731,000
==========
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 was $578,00 and
$650,000, respectively.
Contractual Arrangements - The Company has contractual arrangements with several
celebrities and other third parties, including Marie Osmond, Annette Funicello
and Bob Mackie. Under the terms of these contracts, the celebrities agree to act
as spokesperson for their respective products, promote the product, approve the
design and make a minimum number of public appearances. The Company is obligated
to manufacture a safe product approved by the celebrity, hold the celebrity
harmless from liability, maintain specified levels of liability insurance and
pay royalties ranging from 5% to 10% of net wholesale and retail sales. Each
contract has a termination clause in the event certain minimum annual sales are
not attained (ranging from $50,000 to $500,000). In certain instances, the
celebrity or other third party has the right to terminate the contract if the
minimum sales level is not attained for any single year. The contracts run from
18 months to 5 years and contain audit clauses, with penalties for errors or
omissions.
Letters of Credit - The Company finances certain collectible program purchases
and other product utilizing irrevocable, transferable letters of credit. These
letters of credit are issued to the Company by its major customer's bank, with
the Company as the beneficiary. The Company then transfers a portion of the
letter of credit to the Company's supplier to secure payment of the purchase.
The Company and the supplier draw down the letter of credit when the supplier
ships the product directly to the Company's customer. At December 31, 1997,
there was approximately $88,000 outstanding (drawn down) under these letters of
credit agreements.
Employment Contracts - The Company has entered into six employment agreements
with Company officers with five-year terms. The agreements call for aggregate
annual compensation of $1,015,000 and a discretionary bonus of up to 10% of
operating income.
Litigation - The Company is subject to litigation in the normal course of
business, none of which management believes is material to the financial
statements at December 31, 1997.
F-29
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
11. LONG - TERM DEBT
<TABLE>
<S> <C>
Long-term debt at December 31, 1997 consists of:
Building mortgage, interest at 15.5% per annum,
payable in monthly installments of $6,000, including
interest, secured by real estate $ 349,000
Building mortgage, interest at 14.75% per annum,
payable in monthly installments of $17,000 including
interest, secured by real estate 263,000
Equipment leases, interest ranging from 4.90% to 24.93% per annum, payable in
aggregate monthly installments of $13,000, including interest, secured
by equipment 291,000
---------
903,000
Less current portion (242,000)
---------
$ 661,000
=========
</TABLE>
Principal payments on long term debt are due approximately as follows:
<TABLE>
<S> <C>
1998 $242,000
1999 219,000
2000 73,000
2001 71,000
2002 60,000
Thereafter 238,000
--------
$903,000
========
</TABLE>
12. SIGNIFICANT CONCENTRATIONS AND RISKS
Customer Concentration - During the years ended December 31, 1997 and 1996, the
Company conducted business with one customer whose aggregate sales volume
comprised approximately 29% and 43% of the Company's revenues, respectively. A
reduction in sales to this customer could adversely impact the financial
condition and operations of the Company.
Merchandise Risk - The Company's success is largely dependent on its ability to
provide to its customers merchandise that satisfies consumer tastes and demand.
Any inability to provide appropriate merchandise in sufficient quantities and in
a timely manner could have a material adverse effect on the Company's business,
operating results, and financial condition.
Foreign Currency - approximately 13% of the Company's revenues are derived from
subsidiaries operating in Thailand. In an attempt to reduce economic risks
associated with devaluations of the Thai baht, the Company's Thailand
subsidiaries require their customers to remit payment in U.S. dollars. Included
in other income for the year ended December 31, 1997 is $1,094,000 in
transaction gains associated with this strategy. In the event the
F-30
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
Thai baht strengthens in value against the U.S. dollar in the future, the
Company will be exposed to foreign currency transaction losses under this
strategy.
13. INCOME TAXES
<TABLE>
<CAPTION>
Provision (benefit) for income taxes consists of: 1997 1996
<S> <C> <C>
Current federal and state income taxes $ 37,000 $ 227,000
Current foreign taxes 11,000 408,000
Deferred federal and state income taxes (1,095,000) (185,000)
----------- -----------
Provision (benefit) for income taxes $(1,047,000) $ 450,000
=========== ===========
</TABLE>
A reconciliation of the statutory federal rate and the provision (benefit) for
income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Federal tax at statutory rate $(1,895,000) $ 684,000
State taxes (28,000) (8,000)
Goodwill Amortization 125,000 59,000
Residual U.S. tax on foreign earnings (883,000) (313,000)
Valuation allowance 325,000 --
Non-deductible interest on
convertible debentures 1,219,000 --
Other 90,000 28,000
----------- -----------
$(1,047,000) $ 450,000
=========== ===========
</TABLE>
F-31
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets for
federal and state income taxes consists of the following:
<TABLE>
<CAPTION>
December 31, 1997
<S> <C>
Deferred tax assets
Bad debt reserve $ 261,000
Uniform Capitalization 154,000
Other Reserves 796,000
Returns and allowances 419,000
Pre-acquisition net operating loss carryforward 2,370,000
Post-acquisition net operating loss carry forward 4,585,000
Valuation allowance (2,187,000)
-----------
Total deferred tax assets 6,398,000
Deferred tax liabilities
Difference between book and tax basis of fixed assets $ (271,000)
Prepaids (1,563,000)
State income taxes (308,000)
Other (90,000)
-----------
Total deferred tax liabilities (2,232,000)
-----------
$ 4,166,000
===========
</TABLE>
The Company has not provided any residual U.S. tax on approximately $2,467,000
of the Company's foreign subsidiaries' undistributed earnings as the Company
intends to indefinitely reinvest such earnings in the foreign subsidiaries.
The Company recorded a credit to equity of $1,354,000 as a result of the tax
benefit from the exercise of stock options in 1996. During 1997 the Company had
a tax deduction from exercises of stock options in the amount of $2,162,000.
Since the Company does not have sufficient taxable income or carry back
potential to utilize the deductions generated from the exercise of the options,
approximately $5,319,000 of deductions for the current and prior year have not
been recorded in the accompanying financial statements. As these losses are
utilized in future years, the tax benefit will be recorded to equity.
The Company has an approximate $4,395,000 loss carryforward related to GCI and
TKG which can be used to reduce future taxable income. Sections 382 and 383 of
the Internal Revenue Code of 1986 place certain limitations on the use of these
acquired losses. A maximum of $405,000 of the net operating loss carryforward
can be utilized annually in 1998 and subsequent years. Any net operating loss
not utilized will begin expiring in 2010.
F-32
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
14. DOMESTIC AND THAILAND OPERATIONS
A summary of domestic and Thailand operations is as follows:
<TABLE>
<CAPTION>
Years ended December 31
1997 1996
<S> <C> <C>
Net sales to unaffiliated customers:
Domestic $ 59,230,000 $ 32,858,000
Thailand 9,060,000 9,237,000
------------ ------------
Consolidated $ 68,290,000 $ 42,095,000
============ ============
Operating Income (Loss):
Domestic $ (3,167,000) $ 1,135,000
Thailand 1,125,000 2,715,000
------------ ------------
Consolidated $ (2,042,000) $ 3,850,000
============ ============
Identifiable Assets:
Domestic $ 41,597,000 $ 40,883,000
Thailand 9,364,000 16,689,000
------------ ------------
Consolidated $ 50,961,000 $ 57,572,000
============ ============
</TABLE>
(1) Operating income is net sales less cost of goods sold and operating
expenses.
(2) Identifiable assets are those assets of the Company that are located in,
or related to operations in, each geographic area.
F-33
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (CONTINUED)
15. EARNINGS PER SHARE
Earnings per common share (EPS) data were computed as follows:
Options and warrants to purchase 246,971 shares of common stock at $12 per share
were outstanding during 1996 but were not included in the computation of diluted
EPS because the options' exercise price was greater than the average market
price of the common shares.
<TABLE>
<CAPTION>
1997 1996
------------------------------------------ -----------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------------------------------------------ -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss) $(4,377,000) -- -- $ 1,372,000 -- --
Basic EPS
Income (loss) available to
common shareholders (4,377,000) 18,052,081 $ (0.24) $ 1,372,000 14,713,903 $ 0.09
=========== ===========
Effect of Dilutive Securities
Options and Warrants -- -- -- -- 1,373,584 --
Convertible debentures -- -- -- 148,000 383,137 --
--------------------------
Diluted EPS
Income (loss) available to common
stockholders and assumed conversions $(4,377,000) 18,052,081 $ (0.24) $ 1,520,000 16,470,624 $ 0.09
=========== ===========
</TABLE>
16. EMPLOYEE BENEFIT PLAN
Georgetown Collection, Inc. maintains a defined contribution plan (401(K))
covering employees who have completed six months of service. Matching Company
contributions are made based upon 50% of participant contributions to a maximum
of 2% of participant compensation. During the years ended December 31, 1997 and
1996, the Company made contributions of $37,000 and $32,000, respectively.
F-34
<PAGE> 71
ANNEX 1
See attached copies of Transaction Documents
<PAGE> 72
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of June 8, 1998,
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 each of the purchasers
(individually the "Purchaser" and collectively the "Purchasers") set forth on
the execution page hereof (the "Execution Page").
WHEREAS:
A. The Company and each 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 Company desires to sell, and each Purchaser desires to purchase, upon the
terms and conditions stated in this Agreement in two tranches, (a), in the first
tranche, (i) convertible debentures in the aggregate principal amount of Seven
Million Dollars ($7,000,000) 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"), which Debentures
shall, upon the terms and conditions stated in this Agreement, prior to or
simultaneously with the closing of the second tranche described below, be
exchanged for shares of the Company's preferred stock with a stated value equal
to the aggregate outstanding principal balance of the Debentures with terms
<PAGE> 73
substantially similar to the Debentures and such additional terms as are usual
and customary for similar instruments, including, without limitation, only those
voting rights required by law (the "Preferred Stock"), and (ii) warrants (the
"Warrants"), in the form attached hereto as Exhibit B, to acquire an aggregate
number of shares of Common Stock computed by dividing the aggregate principal
amount of such Debentures by the Fixed Conversion Price (as defined in the
Debentures) multiplied by fifteen percent (15%) and (b), in the second tranche,
(i) shares of Preferred Stock with an aggregate stated value of Three Million
Dollars ($3,000,000) and (ii) Warrants to acquire an aggregate number of shares
of Common Stock computed by dividing the aggregate stated value of such
Preferred Stock by the Fixed Conversion Price multiplied by fifteen percent
(15%). The shares of Common Stock issuable upon conversion of or otherwise
pursuant to the Debentures or the Preferred Stock (which defined term shall be
deemed to include both the Preferred Stock issued in exchange for the Debentures
and the Preferred Stock issued in the second tranche, as described above) 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 Preferred Stock, 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 Purchasers hereby agree as follows:
1. PURCHASE AND SALE OF DEBENTURES, PREFERRED STOCK AND WARRANTS; EXCHANGE FOR
PREFERRED STOCK
a. Purchase of Debentures, Preferred Stock and Warrants; Exchange for Preferred
Stock. The issuance, sale and purchase of the Debentures, the Preferred Stock
and the Warrants shall occur in two tranches with separate closings, the first
of which is hereinafter referred to as the "First Closing," the second of which
is hereinafter referred to as the "Second Closing". The exchange of the
Debentures for the Preferred Stock shall occur prior to or simultaneously with
the Second Closing and the closing related to such exchange shall be hereinafter
referred to as the "Exchange Closing". Each of the First Closing, the Second
Closing and the Exchange Closing is hereinafter referred to as a "Closing". On
the date of the First Closing or the date of the Second Closing, as the case may
be, subject to the satisfaction (or waiver) of the
<PAGE> 74
relevant conditions set forth in Section 6 and Section 7 below, the Company
shall issue and sell to each Purchaser, and each Purchaser severally agrees to
purchase from the Company, such Debentures or Preferred Stock, as the case may
be, and the Warrants for the relevant purchase price as is set forth on such
Purchaser's Execution Page attached hereto (the "Purchase Price"). Each
Purchaser's obligation to purchase its Debentures or Preferred Stock, as the
case may be, and Warrants hereunder is distinct and separate from each other
Purchaser's obligation to purchase its Debentures or Preferred Stock, as the
case may be, and Warrants and no Purchaser shall be required to purchase
hereunder more than the number of its Debentures or Preferred Stock, as the case
may be, and Warrants set forth on such Purchaser's Execution Page hereto
notwithstanding any failure by any other Purchaser to purchase its Debentures or
Preferred Stock, as the case may be, and Warrants hereunder nor shall any
Purchaser have any liability by reason of any such failure by any other
Purchaser. On the date of the Exchange Closing, subject to the satisfaction (or
waiver) of the relevant conditions set forth in Section 6 and Section 7 below,
the Company shall issue shares of Preferred Stock to each Purchaser in exchange
for such Purchaser's Debentures, and each Purchaser severally agrees to make
such exchange. Each Purchaser's obligation to exchange its Debentures for
Preferred Stock is distinct and separate from each other Purchaser's obligation
to exchange its Debentures and no Purchaser shall be required to exchange
hereunder more than the amount of Debentures such Purchaser had purchased
notwithstanding any failure by any other Purchaser to exchange its Debentures
hereunder nor shall any Purchaser have any liability by reason of any such
failure by any other Purchaser.
b. Form of Payment; Mechanism of Exchange. At each of the First Closing or the
Second Closing, each Purchaser shall pay such Purchaser's Purchase Price
hereunder by wire transfer to the Company, in accordance with the Company's
written wiring instructions, against delivery of the duly executed Debentures or
Preferred Stock, as the case may be, and Warrants being purchased by such
Purchaser and the Company shall deliver such Debentures or Preferred Stock, as
the case may be, and Warrants against delivery of such Purchase Price. At the
Exchange Closing, each Purchaser shall deliver such Purchaser's unconverted
Debentures, against delivery of the shares of Preferred Stock being obtained by
such Purchaser in such exchange and the Company shall deliver such Preferred
Stock against delivery of such Debentures. Any interest accrued, but not paid,
on the Debentures being exchanged shall, at the option of each Purchaser, be, at
the time of such exchange, (i) payable to the Purchaser in cash, or (ii)
included in the stated value of the Preferred Stock being received by such
Purchaser for the Debentures being exchanged by such Purchaser.
c. Closing Date. Subject to the satisfaction (or waiver) of the relevant
conditions thereto set forth in Section 6 and Section 7 below, the date and time
of the issuance and sale of the Debentures, Preferred Stock and the Warrants
pursuant to this Agreement and the date and time of the exchange of the
Debentures and the Warrants pursuant to this Agreement shall be (i) in the case
of the First Closing, 12:00 noon Eastern Time on June 8, 1998 and (ii) in the
case of the Second Closing, 12:00 noon Eastern Time on the fifth (5th) trading
<PAGE> 75
day following notification of satisfaction (or waiver) of the relevant
conditions to such Closing and (iii) in the case of the Exchange Closing 12:00
noon Eastern Time on the fifth (5th) trading day following notification of
satisfaction (or waiver) of the relevant conditions to such Closing, and prior
to or simultaneously with the Second Closing (subject, in each case, to a two
(2) business day grace period at either party's option, but in no event later
than June 10, 1998, in the case of the First Closing), or, in each case, such
other time as may be mutually agreed upon by the Company and the Purchasers. The
date of the First Closing, the Second Closing, or the Exchange Closing, as the
case may be, shall hereinafter be referred to as the "First Closing Date,"
"Second Closing Date," or the "Exchange Closing Date," respectively. Each
Closing shall occur at the offices of Klehr, Harrison, Harvey, Branzburg &
Ellers, LLP, 1401 Walnut Street, Philadelphia, Pennsylvania 19102.
2. PURCHASER'S REPRESENTATIONS AND WARRANTIES
Each Purchaser severally, but not jointly, represents and warrants to the
Company as follows:
a. Purchase for Own Account, Etc. Purchaser is purchasing the Securities for
Purchaser's own account and not with a present view towards the sale or
distribution thereof, and Purchaser acknowledges that the Securities may be sold
only pursuant to sales that are exempt from the registration requirements of the
Securities Act and/or sales registered under the Securities Act. Purchaser
understands that 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. Purchaser is an "Accredited Investor" as that
term is defined in Rule 501(a) of Regulation D.
c. Reliance on Exemptions. Purchaser understands that the Securities are being
offered and sold to 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 Purchaser's
compliance with, the representations, warranties, 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. Purchaser and its counsel have been furnished all materials
<PAGE> 76
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 Purchaser or its counsel. Purchaser and its counsel have been
afforded the opportunity to ask questions of the Company and have received what
Purchaser believes to be satisfactory answers to any such inquiries. Neither
such inquiries nor any other due diligence investigation conducted by Purchaser
or its counsel or any of its representatives shall modify, amend or affect
Purchaser's right to rely on the Company's representations and warranties
contained in Section 3 below. Purchaser understands that Purchaser's investment
in the Securities involves a high degree of risk.
e. Governmental Review. 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. 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) 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 Purchaser and such sale or
transfer is pursuant to an exemption from such registration or pursuant to such
registration; 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. 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 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 laws unless offered, sold or
transferred under an available exemption from the registration requirements
of those laws.
<PAGE> 77
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 has been sold under Rule 144 or can be sold under Rule 144(k).
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 Purchaser the Company may require that the above
legend be placed on any such Security and 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 Purchaser and are valid and binding agreements of Purchaser
enforceable in accordance with their terms.
i. Residency. Purchaser is a resident of the jurisdiction set forth under the
Purchaser's name on the Execution Page hereto executed by Purchaser.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each 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
<PAGE> 78
business, operations, properties, prospects or financial condition of the
Company and its subsidiaries, taken as a whole.
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 of the
Preferred Stock 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 and, subject to
(x) the Company obtaining the approval of the shareholders of the Company of the
matters referred to in Section 4(n) hereof, (y) the Company filing an amendment
to its Articles of Incorporation to authorize the Preferred Stock and (z) the
Company issuing the Preferred Stock to the Purchasers, to issue and sell the
Preferred Stock in accordance with the terms hereof and to issue Conversion
Shares upon conversion of the Preferred Stock; (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, subject only to the approval of the
Company's stockholders at the meeting of stockholders referred to in Section
4(n) hereof, no further consent or authorization of the Company, its Board of
Directors or its stockholders is required; and (iii) 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. Stockholder Authorization. The Company believes that neither the execution,
delivery or performance of its obligations under this Agreement, the Debentures,
the Preferred Stock, the Warrants or the Registration Rights Agreement by the
Company nor the consummation by it of the transactions contemplated hereby or
thereby (including, without limitation, the issuance of the Debentures, the
Preferred Stock, or Warrants or the issuance or reservation for issuance of the
Conversion Shares or Warrant Shares) require any consent or authorization of the
Company's stockholders, including but not limited to consent under Rule 4460(i)
promulgated by the National Association of Securities Dealers, Inc. (the "NASD")
or any similar rule, subject only, with respect to the creation and issuance of
the Preferred Stock, the issuance of Conversion Shares in connection with the
conversion of the Preferred Stock and the obligations and the transactions
relating to the Second Closing and the Exchange Closing, to the approval of the
Company's stockholders as required by applicable law, rule or regulation
(including Rule 4460(i) promulgated by the NASD).
d. Capitalization. The capitalization of the Company as of the date hereof,
<PAGE> 79
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(d). All
of such outstanding shares of capital stock have been, or upon issuance will be,
validly issued, fully paid and nonassessable (including the shares of Preferred
Stock). No shares of capital stock of the Company (including the Conversion
Shares and the Warrant Shares) are, and, upon issuance, the Preferred Stock will
not be, 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(d), 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(d), 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, the Preferred Stock, or the Warrants. The Company has furnished to
each 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. On the date of
each Closing, respectively, except for the issuance of some or all of the
Securities as contemplated hereby, there are no changes to the representations
and warranties contained in this Section 3(d). The officer's certificate
referred to in Section 7(a)(iv) and Section 7(b)(iii) shall contain a written
update of Schedule 3(d) as of each Closing Date.
e. Issuance of Shares. The Conversion Shares related to the Debentures (subject
to the limitations set forth in the Debentures) and Warrant Shares are duly
authorized and reserved for issuance, and, upon conversion of the Debentures and
exercise of the Warrants in accordance with, and subject to the limitations set
forth in the terms thereof, will be validly issued, fully paid and
non-assessable, and free from all taxes, liens, claims and encumbrances and
<PAGE> 80
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.
Following (i) the Company obtaining the approval of the shareholders of the
Company of the matters referred to in Section 4(n) hereof, (ii) the Company
filing an amendment to its Articles of Incorporation to authorize the Preferred
Stock and (iii) the Company issuing the Preferred Stock to the Purchasers in
accordance with the terms of this Agreement, the Conversion Shares related to
the Preferred Stock will be duly authorized and reserved for issuance, and upon
conversion of the Preferred Stock in accordance with and subject to the
limitations related to, 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 shareholders
of the Company and will not impose personal liability upon the holder thereof.
f. No Conflicts. The execution, delivery and performance of this Agreement, the
Registration Rights Agreement, the Debentures, the Preferred Stock 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 Preferred Stock,
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), provided, however, that the
authorization and issuance of the Preferred Stock and the exchange of the
Debentures for the Preferred Stock shall require (i) the Company obtaining the
approval of the shareholders of the Company of the matters referred to in
Section 4(n) hereof, (ii) the Company filing an amendment to its Articles of
Incorporation to authorize the Preferred Stock and (iii) the Company issuing the
Preferred Stock to the Purchasers in accordance with the terms of this
Agreement. 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
<PAGE> 81
conducted, and shall not be conducted so long as each 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 and except for
filing an amendment to the Company's Articles of Incorporation to authorize the
Preferred Stock, 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.
g. 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 each 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
<PAGE> 82
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.
h. Absence of Certain Changes. Since December 31, 1997, there has been no
material adverse change and no material adverse development in the business,
properties, operations, financial condition, results of operations or prospects
of the Company, except as disclosed in Schedule 3(h).
i. 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 including, without limitation, the
Securities and Exchange Commission or NASDAQ, pending or, to the knowledge 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.
j. 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, 1997. 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. Except as set forth on Schedule 3(j), 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,
<PAGE> 83
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.
k. 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.
l. Disclosure. All information relating to or concerning the Company set forth
in this Agreement or provided to each 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 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.
m. Acknowledgment Regarding the Purchasers' Purchase of the Securities. The
Company acknowledges and agrees that each of Purchasers 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 each Purchaser is "arms length" and that
any statement made by any 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 such Purchaser's purchase
of Securities and has not been relied
<PAGE> 84
upon by the Company, its officers or directors in any way, except as provided
for or contemplated in Section 2 hereof. The Company further represents to each
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.
n. 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).
o. 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.
p. No Integrated Offering. Neither the Company, nor any of its affiliates, nor
any person acting on its or their behalf, has directly or indirectly made any
offers or sales of any security or solicited any offers to buy any security
under circumstances that would require registration of the 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,
including, without limitation, Rule 4460(i) of the NASD or any similar rule.
q. 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 any 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.
r. 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 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.
<PAGE> 85
s. Tax Status. Except as set forth in the SEC Documents filed prior to the date
hereof or on Schedule 3(s), 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.
t. 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(t) 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 each Purchaser promptly after such filing. The Company shall, on or before
the First Closing Date, take such action as the 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 First
Closing Date. Within two trading days after the First Closing, the Company
<PAGE> 86
agrees to file a Form 8-K concerning this Agreement and the transactions
contemplated hereby, which Form 8-K shall attach this Agreement and its Exhibits
as exhibits to such Form 8-K.
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; Limitation on Acquisitions. The Company shall use the
proceeds from the sale of the Debentures and the Warrants as set forth on
Schedule 4(d); provided, further, that the Company shall not use such proceeds
(i) to repurchase any Common Stock, (ii) to engage in any type of investment
activity similar to that conducted on the date hereof by the Company's
investment division or to otherwise provide such funds to such investment
division, (iii) to make loans or engage in transactions with its directors,
officers, employees, shareholders or their family members and affiliates (as
such term is defined in Rule 12b-2 of the Exchange Act) of such persons or the
Company or (iv) to acquire any stock of or ownership interest of any kind in,
or, except in the ordinary course of business, acquire any assets or property of
any other business entity whatsoever. The Company shall not use any working
capital to acquire any stock of or ownership interest of any kind in, or, except
in the ordinary course of business, acquire any assets or property of any other
business entity whatsoever without the written consent of the Purchasers.
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 First Closing Date (the "Lock-Up Period"), the Company
will not, without the prior written consent of each 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 each 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 each
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");
provided, however, that in the event more than one Purchaser desires to purchase
such securities, (a) the interested Purchasers may allocate such Future Offering
among themselves by agreement among such Purchasers or, in the event such
<PAGE> 87
Purchasers cannot reach an agreement in such period, such Future Offering shall
be allocated among them on a pro rata basis equal to the percentage each such
Purchaser's Purchase Price bears to the sum of the Purchase Prices of such
interested Purchasers. 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 each Purchaser, at each Closing,
reimbursement for the expenses reasonably incurred by such 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 (the "Expenses"). In addition, from time to time thereafter, upon each
Purchaser's written request, the Company shall pay to such Purchaser such
additional Expenses, if any, not covered by such payment, in each case to the
extent reasonably incurred by such 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 Purchasers for more than $35,000
pursuant to this Section 4(f).
g. Financial Information. The Company agrees to send the following reports to
each Purchaser until such 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 IV of the Debentures, including without limitation,
any increase in the number of shares so reserved that may be required in certain
circumstances pursuant to such Article. 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 Purchasers.
<PAGE> 88
i. Listing. The Company shall promptly secure the listing of (i) the Conversion
Shares issuable upon the conversion of the Debentures, subject to the
limitations contained therein, and (ii) following (x) the Company obtaining the
approval of the shareholders of the Company of the matters referred to in
Section 4(n) hereof, (y) the Company filing an amendment to its Articles of
Incorporation to authorize the Preferred Stock and (z) the Company issuing the
Preferred Stock to the Purchasers in accordance with the terms of this
Agreement, the Conversion Shares issuable upon the conversion of the Preferred
Stock 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.
j. Corporate Existence. So long as a Purchaser beneficially owns any Securities,
the Company shall maintain its corporate existence, and in the event of a
merger, consolidation or sale of all or substantially all of the Company's
assets, the Company shall ensure that the surviving or successor entity in such
transaction (i) assumes the Company's obligations hereunder and under the
Debentures and the Warrants (except as otherwise provided therein) 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
<PAGE> 89
AMEX. Notwithstanding the foregoing, the Company covenants and agrees that it
will not engage in any merger, consolidation or sale of all or substantially all
of its assets at any time prior to the effectiveness of the registration
statement required to be filed pursuant to the Registration Rights Agreement
without (A) providing each Purchaser with written notice of such transaction at
least sixty (60) days prior to the consummation of the transaction and (B)
obtaining the written consent of all of the Purchasers interest of the then
outstanding principal amount of the Debentures on or before the 10th day after
the delivery of such notice by the Company.
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 any Purchaser beneficially owns any
Debentures, the Company shall not, without first obtaining the written approval
of such Purchaser, redeem, or declare or pay any cash dividend or distribution
on, any shares of capital stock of the Company.
m. Proxy. The Company shall use its best efforts to cause Louis L.
Knickerbocker, Tamara Knickerbocker, Anthony P. Shutts, Gerald Margolis and
William R. Black to each execute a proxy in form and substance satisfactory to
the Purchasers (collectively, the "Proxies") wherein such persons would agree
with the Company to vote all shares of Common Stock they own in favor of the
transactions contemplated by this Agreement in connection with the shareholder
vote required by Section 4(n) hereof and the Company shall use its best efforts
to enforce such Proxies in any such shareholder vote.
n. Stockholders' Meeting. The Company shall call a meeting of its stockholders
to be held as promptly as practicable and in any event within one hundred twenty
(120) days of the First Closing Date for the purpose of voting upon and
approving this Agreement, the Debentures, Warrants and Registration Rights
Agreement, the authorization and issuance of the Preferred Stock, the exchange
of the Debentures for Preferred Stock and the transactions contemplated hereby
and thereby, including, without limitation, the issuance of the Securities. The
Company shall, through its Board of Directors, recommend to its stockholders
approval of such matters. The Company shall use its best efforts to solicit from
its stockholders proxies in favor of such matters sufficient to comply with all
relevant legal requirements, including, without limitation, Rule 4460(i)
promulgated by the NASD.
o. Preferred Stock. The Company shall use its best efforts to take all
<PAGE> 90
action necessary to issue Preferred Stock with terms substantially similar to
the Debentures and such additional terms as are usual and customary for similar
instruments, including, without limitation, only those voting rights required by
law and to exchange such Preferred Stock for the Debentures upon the terms and
conditions stated herein, including, without limitation as promptly as
practicable after (i) obtaining the approval of the shareholders of the Company
of the matters referred to in Section 4(n) hereof; (ii) filing an amendment to
its Articles of Incorporation to authorize the Preferred Stock and (iii) issuing
the Preferred Stock to the Purchasers.
5. TRANSFER AGENT INSTRUCTIONS.
a. The Company shall instruct its transfer agent to issue certificates,
registered in the name of each 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 each 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 any 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 any Purchaser provides the Company with reasonable assurances
that such Securities may be sold under Rule 144 or such Securities may be sold
pursuant to an effective registration statement, 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 such Purchaser.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
----------------------------------------------
The obligation of the Company hereunder to issue and sell the Debentures,
Preferred Stock and the Warrants to each Purchaser hereunder, and to exchange
Preferred Stock for the Debentures, at each Closing, is subject to the
satisfaction, at or before the relevant Closing Date, of each of the following
<PAGE> 91
conditions thereto relevant to such Closing, 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.
1. A. With respect to the First Closing:
(i) Each Purchaser shall have executed the signature page to this Agreement and
the Registration Rights Agreement, and delivered the same to the Company.
(ii) Each Purchaser shall have delivered such Purchaser's Purchase Price in
accordance with Section 1(b) above.
(iii) The representations and warranties of each Purchaser shall be true and
correct as of the date when made and as of the First 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 each 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 such Purchaser
at or prior to the First Closing Date.
(iv) 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.
b. With respect to the Exchange Closing:
(i) Each Purchaser shall have delivered such Purchaser's Debentures in
accordance with Section 1(b) above.
(ii) The representations and warranties of each Purchaser shall be true and
correct as of the date when made and as of the Exchange 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 each 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 such Purchaser
at or prior to the Exchange Closing Date.
(iii) 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.
(iv) This Agreement, the Debentures, Preferred Stock, Warrants and Registration
Rights Agreement and the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the Securities and the
<PAGE> 92
creation and issuance of the Preferred Stock and the exchange of the Preferred
Stock for the Debentures, shall have been approved and adopted by the
stockholders of the Company in compliance with all relevant legal requirements,
including, without limitation, Rule 4460(i) promulgated by the NASD or any
similar rule, at the stockholders' meeting referred to in Section 4(n) hereof.
c. With respect to the Second Closing:
(i) Each Purchaser shall have delivered such Purchaser's Purchase Price in
accordance with Section 1(b) above.
(ii) The representations and warranties of each Purchaser shall be true and
correct as of the date when made and as of the Second 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 each 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 such Purchaser
at or prior to the Second Closing Date.
(iii) 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.
(iv) This Agreement, the Debentures, Preferred Stock, Warrants and Registration
Rights Agreement and the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the Securities and the creation
and issuance of the Preferred Stock, shall have been approved and adopted by the
stockholders of the Company in compliance with all relevant legal requirements,
including, without limitation, Rule 4460(i) promulgated by the NASD or any
similar rule, at the stockholders' meeting referred to in Section 4(n) hereof.
7. CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE.
The obligation of each Purchaser hereunder to purchase such Purchaser's
Debentures and the Warrants hereunder, and to exchange Debentures for the
Preferred Stock, at each Closing, is subject to the satisfaction, at or before
the relevant Closing Date, of each of the following conditions relevant to such
Closing, provided that these conditions are for such Purchaser's sole benefit
and may be waived by such Purchaser at any time in such Purchaser's sole
discretion:
a. With respect to the First Closing:
<PAGE> 93
(i) The Company shall have executed the signature page to this Agreement and the
Registration Rights Agreement, and delivered the same to such Purchaser.
(ii) The Company shall have delivered to such Purchaser such Purchaser's duly
executed Debentures and Warrants (in such denominations as such Purchaser shall
request) in accordance with Section 1(b) above.
(iii) 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.
(iv) The representations and warranties of the Company shall be true and correct
as of the date when made and as of the First 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 First Closing Date. Each Purchaser shall have received a certificate,
executed by the Chief Executive Officer or the Chief Financial Officer or any
Executive Vice-President of the Company, dated as of the First Closing Date, to
the foregoing effect and as to such other matters as may be reasonably requested
by any Purchaser including, without limitation, a written update of Schedule
3(d).
(v) 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.
(vi) Such Purchaser shall have received an opinion of the Company's counsel,
dated as of the First Closing Date, in form, scope and substance reasonably
satisfactory to such Purchaser and in substantially the form of Exhibit D
attached hereto.
(vii) The Company shall have delivered evidence reasonably satisfactory to each
Purchaser that the Company's transfer agent has agreed to act in accordance with
irrevocable instructions in the form attached hereto as Exhibit E.
(viii) 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.
(ix) Such Purchaser shall have received the Proxies in form and substance
satisfactory to such Purchaser and such Proxies shall remain in full force and
effect and shall not have been revised or amended in any way.
<PAGE> 94
(x) The Purchasers shall have entered into a waiver and agreement for the
transactions contemplated hereby with Bank Boston, N.A. relating to that certain
Loan and Security Agreement dated as of July 16, 1997 among various Borrowers,
including the Company, and Bank Boston, N.A. on terms and conditions acceptable
to the Purchasers in their sole discretion.
(xi) The Purchasers shall have completed their due diligence regarding the
Company to their complete satisfaction in their sole discretion.
b. With respect to the Exchange Closing:
(i) The Company shall have delivered to such Purchaser such Purchaser's duly
authorized and issued shares of Preferred Stock in accordance with Section 1(b)
above.
(ii) 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.
(iii) The representations and warranties (including any additional
representations and warranties with respect to the Preferred Stock as may be
requested by the Purchasers) of the Company shall be true and correct as of the
date when made and as of the Exchange 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 Exchange Closing Date. Each Purchaser shall have received a certificate,
executed by the Chief Executive Officer or Chief Financial Officer or any
Executive Vice-President of the Company, dated as of the Exchange Closing Date,
to the foregoing effect and as to such other matters as may be reasonably
requested by any Purchaser including, without limitation, a written update of
Schedule 3(d).
(iv) 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.
(v) The Purchasers shall have received an opinion of the Company's counsel,
dated as of the Exchange Closing Date, in form, scope and substance reasonably
satisfactory to the Purchasers and in substantially the form of Exhibit D
attached hereto (with such additions relating to the Preferred Stock
as are usual and customary or advisable in the judgment of the Purchasers).
(vi) The Company shall have delivered evidence reasonably satisfactory to each
Purchaser that the Company's transfer agent has agreed to act in accordance
<PAGE> 95
with irrevocable instructions in the form attached hereto as Exhibit E.
(vii) 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.
(viii) This Agreement, the Debentures, Warrants and Registration Rights
Agreement, the Preferred Stock and the exchange of the Preferred Stock for the
Debentures and the transactions contemplated hereby and thereby, including,
without limitation, the issuance of the Securities, shall have been approved and
adopted by the stockholders of the Company in compliance with all relevant legal
requirements, including, without limitation, Rule 4460(i) promulgated by the
NASD or any similar rule, at the stockholders' meeting referred to in Section
4(n) hereof.
(ix) The Registration Statement required to be filed by the Company pursuant to
Section 2(a) of the Registration Rights Agreement shall have been declared
effective by the SEC no later than 180 days after the First Closing Date and
shall be effective and available for use by the Purchasers as of the Exchange
Closing Date.
(x) The Preferred Stock shall have terms substantially similar to the Debentures
and such additional terms as are usual and customary for similar instruments,
including, without limitation, only those voting rights required by law.
c. With respect to the Second Closing:
(i) The Company shall have delivered to such Purchaser such Purchaser's duly
executed certificates representing shares of Preferred Stock and Warrants (in
such denominations as such Purchaser shall request) in accordance with Section
1(b) above.
(ii) 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.
(iii) The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Second 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 Second Closing Date. Each Purchaser shall have received a
certificate, executed by the Chief Executive Officer or Chief Financial Officer
or any Executive Vice-President of the Company, dated as of the Second Closing
Date, to the foregoing effect and as to such other matters as may be reasonably
requested by any Purchaser including, without limitation, a written update of
Schedule 3(d).
<PAGE> 96
(iv) 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.
(v) The Purchasers shall have received an opinion of the Company's counsel,
dated as of the Second Closing Date, in form, scope and substance reasonably
satisfactory to the Purchasers and in substantially the form of Exhibit D
attached hereto (with such additions relating to the Preferred Stock as are
usual and customary or advisable in the judgment of the Purchasers).
(vi) The Company shall have delivered evidence reasonably satisfactory to each
Purchaser that the Company's transfer agent has agreed to act in accordance with
irrevocable instructions in the form attached hereto as Exhibit E.
(vii) 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.
(viii) The First Closing shall have occurred and the Exchange Closing shall have
occurred or shall occur simultaneously with the Second Closing.
(ix) This Agreement, the Debentures, Warrants and Registration Rights Agreement,
the Preferred Stock and the exchange of the Debentures for the Preferred Stock
and the transactions contemplated hereby and thereby, including, without
limitation, the issuance of the Securities, shall have been approved and adopted
by the stockholders of the Company in compliance with all relevant legal
requirements, including, without limitation, Rule 4460(i) promulgated by the
NASD or any similar rule, at the stockholders' meeting referred to in Section
4(n) hereof.
(x) The Registration Statement required to be filed by the Company pursuant to
Section 2(a) of the Registration Rights Agreement shall have been declared
effective by the SEC no later than 180 days after the First Closing Date and
shall be effective and available for use by the Purchasers as of the Second
Closing Date.
(xi) The Closing Bid Price (as defined in the Debentures) for the Common Stock
for any twenty (20) out of the thirty (30) consecutive trading days ending on
the trading day immediately preceding the Second Closing Date (subject to
equitable adjustment for any stock splits, stock dividends, reclassifications or
similar events during such thirty (30) trading day period) shall have been equal
to or greater than $7.50 per share.
<PAGE> 97
(xii) The Second Closing Date shall be at least ninety (90) days after the First
Closing Date and no more than one (1) year after the First Closing Date.
(xiii) At or prior to the Second Closing, the Debentures shall have been
exchanged for the Preferred Stock on terms and conditions satisfactory to the
Purchasers.
(xiv) The Preferred Stock shall have terms substantially similar to the
Debentures and such additional terms as are usual and customary for similar
instruments including, without limitation, only those voting rights required by
law.
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 any 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
<PAGE> 98
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 any 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 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 each
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 any Purchaser, to the address set forth under such Purchaser's name
on the signature page hereto executed by such 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 any Purchaser shall assign this Agreement or any
rights or obligations hereunder. Notwithstanding the foregoing, each 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
<PAGE> 99
other person or entity with the consent of the Company. This provision shall not
limit any 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 such Purchaser's rights hereunder and/or thereunder to
any such transferee. In addition, and notwithstanding anything to the contrary
contained in this Agreement, the Debentures, the Warrants or the Registration
Rights Agreement, the Securities may be pledged and all rights of Purchaser
under this Agreement or any other agreement or document related to the
transaction contemplated hereby may be assigned, without further consent of the
Company, to a bona fide pledgee in connection with a Purchaser's margin or
brokerage accounts.
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.
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 each
Closing hereunder notwithstanding any due diligence investigation conducted by
or on behalf of any Purchaser. Moreover, none of the representations and
warranties made by the Company herein shall act as a waiver of any rights or
remedies any Purchaser may have under applicable federal or state securities
laws. The Company agrees to indemnify and hold harmless each Purchaser and each
other holder of the Securities and all of their stockholders, officers,
directors, employees, partners, members, agents and direct or indirect investors
and affiliates and any of the foregoing person's agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Indemnitees")
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by
any Indemnitee as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in this Agreement, the Debentures, the Warrants, the Registration Rights
Agreement or any other certificate, instrument or document contemplated hereby
or thereby, (b) any breach of any covenant, agreement or obligation of the
Company contained in this Agreement, the Debentures, the Warrants, the
Registration Rights Agreement or any other certificate, instrument or document
contemplated hereby or thereby, (c) any cause of action, suit or claim brought
or made against such Indemnitee and arising out of or resulting from the
execution, delivery, performance or enforcement of this Agreement, the
Debentures, the Warrants, the Registration Rights Agreement or any other
certificate, instrument or document contemplated hereby or thereby, (d) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities or (e) the
status of such Purchaser or holder of the Securities as an investor in the
<PAGE> 100
Company. To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law.
j. Publicity. The Company and each 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,
including, without limitation, the proxy solicitation materials related to the
stockholders' meeting referred to in Section 4(n) hereof; provided, however,
that the Company shall be entitled, without the prior approval of any 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 each
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 First Closing Date shall not have occurred
on or before June 10, 1998, 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 each 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 each Purchaser
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 101
IN WITNESS WHEREOF, the undersigned Purchasers 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: /s/ Anthony P. Shutts
Name: Anthony P. Shutts
Title: Chief Financial Officer
<PAGE> 102
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
Date: June 8, 1998 $__________
FOR VALUE RECEIVED, THE L.L. KNICKERBOCKER CO., INC., a corporation organized
under the laws of the State of California (hereinafter called the "Borrower" or
the "Corporation") hereby promises to pay to the order of ______________________
or registered assigns (individually, the "Holder", and collectively with the
holders of all other debentures of same like and tenor, the "Holders") the sum
of _________ Dollars ($_______) on October 6, 1998 (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.
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 June 8, 1998 by and among the Borrower and the other
signatories thereto (the "Securities Purchase Agreement"). This Debenture shall,
upon the terms and conditions stated in the Securities Purchase Agreement, be
exchanged for shares of the Company's preferred stock with terms substantially
similar to the Debentures and such additional terms as are usual and customary
for similar instruments, including, without limitation, only those voting rights
required by law.
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 VII 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.
<PAGE> 103
B. Prepayment at Borrower's Option.
(i) Within 5 calendar days prior to the beginning of any month during which
the Debentures are outstanding, the Borrower shall provide written notice to the
Holders by facsimile and overnight courier as to whether the Borrower will
prepay any conversions of Debentures in such calendar month (an "Optional
Prepayment Notice"). In the event the Borrower fails to provide an Optional
Prepayment Notice to the Holders within such 5 day period, the Borrower shall
not be permitted to prepay any conversions of Debentures during such calendar
month. In the event a timely Optional Prepayment Notice is provided as
aforesaid, 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 II.E
below) determined by the Variable Conversion Price (as defined in Article II.H
below) then in effect, so long as (x) no Event of Default (irrespective of the
provision of notice, the passage of time or otherwise) or any event which, with
the passage of time, would become an Event of Default shall have occurred, (y)
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 June 5, 1998, by and among the Borrower, the Holder and the other
signatories thereto (the "Registration Rights Agreement"), and (z) the
Registration Statement (as defined in the Registration Rights Agreement) is
effective and available for use) then the Borrower shall be obligated to prepay
("Prepayment at Borrower's Election") the entire portion, but only the entire
portion, of this Debenture which is the subject of the Notice of Conversion for
the Optional Prepayment Amount (as defined below).
(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 II.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 II.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 has received a Notice of Conversion;
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 IX.H hereof.
(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)
<PAGE> 104
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. 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 III.
(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 III 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 effect a
Prepayment at Borrower's Election pursuant to this Article I.B.
ARTICLE II
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
<PAGE> 105
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 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
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>
<PAGE> 106
E. "Conversion Price" means (i) with respect to any Conversion Date occurring
prior to the earliest of (a) the 181st day following the Issue Date, (b) the
first Announcement Date (as defined in Article VIII.C hereof) after the Issue
Date or (c) the delivery by the Corporation of the notice specified in Section
4(j)(A) of the Securities Purchase Agreement (as defined herein) (such earliest
date referred to herein as the "First Variable Conversion Date"), the Fixed
Conversion Price and (ii) with respect to any Conversion Date on or after the
First Variable Conversion Date, the lower of the Fixed Conversion Price and the
Variable Conversion Price, each in effect as of such date and subject to
adjustment as provided herein.
F. "Fixed Conversion Price" means $4.02, and shall be subject to adjustment as
provided herein.
G. "N" means the number of days from, but excluding, the Issue Date.
H. "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.
ARTICLE III
CONVERSION
A. Conversion at the Option of the Holder. (i) Subject to the limitations on
conversions contained in Paragraph C of this Article III, 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, a
<PAGE> 107
Holder shall: (x) fax (or otherwise deliver) a copy of the fully executed Notice
of Conversion to the Corporation for the Common Stock 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 a Holder,
the Corporation shall immediately send, via facsimile, a confirmation to such
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 the Holder notifies the
Corporation that such certificates have been lost, stolen or destroyed and
delivers the documentation to the Company required by Article IX.H hereof.
(i) Delivery of Common Stock Upon Conversion. Upon the surrender of this
Debenture accompanied by a Notice of Conversion, the Corporation shall, no later
than the later of (a) the second business day following the Conversion Date and
(b) the business day following the date of such surrender (or, in the case of
lost, stolen or destroyed certificates, after provision of indemnity pursuant to
Article IX.H) (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 do not bear a legend and the holder thereof
is not then required to return such certificate for the placement of a legend
thereon, the Corporation shall cause its transfer agent to electronically
transmit the Common Stock issuable upon conversion to the holder by crediting
the account of the 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 the holder
physical certificates representing the Common Stock issuable upon conversion.
Further, a Holder may instruct the Corporation to deliver to the holder physical
certificates representing the Common Stock issuable upon conversion in lieu of
delivering such shares by way of DTC Transfer.
(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
<PAGE> 108
be disregarded and the number of shares of Common Stock issuable upon conversion
of the Debentures shall be the next higher 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. If such
dispute involves the calculation of the Conversion Price, the Corporation shall
submit the disputed calculations to an independent outside accountant via
facsimile within two business days of receipt of the Notice of Conversion. The
accountant, at the Corporation's sole expense, shall audit the calculations and
notify the Corporation and the holder of the results no later than two 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 conversion of this Debenture shall be subject
to the following limitations (each of which limitations shall be applied
independently):
(i) Cap Amount. If, notwithstanding the representations and warranties of the
Company contained in Section 3(c) of the Securities Purchase Agreement, the
Company is prohibited by Rule 4460(i) of the National Association of Securities
Dealers, Inc. ("NASD"), or any successor or similar rule, or the rules or
regulations of any other securities exchange on which the Common Stock is then
listed or traded, from issuing a number of shares of Common Stock in excess of a
prescribed amount (the "Cap Amount"), then the Company shall not be required to
issue shares in excess of the Cap Amount; provided, however, that this
limitation in this Article III.C.(i) shall not apply and shall be of no further
force and effect after the date of the effectiveness of the shareholder approval
(the "Shareholder Approval Date") referred to in Section 4(n) of the Securities
Purchase Agreement. Assuming solely for purposes of this paragraph C that such
Rule 4460(i) is applicable, the Cap Amount shall be 3,813,503 shares. The Cap
Amount shall be allocated pro rata to the Holders of the Debentures as provided
in Article IX.D. 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 VI.
(ii) No Five Percent Holders. In no event shall a holder of the Debentures 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 the
Holder and its affiliates (exclusive of shares issuable upon conversion of the
unconverted portion of the Debentures or the unexercised or unconverted portion
of any other securities of the Corporation (including, without limitation, the
warrants (the "Warrants") issued by the Corporation
<PAGE> 109
pursuant to the Securities Purchase Agreement) 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
Debentures with respect to which the determination of this subparagraph is being
made, would result in beneficial ownership by the 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. Except as
provided in the immediately succeeding sentence, the restriction contained in
this subparagraph (ii) shall not be altered, amended, deleted or changed in any
manner whatsoever unless the holders of a majority of the outstanding shares of
Common Stock and the holders of a majority of the outstanding principal amount
of the Debentures shall approve such alteration, amendment, deletion or change.
In applying the foregoing, such limitation should be applied in conjunction with
the application of limitations on conversion or exercise analogous to the
foregoing limitation.
ARTICLE IV
RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. On the Issue Date, the Corporation shall reserve 3,000,000
of the authorized but unissued shares of Common Stock for issuance upon
conversion of the Debentures and, within one week of the Issue Date, the
Corporation shall increase such number of shares so reserved from 3,000,000 to
at least 3,720,000 and thereafter the number of authorized but unissued shares
of Common Stock so reserved (as so increased, the "Reserved Amount") shall not
be decreased and shall at all times be sufficient to provide for the conversion
of the Debentures at the then current Conversion Price thereof. The Reserved
Amount shall be allocated to the Holders of the Debentures as provided in
Article IX.D.
B. Increases to Reserved Amount. If the Reserved Amount for any three
consecutive trading days (the last of such three trading days being the
"Authorization Trigger Date") shall be less than 135% of the number of shares of
Common Stock issuable upon conversion of the Debentures, the Corporation shall
immediately notify the Holders of the Debentures 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 the Debentures. In the event the Corporation fails to so
increase the Reserved Amount within, in the event shareholder approval is
required, ninety (90) days, or, in the event only approval of the Company's
Board of Directors is required, ten (10) days after an Authorization Trigger
Date, each Holder of the Debentures shall thereafter have the option,
exercisable in whole or in part at any time and from time to time by delivery of
<PAGE> 110
a Default Notice (as defined in Article VII.C) to the Corporation, to require
the Corporation to prepay for cash, at the Default Amount (as defined in Article
VII.B), a portion of the Holder's principal amount outstanding of the Debentures
(plus accrued interest thereon) such that, after giving effect to such
prepayment, the holder's allocated portion of the Reserved Amount exceeds 135%
of the total number of shares of Common Stock issuable to such holder upon
conversion of its Debenture. If the Corporation fails to pay the Default Amount
within five (5) business days after its receipt of such Default Notice, then
such Holder shall be entitled to the remedies provided in Article VII.C. Subject
to the limitations on issuance of shares of Common Stock in excess of any
Holder's Cap Amount, notwithstanding anything else contained herein, if the
Corporation has a sufficient number of authorized shares of Common Stock, the
Corporation shall immediately issue additional shares of Common Stock to any
Holder who has exceeded its allocated portion of the Reserved Amount upon
conversions by such Holder of its Debentures.
C. Adjustment to Conversion Price. If the Corporation is prohibited, at any
time, from issuing shares of Common Stock upon conversion of the Debentures to
any Holder because the Corporation does not then have available a sufficient
number of authorized and reserved shares of Common Stock, then the Fixed
Conversion Price in respect of any Debentures held by any Holder (including
Debentures submitted to the Corporation for conversion, but for which shares of
Common Stock have not been issued to any such Holder) shall be adjusted as
provided in Article V.A.
ARTICLE V
FAILURE TO SATISFY CONVERSIONS
A. Conversion Defaults; Adjustments to Conversion Price. The following shall
constitute a "Conversion Default": (i) following the submission by a Holder of a
Notice of Conversion, the Corporation fails for any reason (other than because
of an event described in clause (iii) below) 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 such
Holder is entitled upon such conversion, (ii) the Corporation provides notice to
any Holder of a Debenture 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 of an
event described in clause (iii) below), or (iii) the Corporation is prohibited,
at any time, from issuing shares of Common Stock upon conversion of the
Debentures to any Holder because the Corporation (A) does not have available a
sufficient number of authorized and reserved shares of Common Stock or (B) such
issuance would exceed the then unissued portion of such Holder's Cap Amount. In
the case of a Conversion Default described in clause (i) or (iii) above, the
Fixed Conversion Price in respect of any Debentures held by such Holder
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(including Debentures submitted to the Corporation for conversion, but for which
shares of Common Stock have not been issued to such Holder) shall thereafter be
the lesser of (x) the Fixed Conversion Price on the date of the Conversion
Default and (y) the lowest Conversion Price in effect during the period
beginning on, and including, such date through and including (A) in the case of
a Conversion Default referred to in clause (i) above, the earlier of (1) the day
such shares of Common Stock are delivered to the Holder and (2) the day on which
the holder regains its rights as a holder of the Debentures with respect to such
unconverted Debentures pursuant to the provisions of Article IX.L hereof, and
(B) in the case of a Conversion Default referred to in clause (iii) above, the
date on which the prohibition on issuances of Common Stock terminates. In the
case of a Conversion Default described in clause (ii) above, 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 (as hereinafter defined). Following any
adjustment to the Fixed Conversion Price pursuant to this Article V.A, the Fixed
Conversion Price shall thereafter be subject to further adjustment for any
events described in Article VIII. Upon the occurrence of each reset of the Fixed
Conversion Price pursuant to this Paragraph A, the Corporation, at its expense,
shall promptly compute the new Fixed Conversion Price and prepare and furnish to
each Holder of the Debentures a certificate setting forth such new Fixed
Conversion Price and showing in detail each Conversion Price in effect during
such reset period.
"Default Cure Date" means (i) with respect to a Conversion Default
described in clause (i) of its definition, the date the Corporation effects the
conversion of all of the outstanding Debentures, and (ii) with respect to a
Conversion Default described in clause (ii) of its definition, the date the
Corporation issues freely tradeable shares of Common Stock in satisfaction of
all conversions of the Debentures in accordance with Article III.A, and (iii)
with respect to either type of a Conversion Default, the date on which the
Corporation prepays the Debentures held by such holder pursuant to paragraph C
of this Article V.
B. Buy-In Cure. Unless the Corporation has notified the applicable holder in
writing prior to the delivery by such 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 a
Holder upon a conversion of the Debentures or (b) there shall occur a Legend
Removal Failure (as defined in Article VII.A(iv) below) and (ii) thereafter,
such Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to make delivery in satisfaction of a sale by such Holder of the
unlegended shares of Common Stock (the "Sold Shares") which such Holder
anticipated receiving upon such conversion (a "Buy-In"), the Corporation shall
pay such Holder (in addition to any other remedies available to the Holder) the
amount by which (x) such 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 such Holder from the sale of the Sold
<PAGE> 112
Shares. For example, if a 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 the Holder $1,000. A Holder shall provide the Corporation written
notification and supporting documentation indicating any amounts payable to such
Holder pursuant to this Paragraph B. The Corporation shall make any payments
required pursuant to this Paragraph B in accordance with and subject to the
provisions of Article IX.J.
C. 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 the Holder, for any reason (other than because
such issuance would exceed such Holder's allocated portion of the Reserved
Amount or Cap Amount, for which failures the Holders shall have the remedies set
forth in Articles IV and VI, respectively) to issue shares of Common Stock
within 10 business days after the expiration of the Delivery Period with respect
to any conversion of the Debentures, then the 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 VII.C) to the Corporation,
to have all or any portion of such Holder's outstanding Debentures prepaid by
the Corporation for cash, at the Default Amount (as defined in Article VII.B).
If the Corporation fails to pay such Default Amount within five business days
after its receipt of a Default Notice, then such Holder shall be entitled to the
remedies provided in Article VII.C.
ARTICLE VI
INABILITY TO CONVERT DUE TO CAP AMOUNT
A. Obligation to Cure. If at any time prior to the Shareholder Approval Date 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 such Holder's
Debentures (a "Trading Market Trigger Event"), the Corporation shall immediately
notify the Holders of Debentures 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 the Debentures 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 ("Trading Market Prohibitions"). In the event the Corporation fails to
eliminate all such Trading Market Prohibitions within ninety (90) days after the
Trading Market Trigger Event, then each Holder of Debentures 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 Trading Market Prohibitions are eliminated,
by delivery of a Default Notice (as defined in Article VII.C) to the
Corporation, to require the Corporation to repay for cash, at the Default
<PAGE> 113
Amount, a principal amount of the Holder's Debentures such that, after giving
effect to such repayment, the then unissued portion of such Holder's Cap Amount
exceeds 135% of the total number of shares of Common Stock issuable upon
conversion of such Holder's Debentures. If the Corporation fails to pay the
Default Amount within five (5) business days after its receipt of a Default
Notice, then such Holder shall be entitled to the remedies provided in Articles
VI.B and VII.C. On or after the Shareholder Approval Date, the Corporation shall
treat any such Trading Market Prohibitions as eliminated.
B. Remedies. If the Corporation fails to repay any Debentures pursuant to
Article VI.A within five business days after its receipt of such Default Notice,
and thereafter the Corporation is prohibited, at any time, from issuing shares
of Common Stock upon conversion of the Debentures to any Holder because such
issuance would exceed the then unissued portion of such Holder's Cap Amount
because of 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 its securities, any holder who is so
prohibited from converting its Debentures may elect, as an additional remedy, to
require, with the consent of Holders of at least fifty percent (50%) of the
aggregate outstanding principal amount of the Debentures (including any
Debentures held by the requesting Holder), the Corporation to terminate the
listing of its Common Stock on the Nasdaq SmallCap Market (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.
C. Adjustment to Conversion Price. If the Corporation is prohibited, at any
time, from issuing shares of Common Stock upon conversion of the Debentures to
any Holder because such issuance would exceed the then unissued portion of such
Holder's Cap Amount because of 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 its securities then the
Fixed Conversion Price in respect of any Debentures held by any Holder
(including Debentures submitted to the Corporation for conversion, but for which
shares of Common Stock have not been issued) shall be adjusted as provided in
Article V.A.
ARTICLE VII
EVENTS OF DEFAULT
A. Events of Default. In the event (each of the events described in clauses
(i)-(ix) below after expiration of the applicable cure period (if any) being an
"Event of Default"):
(i) the Corporation fails (i) to pay the principal hereof when
<PAGE> 114
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 hereof;
(ii) the Common Stock (including any of the shares of Common Stock issuable upon
conversion of the Debentures) 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, the Nasdaq National Market or the Nasdaq
SmallCap Market for an aggregate of 10 trading days in any nine month period;
(iii) the Registration Statement required to be filed by the Corporation
pursuant to Section 2(a) of that certain Registration Rights Agreement by and
among the Corporation and the other signatories thereto entered into in
connection with the Securities Purchase Agreement (the "Registration Rights
Agreement") has not been declared effective by the 180th day following the First
Closing Date (as defined in the Securities Purchase Agreement, the "First
Closing Date") or such Registration Statement, after being declared effective,
cannot be utilized by the Holders of the Debentures for the resale of all of
their Registrable Securities (as defined in the Registration Rights Agreement)
for an aggregate of more than 30 days;
(iv) the Corporation fails to remove any restrictive legend on any certificate
or any shares of Common Stock issued to the Holders of the Debentures upon
conversion of any of the Debentures as and when required by this Debenture, the
Securities Purchase Agreement or the Registration Rights Agreement (a "Legend
Removal Failure"), and any such failure continues uncured for five business days
after the Corporation has been notified thereof in writing by the Holder;
(v) the Corporation provides notice to any Holder of the Debentures, including
by way of public announcement, at any time, of its intention not to issue, or
otherwise refuses to issue, shares of Common Stock to any Holder of the
Debentures upon conversion in accordance with the terms of the Debentures (other
than due to the circumstances contemplated by Articles IV or VI 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
(the presentation of any such transaction for stockholder approval being
conclusive evidence that such transaction involves the sale of all or
substantially all of the assets of the Corporation);
(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
and other than pursuant to a merger in which the Corporation is the surviving or
continuing entity and its capital stock is unchanged and the
<PAGE> 115
Corporation has not sold or issued Common Stock (or securities convertible into
or exercisable for Common Stock) equal to 20% or more of the Common Stock or 20%
or more of the voting power outstanding before the issuance); 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);
or
(vii) the Corporation otherwise shall breach any material term hereunder
(including; without limitation, Article IV hereof) or under the Securities
Purchase Agreement, including, without limitation, the representations and
warranties in the Securities Purchase Agreement or the Registration Rights
Agreement and such breach continues uncured for 10 business days after the
Corporation has been notified thereof in writing by any Holder;
(viii) 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 trustee for it or for a substantial part of its
property or business; or such a receiver or trustee shall otherwise be
appointed; or
(ix) 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 of any such Event of Default, at the option of each
Holder, exercisable in whole or in part at any time and from time to time by
delivery of a Default Notice (as defined in Paragraph C below) to the
Corporation while such Event of Default continues, the Corporation shall pay the
Holders (and upon the occurrence of an Event of Default specified in
subparagraphs (viii) and (ix) of this Paragraph A, the Corporation shall be
required to pay the Holders), in satisfaction of its obligation to pay the
outstanding principal amount of the Debentures 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 are hereby
expressly waived, together with all costs, including, without limitation, legal
fees and expenses of collection, and the 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 (v), (vi), (viii) or
(ix) above shall immediately constitute an Event of Default and there shall be
no cure period. Upon the Corporation's receipt of any Default Notice hereunder
(other than during the three trading day period following the Corporation's
delivery of a Default Announcement (as defined below) to all of the Holders in
response to the Corporation's initial receipt of a Default Notice from a holder
of the Debentures, the Corporation shall immediately (and in any event within
one business day following such receipt) deliver a written notice (a "Default
Announcement") to all holders of the Debentures stating the date upon which the
<PAGE> 116
Corporation received such Default Notice and the amount of the Debentures
covered thereby. The Corporation shall not redeem any Debentures during the
three trading day period following the delivery of a required Default
Announcement hereunder. At any time and from time to time during such three
trading day period, each holder of the Debentures may request (either orally or
in writing) information from the Corporation with respect to the instant default
(including, but not limited to, the aggregate principal amount outstanding of
Debentures covered by Default Notices received by the Corporation) and the
Corporation shall furnish (either orally or in writing) as soon as practicable
such requested information to such requesting holder.
B. Definition of Default Amount. The "Default Amount" with respect to a
Debenture means an amount equal to the greater of:
(i) V x M
--------------------
C P
and (ii) V x 111%
where:
"V" means the principal amount aggregate outstanding of the Debentures
being paid plus all accrued and unpaid interest thereon and any Prepayment
Default Payments (if any) through the payment date;
"CP" means the Conversion Price in effect on the date on which the
Corporation receives the Default Notice; and
"M" means (i) with respect to all repayments other than repayments pursuant
to Article VII.A(vi) hereof, the highest Closing Bid Price of the Corporation's
Common Stock during the period beginning on the date on which the Corporation
receives the Default Notice and ending on the date immediately preceding the
date of payment of the Default Amount and (ii) with respect to repayments
pursuant to Article VII.A(vi) hereof, the greater of (a) the amount determined
pursuant to clause (i) of this definition or (b) the fair market value, as of
the date on which the Corporation receives the Default Notice, of the
consideration payable to the holder of a share of Common Stock pursuant to the
transaction which triggers the repayment obligation. For purposes of this
definition, "fair market value" shall be determined by the mutual agreement of
the Corporation and Holders of a majority-in-interest of the then outstanding
principal amount of the Debentures, or if such agreement cannot be reached
within five business days prior to the date of repayment, by an investment
banking firm selected by the Corporation and reasonably acceptable to Holders of
a majority-in-interest of the then outstanding principal amount of the
Debentures, with the costs of such appraisal to be borne by the Corporation.
C. Failure to Pay Default Amounts. If the Corporation fails to pay
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any Holder the Default Amount with respect to any Debenture within five business
days after its receipt of a notice requiring such repayment (a "Default
Notice"), then the holder of any Debenture delivering such Default Notice (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 on which the Corporation receives the Default
Notice until the date of payment of the Default Amount 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 III) 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 on which the Corporation
receives 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 repay all of the outstanding Debentures subject to Default Notices delivered
prior to the date upon which such repayment is to be effected, the Corporation
shall repay the outstanding Debentures from each holder pro rata, based on the
total amounts due the Debentures at the time of repayment included by such
holder in all Default Notices delivered prior to the date upon which such
repayment is to be effected relative to the total amounts due under the
Debentures at the time of repayment included in all of the Default Notices
delivered prior to the date upon which such repayment is to be effected.
ARTICLE VIII
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 First
Closing 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 of such change on or
before the effective date thereof.
B. Adjustment Due to Merger, Consolidation, Etc. If, at any time after the First
Closing 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),
<PAGE> 118
(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 Holders of the Debentures
shall thereafter have the right to receive upon conversion, in lieu of the
shares of Common Stock otherwise issuable, such shares of stock, securities
and/or other property as would have been 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 III.C) had such Corporate Change not taken
place, and in any such case, appropriate provisions (in form and substance
reasonably satisfactory to the Holders of a majority of the principal amount of
the Debentures then outstanding) shall be made with respect to the rights and
interests of the Holders of the Debentures to the end that the economic value of
the Debentures are in no way diminished by such Corporate Change and that the
provisions hereof (including, without limitation, in the case of any such
consolidation, merger or sale in which the successor entity or purchasing entity
is not the Corporation, an immediate adjustment of the Fixed Conversion Price so
that the Fixed Conversion Price immediately after the Corporate Change reflects
the same relative value as compared to the value of the surviving entity's
common stock that existed between the Fixed Conversion Price and the value of
the Corporation's Common Stock immediately prior to such Corporate Change and an
immediate revision to the Variable Conversion Price so that it is determined as
provided in Article II.H but based on the price of the common stock of the
surviving entity and the market in which such common stock is traded) shall
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 Corporate Change unless (i) each
holder of the Debentures has received written notice of such transaction at
least 75 days prior thereto, but in no event later than 20 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 by written instrument (in form and substance reasonably
satisfactory to the Holders of a majority of the principal amount of the
Debentures then outstanding) the obligations of the Debentures. 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.
C. Adjustment Due to Major Announcement. In the event the Corporation at any
time after the First Closing 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
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Corporation) publicly announces a tender offer, exchange offer or another
transaction to purchase 50% or more of the Corporation's Common Stock or
otherwise publicly announces an intention to replace a majority of the
Corporation's Board of Directors by waging a proxy battle or otherwise (the date
of the announcement referred to in clause (i) or (ii) of this Paragraph C is
hereinafter referred to as the "Announcement Date"), then the Conversion Price
shall, effective upon the Announcement Date and continuing through the tenth
trading day following the earlier of the consummation of the proposed
transaction or tender offer, exchange offer or another 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 II.E on the Conversion Date set forth in the Notice of Conversion for
the Optional Conversion. From and after the tenth trading day following the
Abandonment Date, the Conversion Price shall be determined as set forth in
Article II.E. "Abandonment Date" means with respect to any proposed transaction
or tender offer, exchange offer or another transaction for which a public
announcement as contemplated by this Paragraph C has been made, the date upon
which the Corporation (in the case of clause (i) above) or the person, group or
entity (in the case of clause (ii) above) publicly announces the termination or
abandonment of the proposed transaction or tender offer, exchange offer or
another transaction which caused this Paragraph C to become operative.
D. Adjustment Due to Distribution. If, at any time after the First Closing 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 Holders of the Debentures shall be entitled, upon any
conversion of the Debentures 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 III.C) 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.
E. Issuance of Other Securities With Variable Conversion Price. If, at any time
after the First Closing 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.
<PAGE> 120
F. Purchase Rights. If, at any time after the First Closing 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 Holders of the Debentures
will be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such Holder could have acquired if such
holder had held the number of shares of Common Stock acquirable upon complete
conversion of the Debentures (without giving effect to the limitations contained
in Article III.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.
<PAGE> 121
G. Notice of Adjustments. Upon the occurrence of each adjustment or readjustment
of the Conversion Price pursuant to this Article VIII, the Corporation, at its
expense, shall promptly compute such adjustment or readjustment and prepare and
furnish to each Holder of the Debentures 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 any Holder of the Debentures, furnish to such 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 any Debenture.
ARTICLE IX
MISCELLANEOUS
A. Failure or Indulgency Not Waiver. No failure or delay on the part of any
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 thereof or of any other
right, power or privilege.
B. Notices. Any notices required or permitted to be given under the terms of
this Debenture 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:
<PAGE> 122
If to the Corporation:
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, to the address set forth under such Holder's name on the
signature page to the Securities Purchase Agreement executed by such Holder.
Each party shall provide notice to the other parties of any change in address.
C. Amendment Provision. This Debenture and any provision hereof may only be
amended by an instrument in writing signed by the Corporation and all of the
Holders. The term "Debenture" and all references thereto, as used throughout
this instrument, shall mean this instrument as originally executed, or if later
amended or supplemented, then as so amended or supplemented.
D. Assignability; Allocation of Cap Amount and Reserved Amount. 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. The initial
Cap Amount and Reserved Amount shall be allocated pro rata among the Holders of
the Debentures based on the aggregate principal amount of Debentures issued to
each Holder. Each increase to the Cap Amount and the Reserved Amount shall be
allocated pro rata among the Holders of Debentures based on the outstanding
principal amount of Debentures held by each Holder at the time of the increase
in the Cap Amount or Reserved Amount. In the event a Holder shall sell or
otherwise transfer any of such Holder's Debentures, 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 outstanding 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; Jurisdiction. 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 Corporation
<PAGE> 123
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 Debenture and irrevocably agrees that all claims
in respect of such suit or proceeding may be determined in such courts. The
Corporation irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding. The Corporation further agrees that
service of process upon the Corporation mailed by first class mail shall be
deemed in every respect effective service of process upon the Corporation in any
such suit or proceeding. Nothing herein shall affect the right of any Holder to
serve process in any other manner permitted by law. The Corporation 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 any Debenture and (ii) (y) in the
case of loss, theft or destruction, of indemnity (without any bond or other
security) reasonably satisfactory to the Corporation, or (z) in the case of
mutilation, upon surrender and cancellation of any Debenture, the Corporation
shall execute and deliver a new Debenture of like tenor and date. However, the
Corporation shall not be obligated to reissue such lost or stolen Debenture if
the holder contemporaneously requests the Corporation to convert such Debenture.
I. Quarterly Statements of Available Shares. For each calendar quarter beginning
in the quarter in which the initial registration statement required to be filed
pursuant to Section 2(a) of the Registration Rights Agreement is declared
effective and thereafter so long as any Debentures are outstanding, the
Corporation shall deliver (or cause its transfer agent to deliver) to each
Holder a written report notifying the holders of any occurrence which prohibits
the Corporation from issuing Common Stock upon any such conversion. The report
shall also specify (i) the total outstanding principal amounts of Debentures as
of the end of such quarter, (ii) the total number of shares of Common Stock
issued upon all conversions of Debentures prior to the end of such quarter,
(iii) the total number of shares of Common Stock which are reserved for issuance
upon conversion of the Debentures as of the end of such quarter 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. The Corporation (or its transfer
agent) shall deliver the report for each quarter to each Holder prior to the
tenth day of the calendar month following the quarter to which such report
relates. In addition, the Corporation (or its transfer agent) shall provide,
within 15 days after delivery to the Corporation of a written request by any
holder, any of the information enumerated in clauses (i) - (iv) of this
<PAGE> 124
Paragraph I as of the date of such request. Simultaneously with delivering such
quarterly statements or responding to such written request, the Corporation
shall issue a press release with substantially the same information.
J. Payment of Cash; Defaults. Whenever the Corporation is required to make any
cash payment to a Holder under the Debentures (as a Conversion Default Payment,
upon prepayment, repayment or otherwise), such cash payment shall be made to the
Holder within five business days after delivery by such Holder of a notice
specifying that the 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 business day period, such 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 the 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 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)
<PAGE> 125
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 a
Holder of the Debentures, (i) the principal amount of the Debentures and the
interest thereon covered thereby (other than any portion of the Debentures, if
any, which cannot be converted because their conversion would exceed such
Holder's allocated portion of the Reserved Amount or Cap Amount) shall be deemed
converted into shares of Common Stock as of the Conversion Date and (ii) the
Holder's rights as a holder of such Debentures shall cease and terminate (but
only with respect to that portion of the Debentures covered by such Notice of
Conversion), 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 such Holder because of a failure by the Corporation to comply
with the terms of the Debentures. In situations where Article V.B is applicable,
the number of shares of Common Stock referred to in clauses (i) and (ii) of the
immediately preceding sentence shall be determined on the date on which such
shares of Common Stock are delivered to the Holder. Notwithstanding the
foregoing, if a Holder has not received certificates for all shares of Common
Stock prior to the tenth business day after the expiration of the Delivery
Period with respect to a conversion of Debentures for any reason, then (unless
the Holder otherwise elects to retain its status as a holder of Common Stock by
so notifying the Corporation within five business days after the expiration of
such 10 business day period) the portion of the principal amount and interest
thereon subject to such conversion shall be deemed outstanding under the
Debentures and the Corporation shall, as soon as practicable, return the
Debentures to the Holder. In all cases, the Holder shall retain all of its
rights and remedies (including, without limitation, (i) the right to receive
payments pursuant to Article V.C 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 V.A) for the Corporation's failure to convert the
Debentures.
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), and nothing herein shall limit a 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 holders of the
Debentures 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, that the holders of the Debentures 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]
<PAGE> 126
IN WITNESS WHEREOF, Borrower has caused this Debenture to be executed by
its duly authorized officer.
THE L.L. KNICKERBOCKER CO., INC.
By:____________________________________
Name:____________________________
Title:___________________________
<PAGE> 127
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 June __, 1998 (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).
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").
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:
<PAGE> 128
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> 129
EXHIBIT B
to
Securities
Purchase
Agreement
VOID AFTER 5:00 P.M. NEW YORK CITY
TIME ON JUNE 8, 2003
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 ______ Shares of
Common Stock, no par value per share
Date: June 8, 1998
THE L.L. KNICKERBOCKER CO., INC.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, [___________________], 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, [___________________ (______)] 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 $4.72.
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 June 8, 1998, 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.
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
<PAGE> 130
\
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:
(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 VII 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").
<PAGE> 131
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
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
<PAGE> 132
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
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(l)) 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
<PAGE> 133
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.
(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
<PAGE> 134
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 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.
<PAGE> 135
(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 First Closing Date (as defined in the
Securities Purchase Agreement, the "First Closing 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, Preferred Stock (as defined
in the Securities Purchase Agreement, the "Preferred Stock") or Warrants in
accordance with terms of the Securities Purchase Agreement; or (iv) upon
conversion of the Debentures, Preferred Stock or exercise of the Warrants.
(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
<PAGE> 136
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. Notwithstanding the foregoing, in the event of any
consolidation of the Company with, or merger of the Company into, any other
corporation or the sale or conveyance of all or substantially all of the assets
of the Company, at any time during the Exercise Period, the holder of the
Warrant shall, at its option, have the right to receive, in connection with such
transaction, cash consideration equal to the fair market value of this Warrant
as determined in accordance with customary valuation methodology used in the
investment banking industry.
(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
<PAGE> 137
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 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,
<PAGE> 138
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
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
<PAGE> 139
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 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
<PAGE> 140
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 June 8, 1998, 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 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 cancelled 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.
<PAGE> 141
(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, this Warrant shall not be exercisable by a
holder hereof to the extent (but only to the extent) that (a) the number of
shares of Common Stock beneficially owned by such holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned
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. To the extent the above limitation applies,
the determination of whether and to what extent this Warrant shall be
exercisable with respect to other securities owned by such holder shall be in
the sole discretion of the holder and submission of this Warrant for full or
partial exercise shall be deemed to be the holder's determination of whether and
the extent to which this Warrant is exercisable, in each case subject to such
aggregate percentage limitation. No prior inability to exercise Warrants
pursuant to this Section shall have any effect on the applicability of the
provisions of this Section with respect to any subsequent determination of
exercisability. 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. Except as provided in the immediately
succeeding sentence, 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
<PAGE> 142
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
If to the Holder:
with a copy to:
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.
<PAGE> 143
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
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]
<PAGE> 144
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> 145
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.
1. 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.
1. 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
<PAGE> 146
EXHIBIT C
to
Securities
Purchase
Agreement
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of June 8, 1998,
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 Investors").
WHEREAS:
A. In connection with the Securities Purchase Agreement of even date
herewith by and between the Company and the Initial Investors (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 Investors in two
tranches (a), in the first tranche, (i) convertible debentures ("Debentures") in
the aggregate principal amount of Seven Million Dollars ($7,000,000), which are
convertible into shares of the Company's common stock, no par value per share
(the "Common Stock"), which Debentures (to the extent not previously converted)
shall, upon the terms and conditions stated in the Securities Purchase
Agreement, prior to or simultaneously with the closing of the second tranche
described below, be exchanged for shares of the Company's preferred stock with a
stated value equal to the aggregate outstanding principal balance of the
Debentures with terms substantially similar to the Debentures and such
additional terms as are usual and customary for similar instruments, including,
without limitation, only those voting rights required by law (the "Preferred
<PAGE> 147
Stock"), and (ii) warrants (the "Warrants") to acquire an aggregate number of
shares of Common Stock computed by dividing the aggregate principal amount of
such Debentures by the Fixed Conversion Price (hereinafter defined) multiplied
by fifteen percent (15%) and (b), in the second tranche, (i) shares of Preferred
Stock with an aggregate stated value of Three Million Dollars ($3,000,000.00)
and (ii) Warrants to acquire an aggregate number of shares of Common Stock
computed by dividing the aggregate stated value of such Preferred Stock by the
Fixed Conversion Price (as defined in the Debentures) multiplied by fifteen
percent (15%). The shares of Common Stock issuable upon conversion of or
otherwise pursuant to the Debentures or the Preferred Stock (which defined term
shall be deemed to include both the Preferred Stock issued in exchange for the
Debentures and the Preferred Stock issued in the second tranche, as described
above) 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 Investors 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
Investors hereby agree as follows:
<PAGE> 148
1. DEFINITIONS.
a. As used in this Agreement, the following terms shall have the
following meanings:
(i) "Investors" means the Initial Investors 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, whether as
default payments or otherwise.
(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 First Closing Date (as defined in the Securities Purchase Agreement,
the "First Closing Date") 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 Investors (as determined pursuant to Section 11(j)
hereof)) covering the resale of at least 3,981,195 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
<PAGE> 149
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 Investors and their counsel prior to its filing or other submission.
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 Investors, 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 First Closing 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
<PAGE> 150
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 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 III 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
<PAGE> 151
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 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 Investors 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
<PAGE> 152
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 First Closing 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 Securities have been sold and (ii)
the date on which all of the Registrable Securities (in the reasonable opinion
of counsel to the Initial Investors) 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
<PAGE> 153
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 III.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 III.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 "Repurchase Notice"), to require the Company
to purchase for cash, at an amount per share equal to the Default Amount (as
defined in Article VII 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 giving effect to
any limitations on conversion or exercise contained in Article III 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
Repurchase Notice, then such Investor shall be entitled to the remedies provided
in Article VII.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
<PAGE> 154
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.
f. As promptly as practicable after becoming aware of such event, the
Company shall notify each Investor by telephone and facsimile 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
<PAGE> 155
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 Investors 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 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
<PAGE> 156
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, Inc.
("NASD") as such with respect to such Registrable Securities.
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,
<PAGE> 157
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:
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
<PAGE> 158
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.
Notwithstanding anything to the contrary, the Company shall cause the Transfer
Agent to deliver unlegended shares of Common Stock to a transferee of an
Investor in accordance with the terms of the Debentures in connection with any
sale of Registrable Securities with respect to which such Investor has entered
into a contract for sale prior to receipt of such notice and for which such
Investor has not yet settled.
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. Notwithstanding anything in this Section
4(e) to the contrary, this Section 4(e) is not intended to limit an Investor's
rights under Section 2(a) or 3(b) hereof.
<PAGE> 159
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.
<PAGE> 160
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 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
<PAGE> 161
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.
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 Investors 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.
<PAGE> 162
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 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)
<PAGE> 163
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. In addition, and
notwithstanding anything to the contrary contained in this Agreement, the
Securities Purchase Agreement, the Debentures or the Warrants, the Securities
(as defined in the Securities Purchase Agreement) may be pledged, and all rights
of the Investors under this Agreement or any other agreement or document related
to the transaction contemplated hereby may be assigned, without further consent
of the Company, to a bona fide pledgee in connection with an Investor's margin
or brokerage accounts.
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 written consent of the Company , the Initial
Investors (to the extent the Initial Investors still own 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. Shunts, CFO
<PAGE> 164
with a copy to:
William R. Black, Esq.
29 Summit crest
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).
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.
<PAGE> 165
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.
j. All consents, approvals and other determinations to be made by the
Investors or the Initial Investors 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 Investors, 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]
<PAGE> 166
IN WITNESS WHEREOF, the undersigned Initial Investors 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:________________________________
INITIAL INVESTOR:
MARSHALL CAPITAL MANAGEMENT, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
RESIDENCE: Delaware
ADDRESS: 11 Madison Avenue
New York, NY 10010
Telecopy: (212) 325-6519
Attn: Allan D. Weine
INITIAL INVESTOR:
CC INVESTMENTS, LDC
By: CSS Corporation Ltd.,
Corporate Secretary
By:_________________________________
Name:_______________________________
Title:______________________________
RESIDENCE: Cayman Islands
ADDRESS:
CC Investments, LDC
c/o Portfolio Manager
Castle Creek Partners, L.L.C.
333 West Wacker Drive, Suite 1410
Chicago, Illinois 60606
Phone: (312) 554-2770
Facsimile: (312) 435-2636
with copies of all notices to:
Peter H. Lieberman, Esq.
Altheimer & Gray
10 South Wacker Drive, Suite 4000
Chicago, Illinois 60606
Phone: (312) 715-4015
Facsimile: (312) 715-4150
<PAGE> 167
INITIAL INVESTOR:
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> 168
EXHIBIT 1
to
Registration
Rights
Agreement
[Date]
[Name and address
of transfer agent]
RE: THE L.L. KNICKERBOCKER CO., INC.
Ladies and Gentlemen:
We are counsel to THE L.L. KNICKERBOCKER CO., INC., a corporation organized
under the laws of the State of California (the "Company"), and we understand
that [Name of Investor] (the "Holder") has purchased from the Company (i)
convertible debentures due _________ (the "Debentures") and preferred stock due
____________ (the "Preferred Stock"), both of which are convertible into shares
(the "Conversion Shares") of the Company's common stock, no par value per share
(the "Common Stock"), and (ii) warrants (the "Warrants") to acquire shares of
Common Stock (the "Warrant Shares"). The Debentures, Preferred Stock and the
Warrants were issued by the Company pursuant to a Securities Purchase Agreement,
dated as of June 8, 1998, by and among the Company and the signatories thereto
(the "Agreement"). Pursuant to a Registration Rights Agreement, dated as of June
8, 1998, by and among the Company and the signatories thereto (the "Registration
Rights Agreement"), the Company agreed, among other things, to register the
Registrable Securities (as that term is defined in the Registration Rights
Agreement) under the Securities Act of 1933, as amended (the "Securities Act"),
upon the terms provided in the Registration Rights Agreement. In connection with
the Company's obligations under the Registration Rights Agreement, on _____ __,
1998, the Company filed a Registration Statement on Form S-3 (File No.
333-_____________) (the "Registration Statement") with the Securities and
Exchange Commission (the "SEC") relating to the Registrable Securities, which
names the Holder as a selling stockholder thereunder.
[Other customary introductory and scope of examination language to be
inserted]
Based on the foregoing, we are of the opinion that the Registrable
Securities have been registered under the Securities Act.
[Other customary language to be included.]
Very truly yours,
<PAGE> 169
WAIVER
This WAIVER (this "Waiver") dated as of September 4, 1998 by and among THE
L.L. KNICKERBOCKER CO., INC., a California corporation (the "Company"), and
Marshall Capital Management, Inc. ("MCM"), CC Investments LDC ("CCI") and
Capital Ventures International ("CVI", and together with MCM and CCI, the
"Initial Investors").
R E C I T A L S
A. The Company and the Initial Investors have entered into a Securities Purchase
Agreement dated as of June 8, 1998 (the "Securities Purchase Agreement")
pursuant to which the Company issued Convertible Term Debentures dated June 8,
1998 (the "Debentures") and warrants dated June 8, 1998 (the "Warrants") to each
of the Initial Investors. Contemporaneous with the execution and delivery of the
Securities Purchase Agreement, the Company and the Initial Investors entered
into a Registration Rights Agreement dated as of June 8, 1998 (the "Registration
Rights Agreement" and together with the Securities Purchase Agreement, the
Debentures and the Warrants, the "Transaction Documents"). Capitalized terms
used herein are defined as defined in the Registration Rights Agreement unless
otherwise defined herein.
B. The Company has requested that the Initial Investors waive certain of the
deadlines and extend the maturity dates set forth in the Transaction Documents.
The Initial Investors are, on the terms and conditions stated below, agreeable
to granting the request of the Company and the Initial Investors have agreed to
waive certain deadlines and extend the maturity dates in the Transaction
Documents as hereinafter set forth.
1. New Deadlines. The Company agrees to use its best efforts to achieve
each milestone set forth below (each of clauses (a) through (j) below being a
"Company Milestone") as soon as possible and in no event later than the date set
forth in such clause relating to such Company Milestone (each such date being a
"Deadline"):
(a) The Company shall file with the SEC an amendment to the Company's
Registration Statement on Form S-3 (the "First S-3") covering the resale of the
Registrable Securities issuable upon the conversion of, or otherwise pursuant
to, the Debentures and the exercise of, or otherwise pursuant to, the Warrants
and a response to the SEC's comments on such Registration Statement on or before
September 4, 1998;
(b) The Company and the Initial Investors shall agree upon the form of
the Certificate of Designation relating to the Preferred Stock on or before
September 18, 1998;
(c) The Registration Deadline for the First S-3 shall be on or before
October 2, 1998;
(d) The Company shall file its proxy statement (the "Proxy") relating
to the shareholders' meeting (the "Shareholders' Meeting") called for by the
Securities Purchase Agreement with the SEC on or before October 7, 1998;
(e) If the Proxy is not reviewed by the SEC, the Shareholders' Meeting
shall be held on or before November 13, 1998;
(f) If the Proxy is reviewed by the SEC, the Shareholders' Meeting
shall be held on or before December 18, 1998 (the date of the Shareholders'
Meeting, whether in accordance with clause (e) or (f) hereof, shall be referred
to as the "Shareholders' Meeting Date");
(g) The Exchange Closing (as defined in the Securities Purchase
Agreement) shall occur on or before the date five days after the Shareholders'
Meeting Date;
<PAGE> 170
(h) The Company shall file a second Registration Statement on Form S-3
(the "Second S-3") covering the resale of the Registrable Securities issuable
upon the conversion of shares of, or otherwise pursuant to, the Preferred Stock
which shall be issued at the Exchange Closing on or before the first business
day following the Exchange Closing;
(i) The Company shall cause the Second S-3 to become effective on or
before the twentieth day after the Second S-3 has been initially filed with the
SEC; and
(j) No later than December 28, 1998, the number of shares registered
under a Registration Statement filed pursuant to the Registration Rights
Agreement shall be in an amount equal to at least the sum of (a) 200% of the
Registrable Securities issued or issuable upon conversion of the Debentures or
the Preferred Stock computed at the Variable Conversion Price (as defined in the
Debentures or Preferred Stock) and (b) 100% of the Registrable Securities issued
or issuable upon exercise of (i) the Warrants and (ii) the Warrant dated August
19, 1998 issued by the Company to CVI (the "August Warrant") (without giving
effect to any limitations on conversion or exercise contained in such
Debentures, Preferred Stock, Warrants or the August Warrant).
2. Waiver, Amendment and Extension. Subject to Section 3 below, (a) the
Initial Investors agree to (i) waive their rights and remedies with respect to
the failure of the Company to meet the deadlines set forth in the Transaction
Documents relating to the Company Milestones, including, without limitation,
their rights to payments from the Company pursuant to Section 2(c) of the
Registration Rights Agreement and (ii) extend the maturity date of the
Debentures to December 28, 1998 and (b) the parties hereto hereby agree to amend
the terms of the Transaction Documents to conform to the terms hereof.
3. Effect of Deadline Non-Compliance and Compliance. In the event:
(a) the Company fails to (i) use its best efforts to meet each Company
Milestone by its related Deadline and any such failure continues uncured for
three days after the Company has been notified thereof in writing by any Initial
Investor or (ii) meet any Company Milestone by its related Deadline and any such
failure continues uncured for three days (either of the events referred to in
clause (i) or (ii) of this clause (a) being a "Deadline Default"); or
(b) any Event of Default (as defined in the Debentures) occurs, other
than one that is being waived pursuant to or is the subject of the extension
described in Section 2 hereof;
then, the waiver, amendment and extension granted in Section 2 hereof shall
immediately terminate and all the rights and remedies of the Initial Investors
shall be restored as if such waiver, amendment and extension had not been
granted and any Deadline Default shall be considered an Event of Default under
the Debentures. In the event no Deadline Default or the Event of Default occurs
on or before the date the last Company Milestone is met, then the waiver,
amendment and extension granted in Section 2 hereof shall thereafter remain in
full force and effect.
4. Governing Law; Miscellaneous.
(a) Governing Law; Jurisdiction. This Waiver 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.
(b) Counterparts. This Waiver 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 Waiver once executed by a party, may be
delivered to the other
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parties hereto by facsimile transmission of a copy of
this Waiver bearing the signature of the party so delivering this Waiver.
(c) Severability. If any provision of this Waiver shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Waiver or the
validity or enforceability of this Waiver in any other jurisdiction.
(d) Joint Participation in Drafting. Each party to this Waiver has
participated in the negotiation and drafting of this Waiver, 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 Waiver.
(e) Effect on Transaction Documents. Except as set forth above, the
Transaction Documents and all related documents shall remain in full force and
effect and are hereby ratified and confirmed.
IN WITNESS WHEREOF, the undersigned Initial Investors and the Company have
caused this Waiver to be duly executed as of the date first above written.
THE L.L. KNICKERBOCKER CO., INC. CC INVESTMENTS, LDC
By: Castle Creek Partners, L.L.C.,
its Investment Manager
By: /s/ ANTHONY P. SHUTTS By: /s/ JOHN ZIEGELMAN
---------------------------- -------------------------------
Name: ANTHONY P. SHUTTS Name: JOHN ZIEGELMAN
---------------------------- -------------------------------
Title: Chief Financial Officer Title: Managing Member
---------------------------- -------------------------------
MARSHALL CAPITAL MANAGEMENT, INC. CAPITAL VENTURES INTERNATIONAL
By: Heights Capital Management, Inc.,
its authorized agent
By: /s/ ALLAN WEINE By: /s/ MICHAEL SPOLAN
---------------------------- -------------------------------
Name: ALLAN WEINE Name: MICHAEL SPOLAN
---------------------------- -------------------------------
Title: President Title: General Counsel and Secretary
---------------------------- -------------------------------
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STOCKHOLDERS' AGREEMENT
-----------------------
This STOCKHOLDERS' AGREEMENT (this "AGREEMENT") dated as of September
18, 1998 by and among THE L.L. KNICKERBOCKER CO., INC., a California corporation
(the "CORPORATION"), and Marshall Capital Management, Inc. ("MCM"), CC
Investments LDC ("CCI") and Capital Ventures International ("CVI", and together
with MCM and CCI, the "HOLDERS").
R E C I T A L S
A. The Corporation and the Holders have entered into a Securities Purchase
Agreement dated as of June 8, 1998 (the "SECURITIES PURCHASE AGREEMENT")
pursuant to which the Corporation issued Convertible Term Debentures dated June
8, 1998 (the "DEBENTURES") and warrants dated June 8, 1998 (the "WARRANTS") to
each of the Holders. Contemporaneous with the execution and delivery of the
Securities Purchase Agreement, the Corporation and the Holders entered into a
Registration Rights Agreement dated as of June 8, 1998 (the "REGISTRATION RIGHTS
AGREEMENT"). The Securities Purchase Agreement, the Registration Rights
Agreement, the Debentures and the Warrants are collectively referred to herein
as the "TRANSACTION DOCUMENTS". Upon the terms and conditions stated in the
Securities Purchase Agreement, the Holders are exchanging the Debentures for
shares of the Corporation's Series A Convertible Preferred Stock (the "SERIES A
PREFERRED STOCK") at the Exchange Closing (as defined in the Securities Purchase
Agreement), the rights, preferences, privileges and restrictions of which are
set forth in the form of Certificate of Determination attached hereto as Exhibit
A (the "CERTIFICATE OF DETERMINATION"). The parties hereto entered into a Waiver
dated as of September 4, 1998 (the "WAIVER") that waived and amended certain
terms of the Transaction Documents upon the terms and conditions stated in the
Waiver, and all references to the Transaction Documents (individually and
collectively) shall mean and be the Transaction Documents as their respective
terms have been waived, extended and amended by the Waiver. Capitalized terms
used herein are defined as defined in the Certificate of Determination unless
otherwise defined herein.
B. The Corporation has requested that the Holders agree to set forth in this
Agreement, instead of the Certificate of Determination, certain terms intended
to relate to the Series A Preferred Stock and the shares of Common Stock of the
Corporation ("Common Stock") issuable upon the conversion of shares of the
Series A Preferred Stock. The Holders are, on the terms and conditions stated
below, agreeable to granting the request of the Corporation.
NOW, THEREFORE, the Corporation and the Holders hereby agree as follows:
1. Certificate of Determination. The Certificate of Determination
relating to the Series A Preferred Stock shall be in substantially the form
attached hereto as Exhibit A.
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<PAGE> 173
2. Supplement to Certificate of Determination. The terms of the
Certificate of Determination are, effective as of the date of the Exchange
Closing, hereby supplemented by this Agreement as follows:
(a) Buy-In Cure. Unless the Corporation has notified the
applicable Holder in writing prior to the delivery by such Holder of a Notice of
Conversion in the form attached hereto as Exhibit B (the "NOTICE OF CONVERSION")
that the Corporation is unable to honor conversions, if (i) there shall occur a
Legend Removal Failure (as defined in Section (b)(i) below) and (ii) thereafter,
such Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to make delivery in satisfaction of a sale by such Holder of the
unlegended shares of Common Stock (the "SOLD SHARES") which such Holder
anticipated receiving upon such conversion (a "BUY-IN"), the Corporation shall
pay such Holder (in addition to any other remedies available to the Holder) the
amount by which (x) such 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 such Holder from the sale of the Sold
Shares. For example, if a 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 the Holder $1,000. A Holder shall provide the Corporation written
notification and supporting documentation indicating any amounts payable to such
holder pursuant to this Paragraph (a). The Corporation shall make any payments
required pursuant to this Paragraph (a) in accordance with and subject to the
provisions of Article XIV.E of the Certificate of Determination.
(b) Redemption Events. Each of the following events shall be
deemed a Redemption Event after expiration of the applicable cure period and, in
any such event, each Holder shall be entitled to the rights and remedies
provided in the Certificate of Determination with respect to Redemption Events:
(i) the Corporation fails to remove any restrictive legend
on any certificate or any shares of Common Stock issued to the Holders of Series
A Preferred Stock upon conversion of the Series A Preferred Stock as and when
required by this Agreement, the Securities Purchase Agreement or the
Registration Rights Agreement (a "LEGEND REMOVAL FAILURE"), and any such failure
continues uncured for five business days after the Corporation has been notified
thereof in writing by the Holder; or
(ii) the Corporation otherwise shall breach any material
term hereunder (including, without limitation, Section 2(h) hereof) or under the
Certificate of Determination (including, without limitation, Article VI thereof)
or under the Securities Purchase Agreement (including, without limitation, the
representations and warranties in the Securities Purchase Agreement) or the
Registration Rights Agreement and such breach continues uncured for 10 business
days after the Corporation has been notified thereof in writing by the Holder.
(c) Pari Passu Securities Liquidation Preference. The Liquidation
Preference
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<PAGE> 174
with respect to any Pari Passu Securities shall be as set forth in the
Certificate of Determination filed with the Secretary of State of California in
respect thereof.
(d) Allocation of Reserved Amount. The initial Reserved Amount
shall be allocated pro rata among the holders of Series A Preferred Stock based
on the number of shares of Series A Preferred Stock issued to each holder. Each
increase to the Reserved Amount shall be allocated pro rata among the Holders of
Series A Preferred Stock based on the number of shares of Series A Preferred
Stock held by each Holder at the time of the increase in the Reserved Amount. In
the event a Holder shall sell or otherwise transfer any of such Holder's shares
of Series A Preferred Stock, each transferee shall be allocated a pro rata
portion of such transferor's Reserved Amount. Any portion of the Reserved Amount
which remains allocated to any person or entity which does not hold any Series A
Preferred Stock shall be allocated to the remaining Holders of shares of Series
A Preferred Stock, pro rata based on the number of shares of Series A Preferred
Stock then held by such Holders.
(e) Restrictions on Shares. The shares of Common Stock issuable
upon conversion of any shares of Series A Preferred Stock 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 of counsel in comparable transactions) to the
effect that such sale or transfer is exempt from the registration requirements
of the Securities Act and complies with applicable state securities laws, (iii)
they are sold under Rule 144 under the Securities Act or (iv) they are sold or
transferred to an affiliate of the Holder of such shares of Common Stock and
such sale or transfer is pursuant to an exemption from such registration or
pursuant to such registration. Except as otherwise provided in the Securities
Purchase Agreement, each certificate for shares of Common Stock issuable upon
conversion of any shares of Series A Preferred Stock 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 any shares of Series A Preferred Stock, the
Corporation shall remove the foregoing legend
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<PAGE> 175
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 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 and in compliance with applicable state securities laws
or (B) such holder provides the Corporation with reasonable assurances that such
security has been sold under Rule 144 or can be sold under Rule 144(k) or (ii) a
registration statement under the Securities Act covering the resale of such
securities is in effect. Nothing in this Agreement or the Certificate of
Determination 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.
(f) Status as Stockholder. Upon submission of a Notice of
Conversion by a Holder of Series A Preferred Stock, (i) the shares covered
thereby (other than the shares, if any, which cannot be issued because their
issuance would exceed such holder's allocated portion of the Reserved Amount)
shall be deemed converted into shares of Common Stock and (ii) the Holder's
rights as a holder of such converted shares of Series A Preferred Stock shall
cease and terminate (but only with respect to such shares covered by such Notice
of Conversion), 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 such Holder because of a failure by the Corporation to
comply with the terms of this Agreement or the Certificate of Determination. In
situations where Section 2(a) hereof is applicable, the number of shares of
Common Stock referred to in clauses (i) and (ii) of the immediately preceding
sentence shall be determined on the date on which such shares of Common Stock
are delivered to the Holder. Notwithstanding the foregoing, if a Holder has not
received certificates for all shares of Common Stock prior to the tenth business
day after the expiration of the Delivery Period with respect to a conversion of
Series A Preferred Stock for any reason, then (unless the Holder otherwise
elects to retain its status as a holder of Common Stock by so notifying the
Corporation within five business days after the expiration of such 10 business
day period) the holder shall regain the rights of a holder of Series A Preferred
Stock with respect to such unconverted shares of Series A Preferred Stock and
the Corporation shall, as soon as practicable, return such unconverted shares to
the Holder. In all cases, the Holder shall retain all of its rights and remedies
(including, without limitation, (i) the right to receive payments pursuant to
Article VII.C of the Certificate of Determination 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 VII.A of the Certificate of Determination)
for the Corporation's failure to convert Series A Preferred Stock.
(g) Remedies Cumulative. The remedies provided in this Agreement
and the Certificate of Determination shall be cumulative and in addition to all
other remedies available under this Agreement and the Certificate of
Determination, at law or in equity (including a decree of specific performance
and/or other injunctive relief), and nothing herein shall limit a holder's right
to pursue actual damages for any failure by the Corporation to comply with the
terms of this Agreement and the Certificate of Determination. The Corporation
acknowledges that a breach by it of its obligations hereunder and thereunder
will cause irreparable harm to the holders of Series A Preferred Stock and that
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<PAGE> 176
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, that the
holders of Series A Preferred Stock 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.
(h) Amend Articles. Prior to the Exchange Closing, the
Corporation shall amend its Articles to provide for a provision substantially in
the form of Exhibit C (the "AMENDMENT") relating to the Series A Preferred
Stock; provided that the shareholders of the Corporation approve the Amendment.
The Corporation shall recommend such Amendment at the Stockholders Meeting
referred to in Section 4(n) of the Securities Purchase Agreement.
3. Representations. The Corporation represents and warrants to each
Holder as follows:
(a) Authorization; Enforcement. (i) The Corporation has the
requisite corporate power and authority to enter into and perform its
obligations under this Agreement, subject to (x) the Corporation obtaining the
approval of the shareholders of the Corporation of the matters referred to in
Section 4(n) of the Securities Purchase Agreement, (y) the Corporation filing an
amendment to its Articles of Incorporation to authorize the Series A Preferred
Stock and (z) the Corporation issuing the Series A Preferred Stock to the
Holders, (ii) the execution, delivery and performance of this Agreement by the
Corporation and the consummation by it of the transactions contemplated hereby
have been duly authorized by the Corporation's Board of Directors and, subject
only to the approval of the Corporation's stockholders at the meeting of
stockholders referred to in Section 4(n) of the Securities Purchase Agreement,
no further consent or authorization of the Corporation, its Board of Directors
or its stockholders is required; and (iii) this Agreement constitutes valid and
binding obligations of the Corporation enforceable against the Corporation in
accordance with its terms.
(b) No Conflicts. The execution, delivery and performance of this
Agreement by the Corporation, and the consummation by the Corporation of the
transactions contemplated hereby will not (i) result in a violation of the
Articles or By-laws of the Corporation 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 Corporation 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 Corporation or any
of its subsidiaries or by which any property or asset of the Corporation 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 (as defined in the Securities Purchase
Agreement)), provided, however, that the authorization and issuance of the
Series A Preferred Stock and the exchange of the Debentures for the Series A
Preferred Stock shall require (i) the Corporation obtaining the approval of the
shareholders of the Corporation of the matters referred to in Section 4(n) of
the Securities Purchase Agreement, (ii) the Corporation filing an amendment to
its Articles of Incorporation to authorize the Preferred Stock (including the
Amendment) and (iii) the Corporation
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<PAGE> 177
issuing the Preferred Stock to the Holders in accordance with the terms of the
Securities Purchase Agreement.
4. 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 Corporation
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
Corporation irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding. The Corporation further agrees that
service of process upon the Corporation mailed by first class mail shall be
deemed in every respect effective service of process upon the Corporation in any
such suit or proceeding. Nothing herein shall affect the right of any Holder to
serve process in any other manner permitted by law. The Corporation 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 signature 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
agreements, documents and 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
Corporation nor any Holder make any representation, warranty, covenant or
undertaking with respect to such matters. 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 by the same
action that would be required to alter or change the rights, preferences or
privileges of the Series
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<PAGE> 178
A Preferred Stock 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 4(e) shall be binding upon each
Holder and the Corporation.
(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 (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 Corporation:
The L.L. Knickerbocker Co., Inc.
25800 Commercenter Drive
Lake Forest, CA 92630
Telecopy: (949) 595-7913
Attention: Anthony P. Shutts, CFO
with a copy to:
The L.L. Knickerbocker Co., Inc.
25800 Commercenter Drive
Lake Forest, CA 92630
Telecopy: (949) 595-7913
Attention: William R. Black, Esq.
If to a Holder, at such address as such Holder shall have provided in writing to
the Corporation or such other address as such Holder furnishes by notice given
in accordance with this Section 4(f).
(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 Corporation nor any Holder shall assign this
Agreement or any rights or obligations hereunder. The rights of the Holders
hereunder shall be automatically assignable by each Holder without any further
consent on the part of the Corporation to any transferee of all or any portion
of the Series A Preferred Stock. In addition, and notwithstanding anything to
the contrary contained in this Agreement, the Certificate of Determination or
the Transaction Documents, the Securities (as defined in the Securities Purchase
Agreement) may be pledged, and all rights of the Holders under this Agreement or
any other agreement or document related to the transaction contemplated hereby
may be assigned, without further consent of the Corporation, to a bona fide
pledgee in connection with an Holder's margin or brokerage accounts.
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<PAGE> 179
(h) Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and assigns, and
is not for the benefit of, nor may any provision hereof be enforced by, any
other person.
(i) 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.
(j) Joint Participation in Drafting. Each party to this Agreement
has participated in the negotiation and drafting of this Agreement and the
Certificate of Determination. 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.
(k) Effect on Transaction Documents and the Certificate of
Determination. All references to the Preferred Stock or the Series A Preferred
Stock in this Agreement, the Transaction Documents or the Certificate of
Determination, as the case may be, shall be deemed to mean and be a reference to
all of the rights, preferences, privileges and restrictions relating to the
Series A Preferred Stock or the shares of Common Stock issuable upon conversion
of or otherwise pursuant to the Series A Preferred Stock set forth in this
Agreement, the Certificate of Determination and the Amendment. The
representations and warranties of the Corporation set forth herein shall be
deemed to be given pursuant to Section 3 of the Securities Purchase Agreement.
The following conditions shall be deemed to be additional conditions to each
Holder's obligations under Section 7(b) of the Securities Purchase Agreement to
exchange the Debentures for the Series A Preferred Stock at the Exchange
Closing: (i) the performance of, satisfaction of and compliance with Section
2(h) by the Corporation, (ii) the Amendment shall have occurred and be in full
force and effect and (iii) one or more registration statements of the
Corporation under the Securities Act covering the Registrable Securities (as
defined in the Registration Rights Agreement) shall be effective and available
for use by the Holders as of the date of the Exchange Closing in accordance with
the Registration Rights Agreement. The Transaction Documents and all related
agreements, documents and instruments shall remain in full force and effect and
are hereby ratified and confirmed.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 180
IN WITNESS WHEREOF, the undersigned Holders and the Corporation have
caused this Agreement to be duly executed as of the date first above written.
THE L.L. KNICKERBOCKER CO., INC. CC INVESTMENTS, LDC
By: Castle Creek Partners, L.L.C.,
its Investment Manager
By: /S/ ANTHONY P. SHUTTS By: /S/ JOHN ZIEGELMAN
---------------------------- ----------------------------
Name: ANTHONY P. SHUTTS Name: JOHN ZIEGELMAN
---------------------------- ----------------------------
Title: Chief Financial Officer Title: Managing Member
---------------------------- ----------------------------
MARSHALL CAPITAL MANAGEMENT, INC. CAPITAL VENTURES INTERNATIONAL
By: Heights Capital Management, Inc.,
its authorized agent
By: /S/ ALLAN WEINE By: /S/ MICHAEL SPOLAN
---------------------------- ----------------------------
Name: ALLAN WEINE Name: MICHAEL SPOLAN
---------------------------- ----------------------------
Title: President Title: General Counsel and Secretary
---------------------------- ----------------------------
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<PAGE> 181
Exhibit A
---------
Certificate of Determination is attached as Annex II to the Proxy Statement
<PAGE> 182
Exhibit B
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series A Preferred Stock)
The undersigned hereby irrevocably elects to convert ____________ shares of
Series A Preferred Stock (the "CONVERSION"), represented by stock certificate
Nos(s). ___________ (the "PREFERRED STOCK CERTIFICATES"), into shares of common
stock ("COMMON STOCK") of THE L.L. KNICKERBOCKER CO., INC. (the "CORPORATION")
according to the conditions of the Certificate of Determination of Series A
Convertible Preferred Stock (the "CERTIFICATE OF DETERMINATION"), 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 each Preferred Stock Certificate is
attached hereto (or evidence of loss, theft or destruction thereof).
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").
The undersigned acknowledges that all offers and sales by the undersigned of the
securities issuable to the undersigned upon conversion of the Series A Preferred
Stock may only be made pursuant to registration of the Common Stock under the
Securities Act of 1933, as amended (the "ACT"), or pursuant to an exemption from
registration under the Act.
o 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:
--------------------------
Accrued Premium for all
Shares Subject to Conversion:
----------------
Applicable Conversion Price:
-----------------
Number of Shares of Common
Stock to be Issued:
--------------------------
Signature:
-----------------------------------
Name:
----------------------------------------
Address:
-------------------------------------
-------------------------------------
<PAGE> 183
Exhibit C
---------
Article VII
All capitalized terms used in this Article VII are defined as defined in the
Certificate of Determination of Series A Convertible Preferred Stock of the
corporation unless otherwise defined in this Article VII. Except in connection
with a Required Conversion at Maturity, in no event shall a Holder of shares of
Series A Preferred Stock 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 the Holder and its affiliates (exclusive of shares
issuable upon conversion of the unconverted portion of the shares of Series A
Preferred Stock or the unexercised or unconverted portion of any other
securities of the Corporation (including, without limitation, the warrants, as
amended by the Waiver, issued by the Corporation pursuant to the Securities
Purchase Agreement) 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 shares of Series A Preferred Stock
with respect to which the determination of this Article VII is being made, would
result in beneficial ownership by the holder and its affiliates of more than
4.99% of the outstanding shares of Common Stock. For purposes of this Article
VII, beneficial ownership shall be determined in accordance with Section 13(d)
of the Securities Exchange Act of 1934, as amended, and Regulations 13 D-G
thereunder, except as otherwise provided in clause (x) above. Except as provided
in the immediately succeeding sentence, the restriction contained in this
Article VII shall not be altered, amended, deleted or changed in any manner
whatsoever unless the holders of a majority of the outstanding shares of Common
Stock and the Holders of a majority of the outstanding shares of Series A
Preferred Stock shall approve such alteration, amendment, deletion or change. In
applying the foregoing, such limitation should be applied in conjunction with
the application of limitations on conversion or exercise analogous to the
foregoing limitation.
<PAGE> 184
ANNEX II
See attached copy of Certificate of Determination of
Series A Convertible Preferred Stock
<PAGE> 185
CERTIFICATE OF DETERMINATION
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
THE L.L. KNICKERBOCKER CO., INC.
LOUIS L. KNICKERBOCKER and WILLIAM R. BLACK certify that:
1. They are the Chairman of the Board and Secretary,
respectively, of THE L.L. KNICKERBOCKER CO., INC., a California corporation (the
"CORPORATION").
2. The authorized number of shares of Preferred Stock of the
Corporation is Ten Million (10,000,000) and the number of shares of Series A
Convertible Preferred Stock of the Corporation, none of which has been issued,
is Ten Thousand (10,000).
3. The Board of Directors of the Corporation (the "BOARD OF
DIRECTORS" or the "BOARD") duly adopted the following resolution:
WHEREAS, the Articles of Incorporation of the Corporation (the
"ARTICLES") authorize the Preferred Stock of the Corporation (the "PREFERRED
STOCK") to be issued in series and authorize the Board of Directors to determine
the rights, preferences, privileges and restrictions granted to or imposed upon
any wholly unissued series of Preferred Stock and to fix the number of shares
and designation of any such series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby
establish a series of Preferred Stock as follows:
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 10,000 shares of
Preferred Stock, is the Series A Convertible Preferred Stock (the "SERIES A
PREFERRED STOCK") and the face amount shall be One Thousand U.S. Dollars
($1,000.00) per share (the "FACE AMOUNT"). The Series A Preferred Stock is being
issued by the Corporation pursuant to that certain Securities Purchase
Agreement, dated as of June 8, 1998 by and among the Corporation and the other
signatories thereto, as amended
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by that certain Waiver dated as of September 4, 1998 by and among the
Corporation and the other signatories thereto (the "WAIVER") (as amended, the
"SECURITIES PURCHASE AGREEMENT"). Certain agreements related to the Series A
Preferred Stock and shares of Common Stock of the Corporation ("COMMON STOCK")
issuable upon the conversion of shares of Series A Preferred Stock are set forth
in that certain Stockholders' Agreement dated as of September 18, 1998 (the
"STOCKHOLDERS' AGREEMENT") by and among the Corporation and the other
signatories thereto.
II. NO DIVIDENDS
The Series A Preferred Stock will bear no dividends, and the holders of
the Series A Preferred Stock (each a "HOLDER") shall not be entitled to receive
dividends on the Series A Preferred Stock.
III. OPTIONAL REDEMPTION BY CORPORATION
A. LIMITED RIGHT TO REDEEM. Upon the occurrence of a Redemption Event
(as defined herein), the shares of Series A Preferred Stock shall be redeemed by
the Corporation in accordance with the provisions of Article VIII hereof. Except
as provided in Paragraph B of this Article III, the shares of Series A Preferred
Stock may not be redeemed at the option of the Corporation.
B. REDEMPTION AT CORPORATION'S OPTION.
(i) Within 5 calendar days prior to the beginning of any month during
which any shares of Series A Preferred Stock are outstanding, the Corporation
shall provide written notice to the Holders by facsimile and overnight courier
as to whether the Corporation will redeem any conversions of Series A Preferred
Stock in such calendar month (an "OPTIONAL REDEMPTION NOTICE"). In the event the
Corporation fails to provide an Optional Redemption Notice to the Holders within
such 5 day period, the Corporation shall not be permitted to so redeem any
conversions of Series A Preferred Stock during such calendar month. In the event
a timely Optional Redemption Notice is provided as aforesaid, upon Corporation's
receipt of a Notice of Conversion (as defined in Article IV.B below) effected at
a Conversion Price (as defined in Article IV.E below) determined by the Variable
Conversion Price (as defined in Article IV.J below) then in effect, so long as
(x) no Redemption Event (irrespective of the provision of notice, the passage of
time or otherwise) or any event which, with the passage of time, would become a
Redemption Event shall have occurred, (y) the Corporation is not in material
violation of any of its obligations under the Securities Purchase Agreement or
that certain Registration Rights Agreement, dated as of June 8, 1998, by and
among the Corporation and the initial investors named therein, as amended by the
Waiver (as amended, the "REGISTRATION RIGHTS AGREEMENT"), and (z) the
Registration Statement (as defined in the Registration Rights Agreement) is
effective and available for use, then the Corporation shall be obligated to
redeem ("REDEMPTION AT CORPORATION'S ELECTION") the entire number of shares, but
only the entire number of shares, of the Series A Preferred Stock which are the
subject of the Notice of Conversion for the Optional Redemption Amount (as
defined below).
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(ii) The "OPTIONAL REDEMPTION AMOUNT" with respect to any share of
Series A Preferred Stock means an amount, in cash, equal to the product of (x)
the Closing Bid Price (as defined in Article IV.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 IV.B
below) by (II) the Conversion Price in effect on the Conversion Date specified
in the Notice of Conversion. The Optional Redemption Amount shall be paid to the
Holder on or before the date (the "OPTIONAL REDEMPTION DATE") which is three (3)
business days after the date on which the Corporation has received a Notice of
Conversion; provided, however, that the Corporation shall not be obligated to
deliver any portion of the Optional Redemption Amount until either the
certificates representing the shares of Series A Preferred Stock being redeemed
are delivered to the office of the Corporation or the holder notifies the
Corporation that the certificates representing such shares of Series A Preferred
Stock have been lost, stolen or destroyed and delivers the documentation
required in accordance with Article XIV.C hereof.
(iii) If the Corporation fails to deliver the Optional Redemption
Amount to the Holder on or before the Optional Redemption Date (an "OPTIONAL
REDEMPTION DEFAULT"), the Corporation shall pay to Holder an amount equal to:
(.24) x (D/365) x (Optional Redemption Amount)
where:
"D" means the number of days from the Optional Redemption Date through
and including the date on which the Corporation delivers the Optional Redemption
Amount to the Holder.
The payments to which Holder shall be entitled pursuant to this
subparagraph (iii) are referred to herein as "REDEMPTION DEFAULT PAYMENTS."
Holder may elect to receive accrued Redemption Default Payments in cash or to
convert all or any portion of such accrued Redemption 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 Redemption Default through the
Conversion Date for such conversion. In the event Holder elects to receive any
Redemption Default Payments in cash, it shall so notify the Corporation in
writing. In the event Holder elects to convert all or any portion of the
Redemption Default Payments into Common Stock, Holder shall indicate on a Notice
of Conversion such portion of the Redemption Default Payments which Holder
elects to so convert and such conversion shall otherwise be effected in
accordance with the provisions of Article V.
(iv) In the event of an Optional Redemption Default, the Holder
shall have the right, at any time prior to the Corporation's delivery of the
Optional Redemption Amount to the Holder, to convert the Optional Redemption
Amount into Common Stock in accordance with the
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procedures set forth in Article V 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 Corporation'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 Redemption Default, the
Corporation shall forever forfeit its rights to effect a Redemption at
Corporation's Election pursuant to this Article III.B.
IV. CERTAIN DEFINITIONS
For purposes of this Certificate of Determination, 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 then outstanding shares of Series A Preferred Stock 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 holders of a majority of the then outstanding
shares of Series A Preferred Stock, with the costs of such appraisal to be borne
by the Corporation.
B. "CONVERSION AMOUNT" means the Face Amount of each share of Series A
Preferred Stock being converted plus any Premium (as defined below) thereon
through the Conversion Date and any Redemption Default Payments payable with
respect thereto, each as specified in the notice of conversion in the form (the
"NOTICE OF CONVERSION") set forth in the Stockholders' Agreement.
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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 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:
If the Conversion Date is: Then the Conversion Percentage is:
-------------------------- ----------------------------------
Prior to the 181st day 100%
following the Issue Date
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
E. "CONVERSION PRICE" means (i) with respect to any Conversion Date
occurring prior to the earliest of (a) the 181st day following the Issue Date,
(b) the first Announcement Date (as defined in Article XI .C hereof) after the
Issue Date, or (c) the delivery by the Corporation of the notice specified in
Section 4(j)(A) of the Securities Purchase Agreement (as defined herein) (such
earliest date referred to herein as the "FIRST VARIABLE CONVERSION DATE"), the
Fixed Conversion Price and (ii) with respect to any Conversion Date on or after
the First Variable Conversion Date, the lower of the Fixed Conversion Price and
the Variable Conversion Price, each in effect as of such date and subject to
adjustment as provided herein.
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F. "FIXED CONVERSION PRICE" means (i) $4.02, in the case of shares of
Series A Preferred Stock issued at the Exchange Closing (as defined in the
Securities Purchase Agreement ) or (ii) an amount computed by multiplying the
average of the Closing Bid Prices of the Common Stock on the five trading days
immediately preceding the Second Closing (as defined in the Securities Purchase
Agreement) by 115%, in the case of shares of Series A Preferred Stock issued at
the Second Closing, and shall be subject to adjustment, in either case, as
provided herein.
G. "ISSUE DATE" means (i) June 8, 1998, in the case of shares of Series
A Preferred Stock issued at the Exchange Closing or (ii) the date of the Second
Closing, in the case of shares of Series A Preferred Stock issued at the Second
Closing.
H. "N" means the number of days from, but excluding, the Issue Date.
I. "PREMIUM" means an amount equal to (.06) x (N/360) x (1,000).
J. "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 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.
V. CONVERSION
A. CONVERSION AT THE OPTION OF THE HOLDER. Subject to the limitations on
conversions contained in Article VII of the Articles, each Holder may, at any
time and from time to time, convert (an "OPTIONAL CONVERSION") each of its
shares of Series A Preferred Stock 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, a
Holder shall: (x) fax (or otherwise deliver) a copy of the fully completed and
executed Notice of Conversion to the Corporation for the Common Stock and (y)
surrender or cause to be surrendered the original certificates representing the
Series A Preferred Stock being converted (the "PREFERRED STOCK
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<PAGE> 191
CERTIFICATES"), 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 a Holder, the
Corporation shall immediately send, via facsimile, a confirmation to such 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 the Preferred Stock Certificates
are delivered to the Corporation as provided above, or the holder notifies the
Corporation that such certificates have been lost, stolen or destroyed and
delivers the documentation to the Corporation required by Article XIV.C hereof.
a. DELIVERY OF COMMON STOCK UPON CONVERSION. Upon the surrender of
Preferred Stock Certificates from a Holder accompanied by a Notice of
Conversion, the Corporation shall, no later than the later of (a) the second
business day following the Conversion Date and (b) the business day following
the date of such surrender (or, in the case of lost, stolen or destroyed
certificates, after provision of indemnity pursuant to Article XIV.C) (the
"DELIVERY PERIOD"), issue and deliver to the Holder or its nominee (x) that
number of shares of Common Stock issuable upon conversion of such shares of
Series A Preferred Stock being converted and (y) a certificate representing the
number of shares of Series A Preferred Stock 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 do not bear a legend and the holder thereof is not then
required to return such certificate for the placement of a legend thereon, the
Corporation shall cause its transfer agent to electronically transmit the Common
Stock issuable upon conversion to the holder by crediting the account of the
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 the holder physical certificates
representing the Common Stock issuable upon conversion. Further, a Holder may
instruct the Corporation to deliver to the holder physical certificates
representing the Common Stock issuable upon conversion in lieu of delivering
such shares by way of DTC Transfer.
b. 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 the Series A Preferred Stock.
c. NO FRACTIONAL SHARES. If any conversion of Series A Preferred
Stock 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 the Series A Preferred Stock shall be the next
higher whole number of shares.
d. 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 (a) above. If such
dispute involves the calculation of the Conversion
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Price, the Corporation shall submit the disputed calculations to an independent
outside accountant via facsimile within two business days of receipt of the
Notice of Conversion. The accountant, at the Corporation's sole expense, shall
audit the calculations and notify the Corporation and the holder of the results
no later than two 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 (a) above.
C. REQUIRED CONVERSION AT MATURITY. Provided all shares of Common Stock
issuable upon conversion of all outstanding shares of Series A Preferred Stock
are then (i) authorized and reserved for issuance, (ii) registered under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), for resale by the
holders of such shares of Series A Preferred Stock and, (iii) eligible to be
traded on either the New York Stock Exchange, the American Stock Exchange, the
Nasdaq National Market or the Nasdaq SmallCap Market, each share of Series A
Preferred Stock issued and outstanding on the date which is the three (3) year
anniversary of the Issue Date (the "MATURITY DATE") automatically shall be
converted into shares of Common Stock on such date in accordance with the
conversion formula set forth in Paragraph A of this Article V (the "REQUIRED
CONVERSION AT MATURITY"). If the Required Conversion at Maturity occurs, the
Corporation and the holders of Series A Preferred Stock shall follow the
applicable conversion procedures set forth in Paragraph B of this Article V with
respect to the shares of Series A Preferred Stock for which the Maturity Date
has occurred; provided, however, that the Holders of Series A Preferred Stock
are not required to deliver a Notice of Conversion to the Corporation or its
transfer agent. If the Required Conversion at Maturity does not occur, each
Holder of Series A Preferred Stock shall thereafter have the option, exercisable
in whole or in part at any time and from time to time by delivery of a
Redemption Notice (as defined in Article VIII.C.) to the Corporation, to require
the Corporation to purchase for cash, at an amount per share equal to the
Redemption Amount (as defined in Article VIII.B), the Holder's Series A
Preferred Stock for which the Maturity Date has occurred. If the Corporation
fails to redeem any of such shares within five (5) business days after the day
on which the Corporation receives such Redemption Notice , then such Holder
shall be entitled to the remedies provided in Article VIII.C with respect to the
shares of Series A Preferred Stock for which the Maturity Date has occurred.
VI. RESERVATION OF SHARES OF COMMON STOCK
A. RESERVED AMOUNT. Upon the initial issuance of the shares of Series A
Preferred Stock, the Corporation shall reserve for issuance upon conversion of
the Series A Preferred Stock that number of shares of the authorized but
unissued shares of Common Stock which is equal to Two Hundred Percent (200%) of
the number of shares of Common Stock which would be issuable if all outstanding
shares of Series A Preferred Stock are converted on the Issue Date based on the
Variable Conversion Price (without giving effect to any limitations on
conversion contained herein) 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 Series A Preferred Stock outstanding at the then current Conversion Price
thereof.
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B. INCREASES TO RESERVED AMOUNT. If the Reserved Amount for any three
consecutive trading days (the last of such three trading days being the
"AUTHORIZATION TRIGGER DATE") shall be less than 135% of the number of shares of
Common Stock issuable upon conversion of the then outstanding shares of Series A
Preferred Stock, the Corporation shall immediately notify the Holders of Series
A Preferred Stock 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 the
outstanding Series A Preferred Stock. In the event the Corporation fails to so
increase the Reserved Amount within, in the event shareholder approval is
required, ninety (90) days, or, in the event only approval of the Corporation's
Board of Directors is required, ten (10) days after an Authorization Trigger
Date, each holder of Series A Preferred Stock shall thereafter have the option,
exercisable in whole or in part at any time and from time to time by delivery of
a Redemption Notice (as defined in Article VIII.C) to the Corporation, to
require the Corporation to purchase for cash, at an amount per share equal to
the Redemption Amount (as defined in Article VIII.B), a portion of the holder's
Series A Preferred Stock such that, after giving effect to such purchase, the
holder's allocated portion of the Reserved Amount exceeds 135% of the total
number of shares of Common Stock issuable to such holder upon conversion of its
Series A Preferred Stock. If the Corporation fails to redeem any of such shares
within five (5) business days after its receipt of such Redemption Notice, then
such holder shall be entitled to the remedies provided in Article VIII.C.
Notwithstanding anything else contained herein, if the Corporation has a
sufficient number of authorized shares of Common Stock, the Corporation shall
immediately issue additional shares of Common Stock to any Holder who has
exceeded its allocated portion of the Reserved Amount upon conversions by such
Holder of its shares of Series A Preferred Stock.
C. ADJUSTMENT TO CONVERSION PRICE. If the Corporation is prohibited, at
any time, from issuing shares of Common Stock upon conversion of Series A
Preferred Stock to any Holder because the Corporation does not then have
available a sufficient number of authorized and reserved shares of Common Stock,
then the Fixed Conversion Price in respect of any shares of Series A Preferred
Stock held by any holder (including shares of Series A Preferred Stock submitted
to the Corporation for conversion, but for which shares of Common Stock have not
been issued to any such Holder) shall be adjusted as provided in Article VII.A.
VII. FAILURE TO SATISFY CONVERSIONS
A. CONVERSION DEFAULTS; ADJUSTMENTS TO CONVERSION PRICE. The following
shall constitute a "Conversion Default": (i) following the submission by a
Holder of shares of Series A Preferred Stock of a Notice of Conversion, the
Corporation fails for any reason (other than because of an event described in
clause (iii) below) to deliver, on or prior to the fourth business day following
the
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expiration of the Delivery Period for such conversion, such number of freely
tradeable shares of Common Stock to which such Holder is entitled upon such
conversion, (ii) the Corporation provides notice to any Holder of Series A
Preferred Stock 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 this Certificate of Determination (other than
because of an event described in clause (iii) below), or (iii) the Corporation
is prohibited, at any time, from issuing shares of Common Stock upon conversion
of Series A Preferred Stock to any Holder because the Corporation does not have
available a sufficient number of authorized shares of Common Stock. In the case
of a Conversion Default described in clause (i) or (iii) above, the Fixed
Conversion Price in respect of any shares of Series A Preferred Stock held by
such Holder (including shares of Series A Preferred Stock submitted to the
Corporation for conversion, but for which shares of Common Stock have not been
issued to such Holder) shall thereafter be the lesser of (x) the Fixed
Conversion Price on the date of the Conversion Default and (y) the lowest
Conversion Price in effect during the period beginning on, and including, such
date through and including (A) in the case of a Conversion Default referred to
in clause (i) above, the earlier of (1) the day such shares of Common Stock are
delivered to the Holder and (2) the day on which the Holder regains its rights
as a Holder of Series A Preferred Stock with respect to such unconverted shares
of Series A Preferred Stock pursuant to the provisions of Article XIV.F hereof,
and (B) in the case of a Conversion Default referred to in clause (iii) above,
the date on which the prohibition on issuances of Common Stock terminates. In
the case of a Conversion Default described in clause (ii) above, 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 (as hereinafter defined). Following any
adjustment to the Fixed Conversion Price pursuant to this Article VII.A, the
Fixed Conversion Price shall thereafter be subject to further adjustment for any
events described in Article XI. Upon the occurrence of each reset of the Fixed
Conversion Price pursuant to this Paragraph A, the Corporation, at its expense,
shall promptly compute the new Fixed Conversion Price and prepare and furnish to
each Holder of Series A Preferred Stock with respect to which the Conversion
Default occurred a certificate setting forth such new Fixed Conversion Price and
showing in detail each Conversion Price in effect during such reset period.
"DEFAULT CURE DATE" means (i) with respect to a Conversion Default
described in clause (i) of its definition, the date the Corporation effects the
conversion of the full number of shares of Series A Preferred Stock, and (ii)
with respect to a Conversion Default described in clause (ii) of its definition,
the date the Corporation issues freely tradeable shares of Common Stock in
satisfaction of all conversions of Series A Preferred Stock in accordance with
Article V.A, and (iii) with respect to either type of a Conversion Default, the
date on which the Corporation redeems shares of Series A Preferred Stock held by
such holder pursuant to paragraph C of this Article VII.
B. BUY-IN CURE. Unless the Corporation has notified the applicable
Holder in writing prior to the delivery by such Holder of a Notice of Conversion
that the Corporation is unable to honor conversions, if (i) the Corporation
fails for any reason to deliver during the Delivery Period shares
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of Common Stock to a Holder upon a conversion of shares of Series A Preferred
Stock and (ii) thereafter, such Holder purchases (in an open market transaction
or otherwise) shares of Common Stock to make delivery in satisfaction of a sale
by such Holder of the unlegended shares of Common Stock (the "SOLD SHARES")
which such Holder anticipated receiving upon such conversion (a "BUY-IN"), the
Corporation shall pay such Holder (in addition to any other remedies available
to the Holder) the amount by which (x) such 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 such Holder from the
sale of the Sold Shares. For example, if a 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 the Holder $1,000. A Holder shall provide the Corporation
written notification and supporting documentation indicating any amounts payable
to such holder pursuant to this Paragraph B. The Corporation shall make any
payments required pursuant to this Paragraph B in accordance with and subject to
the provisions of Article XIV.E.
C. REDEMPTION RIGHT. If the Corporation fails, and such failure
continues uncured for five (5) business days after the Corporation has been
notified thereof in writing by the Holder, for any reason (other than because
such issuance would exceed such Holder's allocated portion of the Reserved
Amount, for which failures the Holders shall have the remedies set forth in
Article VI) to issue shares of Common Stock within 10 business days after the
expiration of the Delivery Period with respect to any conversion of Series A
Preferred Stock, then the 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
Redemption Notice (as defined in Article VIII.C) to the Corporation, to have all
or any portion of such Holder's outstanding shares of Series A Preferred Stock
purchased by the Corporation for cash, at an amount per share equal to the
Redemption Amount (as defined in Article VIII.B). If the Corporation fails to
redeem any of such shares within five business days after its receipt of such
Redemption Notice, then such Holder shall be entitled to the remedies provided
in Article VIII.C.
VIII. REDEMPTION DUE TO CERTAIN EVENTS
A. REDEMPTION BY HOLDER. In the event (each of the events described in
clauses (i)-(iv) below after expiration of the applicable cure period (if any)
being a "REDEMPTION EVENT"):
(i) the Common Stock (including any of the shares of Common Stock
issuable upon conversion of the Series A Preferred Stock) 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, the Nasdaq
National Market or the Nasdaq SmallCap Market for an aggregate of ten (10)
trading days in any nine month period;
(ii) the Registration Statement required to be filed by the
Corporation pursuant to Section 2(a) of the Registration Rights Agreement in
accordance with Section 1(h) of the Waiver
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has not been declared effective by the date required by Section 1(i) of the
Waiver, or such Registration Statement, after being declared effective, cannot
be utilized by the holders of Series A Preferred Stock for the resale of all of
their Registrable Securities (as defined in the Registration Rights Agreement)
for an aggregate of more than 30 days;
(iii) the Corporation provides notice to any Holder of Series A
Preferred Stock, including by way of public announcement, at any time, of its
intention not to issue, or otherwise refuses to issue, shares of Common Stock to
any Holder of Series A Preferred Stock upon conversion in accordance with the
terms of this Certificate of Determination (other than due to the circumstances
contemplated by Article VI for which the holders shall have the remedies set
forth in such Article);
(iv) the Corporation shall:
(a) sell, convey or dispose of all or substantially all of
its assets (the presentation of any such transaction for stockholder approval
being conclusive evidence that such transaction involves the sale of all or
substantially all of the assets of the Corporation);
(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 and other than pursuant to a merger in which the Corporation is
the surviving or continuing entity and its capital stock is unchanged and the
Corporation has not sold or issued Common Stock (or securities convertible into
or exercisable for Common Stock) equal to 20% or more of the Common Stock or 20%
or more of the voting power outstanding before the issuance); 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);
then, upon the occurrence of any such Redemption Event, each holder of shares of
Series A Preferred Stock shall thereafter have the option, exercisable in whole
or in part at any time and from time to time by delivery of a Redemption Notice
(as defined in Paragraph C below) to the Corporation while such Redemption Event
continues, to require the Corporation to purchase for cash any or all of the
then outstanding shares of Series A Preferred Stock held by such holder for an
amount per share equal to the Redemption Amount (as defined in Paragraph B
below) in effect at the time of the redemption hereunder. For the avoidance of
doubt, the occurrence of any event described in clauses (iii) or (iv) above
shall immediately constitute a Redemption Event and there shall be no cure
period. Upon the Corporation's receipt of any Redemption Notice hereunder (other
than during the three trading day period following the Corporation's delivery of
a Redemption Announcement (as defined below) to all of the Holders in response
to the Corporation's initial receipt of a Redemption Notice from a ZHolder of
Series A Preferred Stock), the Corporation shall immediately (and in any event
within one business day following such receipt) deliver a written
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notice (a "REDEMPTION ANNOUNCEMENT") to all holders of Series A Preferred Stock
stating the date upon which the Corporation received such Redemption Notice and
the amount of Series A Preferred Stock covered thereby. The Corporation shall
not redeem any shares of Series A Preferred Stock during the three trading day
period following the delivery of a required Redemption Announcement hereunder.
At any time and from time to time during such three trading day period, each
holder of Series A Preferred Stock may request (either orally or in writing)
information from the Corporation with respect to the instant redemption
(including, but not limited to, the aggregate number of shares of Series A
Preferred Stock covered by Redemption Notices received by the Corporation) and
the Corporation shall furnish (either orally or in writing) as soon as
practicable such requested information to such requesting holder.
B. Definition of Redemption Amount. The "REDEMPTION AMOUNT" with respect
to a share of Series A Preferred Stock means an amount equal to the greater of:
(i) V
--- x M
C P
and (ii) V X 111%
where:
"V" means the Face Amount thereof plus the accrued Premium thereon and
any Redemption Default Payments (if any) through the date of payment of the
Redemption Amount;
"CP" means the Conversion Price in effect on the date on which the
Corporation receives the Redemption Notice; and
"M" means (i) with respect to all redemptions other than redemptions
pursuant to Article VIII.A(iv) hereof, the highest Closing Bid Price of the
Corporation's Common Stock during the period beginning on the date on which the
Corporation receives the Redemption Notice and ending on the date immediately
preceding the date of payment of the Redemption Amount and (ii) with respect to
redemptions pursuant to Article VIII.A(iv) hereof, the greater of (a) the amount
determined pursuant to clause (i) of this definition or (b) the fair market
value, as of the date on which the Corporation receives the Redemption Notice,
of the consideration payable to the holder of a share of Common Stock pursuant
to the transaction which triggers the redemption. For purposes of this
definition, "fair market value" shall be determined by the mutual agreement of
the Corporation and holders of a majority-in-interest of the shares of Series A
Preferred Stock then outstanding, or if such agreement cannot be reached within
five business days prior to the date of redemption, by an investment banking
firm selected by the Corporation and reasonably acceptable to holders of a
majority-in-interest of the then outstanding shares of Series A Preferred Stock,
with the costs of such appraisal to be borne by the Corporation.
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C. REDEMPTION DEFAULTS. If the Corporation fails to pay any Holder the
Redemption Amount with respect to any share of Series A Preferred Stock within
ten business days after its receipt of a notice requiring such redemption (a
"REDEMPTION NOTICE"), then the holder of Series A Preferred Stock delivering
such Redemption Notice (i) shall be entitled to interest on the Redemption
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 on which the
Corporation receives the Redemption Notice until the date of payment of the
Redemption Amount 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 V) all or any
portion of the Redemption Amount, plus interest as aforesaid, into shares of
Common Stock at the lowest Conversion Price in effect during the period
beginning on the date on which the Corporation receives the Redemption Notice
and ending on the Conversion Date with respect to the conversion of such
Redemption Amount. In the event the Corporation is not able to redeem all of the
shares of Series A Preferred Stock subject to Redemption Notices delivered prior
to the date upon which such redemption is to be effected, the Corporation shall
redeem shares of Series A Preferred Stock from each holder pro rata, based on
the total number of shares of Series A Preferred Stock outstanding at the time
of redemption included by such holder in all Redemption Notices delivered prior
to the date upon which such redemption is to be effected relative to the total
number of shares of Series A Preferred Stock outstanding at the time of
redemption included in all of the Redemption Notices delivered prior to the date
upon which such redemption is to be effected.
IX. RANK
All shares of the Series A Preferred Stock shall rank (i) prior to the
Corporation's Common Stock; and (ii) prior to any class or series of capital
stock of the Corporation hereafter created (unless, with the consent of the
holders of Series A Preferred Stock obtained in accordance with Article XIII
hereof, such class or series of capital stock specifically, by its terms, ranks
senior to or pari passu with the Series A Preferred Stock) (collectively with
the Common Stock, "JUNIOR SECURITIES"); (iii) pari passu with any class or
series of capital stock of the Corporation hereafter created (with the consent
of the holders of Series A Preferred Stock obtained in accordance with Article
XIII hereof) specifically ranking, by its terms, on parity with the Series A
Preferred Stock (the "PARI PASSU SECURITIES"); and (iv) junior to any class or
series of capital stock of the Corporation hereafter created (with the consent
of the holders of Series A Preferred Stock obtained in accordance with Article
XIII hereof) specifically ranking, by its terms, senior to the Series A
Preferred Stock (collectively, the "SENIOR SECURITIES"), in each case as to
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary.
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X. LIQUIDATION PREFERENCE
A. If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the U.S. Federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of 60 consecutive days and,
on account of any such event, the Corporation shall liquidate, dissolve or wind
up, or if the Corporation shall otherwise liquidate, dissolve or wind up,
including, but not limited to, the sale or transfer of all or substantially all
of the Corporation's assets in one transaction or in a series of related
transactions (a "LIQUIDATION EVENT"), no distribution shall be made to the
holders of any shares of capital stock of the Corporation (other than Senior
Securities) upon liquidation, dissolution or winding up unless prior thereto the
holders of shares of Series A Preferred Stock shall have received the
Liquidation Preference with respect to each share. If, upon the occurrence of a
Liquidation Event, the assets and funds available for distribution among the
holders of the Series A Preferred Stock and holders of Pari Passu Securities
shall be insufficient to permit the payment to such holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series A Preferred Stock and the Pari
Passu Securities shall be distributed ratably among such shares in proportion to
the ratio that the Liquidation Preference payable on each such share bears to
the aggregate Liquidation Preference payable on all such shares.
B. The purchase or redemption by the Corporation of stock of any class,
in any manner permitted by law, shall not, for the purposes hereof, be regarded
as a liquidation, dissolution or winding up of the Corporation. Neither the
consolidation or merger of the Corporation with or into any other entity nor the
sale or transfer by the Corporation of less than substantially all of its assets
shall, for the purposes hereof, be deemed to be a liquidation, dissolution or
winding up of the Corporation.
C. The "LIQUIDATION PREFERENCE" with respect to a share of Series A
Preferred Stock means an amount equal to the Face Amount thereof plus the
accrued Premium thereon through the date of final distribution.
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XI. 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 of such change on or
before the effective date thereof.
B. ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time 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 holders of Series A
Preferred Stock shall thereafter have the right to receive upon conversion, in
lieu of the shares of Common Stock otherwise issuable, such shares of stock,
securities and/or other property as would have been 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 VII of the Articles had such
Corporate Change not taken place, and in any such case, appropriate provisions
(in form and substance reasonably satisfactory to the holders of a majority of
the shares of the Series A Preferred Stock then outstanding) shall be made with
respect to the rights and interests of the holders of the Series A Preferred
Stock to the end that the economic value of the shares of Series A Preferred
Stock are in no way diminished by such Corporate Change and that the provisions
hereof (including, without limitation, in the case of any such consolidation,
merger or sale in which the successor entity or purchasing entity is not the
Corporation, an immediate adjustment of the Fixed Conversion Price so that the
Fixed Conversion Price immediately after the Corporate Change reflects the same
relative value as compared to the value of the surviving entity's common stock
that existed between the Fixed Conversion Price and the value of the
Corporation's Common Stock immediately prior to such Corporate Change and an
immediate revision to the Variable Conversion Price so that it is determined as
provided in Article IV.J but based on the price of the common stock of the
surviving entity and the market in which such common stock is traded) shall
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 Corporate Change unless (i) each
holder of Series A Preferred Stock has received written notice of such
transaction at least 75 days prior thereto, but in no event later than 20 days
prior to the record date for the determination of
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<PAGE> 201
shareholders entitled to vote with respect thereto, and (ii) the resulting
successor or acquiring entity (if not the Corporation) assumes by written
instrument (in form and substance reasonably satisfactory to the holders of a
majority of the Series A Preferred Shares then outstanding) the obligations of
this Certificate of Determination. 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 shares of
Series A Preferred Stock outstanding as of the date of such transaction, and
shall similarly apply to successive reclassifications, consolidations, mergers,
sales, transfers or share exchanges.
C. ADJUSTMENT DUE TO MAJOR ANNOUNCEMENT. In the event the Corporation at
any time 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 or otherwise publicly
announces an intention to replace a majority of the Corporation's Board of
Directors by waging a proxy battle or otherwise (the date of the announcement
referred to in clause (i) or (ii) of this Paragraph C is hereinafter referred to
as the "ANNOUNCEMENT DATE"), then the Conversion Price shall, effective upon the
Announcement Date and continuing through the tenth trading day following the
earlier of the consummation of the proposed transaction or tender offer,
exchange offer or another transaction or the Abandonment Date (as defined
below), be equal to the lower of (x) the Conversion Price which would have been
applicable for Optional Conversion occurring on the Announcement Date and (y)
the Conversion Price determined in accordance with Article IV.E on the
Conversion Date set forth in the Notice of Conversion for the Optional
Conversion. From and after the tenth trading day following the Abandonment Date,
the Conversion Price shall be determined as set forth in Article IV.E.
"ABANDONMENT DATE" means with respect to any proposed transaction or tender
offer, exchange offer or another transaction for which a public announcement as
contemplated by this Paragraph C has been made, the date upon which the
Corporation (in the case of clause (i) above) or the person, group or entity (in
the case of clause (ii) above) publicly announces the termination or abandonment
of the proposed transaction or tender offer, exchange offer or another
transaction which caused this Paragraph C to become operative.
D. ADJUSTMENT DUE TO DISTRIBUTION. If, at any time 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 holders of Series A Preferred Stock shall be entitled,
upon any conversion of shares of Series A Preferred Stock 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 VII
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of the Articles 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.
E. ISSUANCE OF OTHER SECURITIES WITH VARIABLE CONVERSION PRICE. If, at
any time 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 shares of Series A Preferred
Stock 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 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 Holders of Series A
Preferred Stock will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock acquirable
upon complete conversion of the Series A Preferred Stock (without giving effect
to the limitations contained in Article VII of the Articles) 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 XI, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to each Holder of Series A Preferred Stock
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 any Holder of Series
A Preferred Stock, furnish to such 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 a
share of Series A Preferred Stock.
XII. VOTING RIGHTS
The holders of the Series A Preferred Stock have no voting power
whatsoever, except as otherwise provided by the California Corporations Code
(the "BUSINESS CORPORATION LAW"), in this Article XII and in Article XIII below.
Notwithstanding the above, the Corporation shall provide each holder of
Series A Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and
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other information sent to shareholders). If the Corporation takes a record of
its shareholders for the purpose of determining shareholders entitled to (a)
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or (b) to vote in connection with any proposed sale,
lease or conveyance of all or substantially all of the assets of the
Corporation, or any proposed merger, consolidation, liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least 20 days prior to the record date specified therein (or 75 days
prior to the consummation of the transaction or event, whichever is earlier, but
in no event earlier than public announcement of such proposed transaction), of
the date on which any such record is to be taken for the purpose of such vote,
dividend, distribution, right or other event, and a brief statement regarding
the amount and character of such vote, dividend, distribution, right or other
event to the extent known at such time.
To the extent that under the Business Corporation Law the vote of the
holders of the Series A Preferred Stock, voting separately as a class or series,
as applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the then
outstanding shares of the Series A Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of the holders of at
least a majority of the then outstanding shares of Series A Preferred Stock
(except as otherwise may be required under the Business Corporation Law) shall
constitute the approval of such action by the class. To the extent that under
the Business Corporation Law holders of the Series A Preferred Stock are
entitled to vote on a matter with holders of Common Stock, voting together as
one class, each share of Series A Preferred Stock shall be entitled to a number
of votes equal to the number of shares of Common Stock into which it is then
convertible (subject to the limitations contained in Article VII of the
Articles) using the record date for the taking of such vote of shareholders as
the date as of which the Conversion Price is calculated.
XIII. PROTECTION PROVISIONS
So long as any shares of Series A Preferred Stock are outstanding, the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Law) of the Holders of a
majority of the then outstanding shares of Series A Preferred Stock:
1. alter or change the rights, preferences or privileges of the
Series A Preferred Stock;
2. alter or change the rights, preferences or privileges of any
capital stock of the Corporation so as to affect adversely the Series A
Preferred Stock;
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3. create any new class or series of capital stock having a
preference over the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article IX hereof, "SENIOR SECURITIES");
4. create any new class or series of capital stock ranking pari
passu with the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article IX hereof, "PARI PASSU SECURITIES");
5. increase the authorized number of shares of Series A Preferred
Stock;
6. issue any shares of Senior Securities or Pari Passu Securities;
7. issue any shares of Series A Preferred Stock other than pursuant
to the Securities Purchase Agreement; or
8. redeem, or declare or pay any cash dividend or distribution on,
any Junior Securities.
In the event that Holders of a majority of the then outstanding shares
of Series A Preferred Stock agree to allow the Corporation to alter or change
the rights, preferences or privileges of the shares of Series A Preferred Stock,
pursuant to the terms hereof, then the Corporation will deliver notice of such
approved change to the holders of the Series A Preferred Stock that did not
agree to such alteration or change (the "DISSENTING HOLDERS") and the Dissenting
Holders shall have the right for a period of thirty (30) days following such
delivery to convert their Preferred Shares pursuant to the terms hereof as they
existed prior to such alteration or change, or to continue to hold such
Preferred Shares. Notwithstanding the foregoing, no change pursuant to this
Article XIII shall be effective to the extent that, by its terms, it applies to
less than all of the Holders of shares of Series A Preferred Stock then
outstanding. Notwithstanding the foregoing or any other provisions herein to the
contrary, any Holder may sell or otherwise transfer the shares of Series A
Preferred Stock of such Holder to the Corporation or any other third party on
terms negotiated between such Holder and the Corporation or such third party, so
long as such transfer shall have been made in accordance with the applicable
requirements of the Securities Purchase Agreement and the Business Corporation
Law.
XIV. MISCELLANEOUS
A. FAILURE OR INDULGENCY NOT WAIVER. No failure or delay on the part of
any 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 thereof or of
any other right, power or privilege.
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B. CANCELLATION OF SERIES A PREFERRED STOCK. If any shares of Series A
Preferred Stock are converted pursuant to Article V, the shares so converted
shall be canceled, shall return to the status of authorized, but unissued
preferred stock of no designated series, and shall not be issuable by the
Corporation as Series A Preferred Stock.
C. LOST OR STOLEN CERTIFICATES. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity (without any bond or other security) reasonably satisfactory to the
Corporation, or (z) in the case of mutilation, upon surrender and cancellation
of the Preferred Stock Certificate(s), the Corporation shall execute and deliver
new Preferred Stock Certificate(s) of like tenor and date. However, the
Corporation shall not be obligated to reissue such lost or stolen Preferred
Stock Certificate(s) if the holder contemporaneously requests the Corporation to
convert such Series A Preferred Stock.
D. QUARTERLY STATEMENTS OF AVAILABLE SHARES. For each calendar quarter
beginning in the quarter in which the registration statement required to be
filed pursuant to Section 2(a) of the Registration Rights Agreement in
accordance with Section 1(h) of the Waiver is declared effective and thereafter
so long as any shares of Series A Preferred Stock are outstanding, the
Corporation shall deliver (or cause its transfer agent to deliver) to each
Holder a written report notifying the Holders of any occurrence which prohibits
the Corporation from issuing Common Stock upon any such conversion. The report
shall also specify (i) the total number of shares of Series A Preferred Stock
outstanding as of the end of such quarter, (ii) the total number of shares of
Common Stock issued upon all conversions of Series A Preferred Stock prior to
the end of such quarter, (iii) the total number of shares of Common Stock which
are reserved for issuance upon conversion of the Series A Preferred Stock as of
the end of such quarter and (iv) the total number of shares of Common Stock
which may thereafter be issued by the Corporation upon conversion of the Series
A Preferred Stock before the Corporation would exceed the Reserved Amount. The
Corporation (or its transfer agent) shall deliver the report for each quarter to
each Holder prior to the tenth day of the calendar month following the quarter
to which such report relates. In addition, the Corporation (or its transfer
agent) shall provide, within 15 days after delivery to the Corporation of a
written request by any holder, any of the information enumerated in clauses (i)
- - (iv) of this Paragraph D as of the date of such request. Simultaneously with
delivering such quarterly statements or responding to such written request, the
Corporation shall issue a press release with substantially the same information.
E. PAYMENT OF CASH; DEFAULTS. Whenever the Corporation is required to
make any cash payment to a Holder under this Certificate of Determination (upon
redemption or otherwise), such cash payment shall be made to the Holder within
five business days after delivery by such Holder of a notice specifying that the
Holder elects to receive such payment in cash and the method (e.g., by check,
wire transfer) in which such payment should be made. All payments hereunder
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 for the Holder as appears on the record books of the
Corporation (or at such other address as such Holder shall hereafter give to
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the Corporation by written notice). If such payment is not delivered within such
five business day period, such 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 the Holder.
F. STATUS AS STOCKHOLDER. Upon submission of a Notice of Conversion by a
Holder of Series A Preferred Stock, (i) the shares covered thereby (other than
the shares, if any, which cannot be issued because their issuance would exceed
such holder's allocated portion of the Reserved Amount) shall be deemed
converted into shares of Common Stock and (ii) the Holder's rights as a holder
of such converted shares of Series A Preferred Stock shall cease and terminate
(but only with respect to such shares covered by such Notice of Conversion),
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 such Holder because of a failure by the Corporation to comply with the terms
of this Certificate of Determination. In situations where Article VII.B is
applicable, the number of shares of Common Stock referred to in clauses (i) and
(ii) of the immediately preceding sentence shall be determined on the date on
which such shares of Common Stock are delivered to the Holder. Notwithstanding
the foregoing, if a Holder has not received certificates for all shares of
Common Stock prior to the tenth business day after the expiration of the
Delivery Period with respect to a conversion of Series A Preferred Stock for any
reason, then (unless the Holder otherwise elects to retain its status as a
holder of Common Stock by so notifying the Corporation within five business days
after the expiration of such 10 business day period) the holder shall regain the
rights of a holder of Series A Preferred Stock with respect to such unconverted
shares of Series A Preferred Stock and the Corporation shall, as soon as
practicable, return such unconverted shares to the Holder. In all cases, the
Holder shall retain all of its rights and remedies (including, without
limitation, (i) the right to receive payments pursuant to Article VII.C 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 VII.A) for the
Corporation's failure to convert Series A Preferred Stock.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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Each of the undersigned declares under penalty of perjury under the
laws of the State of California that the matters set forth in this Certificate
are true and correct of his own knowledge.
Dated: __________ __, 1998
-------------------------------------
Louis L. Knickerbocker,
Chairman of the Board
-------------------------------------
William R. Black, Secretary
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THE L.L. KNICKERBOCKER CO., INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD, TUESDAY, DECEMBER 8, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of THE L.L. KNICKERBOCKER CO., INC., a
California corporation, hereby acknowledges receipt of the Notice of Special
Meeting of Shareholders and Proxy Statement, each dated November 18, 1998, and
hereby appoints Louis L. Knickerbocker, William R. Black and Anthony P. Shutts,
and each of them, proxies and attorneys-in-fact, with full power to each of
substitution, on behalf and in the name of the undersigned, to represent the
undersigned at the Special Meeting of Shareholders of THE L.L. KNICKERBOCKER
CO., INC. (the "Company") to be held on Tuesday, December 8, 1998 at 10:00 a.m.
local time, at the Company's principal executive offices at 25800 Commercentre
Drive, Lake Forest, California 92630 and at any adjournment or adjournments
thereof, and to vote all shares of Common Stock which the undersigned would be
entitled to vote if then and there personally present, on the matters set forth
below:
1. Proposal to approve a proposed amendment to the Company's articles of
incorporation to authorize the issuance of 10,000,000 shares of preferred
stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Proposal to approve the transactions contemplated by that certain Securities
Purchase Agreement dated as of June 8, 1998 among the Company and certain
investors named therein, including the issuance by the Company of convertible
term debentures in the original principal amount of $7,000,000 (the
"Debentures"), stock purchase warrants (the "Warrants") to purchase shares of
common stock ("Common Stock") of the Company, shares of Series A Convertible
Preferred Stock (the "Series A Stock") of the Company, and shares of Common
Stock of the Company upon the conversion of the Debentures and shares of
Series A Stock and the exercise of the Warrants.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
and, in their discretion, upon such other matter or matters which may properly
come before the meeting or any adjournment or adjournments thereof.
[continued, and to be signed and dated, on the other side]
<PAGE> 209
[continued from other side]
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE PROPOSALS LISTED AND AS SAID PROXIES DEEM
ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING,
INCLUDING, AMONG OTHER THINGS, CONSIDERATION OF ANY MOTION MADE FOR ADJOURNMENT
OF THE MEETING (INCLUDING, WITHOUT LIMITATION, FOR PURPOSES OF SOLICITING
ADDITIONAL VOTES TO APPROVE AND ADOPT THE PROPOSALS).
(This Proxy should be marked, dated and signed
by the shareholder(s) exactly as his or her name
appears hereon, and returned promptly in the
enclosed envelope. Persons signing in a
fiduciary capacity should so indicate. If shares
are held by joint tenants or as community
property, both should sign.)
I plan to attend the meeting ___________________
I do not plan to attend the meeting_____________
Change of Address/comments on reverse side
Dated: _______________________________, 1998
________________________________________________
Signature
________________________________________________
Signature
