As filed with the Securities and Exchange Commission on May 14, 1999
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Under Section 12(b) or (g)
of the Securities Exchange Act of 1934
AMERICAN INTERACTIVE MEDIA, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 88-0233444
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
611 BROADWAY, SUITE 308
NEW YORK, NEW YORK 10012
(Address of Principal Executive Office) (Zip Code)
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Registrant's telephone number, including area code: (212) 539-0700
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SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT: None
SECURITIES TO BE REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, $0.001 Par Value
(Title of Class)
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FORWARD-LOOKING STATEMENTS -- CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
This Registration Statement on Form 10 contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Words such as "expects,"
"anticipates," "forecasts," "intends," "plans," "believes," "projects," and
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements include, but are not
limited to, statements regarding expected product development, expected business
growth, industry growth, developing market opportunities, ability to generate
revenues and year 2000 readiness under "Item 1--Business," "Item 2--Financial
Information--Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Registration Statement. These
statements are not guarantees of future performance and involve risks and
uncertainties and are based on a number of assumptions that could ultimately
prove to be wrong. Actual results and outcomes may vary materially from what is
expressed or forecast in such statements. Among the factors that could cause
actual results to differ materially are: general economic and business
conditions; the Company's limited cash flow and the availability and terms of
needed working capital; uncertain acceptance of the Company's products; rapid
technological change and evolving industry standards; the Company's dependence
on the Internet, cable and direct satellite industries; competition; the
Company's ability to manage potential growth, if any; risk of system failures
and other risks detailed in this Registration Statement. The Company undertakes
no obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
ITEM 1. BUSINESS
GENERAL OVERVIEW
American Interactive Media, Inc. ("AIME"), is a media company which creates
entertainment programming designed to be distributed through the Internet and
cable and satellite television. AIME, through a predecessor, was incorporated in
Nevada and began operations in 1986 in an unrelated business. AIME was inactive
from 1992 until March 15, 1995, when AIME acquired American Direct Media Inc.,
("ADM") a direct marketing company. In 1995, following the acquisition of ADM,
AIME determined that it would focus exclusively on developing hardware and
software that would allow consumers to access the Internet over their television
sets. On September 26, 1997, AIME acquired WebFeat, Inc. ("WebFeat"), a company
involved in the development of entertainment program networks ("Program
Networks" or "Networks") for the Internet which could be repackaged for
transmission over other broadband networks, primarily digital cable and direct
broadcast satellite ("DBS"). On January 29, 1998, AIME reincorporated in
Delaware through a merger of AIME with and into a wholly-owned subsidiary formed
for that sole purpose. In 1999, AIME redirected its focus exclusively towards
the development of entertainment Program Networks.
Since 1995, we have focused exclusively on Internet-related products and
services. Until recently, a primary focus of ours had been our webPASSPORT
System, a unique customizable service designed for both personal computer ("PC")
and Internet-to-television viewing. The webPASSPORT System utilized a television
set-top box capable of adding Internet access to a standard television, and a
proprietary World Wide Web ("Web") browser designed to permit users to navigate
vast sources of information available on the System's "channels," or categories
of websites grouped together for ease of reference. In connection with our
decision to focus exclusively on the development of our Program Networks, on
March 3, 1999, we executed a Letter of Intent with PowerChannel, Inc. for the
sale of the webPASSPORT System and related equipment in conjunction with the
grant of a non-exclusive, worldwide license to operate and use the webPASSPORT
System.
Our current focus is on developing entertainment Program Networks for
Internet and cable and satellite television distribution. Each Network is
comprised of a group of programs with a common theme, such as, comedy, crime and
law enforcement, and romance, and is targeted at a niche audience. Initially,
these entertainment Networks are formatted for the Web, the graphical,
multimedia-rich portion of the Internet,
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utilizing streaming video and audio technology, a graphical environment and
interactive features. The Networks are designed to be distributed over
additional platforms, primarily digital cable and direct satellite, but
distribution over analog cable and satellite, radio, and over-the-air television
broadcast is planned as well. On the Web, our Networks combine the video
entertainment qualities of television with the interactivity and community
building properties of the Internet.
ComedyNet, our first digital Program Network launched on the Internet, is
webcast (broadcast over the Web) at www.comedynet.com. ComedyNet, which combines
live and on-demand streaming video and audio, chat rooms, message boards and
other interactive features, brings daily, original and cutting-edge comedy
programming to the Internet. Within its first nine months of webcasting,
ComedyNet has already received a number of awards and industry distinctions.
In addition to ComedyNet, we have entered into a joint venture with New
Tech Entertainment, LLC ("New Tech"), an Internet and television production
company, to develop entertainment-based Program Networks including CrimeBeat,
which will be launched on the Web in June 1999, and Pop City and Romance Land,
which we plan to launch on the Web. We have also entered into a joint venture
with Bid.Com International, Inc. ("Bid.Com") in December 1998 to develop auction
opportunities on the Web and other broadband platforms using video and video
streaming.
The Program Networks we are developing are currently in the early stages of
commercial rollout. Through offering high quality Program Networks, we seek to
accomplish two things: (1) maximize brand awareness for subsequent distribution
across multiple digital platforms, and (2) generate subscription and
non-subscription based revenues from distribution fees, advertising, monthly
access fees, content tier access for premium services, merchandising, show
sponsorships, network carriage fees and pay-per-view. There can be no assurance
that we will be successful in developing successful Networks or that our
Networks will attract a sufficient audience in order to generate profits. See
"Risk Factors--The Development of a Market For Our Programming Is Uncertain" and
"--Acceptance of Our Programming Is Uncertain".
STRATEGY
Our business strategy is to develop and launch a diverse portfolio of
branded Program Networks on the Internet, leverage Web syndication to attract
viewership and gain additional distribution, and repackage the Networks for
distribution across additional broadband media. Since our programming is
designed for multi-platform distribution, the Program Networks can be migrated
to other media, such as digital cable and direct satellite platforms, to broaden
their audience, seize cross-promotional opportunities, and fully exploit
merchandising and related revenue streams. Key elements of our strategy include:
Program Network Development; Brand Building
As a programming and marketing company, our goal is to develop, manage
and/or own a broad and diverse group of multi-platform Program Networks. We seek
to develop and introduce, through the Internet, Program Networks with high
entertainment appeal and which combine creative content with interactive
features. Our strategy is to incubate these programs on the Internet by building
recognized brands and, as opportunities develop, migrate them to additional
broadband platforms including direct satellite and digital cable.
The Networks we are developing and launching are targeted at niche, clearly
defined audiences, which we believe are attractive to advertisers. The initial
audiences being targeted include the comedy audience (ComedyNet), men ages 18-34
(CrimeBeat) and women ages 18-54 (Romance Land). We believe that brand-name
recognition of our Program Networks will be critical to attracting and retaining
viewers, advertisers and commerce partners.
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Web Syndication
We are intent on gaining maximum distribution of our Program Networks on
the Web before migrating them to other media platforms. Maintaining a presence
on Portals, or Web access points, and other high-traffic websites known as
gateways, is an important factor in obtaining traffic, establishing brand
identity and attracting advertisers. Many of these gateway and Portal sites,
which serve as launching or starting points for many Web users, provide content
and information that is acquired from third-party content providers. We are
seeking to develop Networks that capitalize on this demand for quality
entertainment content. We seek to enter into distribution and syndication
partnerships to provide multiple gateways into the Program Networks, thereby
increasing our Networks' visibility, broadening each Network's reach and
building brand recognition.
Platform Migration; Multi-platform Distribution
A key element of our strategy is to establish brand identities for our
Networks through Web syndication and targeted marketing as a first step in a
multimedia rollout. We seek to exploit the cost effective content-development
and bandwidth costs associated with Internet programming as a means of building
brand recognition. We believe that quality niche programming will be in high
demand as Internet penetration accelerates. Furthermore, we believe that with
the deployment of digital bandwidth, significant market opportunities will
develop for brand-name content that interacts with viewers through various media
platforms including the Internet, cable, broadcast television and radio.
We have focused on developing programming that is designed to migrate to
other platforms including digital cable and direct satellite in order to be in a
position to capitalize on the benefits of multi-platform distribution. We
believe that multi-platform distribution of our programming will afford the
benefits of cross-promotional opportunities, enhanced advertising and
sponsorship revenues and maximum exploitation of merchandising. Successful
implementation of this strategy is partly dependent upon the acceptance, timing
and penetration of next generation digital programming and digital set-top
boxes.
Build Revenue Streams
Since our Program Networks will be targeted to niche audiences, we believe
that the traffic and user demographics on our Networks will provide an
attractive platform for measurable, targeted, cost-effective and interactive
advertising on the Web. We seek to provide advertisers with a variety of Web
advertising solutions including traditional banner ads, dynamic video
commercials, audio promotions and video animations, helping them exploit the
multimedia capabilities of the Internet as an advertising medium.
As our Networks are migrated to cable and other television-based platforms,
we seek to generate revenues by selling commercial spots (giving a share to the
local cable operator/satellite provider to sell local spots), through
subscription fees for special programming, such as pay-per-view events,
merchandising and distribution fees. Additionally, we expect to offer "program"
or "event" single-advertiser sponsorships that run on both the Web and
television-based platforms.
Strategic Alliances
We have entered into, and seek to form, strategic alliances in order to
benefit from the expertise of other companies in the areas of technology,
consumer marketing, distribution (both Web syndication and cable carriage),
advertising sales, and content production and aggregation. These alliances allow
us to contain costs as well as enable us to focus our efforts on our core
strengths of programming and marketing. In the area of content production, we
have entered into a joint venture with New Tech to develop various niche
Networks on the Web and cable and satellite platforms. We have also entered into
a joint venture with Bid.Com to develop auction opportunities on the Web and
other digital broadband platforms utilizing video and video streaming. In the
area of distribution, we have entered into an arrangement with United Stations
Radio Network, a radio program distributor, for the audio syndication of our
comedy programming. In the area of advertising, we are working with Phase2Media
to handle our advertising needs. In the area of technology, we are working with
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INTERVU, Inc. ("INTERVU") and RealNetworks Inc. ("RealNetworks") to handle our
streaming media needs.
Portfolio Approach
A central focus of our strategy is to develop and distribute a portfolio of
branded Networks to diverse audiences through a variety of platforms. We believe
that it is more efficient to launch a series of niche Networks with diverse
audience appeal through a variety of distribution platforms since each program
uses the same production capabilities (studio, software, etc.), storage (file
servers) and broadcast facilities (down links, encoding, streaming, etc.). We
believe that we can benefit from economies of scale by commingling creative,
design and productive functions across multiple Networks, as well as
distribution, advertising sales, administrative, and to a lesser extent,
marketing efforts. Furthermore, by launching our programs on a variety of
distribution platforms, we believe we can reduce risk by eliminating reliance on
any one distribution sector (e.g., cable and satellite operators, broadcast
television and Web-portals).
INDUSTRY BACKGROUND
Demand for Entertainment Programming
The entertainment industry is presently undergoing strategic changes as new
technologies proliferate in both the development and production of projects and
in the electronic distribution of entertainment programming. The development and
growth of the Internet, 500 channel cable systems, DBS, home video, CD-ROMs and
other interactive multimedia are creating many more opportunities for the
distribution of entertainment programming to the consumer.
According to an industry expert, more than two-thirds of all active
Internet users seek entertainment content online. The market for multimedia
entertainment has evolved and has grown dramatically with the proliferation and
sophistication of PCs and the development of streaming media technologies. The
enhanced processing, graphics, sound, storage and transmission capabilities have
enabled PC users to more easily and efficiently access compelling entertainment
content online capable of rivaling traditional broadcast media. Although a vast
amount of entertainment related content is being added to the Web every day, the
quality of this content varies significantly. We believe that higher quality
content is typically found on topic-specific sites, such as our Program
Networks. Consequently, we believe that our Program Networks, which offer
compelling and creative content combined with state-of-the-art multimedia
capabilities, will benefit from the growing demand for quality, interactive,
entertainment programming.
Growth of the Internet and the World Wide Web
The Internet is a global collection of thousands of computer networks
interconnected to enable commercial organizations, educational institutions,
government agencies and individuals to communicate electronically, access and
share information, and conduct business. Much of the growth to date in the use
of the Internet by businesses and individuals is due to the emergence of the
Web, the graphical, multimedia-rich portion of the Internet. Within the Web
there can be found content such as magazines, news and sports information,
entertainment, video and audio broadcasts, as well as technologies and
activities such as customer service, electronic commerce, hotel and airline
reservations, banking, games and discussion groups. Electronic documents or "Web
pages," which may contain textual, audio and video information, are published on
the World Wide Web on what is referred to as a "website" in a common format.
Users can view and move among these Web pages by using software called "Web
browsers" such as Netscape Navigator or Microsoft Internet Explorer. Users
specify which electronic documents they wish to view with their Web browser by
entering a document's unique electronic Web address, or Universal Resource
Locator ("URL"). The Internet has been growing rapidly in recent years, spurred
by developments such as easy-to-use Web browsers with intuitive graphical user
interfaces, the availability of multimedia PCs, the rapid development of ways to
access the Web without a PC, the adoption of more robust network architectures
and the emergence of compelling Web-based content and commerce applications. The
broad acceptance of the Internet Protocol standard, specifically, has
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also led to the emergence of intranets (or mini, private Internets) and the
development of a wide range of non-PC devices that allow users to access the
Internet and intranets.
Estimates relating to the Internet vary widely since there is no standard
for measuring users accessing the Internet and historic data is sparse. Some
industry experts analyzing the Internet estimate that there will be 200 million
Web users worldwide by the end of 2000. Other industry experts estimate 77.6
million U.S. Internet account holders by the year 2002. While the estimates vary
as to the exact numbers, industry analysts predict increasing usage of all types
of Internet access devices in the coming years.
Business Opportunities on the Web
As is the case with Internet usage, the growth of advertising and consumer
dollars spent on the Web has been increasing. Industry experts have estimated
that home shoppers will spend more than $78.5 billion online annually by the
year 2003, and advertising revenue on the Internet will reach $15 billion by
2003. We believe that a significant opportunity exists for companies providing
unique technologies, compelling content, products and services on the Internet.
We believe the Web is an attractive advertising medium because of its
interactivity, flexibility, targetability, cost and accountability. The
interactive nature of Web advertising enables advertisers to establish dialogues
and more meaningful relationships with potential customers. The flexible nature
of a digital medium such as the Web enables advertisers to change their messages
on a daily basis in response to real world events and consumer feedback. The
ability to target advertisements to broad audiences, specific regional
populations, or select individuals makes Web advertising versatile.
Web advertising can represent a substantial cost savings over more
traditional print or broadcast media. Unlike traditional advertising where
advertisements are presented to consumers who may or may not have an interest in
them, Web advertisements are usually delivered only when a consumer calls for a
piece of information or a particular Web page by clicking on a hyperlink. We
believe that the Web, unlike traditional media, is a more accountable medium
where advertisers can receive reports on the impression levels, demographic
viewership and effectiveness of their advertisements. Not only is the amount of
advertising on the Web increasing, but also the diversity of advertisers. Web
advertising pioneers were mostly technology and Internet-related companies.
Today, a growing percentage of Web advertisers consists of more traditional
business and consumer companies. As the diversity of Web advertisers grows, so
should the amount of revenue generated by Web advertising. We expect to generate
advertising revenue directly through advertisements on the Program Networks as
well as through revenue sharing agreements for advertisements on our linking
partners' pages.
We believe that the leading Internet content providers will benefit from
the increasing number of Internet users since advertisers will more likely
advertise on websites that demonstrate a high volume of user traffic or provide
advertising programs designed for specific demographic groups. We believe that
our Program Networks will offer attractive consumer demographics and will
provide an attractive platform for measurable, targeted, cost effective and
interactive advertising.
Development of Multimedia Content on the Internet
Much of the Internet's rapid evolution towards becoming a mass medium can
be attributed to the accelerated pace of technological innovation, which has
expanded the Web's capabilities and improved users' experiences. One of the
important changes in the Internet is its evolution from a mass of static,
text-oriented Web pages and e-mail services to a much richer environment,
capable of delivering graphical, interactive and multimedia content. Prior to
the development of streaming media technologies, users could not play back audio
and video clips until the content was downloaded in its entirety. As a result,
live Internet broadcasts were not possible. The development of streaming media
products from various companies enables the simultaneous transmission and
playback (i.e., the Internet broadcast or "webcast") of continuous "streams" of
audio and video content over the Internet and intranets. These technologies have
evolved to deliver audio and video over widely
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used modems, yet can scale in quality to take advantage of higher speed access
that is expected to be provided by xDSL, cable modems and other emerging
broadband technologies. A key programming element of each of our Networks is the
streaming of live or stored full-motion video and audio. We are already
delivering streaming audio and video via ComedyNet and CrimeBeat, and we plan to
do so over the other Program Networks we are developing.
Broadcasting audio and video content over the Internet offers certain
opportunities that are not generally available from traditional media. Currently
available analog technology and government regulations limit the ability of
radio and television stations to broadcast beyond certain geographic areas.
Radios and televisions are not widely used in office buildings and other
workplaces, where Internet access has become commonplace. In addition,
traditional broadcasters are limited in their ability to measure or identify in
real time the listeners or viewers of a program. By using the Internet, targeted
streaming media content can be broadcast to a geographically dispersed audience
of customers at relatively low costs. Internet users can interact with the
broadcast content by responding to online surveys, voting in polls and obtaining
additional information. In addition, Internet broadcasters can provide highly
specific information about a program's audience to content providers,
advertisers and users of Internet business services. This information may be
more accurate than the industry surveys, such as those operated by Nielsen Media
Research for television, which rely on a sampling of all viewers. Operators of
websites can keep track of the number of visitors to their sites and the amount
of time spent there as well as the number of times that users revisit the site.
Such information can be used by strategic partners as well as linking partners
in market studies and to generate advertising revenue.
Cable Television and Direct Satellite Services
Cable television is a service that delivers multiple channels of television
programming to subscribers who pay a monthly fee for the services they receive.
Television and radio signals are received over-the-air or via satellite delivery
by antennas, microwave relay stations and satellite earth stations and are
modulated, amplified and distributed over a network of coaxial and fiber optic
cable to the subscribers' television sets. Cable television systems offer
varying levels of service which may include, among other programming, local
broadcast network affiliates and independent television stations,
satellite-delivered "superstations", certain other news, information and
entertainment channels such as CNN, CNBC, ESPN, MTV, and certain premium
services such as HBO, Showtime, The Movie Channel, Starz, Cinemax, and
pay-per-view specials. Pay-per-view television enables a subscriber with an
addressable set-top decoder or satellite receiver to purchase a block of
programming, an individual movie or an event, for a set fee. Pay-per-view
programming can be delivered via any number of delivery methods including via
cable television, direct to home ("DTH") to households with large satellite
dishes receiving a C-band low power analog or digital signal, direct broadcast
satellite ("DBS") to households with small satellite dishes receiving a Ku-band
medium or high power digital signal such as currently offered by DirecTV,
Primestar and Echostar (referred to as "DBS services"), wireless cable systems
and via new technologies such as cable modem and the Internet. As our
programming develops and brand recognition is gained, we expect to launch some
of our Program Networks as television-based channels on digital cable and direct
satellite platforms. Additionally, we expect to offer "special events" on
pay-per-view models.
Many cable and broadcasting companies have recently begun to utilize
digital compression technology, which converts, on average, 10 to 12 analog
signals (now used to transmit video) into a digital format and compresses such
signals into the space normally occupied by one analog signal. The digitally
compressed signal is uplinked to a satellite, which sends the signal back down
to a cable system's headend to be distributed, via optical fiber and coaxial
cable, to the customer's home. At the home, a set-top box converts the digital
signal back into analog channels that can be viewed on a normal television set.
The implementation of digital technology will significantly enhance the quantity
and quality of channel offerings and will allow for the introduction of
high-speed data services and Internet access to customers. These next generation
television set-top boxes using digital compression technology have recently
become commercially viable. Cable operators are currently upgrading and
rebuilding their networks to offer digital video and programming services. It
has been estimated that of the approximately 65 million U.S. cable subscribers,
approximately 7.7 million homes will
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install digital set top boxes by the end of 2000. Additionally, the FCC has
mandated that all broadcasters convert to digital format by 2006.
We believe that as the deployment of digital bandwidth accelerates,
significant market opportunities will emerge for branded content and services
that interact with viewers through various platforms including the Internet,
digital cable, direct satellite, and other broadcast media. Since our
programming is being developed for multi-platform distribution, we are seeking
to capitalize on the development and penetration of digital compression
technology and other broadband technologies that will merge traditional
television with the interactivity of the Web. We believe that by migrating our
Networks to television-based platforms we will enhance our ability to generate
greater revenues including advertising/sponsorship sales, licensing,
pay-per-view fees, subscription revenues and merchandising.
PRODUCTS: THE CONTENT PORTFOLIO
As a programming and marketing company, it is our goal to develop, manage
and/or own a broad and diverse group of multi-platform Program Networks. Our
current portfolio consists of ComedyNet, a wholly-owned network, and CrimeBeat,
which was created jointly with New Tech. The unique aspect of each of these
Networks is their entertainment orientation, which is in contrast to the
informational focus of most other Web offerings. Accordingly, our Networks focus
on quality and appealing entertainment content, and incorporate information,
data and cross references available on the Web only to the extent that it
enhances or supports the core entertainment and leisure value of our Networks.
Our Program Networks retain a television-centric focus while incorporating
enhanced Internet features. They incorporate full-motion video, audio and
multimedia programming layered with information, referrals, merchandising and
promotional elements, in a rich interactive environment. A key programming
element of each Network is the video streaming of live or stored, full-motion
video. In addition to streaming video, a wide variety of features are
incorporated into each Network including libraries of audio, archive/pictorial
stills, databases and linked sites.
All of the website design and development for our Networks is performed
in-house by our web developers, programmers and technical personnel. This
includes the development of designs for aesthetic and functional characteristics
of the websites, as well as the creation of computer files and code that
implement the websites. We maintain our own writers, researchers and production
personnel to develop and produce original productions across all of our
Networks. In addition, we acquire content through strategic alliances with third
parties.
Set forth below is a profile of each Network that has been launched, or in
development and scheduled to be launched within the next 12 months:
ComedyNet
ComedyNet was our first digital Program Network launched on the Internet
(www.comedynet.com), and the first in a series of digital program offerings we
plan to migrate to other broadband platforms. In response to what we believe is
clear market interest in a competitor to Comedy Central, ComedyNet will be the
first of our Networks to be launched as a digital cable network. ComedyNet has
attracted a broad and varied roster of talent, established names and newcomers,
and is relying on very irreverent and creative programming. For example, Jackie
"The Jokeman" Martling, a member of the Howard Stern Show team, has his
highly-trafficked Jokeland website, which receives approximately 800,000 page
views per month, under the ComedyNet umbrella, giving ComedyNet significant
branding opportunities. Additionally, nationally known comedic talent David
Brenner is the Chair of our Comic Advisory Board and has signed on as the media
spokesperson for the Network. Well-known comedian George Carlin is also on the
board.
ComedyNet brings daily, original, cutting-edge comedy programming to the
Internet. The programming is produced at our own webcasting studio in New York
and webcast live from various well-known
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venues around the country. ComedyNet is currently scheduled to produce and own
eight hours per week of original programming for distribution in all media. To
date, with very limited marketing, the ComedyNet website is currently attracting
approximately 950,000 page views per month, including approximately 800,000 page
views per month through the Jokeland site. We plan to increase ComedyNet's
exposure by licensing and syndicating ComedyNet's program elements to other
heavily trafficked websites. Toward that end, we have signed syndication
agreements with My TV Networks and Entertainment Blvd.Com, and we are currently
negotiating and seeking additional distribution arrangements with operators of
major portals, content aggregators and other heavily trafficked sites.
In addition to original and creative content, ComedyNet offers
state-of-the-art interactive programming. In conjunction with Bid.Com, ComedyNet
recently launched the Internet's first live streaming video and audio auction.
This first-of-its-kind auction, hosted by veteran comedian Lewis Black, utilized
Bid.Com's patented declining-price (Dutch) auction technology and our creative,
marketing and production capabilities. The auction was broadcast by
RealNetworks' Real Broadcast Network in RealAudio and RealVideo. Thousands of
visitors to the www.bid.com and www.comedynet.com websites visited the auction,
and over 90% of the items up for auction sold out. In light of the success of
this debut auction, we are currently planning to broadcast future auctions with
celebrity and non-celebrity auctioneers alike, and we expect to begin regularly
scheduled broadcasts in the coming months.
During its first year of operation, ComedyNet has received numerous
industry awards and distinctions including the Humor Indies "Three Star Salute"
award; the "SAV Award" from Audio Visual Daily News for the top streaming
audio/video comedy site; "Best of the Planet" award; the "Top 100 Websearchers
Award," and was chosen as one of the top three humor sites in Netguide.com's
"The Best of 1998." Most recently, it was a finalist for the "Most Entertaining
Site" for a 1999 RealNetworks "Streamers Award."
ComedyNet, which debuted on the Web in the second quarter of 1998, is
targeted towards the 18-34 year old male audience. The programming consists of
two hours of live video four nights a week, video archive available on demand
and regular block rotations of programming. Eventually, we expect to launch
pay-per-view events on the Web. We plan to distribute ComedyNet on digital
cable, direct satellite or other television-based platforms. When migrated, we
expect the Network to feature block rotations of programming around live event
broadcasts.
ComedyNet's content sources include original productions, live comedy club
performances from 15 different cities across the country, sketch comedy,
improvisation, serials, experimental and cutting-edge, and special events such
as Marshalls Women in Comedy, Toyota Comedy Festival and the Chicago Comedy
Festival. Acquired Programming includes Jokeland.com, which Jackie Martling
promotes several times a day on the Howard Stern Show.
Current original content presently airing or in development includes:
o Comedy On The Road: ComedyNet unearths the future of comedy as we tape
from comedy clubs across the US and Canada. Some of the major clubs
include San Francisco's Punch Line, Denver's Comedy Works, Houston's
Laff Stop, Toronto's Laugh Resort, Chicago's Zanies and Boston's
Comedy Connection.
o Scottland: Scottland, which will be created by and star Scott Thompson
of "Kids in the Hall" and "The Larry Sanders Show," will be the first
original episodic comedy to webcast online. We plan to launch
twenty-six episodes of the video-streamed comedy series on the Web
this summer.
o A Day in the Life: A new video-streaming series which debuted on April
1, 1999. Each installment will juxtapose stand-up performances of a
different up-and-coming comedian/comedy team with stand-alone segments
of the funniest moments from their off-stage lives.
o Stella: Three guys from the sketch group "The State" have reconvened
to create five minute films that show bizarre situations in the most
commonplace settings like turning a typical Christmas carolling event
into a free-for-all.
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o Net//Witts: Sketch group formerly of CNET, HBO and Comedy Central
provides interstitials n the form of parodies and mockumentaries.
o Party in our Shorts: Established and up-and-coming comedians go beyond
the stand-up mike and hit the road with a video camera in search of
"funny."
o Lost in LA LA Land: Kelly Carlin-McCall reports from Los Angeles as
only a native can--from pieces on cell phone etiquette to crashing
Hugh Hefner's birthday party.
o Breakup Girl: The superheroine who dominates the web at
Breakupgirl.com is live monthly from the Gotham Comedy Club giving
advice to the lovelorn on ComedyNet.
We have engaged in brand marketing including promotions, sponsorships, and
events during the current website stage, and we plan on extensive marketing to
the cable/satellite industry to obtain distribution. We also plan to undertake
joint and cooperative consumer marketing campaigns. In order to generate traffic
to the ComedyNet website, we have undertaken extensive search engine
registration, and have syndicated ComedyNet program elements to
heavily-trafficked websites including Entertainment Blvd.Com and several radio
stations' websites. In addition, we have sought extensive multimedia
sponsorships, and we have entered into a cross-promotional barter arrangement
with United Stations Radio Network for the audio syndication of ComedyNet's
programming.
We believe that ComedyNet is well-suited for migration to other broadband
platforms since the video programming that it offers differentiates it from
other comedy-related sites; it offers well recognized talent support; it fills
the demand for standup comedy; and it offers the cable industry a competitor to
Comedy Central.
New Tech Projects
AIM/New Tech, LLC, our joint venture with New Tech (the "Joint Venture"),
is currently developing Networks to launch on the Web, with plans for eventual
migration to other broadband platforms as opportunities develop. New Tech, which
was founded by Herman Rush, a former chairman of Columbia Pictures Television
and ICM Talent Executive, offers extensive television-based experience. The
Joint Venture's Networks are being developed in conjunction with experienced
television and broadcast producers including Sonny Grosso and Boardwalk
Entertainment. The Joint Ventures' Networks include CrimeBeat, which will be the
first to be launched on the Web, in June 1999, and Romance Land and Pop City.
CrimeBeat
CrimeBeat, targeted towards males ages 18-34, offers law enforcement
"Infotainment" programming in topical magazine format, and incorporates
interactive features, streaming video and audio elements. CrimeBeat also offers
standard community features including chat and message boards. We expect that
the Network will primarily be advertiser-supported, but we also expect to
generate revenues from e-commerce and access fees for premium content.
CrimeBeat's content consists of a blend of acquired and original
programming. Program areas include:
o Crime Talk o Missing Children
o Crime Fighters Hall of Fame o Crime Prevention
o CrimeSpeak o Cold Case Squad
o Mugshot Archives o Protect & Serve
o FBI Case Files o NYPD Police Scanner
o Most Wanted Fugitives
Sonny Grosso, a producer of crime-related television programs, will produce
CrimeBeat's programming. Additionally, The John Jay College of Criminal Justice
has agreed to serve as a content partner and advisor.
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To generate awareness among CrimeBeat's niche target audience, we plan to
undertake grass-roots marketing and cross-promotions from organizations and
associations such as the PBA, Neighborhood Watch and Community Associations, and
Victims' Rights Groups. To generate Web traffic, we plan to advertise on search
engines and related sites, and we expect print publications and newsletters to
generate traffic to the site as well.
We believe that there is a significant market demand for law enforcement
Infotainment programming. We believe that CrimeBeat will offer an untapped
breadth of categories in an interactive venue for a highly-involved niche
audience. Additionally, we believe that the subject matter's proven commercial
success makes it well-suited for eventual migration to other broadband
platforms. We believe that CrimeBeat has a significant advantage over
competitive programming on the Web which currently consists of numerous amateur
sites that lack coordination, brand name recognition and offer extremely limited
original content.
Romance Land
Romance Land, targeted towards females ages 18-54, will be a website
devoted to romance-related content. It is expected that the site will primarily
be advertiser-supported, but we believe there will be opportunities to generate
revenues from e-commerce and access fees for premium content. We expect to
produce original episodes, but some programming will be acquired. Program areas
will include:
o Lifestyles of Love o Hopeless Romantics' Theater
o Fashion Fantasy o Cupid's Hall of Fame,
o Follow Your Heart (travel) o The Business of Romance
o Starlight Lane (celebrities) o Love Games
o Royal Romance o Love Letters
o The Book Connoisseur o The Tea Salon Chat Room
o Blue Ribbon Fiction o La Boutique Romantique
Boardwalk Entertainment, a producer for Lifetime television for women, will
be responsible for production and design of the Network. Additionally, Charlene
Keel, an established author of romance novels and other romance-related
publications, will supervise the overall site for content and marketing
opportunities.
We expect to launch the Network in 1999. We expect to rely heavily on
publicity to establish brand identity and achieve broad appeal. We plan to
augment the publicity that we expect the Network to generate by entering into
cross-promotional arrangements with publishers, soap operas and women's
magazines. Additionally, we hope to feature celebrities as well as contests and
sweepstakes to generate additional traffic.
We believe that Romance Land will appeal to the large market for
romance-related subject matter. Additionally, we believe that the interactive
nature and one-to-one marketing opportunities of the Network will provide an
attractive audience for advertisers.
Pop City
Pop City, which will target all demographic segments, will be a multi-media
entertainment, information and merchandising service devoted exclusively to
American popular culture. Pop City's content will be in the nature of topical
retrospectives, and we plan to include video programming, "live event" webcasts,
compilations, lists and retrospectives, and magazine, radio and television
archives. We expect the Network to be primarily advertiser-supported, but we
also anticipate revenues from access fees for premium content and transactional
activities. The Network will have a heavy commerce emphasis and we plan to offer
many contests, sweepstakes and promotional tie-ins. The Program areas we plan to
offer include:
o What We Wore o What We Listened To
o What We Played o What We Danced
o What We Bought o What We Watched
o What We Ate o What We Believed In
o What We Drove o What We Admired
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We expect to launch the Network in 2000. In addition, we believe that there
is potential to repackage Pop City's programming for videocassette and broadcast
distribution. We expect to establish brand identity and generate traffic to the
Network by engaging in broad media marketing initiatives including contests and
sweepstakes, event co-sponsorships, cross-promotion and barter arrangements with
advertisers and content providers and Web syndication agreements with operators
of portals and other heavily trafficked sites.
INFRASTRUCTURE AND TECHNOLOGY
We currently perform in-house our database management and website and
Network design and maintenance. We outsource our steaming media needs,
advertising sales and web server co-location including bandwidth connectivity.
We believe that by outsourcing these functions, we are better able to focus our
resources on content development and marketing.
Our operating infrastructure is designed to provide timely and efficient
delivery of programming to users. In response to users' requests, each Web page
is generated and delivered by one of our Web applications servers. We currently
host all of our systems on our own servers in order to maintain quality control
and manage our proprietary databases. Our servers are housed at Exodus Internet
Data Centers ("Exodus"), one of the leading providers of Internet co-location
and management solutions.
The servers housed at Exodus provide support for the operations of our
Networks. We are responsible for updating the content, and code on our Networks'
websites. This is accomplished utilizing point to point T1 connections from our
facility to the servers housed at Exodus. Exodus monitors our servers and
provides us with the necessary bandwidth requirements to ensure efficient
delivery of our content. Exodus provides comprehensive facilities management
services including human and technical monitoring of all production servers 24
hours per day, seven days per week. Exodus also provides the means of
connectivity from our servers to the Internet via multiple DS3 and OC12
connections. These connections link to many different parts of the Internet via
a combination of public and private peering agreements. Outsourcing our
bandwidth connectivity and server monitoring requirements to Exodus enables us
to focus our efforts and resources on the development of our content.
We have established relationships with INTERVU and RealNetworks to handle
all of our streaming media server capacity needs. We do not maintain our own
streaming media servers. We encode our live and on-demand programming into
digital format for network distribution, and transmit the data to our streaming
media partners' (INTERVU or RealNetworks) server farms for distributed network
streaming to Internet users. The encoding process is performed either in-house,
for programming developed in our Production Studio and Master Control and
Playback Center, or from other remote locations. In-house encoded programming is
delivered to our streaming media partners via T1 or ISDN connections. Remote
programming is encoded on-site and streamed, via ISDN connections, to our
partners. We have established ongoing relationships with the operators of many
of the comedy clubs and locations from which our remote programming originates.
As a result we have been able to install the necessary infrastructure at these
locations, including the ISDN connections to deliver the programming to our
streaming media partners' hosting center, in order to provide efficient
transmission of our live event broadcast to Internet users.
Our in-house Production Studio provides all audio and video services for
our Networks' content and operations. Capabilities include single camera ENG and
EFP shoots, multi-camera remote and studio shoots, both live and pre-recorded,
on-line and non-linear videotape editing, graphics and animation. The Production
Studio also creates and builds all of its own sets and scenery. All lighting
concepts and designs are handled in-house. Crews for all shoots are provided
either from our experienced in-house staff or pulled from our extensive pool of
free-lance technicians, depending on the size or requirements of any given
production.
Our Master Control and Playback Center is where all Network feeds to either
the Internet or satellite will originate. Live and pre-recorded programs are
outputted via T1 connections to the Internet or in the case of a satellite feed
via fiber optic connections. Program scheduling and playback, as well as quality
control of audio and video content are achieved at this location.
The systems being housed at Exodus also support our back-end
infrastructure. This includes all of our Internet applications, such as chat
message boards, Web-based favorites, and a Web-based registration system. This
registration
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system is supported by Oracle's version 7.34 database so that management of
users and the information that is collected can be used to improve our product
offerings. With the levels of database information that is collected, we need to
have both a large collection area, a BoxHill 90-gigabyte Raid Disk system, and a
BoxHill DLT tape back-up system. The management of the complete site is handled
with administrative support from Resonate Central Dispatch so that servers'
utilization is managed in a way to maintain the best overall support for our
Networks' needs.
Each of our Networks utilizes an extensive set of integrated database and
audience measurement systems to track Network usage for marketing analysis. Our
information system incorporates industry standard site management and reporting
tools developed by a third party, as well as proprietary programming for unique
user session analysis. This data can be turned into valuable advertising
research information including advertisement reach and frequency of access. We
are currently in discussion with a third party to assist in our efforts to
collect and analyze relevant site usage information.
RESEARCH AND DEVELOPMENT
Since acquiring WebFeat and redirecting our focus to the development of
entertainment-based programming, we have not directed significant resources
towards research and development. Substantially all of our research and
development expenditures incurred prior to our acquisition of WebFeat were
related to the webPASSPORT System, and as such, have been reclassified as
discontinued operations. However, since the WebFeat acquisition, we have devoted
significant time and financial resources to content production and development
activities. As a result of our redirected focus on entertainment programming, we
anticipate that a portion of our ongoing operations will continue to include
content production and development activities, which for 1998 and 1997, totaled
$2,369,921 and $245,758, respectively.
STRATEGIC AND DISTRIBUTION RELATIONSHIPS
We have entered into various strategic relationships and other arrangements
to assist in the development, production and distribution of our Program
Networks. These strategic relationships will be integral elements in the
execution of our business strategy.
License Agreement Bid.Com International Inc.
In December 1998, we entered into a license agreement (the "License
Agreement") with Bid.Com, one of the Internet's leading online auction
companies. Pursuant to the License Agreement, we entered into a non-exclusive
license to use Bid.Com's online auction technology to develop auction
opportunities on the Web and other broadband platforms. We have also entered
into a joint venture with Bid.Com with plans to create a shopping channel based
on Bid.Com's state-of-the-art online auction and electronic commerce
("e-commerce") technology. Through our joint venture with Bid.Com, we seek to
provide consumers with an entertaining shopping experience in a variety of
electronic media platforms. The License Agreement expires June 30, 2001. We have
agreed with Bid.Com to share in the gross margin created through our joint
venture pursuant to a formula set forth in the License Agreement. In exchange
for consulting services, we issued to Bid.Com an aggregate of 126,221 shares of
our Common Stock in 1998.
Joint Venture with New Tech
On August 27, 1998, we entered into an Operating Agreement with New Tech,
for the formation and operation of our joint venture, AIM/New Tech, LLC, a
Delaware limited liability company (the "Joint Venture"). In accordance with the
Joint Venture's Operating Agreement, New Tech contributed to the Joint Venture a
number of joint venture agreements with a variety of partners. These agreements
gave the Joint Venture the right to develop, market and distribute certain
entertainment-based programming on the Internet and other broadband platforms.
We agreed to fund the development of these projects in exchange for the right to
one-third share of all profits subsequent to the recovery of all development
funding. The other two-thirds will be split, with half going to New Tech and the
other half to the Network's talent/producer. The term of the Joint Venture is
from August 27, 1998 until December 31, 2048, unless dissolved earlier in
accordance with the terms of the Operating Agreement. AIME and New Tech jointly
manage the operations of the Joint Venture.
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Cable MSO's and Satellite Distribution Company
We are currently in discussions with major cable operators and a leading
direct broadcast satellite company for distribution of our Networks on digital
tiers. As they roll out new digital set-top boxes to their subscribers, our
Networks will be available to those end-users. There can be no assurance that we
will be successful in entering into these distribution agreements.
Syndication Agreement with United Stations Radio Network
In December 1998, we entered into an agreement with United Stations Radio
Network, a radio program distributor, for the promotional radio and Internet
syndication of portions of ComedyNet's audio programming. Pursuant to our
agreement, United Stations Radio Network has agreed to syndicate an audio
version of "A ComedyNet Minute." Currently, "A ComedyNet Minute" is being
syndicated on 60 radio stations across the country. Although there is cash
compensation for the spots within the ComedyNet minute, we believe that we
derive a more substantial benefit from the "Brought to you by ComedyNet.com"
announcement before and after each segment airs. United Stations Radio Network
will also syndicate a ComedyNet minute video stream to the websites of some of
these radio stations. Currently, ComedyNet is syndicated on the website of the
"Z100" radio station in New York City, which receives approximately 3 million
page views per month.
Letter of Intent with PowerChannel, Inc.
Pursuant to our plans to divest the webPASSPORT system, on March 3, 1999,
we signed a Letter of Intent with PowerChannel, Inc. ("PowerChannel") for the
sale of the webPASSPORT server infrastructure and related equipment in
conjunction with the grant of a non-exclusive, worldwide license to operate and
use the webPASSPORT System. Pursuant to the Letter of Intent, PowerChannel will
take over the operations of the webPASSPORT System and assume all attendant
responsibilities. In consideration, PowerChannel has agreed to (i) execute a
promissory note in the principal amount of $1 million, to mature December 31,
2000, convertible at our option into 200,000 shares of PowerChannel common stock
at a conversion price of $5.00 per share, and (ii) pay us a one-time license fee
of $10.00 for each set-box utilizing the webPASSPORT System that PowerChannel
installs for its customers, which payment would offset the promissory note. The
divestiture of the webPASSPORT System will allow us to focus our efforts on our
core areas of competency-development and marketing multi-platform,
entertainment-based programming.
SALES AND MARKETING
Our marketing strategy is to promote brand recognition of our Networks to
both consumers and trade industry partners. To accomplish this, we plan to
utilize both traditional and innovative media vehicles for marketing and
promotional purposes including radio, television and print advertisements as
well as marketing arrangements with other highly-trafficked websites. We also
plan to implement traditional promotional strategies including celebrity
in-store appearances and autograph signings, product demonstrations and premium
giveaways, direct marketing outreach campaigns, on-set coverage of program
shoots, shopping mall tours and sweepstakes. Our online promotions will include
celebrity chats to promote special events and programming on our Networks,
newsletters to registered visitors, interactive contests and raffles,
cross-promotions between our Networks, and live streaming video from regional
events, festivals and trade shows.
We believe that our Networks will offer attractive user demographics to
advertisers. Additionally, we offer differentiated advertising solutions
including both traditional banner ads and multimedia packages incorporating
audio and video. To capitalize on the advertising opportunities we expect will
develop as brand recognition of our Networks is established, we have decided to
employ Phase2Media to handle our advertising needs.
INTELLECTUAL PROPERTY RIGHTS
We regard our copyrights, trademarks, trade dress, trade secrets and
similar intellectual property as critical to our success, and we rely upon
trademark and copyright law, trade secret protection, and confidentiality and
license agreements with our employees, customers, partners and others to protect
our proprietary rights. We plan to register our material trademarks in the
United States and, based upon anticipated use, may also register in certain
other countries.
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However, effective trademark, copyright and trade secret protection is not
available in every country in which our products and services are or may become
available.
We have licensed in the past, and expect that we may license in the future,
elements of our trademarks, trade dress and similar proprietary rights to third
parties. While we attempt to ensure that the quality of our brands is maintained
by such licensees, there can be no assurance that such licensees will not take
actions that might materially and adversely affect the value of our proprietary
rights or the reputation of our products, either of which could have a material
adverse effect on our business. Moreover, while we believe that we have the
right to use our marks in connection with our business, and we generally have
the right to prohibit others from using such marks in certain fields of use,
there can be no assurance that we will be able to maintain such rights.
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of business, including
claims of alleged infringement of the trademarks and other intellectual property
rights of third parties by us and our licensees. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources. We are not aware of any legal proceedings or claims that
the we believe will have, individually or in the aggregate, a material adverse
effect on the our business, financial condition or results of operations
COMPETITION
The market for entertainment programming is highly competitive. We compete
(or in the future may compete) directly or indirectly with a variety of
businesses that provide content through one or more media, such as print, radio,
television, cable television, and the Internet. These include (i) Internet
entertainment content providers; (ii) television-based entertainment networks;
(iii) established online services; and (iv) traditional off-line media
companies. Many of these present or potential future competitors have, or can be
expected to have, substantially greater market presence and brand recognition,
longer operating histories as well as greater financial, technical, marketing
and other resources than we do.
A large number of websites and online services (including, among others,
Yahoo!, the Microsoft Network and AOL) offer entertainment-based programming
that might be competitive with the programming we offer. Many of our existing
competitors have significantly greater financial, technical and marketing
resources than we do. In addition, providers of Internet content may be acquired
by, receive investments from or enter into other commercial relationships with
larger, well-established and well-financed companies, such as Microsoft, Yahoo!
or AOL. Greater competition resulting from such relationships could have a
material adverse effect on our business, operating results and financial
condition. There can be no assurance that our competitors will not develop
content that is more attractive to consumers or that achieves greater market
acceptance than our offerings. To compete successfully we must provide
sufficiently compelling and popular content to generate consumers and support
advertising to reach such consumers.
We also compete with online services, other website operators and
advertising supported networks, as well as traditional media such as television,
radio and print for a share of advertisers' total advertising budgets. We
believe that the principal competitive factors for attracting advertisers
include the number of users accessing our websites, the demographics of the
users, our ability to deliver focused advertising and interactivity through our
websites and the overall cost-effectiveness and value of advertising we offer.
There is intense competition for the sale of advertising on high-traffic
websites, which has resulted in a wide range of rates quoted by different
vendors for a variety of advertising services, making it difficult to project
levels of Internet advertising that will be realized generally or by any
specific company. Any competition for advertisers among present and future
websites, as well as competition with other traditional media for advertising
placements, could result in significant price competition. We believe that the
number of companies selling Web-based advertising and the available inventory of
advertising space have recently increased substantially. Accordingly, we may
face increased pricing pressure for the sale of advertisements.
When migrated to other television-based broadband platforms, our
programming will compete with other program services for channel space and
compensation for carriage from cable television operators, DTH, DBS and other
multichannel distributors. Competition in the production and distribution of
television programming is intense. We expect to compete with other first-run
programming, network reruns and programs produced by local television stations.
Many of these present or potential future competitors are large publicly-held
companies which have, or can be expected to have, substantially greater market
presence and brand recognition, longer operating histories as well as greater
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financial, technical, marketing and other resources than we do. These
competitors include large television and film studios such as Paramount
Communications Inc., Columbia Pictures Television, 20th Century FoxFilm Corp.,
MCA Inc., and Warner Bros. Inc., as well as other television distribution
companies such as King World Productions, Inc., All-American Television Inc. and
Viacom International, Inc. We also expect to compete with other companies for
the sale of television advertising time, including Tribune Broadcasting
Co./Entertainment Co., Viacom International, Inc., All-American and King World.
Our success is highly dependent upon such various unpredictable factors as the
viewing preferences of television audiences. Public taste is unpredictable and a
shift in demand could cause our programming to lose its appeal. Television
programming also competes for audiences with many other forms of entertainment
and leisure time activities, some of which include new areas of technology
(e.g., video games and home video), the impact of which on our operations cannot
be predicted.
EMPLOYEES
As of March 31, 1999, we had 33 employees in addition to our four executive
officers. We also routinely use consultants. None of our employees are
represented by a labor union. We have experienced no work stoppages and consider
our relations with employees to be good.
DIVIDENDS
We have never declared or paid cash dividends on our Common Stock and we do
not anticipate paying cash dividends on our Common Stock in the foreseeable
future. We intend to retain future earnings, if any, for reinvestment in the
future operation and expansion of our business and related development
activities. We have granted a covenant to Hollinger Digital, Inc. ("Hollinger"),
that we will not pay any dividends on our Common Stock so long as certain
Debentures, issued to Hollinger pursuant to a Securities Purchase Agreement
between AIME and Hollinger dated December 3, 1997, are outstanding. See "Certain
Relationships and Related Party Transactions--Securities Purchase Agreement with
Hollinger Digital, Inc." set forth below. A similar covenant was granted to
Pioneer Ventures Associates Limited Partnership ("Pioneer") with respect to the
Series A Senior Convertible Preferred Stock ("Series A Preferred Stock") which
was issued to Pioneer pursuant to an Investment Agreement between AIME and
Pioneer dated November 16, 1998. See "Certain Relationships and Related Party
Transactions--Investment Agreement with Pioneer Ventures Associates Limited
Partnership," below. Upon approval of 75% of the Board of Directors, we may pay
cash dividends to Pioneer on the Series A Preferred Stock. Alternatively, upon
approval of a majority of our Board of Directors, we may elect to pay dividends
upon the Series A Preferred Stock by the issuance of additional shares of Series
A Preferred Stock (a "Stock Dividend"), which shall have the terms and
conditions identical to other shares of Series A Preferred Stock. In lieu of
payment of cash dividends, on December 31, 1998 and March 31, 1999, we paid
Stock Dividends on Pioneer's Preferred Stock of 163 and 330 shares,
respectively, of Series A Preferred Stock.
Any future determination to pay cash dividends on our Common Stock or
Preferred Stock will be at the discretion of the Board of Directors and will be
dependent upon our financial condition, results of operations, capital
requirements and such other factors as the Board of Directors deems relevant, as
well as the terms of any financing arrangement.
RISK FACTORS
Investment in our Common Stock involves a high degree of risk. You should
carefully consider the following risk factors and other information contained in
this Registration Statement. The risks and uncertainties described below are not
the only ones we face. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business operations.
If any of the following risks are fully or partially realized, our business,
financial condition or results of operations could be materially adversely
affected. In such case, the value of our Common Stock could decline. This
Registration Statement also contains forward-looking statements that are subject
to risk and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including risk and uncertainties we face which are described below and elsewhere
in this Registration Statement.
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We Have An Extremely Limited Operating History; We Have An Accumulated
Deficit; There Is Doubt As To Our Ability To Continue As A Going Concern
We commenced operations through a predecessor company in 1986. We have
generated minimal revenues to date with respect to our continuing operations,
and we have an extremely limited operating history upon which an evaluation of
our business and our prospects can be made. The likelihood of our success must
be considered in light of the problems, expenses, difficulties, complications
and delays frequently encountered by companies in their early stage of
development, particularly companies in the new and rapidly evolving market for
Internet services. Specifically, such risks include the failure to anticipate
and adapt to a developing market, the rejection of our programming by consumers,
development of equal or superior programming by competitors and the failure of
the market to adopt the Internet as a transaction medium.
We have had limited financial resources to date and we have incurred
operating losses since our inception. As of December 31, 1998, we had an
accumulated deficit of approximately $47.9 million. This amount represents a
cumulative loss from continuing operations of $8,033,861, a cumulative loss from
discontinued operations of $24,085,959, and an extraordinary loss on
extinguishment of debt of $15,749,817. We also expect to significantly increase
our operating expenses to expand our sales and marketing operations, to fund
greater levels of content production and development and to develop other forms
of revenue-generating business. Our independent auditors have included an
explanatory paragraph in their report on our consolidated financial statements
as of and for the years ended December 31, 1998 and 1997 which paragraph
expresses substantial doubt about our ability to continue as a going concern. As
a result of the foregoing factors, there can be no assurance that our services
and products will ever generate sufficient revenues or that our operations will
ever be profitable.
We May Not Be Able to Generate or Maintain Sufficient Cash to Fund Our
Operations; Uncertainty of Additional Funding
We believe that our existing capital resources together with future fund
raising efforts will be sufficient to meet our operating expenses and capital
requirements until the third quarter of 1999. However, our long-term capital
requirements will depend upon many factors, including, but not limited to, the
rate of market acceptance of our programming; our ability to develop, maintain
and expand our consumer base; the level of resources required to expand our
marketing and sales organization, information systems and content production and
development activities; the availability of hardware and software provided by
third-party vendors; and other factors.
In particular, a slower than expected rate of acceptance of our services
could place a strain on or exhaust our available cash resources. The timing and
amount of such capital requirements are not entirely within our control and
cannot accurately be predicted. If capital requirements materially exceed those
currently anticipated, we may require additional financing sooner than
anticipated. We have no commitments for additional financing, and there can be
no assurance that any such additional financing would be available in a timely
manner, on terms acceptable to us, or at all. Further, any additional equity
financing could be dilutive to our then-existing stockholders and any debt
financing could involve restrictive covenants with respect to future capital
raising activities and other financial and operational matters. If adequate
funds are not available to satisfy either short or long-term capital
requirements, we may be required to curtail our operations significantly or to
obtain funds through arrangements with strategic partners or others that may
require our company to relinquish material rights to certain of our technologies
or potential markets.
The Development of a Market For Our Programming Is Uncertain
The markets for our programming have only recently begun to develop, are
rapidly evolving and are characterized by an increasing number of market
entrants who have introduced or developed competing programming for distribution
on the Internet and the Web. As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for recently introduced services
are subject to a high level of uncertainty and risk. Because the market for our
Networks is new and evolving, it is difficult to predict the future growth rate,
if any, and size of this market. There can be no assurance either that the
market for our Networks will develop or that demand for our Networks will emerge
or become sustainable. If the market fails to develop, develops more slowly than
expected or becomes saturated with competitors, or if our Networks do not
achieve or sustain market acceptance, our business, operating results and
financial condition will be materially adversely affected.
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Acceptance of Our Programming Is Uncertain
Our future success is substantially dependent on consumer acceptance of our
program offerings. The commercial success of our Program Networks will depend on
our ability to predict the type of content that will appeal to the targeted
audiences and to develop material that will capture the audiences' attention.
There can be no assurance that the intended audiences of our Networks will find
our content appealing or that our programming will attract a significant amount
of users. Since our business strategy, including Network migration to other
platforms, is dependent on generating user traffic and establishing brand
recognition, our inability to attract users would have a material adverse affect
on our business, results of operations and financial condition.
Our Business Is Dependent On Continued Growth In Use of the Internet
Our future success is substantially dependent upon the continued growth in
the use of the Internet. Rapid growth in the use of and interest in the Internet
is a recent phenomenon. There can be no assurance that communication or commerce
over the Internet will become widespread or that extensive content will continue
to be provided over the Internet. The Internet may not prove to be a viable
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary infrastructure, such as a reliable network backbone
or timely development and commercialization of performance improvements,
including high speed modems. In addition, to the extent that the Internet
continues to experience significant growth in the number of users and level of
use, there can be no assurance that the Internet infrastructure will continue to
be able to support the demands placed upon it by such potential growth or that
the performance or reliability of the Web will not be adversely affected by this
continued growth. In addition, the Internet could lose its viability due to
delays in the development or adoption of new standards and protocols required to
handle increased levels of Internet activity or due to increased governmental
regulation. Changes in or insufficient availability of telecommunications
services to support the Internet could also result in slower response times and
adversely affect usage of the Web and our online media properties. If use of the
Internet does not continue to grow or if the Internet infrastructure does not
effectively support growth that may occur, our business, operating results and
financial condition would be materially and adversely affected.
The Market for Our Programming is Characterized By Rapid Technological
Change and Evolving Industry Standards
The Internet is characterized by rapidly changing technology, evolving
industry standards, changing user needs and frequent new service and product
introductions. Our success will depend in part on our ability to identify and
use leading technologies effectively, to continue to develop our technical
capabilities, to enhance our existing services and to develop new services to
meet changing user needs in a timely and cost-effective manner.
Our future success will depend in significant part on our ability to
continually improve the quality, features and reliability of our Program
Networks in response to both evolving demands of the marketplace and competitive
product offerings, and there can be no assurance that we will be successful in
doing so. In addition, the widespread adoption of new Web functionality through
developments such as the Java programming language and increasingly personalized
information filtering and delivery could require fundamental changes in our
services and could fundamentally affect our business, operating results and
financial condition.
Need to Generate Advertising Revenue
The success of our business is dependent upon generating revenues from
Internet advertising. To date, we have not generated significant revenues from
advertising. Although we are working with Phase2Media to handle all of our
advertising sales, there can be no assurance that advertisers will be willing to
advertise on our Networks' websites. If we are unable to generate revenues from
advertising, our business, results of operations and financial condition would
be materially adversely affected.
Acceptance and Development of the Internet as an Advertising Medium Is
Uncertain
The market for Internet advertising has only recently begun to develop, is
rapidly evolving and is characterized by an increasing number of market
entrants. As is typical in the case of a new and rapidly evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. Our
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ability to generate advertising revenue will depend on, among other factors, (i)
the development of the Internet as an advertising medium, (ii) pricing of
advertising on other websites, (iii) the amount of traffic on our websites, (iv)
our ability to achieve and demonstrate user and member demographic
characteristics that are attractive to advertisers, (v) the development and
expansion of our advertising sales force and (vi) the establishment and
maintenance of desirable advertising sales agency relationships.
Most potential advertisers and their advertising agencies have only limited
experience with the Internet as an advertising medium and have not devoted a
significant portion of their advertising expenditures to Web-based advertising.
There can be no assurance that advertisers or advertising agencies will be
persuaded to allocate or continue to allocate portions of their budgets to
Web-based advertising or, if so persuaded, that they will find such advertising
to be effective for promoting their products and services relative to
traditional print and broadcast media. No standards have yet been widely
accepted for the measurement of the effectiveness of Web-based advertising, and
there can be no assurance that such standards will develop sufficiently to
enable Web-based advertising to become a significant advertising medium.
Acceptance of the Internet among advertisers and advertising agencies will also
depend, to a large extent, on the level of use of the Internet by consumers and
upon growth in the commercial use of the Internet. If widespread commercial use
of the Internet does not develop, or if the Internet does not develop as an
effective and measurable medium for advertising, our business, results of
operations and financial condition could be materially adversely affected.
We Depend Upon Continued Acceptance of Streaming Media Technology
Our success depends on the market acceptance of streaming media technology
provided by companies such as RealNetworks, Inc. ("RealNetworks") and Microsoft
Corporation ("Microsoft") to broadcast our programming over the Web. Prior to
the advent of streaming technology, Internet users could not initiate the
playback of audio or video clips until such content was downloaded in its
entirety, resulting in significant waiting times. As a result, live broadcasts
of audio and video content over the Internet were not possible. Early streaming
media technology suffered from poor audio quality, and video streaming at 28.8
kbps (thousands of bits per second) currently is of lower quality than
traditional media broadcasts. In addition, congestion over the Internet and
packet loss may interrupt audio and video streams, resulting in unsatisfying
user experiences. In order to receive streamed media adequately, users generally
must have multimedia PCs with certain microprocessor requirements and at least
28.8 kbps Internet access and streaming media software. Users typically
electronically download such software and install it on their PCs. Such
installation may require technical expertise that some users do not possess. In
addition, older versions of certain Web browsers may need to be reconfigured in
order to receive streaming media from our websites. Widespread adoption of
streaming media technology depends on overcoming these obstacles, improving
audio and video quality and educating customers and users in the use of
streaming media technology. If streaming media technology fails to achieve broad
commercial acceptance and we fail to adapt to other methods of delivering our
programming, our business, results of operations and financial condition could
be materially adversely affected.
Our Business Is Dependent on Providers of Streaming Media Products
We presently rely on providers of streaming media products, such as
RealNetworks and Microsoft, to provide a broad base of users with streaming
media software. Internet users are currently able to download electronically
copies of the RealNetwork's RealPlayer and Microsoft's NetShow Player software
free of charge. If providers of streaming media products begin charging users
for copies of their player software, fewer users will install streaming media
software on their systems. Such action could have a material adverse effect on
our business, results of operations and financial condition.
Our Business Is Dependent On Continued Deployment of Digital Compression
Technology and Digital Set-Top Boxes
The success of our migration strategy is dependent upon the slowly evolving
digital-distribution broadcast market. The number of potential viewers of our
Program Networks is directly affected by the speed with which cable system
operators both upgrade their current programming distribution systems for
digital distribution and deploy digital set-top boxes to their subscribers. The
successful migration of our programming is dependent, in part, upon subscribers
having a digital television set-top box installed in their homes. The timely
deployment of digital television set-top boxes is entirely out of our control.
There may not be a sufficient number of potential subscribers to receive digital
television set-top boxes in the near future so as to enable us to deploy our
programming in accordance with our business
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plan. While we anticipate maximum penetration of digital services and hardware
within the next three to five years, any material delays in the deployment of
digital television distribution systems and set-top boxes could have a material
adverse effect on our business, results of operations and financial condition.
There May Be A Possible Shortage of Available Channels for Cable Carriage
Of Our Networks
In order for our programming to be delivered over cable and direct
broadcast satellite systems to the home, we must compete with other programming
services for digital channel space. Most distributors of television programming
have channel capacity limitations. We believe, although there can be no
assurance, that the cable and direct broadcast satellite industries, in general,
will continue to increase digital channel capacity. There can be no assurance,
however, that distributors of television programming will devote a sufficient
number of channels or bandwidth to our programming in the future even as they
increase channel capacity. Our inability to obtain cable carriage for our
Networks would have a material adverse effect on our business, results of
operations and financial condition.
The Market For Our Programming is Highly Competitive
The market for entertainment programming is highly competitive. We compete
(or in the future may compete) directly or indirectly with a variety of
businesses that provide content through one or more media, such as print, radio,
television, cable television, and the Internet. These include (i) Internet
entertainment content providers; (ii) television-based entertainment networks;
(iii) established online services; and (iv) traditional off-line media
companies. Many of these present or potential future competitors have, or can be
expected to have, substantially greater market presence and brand recognition,
longer operating histories as well as greater financial, technical, marketing
and other resources than we do.
A large number of websites and online services (including, among others,
Yahoo!, the Microsoft Network and AOL) offer entertainment based programming
that are competitive with the programming we offer. Many of our existing
competitors have significantly greater financial, technical and marketing
resources than we do. In addition, providers of Internet content may be acquired
by, receive investments from or enter into other commercial relationships with
larger, well-established and well-financed companies, such as Microsoft, Yahoo!
or AOL. Greater competition resulting from such relationships could have a
material adverse effect on our business, operating results and financial
condition. There can be no assurance that our competitors will not develop
content that is more attractive to consumers or that achieves greater market
acceptance than our offerings. To compete successfully we must provide
sufficiently compelling and popular content to generate consumers and support
advertising to reach such consumers.
We also compete with online services, other website operators and
advertising supported networks, as well as traditional media such as television,
radio and print for a share of advertisers' total advertising budgets. We
believe that the principal competitive factors for attracting advertisers
include the number of users accessing our websites, the demographics of the
users, our ability to deliver focused advertising and interactivity through our
websites and the overall cost-effectiveness and value of advertising we offer.
There is intense competition for the sale of advertising on high-traffic
websites, which has resulted in a wide range of rates quoted by different
vendors for a variety of advertising services, making it difficult to project
levels of Internet advertising that will be realized generally or by any
specific company. Any competition for advertisers among present and future
websites, as well as competition with other traditional media for advertising
placements, could result in significant price competition. We believe that the
number of companies selling Web-based advertising and the available inventory of
advertising space have recently increased substantially. Accordingly, we may
face increased pricing pressure for the sale of advertisements.
When migrated to other television-based broadband platforms, our
programming will compete with other program services for channel space and
compensation for carriage from cable television operators, DTH, DBS and other
multichannel distributors. Competition in the production and distribution of
television programming is intense. We expect to compete with other first-run
programming, network reruns and programs produced by local television stations.
Many of these present or potential future competitors are large publicly-held
companies which have, or can be expected to have, substantially greater market
presence and brand recognition, longer operating histories as well as greater
financial, technical, marketing and other resources than we do. These
competitors include large television and film studios such as Paramount
Communications Inc., Columbia Pictures Television, 20th Century FoxFilm Corp.,
MCA Inc., and Warner Bros. Inc., as well as other television distribution
companies such as King World Productions, Inc., All-American Television Inc. and
Viacom International, Inc. We also expect to compete with other companies for
the sale of television advertising time, including Tribune Broadcasting
Co./Entertainment Co., Viacom International, Inc., All-
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American and King World. Our success is highly dependent upon such various
unpredictable factors as the viewing preferences of television audiences. Public
taste is unpredictable and a shift in demand could cause our programming to lose
its appeal. Television programming also competes for audiences with many other
forms of entertainment and leisure time activities, some of which include new
areas of technology (e.g., video games and home video), the impact of which on
our operations cannot be predicted.
We Depend On Key Personnel
We are highly dependent on the skills of our key employees, including
creative, technical, sales, marketing, information systems, financial and
executive personnel. Therefore, the success of our business is highly dependent
upon our ability to retain such personnel and to identify, hire and retain
additional personnel as the need arises. Competition for key personnel,
particularly persons having technical expertise, is intense, and there can be no
assurance that we will be able to retain existing personnel or to identify or
hire additional qualified personnel. Our inability to attract, hire or retain
necessary personnel could have a material adverse effect.
We are also highly dependent on the continued services of our senior
management team, which currently is composed of a small number of individuals.
While our Chief Executive Officer has signed an employment agreement, such
agreement is of limited duration and is subject to termination under certain
circumstances.
We Are Substantially Dependent Upon Third Parties
We depend substantially upon third parties for several critical elements of
our business including, among others, technology and infrastructure,
distribution activities and advertising sales.
We rely on a number of private third party technology and infrastructure
providers. These various companies provide us with connection to the Internet,
as well as technologies underlying our program offerings. Any errors, failures
or delays experienced in connection with these third party technologies and
information services could negatively impact our relationship with users and
could have a material adverse effect on our business, operating results and
financial condition.
We expect to rely on third parties to sell advertising related to our
digital media product offerings. There can be no assurance that our selling,
marketing, and advertising representatives will achieve our sales objectives.
Any failure by our third party sales representatives to achieve successful sales
could have a material adverse effect on our business, operating results and
financial condition.
Our ability to link to other websites and the willingness of the owners of
such sites to enter into linking agreements which permit us to link from our
websites to the third party's website through hypertext links will be critical
to our operations. Search engines, directories and other navigational tools
managed by Internet service providers and Web browser companies also will
significantly affect traffic to our websites. We also will depend on our
relationships with third party vendors of Internet development tools and
technologies in order to develop the content required to attract users to our
websites. Developing and maintaining satisfactory relationships with such
persons could become more difficult and expensive as competition increases among
content providers. If we are unable to develop and maintain satisfactory
relationships with such third parties, or if our competitors are better able to
maintain such relationships, our business, results of operations and financial
condition could be materially and adversely affected.
Our Systems Are Vulnerable to the Risk Of Capacity Constraints and Systems
Failures
A key element of our strategy is the generation of a high volume of use of
our Program Networks. Accordingly, the performance of our online Networks is
critical to our reputation, our ability to attract advertisers to our websites
and to achieve market acceptance of these products and media properties. Any
system failure that causes interruption or an increase in response time of our
Networks could result in less traffic to our websites and significant customer
service complaints and issues. If sustained or repeated, such failures could
reduce the attractiveness of our products and Networks to end-users, advertisers
and licensees.
A rapid increase in the volume of viewers to our Networks could strain the
capacity of the software or hardware deployed by us, which could lead to slower
response time or system failures and thus adversely affect our ability to
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generate revenue. In addition, as the number of end-users increases, there can
be no assurance that the services and infrastructure that support our Networks
will be able to adjust to the increasing number of users.
Our Systems Are Vulnerable to Security Risks
Our Internet infrastructure and the infrastructure of our hosting partner
is vulnerable to computer viruses, break-ins and similar disruptive problems by
our customers and other Internet users. These factors could lead to
interruption, delays or cessation in service. In addition, unauthorized use of
the Internet could also jeopardize the security of confidential information
stored in the computer systems of our customers and other parties using the
Internet, which could deter potential customers from accessing our websites or
websites to which our websites link and give rise to liability to users whose
security or privacy has been infringed. A security breach could result in loss
of customers, damage to our reputation, damage to our websites or to the
websites to which our websites link, costs of repair and detection, and other
expenses. The occurrence of any of these events could have a material adverse
effect on our business, results of operations and financial condition.
Our operations are dependent in part upon our ability to protect our
operating systems and the operating systems of our hosting partner, against
physical damage from fire, floods, earthquakes, power loss, telecommunications
failures, break-ins and similar events. Despite our implementation of network
security measures, our servers are vulnerable to computer viruses, break-ins and
similar disruptions from unauthorized tampering with our computer systems. The
occurrence of any of these events could result in interruptions, delays or
cessations in service to users of our media properties, which could have a
material adverse effect on our business, operating results and financial
condition.
Risks Related To Our Proprietary Technology and Intellectual Property
We regard our technology and the content created for our websites as
proprietary and will attempt to protect such proprietary rights through, among
other means, trademark and copyright registration, trade secret protection and
confidentiality and non-disclosure agreements with our employees and independent
contractors. We plan to register our trademarks and copyrights in the United
States and in any foreign countries in which such trademarks and copyrights are
used. Effective trademark, copyright and trade secret protection may afford us
only limited protection in the United States and may not be available in every
country in which our websites and services are distributed or made available.
Despite our efforts to protect our proprietary rights, the rapid pace of
technological innovation on the Internet makes it possible for third parties to
copy or otherwise obtain and use our products or technology without
authorization, or to develop similar technology independently. Policing
unauthorized use of our technology and intellectual property will be difficult.
There can be no assurance that the precautions we have taken will prevent
misappropriation or infringement of our technology or intellectual property. In
addition, notwithstanding our best efforts to obtain confidentiality agreements
from all employees and independent contractors providing services in connection
with the development and design of our websites, no assurance can be given that
others will not gain access to our trade secrets, that such agreements will be
honored by employees and independent contractors, or enforced by the courts, or
that we will be able to protect effectively our rights to our proprietary
technology and intellectual property.
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of business, including
claims of alleged infringement of the trademarks and other intellectual property
rights of third parties by us and our licensees. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources. We are not aware of any legal proceedings or claims that
the we believe will have, individually or in the aggregate, a material adverse
effect on the our business, financial condition or results of operations
Government Regulation and Legal Uncertainties
Our proposed business is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
or commerce on the Internet. However, due to the increasing popularity and use
of the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet, covering issues such as user privacy,
pricing, characteristics and quality of products and services. The
Telecommunications Reform Act of 1996 imposes criminal penalties on anyone who
distributes obscene, indecent or patently offensive communications on the
Internet.
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Although most of that law has recently been held to be unconstitutional, new
Internet regulating legislation is constantly being discussed, and two bills
recently passed the Senate commerce committee. One bill would require websites
to verify the age of every user if the site distributes material deemed obscene
to minors, which would be the first step in regulating the Internet. The manner
in which these bills, or any similar legislation which may be enacted in the
future, will be interpreted and enforced and their effects on our proposed
operations cannot yet be fully determined. The adoption of any additional laws
or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for our services and products and increase our cost of doing
business. Furthermore, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, libel and
personal privacy is uncertain. Any such new legislation or regulation could have
an adverse effect on our business, results of operations and financial
condition.
Due to the global nature of the Internet, it is possible that, although our
transmissions over the Internet originate primarily in New York and New Jersey,
the governments of other states and foreign countries might attempt to regulate
these transmissions or prosecute us for violations of their laws. These laws may
be modified, or new laws enacted, in the future. Any of the foregoing
developments could have a material adverse effect on our business, results of
operations and financial condition. Any new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the Internet and other online services could have a material
adverse effect on our business, results of operations and financial condition.
Our Business May Be Affected By Internet Taxation
A number of legislative proposals have been made at the federal, state and
local level, and by certain foreign governments, that would impose additional
taxes on the sale of goods and services over the Internet and certain states
have taken measures to tax Internet-related activities. Although Congress
recently placed a three-year moratorium on state and local taxes on Internet
access or on discriminatory taxes on electronic commerce, existing state or
local laws were expressly excepted from this moratorium. Further, once this
moratorium is lifted, some type of federal and/or state taxes may be imposed
upon Internet commerce. This legislation, or other attempts at regulating
commerce over the Internet, may substantially impede the growth of commerce on
the Internet and, as a result, adversely affect our opportunity to derive
financial benefit from those activities.
We May Be Found Liable For Information Services and Commerce-Related
Activities
Because materials may be downloaded by online or Internet services operated
or facilitated by us and may be subsequently distributed to others, there is a
potential that claims will be made against us for defamation, negligence,
copyright or trademark infringement, personal injury, or other theories, based
on the nature and content of such materials. Such claims have been brought, and
sometimes successfully pressed, against online service providers in the past.
Such claims might include, among others, that by providing hypertext links to
websites operated by third parties, we are liable for copyright or trademark
infringement or other wrongful actions by such third parties through such
websites. Such claims, if successful, could have a material adverse effect on
our business, results of operations and financial condition.
We May Be Subject To Privacy Regulations
The Federal Trade Commission ("FTC") is considering adopting regulations
regarding the collection and use of personal identifying information obtained
from individuals when accessing websites, with particular emphasis on access by
minors. These regulations may include requirements that companies establish
certain procedures to, among other things: (i) give adequate notice to consumers
regarding information collection and disclosure practices; (ii) provide
consumers with the ability to have personal identifying information deleted from
a company's database; (ii) provide consumers with access to their personal
information and with the ability to rectify inaccurate information; (iv) clearly
identify affiliations or a lack thereof with third parties that may collect
information or sponsor activities on a company's website; and (vi) obtain
express parental consent prior to collecting and using personal identifying
information obtained from children under 13 years of age. These regulations may
also include enforcement and redress provisions. Moreover, even in the absence
of those regulations, the FTC has begun investigations into the privacy
practices of companies that collect information on the Internet. One
investigation resulted in a consent decree pursuant to which an Internet company
agreed to establish programs to implement the principles noted above. We may
become subject to a similar investigation, or the FTC's regulatory and
enforcement efforts may adversely affect our ability to collect demographic and
personal information from users, which could have an adverse effect on our
ability to provide highly
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targeted opportunities for advertisers and electronic commerce marketers. Any of
these developments would have a material adverse effect on our business, results
of operations and financial condition.
It is also possible that "cookies," or information keyed to a specific
server, file pathway or directory location that is stored on a user's hard
drive, possibly without the user's knowledge, which are used to track
demographic information and to target advertising, may become subject to laws
limiting or prohibiting their use. A number of Internet commentators, advocates
and governmental bodies in the United States and other countries have urged the
passage of laws limiting or abolishing the use of cookies. Limitations on or
elimination of our use of cookies could limit the effectiveness of our targeting
of advertisements, which could have a material adverse effect on our business,
results of operations and financial condition.
The European Union ("EU") has adopted a directive that imposes restrictions
on the collection and use of personal data. Under the directive, EU citizens are
guaranteed rights to access their data, rights to know where the data
originated, rights to have inaccurate data rectified, rights to recourse in the
event of unlawful processing and rights to withhold permission to use their data
for direct marketing. The directive could, among other things, affect U.S.
companies that collect information over the Internet from individuals in EU
member countries, and may impose restrictions that are more stringent than
current Internet privacy standard in the United States. In particular, companies
with offices located in EU countries will not be allowed to send personal
information to countries that do not maintain adequate standards of privacy. The
directive does not, however, define what standards of privacy are adequate. As a
result, the directive may adversely affect the activities of companies such as
our company that engage in data collection from users in EU member countries.
Impact of Year 2000 Issue
The Year 2000 issue results from computer programs written using two
digits, rather than four, to define the applicable year. Any of our computer
programs that have date-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.
We have made a preliminary assessment of the Year 2000 readiness of our
operating financial and administrative systems, including the hardware and
software that support our systems. Our assessment plan consists of contacting
third-party vendors and licensors of material hardware, software and services
that are both directly and indirectly related to the delivery of our content
properties; assessing repair or replacement requirements; implementing repair or
replacement procedures; and creating contingency plans in the event of Year 2000
failures.
To the extent we purchase additional systems, we require that such systems
are warranted by the vendors to be Year 2000 compliant. We continue to seek
assurances from our existing vendors whose systems are not warranted to be Year
2000 compliant that such systems will be Year 2000 compliant. We employ a
manager of management information systems, whose responsibilities include
oversight of Year 2000 compliance. We do not separately track the internal costs
incurred for Year 2000 projects, which are principally the related payroll costs
for its information systems personnel. Although we do not believe that any
additional Year 2000 compliance-related costs will be significant, there can be
no assurance that costs incurred to address unanticipated issues would not have
a material adverse effect on our business, operating results and financial
conditions. Any failure of third-party equipment or software comprising any part
of our systems to operate properly with regard to Year 2000 and thereafter could
require us to incur unanticipated expenses to address associated problems, which
could have a material adverse effect on our business, operating results and
financial condition.
We believe, based on an internal assessment, that the current versions of
the software products we utilize are Year 2000 compliant. We have no plans to
ascertain whether the internal systems and products of our potential future
customers are Year 2000 compliant. We may in the future be subject to claims
based on Year 2000 problems in others' products or issues arising from the
integration of multiple products within an overall system. Although we have not
been involved in any litigation or proceeding to date involving our products or
services related to Year 2000 issues, there can be no assurance that we will not
in the future be required to defend our products or services or to negotiate
resolutions of claims based on Year 2000 issues. The costs of defending and
resolving Year 2000-related disputes, and any liabilities of ours for Year
2000-related damages, including consequential damages, could have a material
adverse effect on our business, operating results and financial condition.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of our control will be Year 2000 compliant. The failure by those
entities to be Year 2000 compliant could result in a systemic failure beyond our
control, such as a prolonged Internet, telecommunications or electrical failure,
which could also prevent us from delivering our Network programming, decrease
the use of the Internet or prevent users from accessing our websites, any of
which would have a material adverse effect on our business, results of
operations and financial condition.
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We do not have any specific contingency plans if any Year 2000 problems
develop with respect to the our embedded systems or systems acquired from
vendors. Contingency plans will be developed if we identify instances of
noncompliance and such noncompliance is expected to have a material adverse
impact on our operations. The cost of developing and implementing such plans may
itself be material.
The Year 2000 problem is pervasive and complex, as virtually every computer
operation will be affected in some way. Consequently, no assurance can be given
that Year 2000 compliance can be achieved without significant additional costs.
No Assurance of A Public Market For Our Common Stock
Our shares of Common Stock are presently traded in the over-the-counter
market. Our Common Stock is quoted on the "Over The Counter Bulletin Board," an
NASD-sponsored and operated inter-dealer automated quotation system for equity
securities not included in the Nasdaq SmallCap Market or Nasdaq National Market.
Although the Bulletin Board has recently begun to receive greater recognition
from the brokerage community, the trading volume of securities quoted on the
Bulletin Board is normally significantly less than that of securities traded in
the Nasdaq SmallCap and Nasdaq National Markets. As a result, purchasers of the
shares of our Common Stock may have more difficulty selling or obtaining
quotations of the price of our securities than they would have if our Common
Stock were listed on Nasdaq or a national securities exchange. Unless and until
our Common Stock is listed on the Nasdaq or a national securities exchange, of
which no assurance can be given, the liquidity of our Common Stock may be
impaired, not only in the number of shares which could be bought and sold, but
also through delays in the timing of transactions, and lower prices for shares
of our Common Stock than might otherwise be obtained. The development of a
public trading market for our Common Stock depends upon the existence of willing
buyers and sellers, the presence of which is not within our control. There can
be no assurance that a regular trading market for the Common Stock will develop
or that, if developed, it will be sustained.
Volatility Of Stock Price
The trading price of our Common Stock has been and may continue to be
subject to wide fluctuations in response to a number of events and factors, such
as quarterly variations in operating results, announcements of technological
innovations or new products and media properties by us or our competitors,
changes in financial estimates and recommendations by securities analysts, the
operating and stock price performance of other companies that investors may deem
comparable to our company and news reports relating to trends in our markets. In
addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of such companies.
These broad market and industry fluctuations may adversely affect the trading
price of our Common Stock, regardless of our operating performance.
Concentration Of Stock Ownership
As of March 31, 1999, the present directors, executive officers, greater
than 5% shareholders and their respective affiliates beneficially owned
approximately 69% of our outstanding Common Stock. Additionally, as of March 31,
1999, Hollinger and Pioneer, through the combination of senior convertible
securities, options, and warrants have the ability to acquire through conversion
or purchase directly from us approximately 24% of our outstanding Common Stock
on a fully-diluted basis.
As a result of their ownership, the directors, executive officers, greater
than 5% shareholders (including Hollinger and Pioneer) and their respective
affiliates collectively are able to control all matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may also have the effect
of delaying or preventing a change in control.
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Certain Anti-takeover Measures May Have an Adverse Effect on our Stock
Price.
Certain provisions of our certificate of incorporation and Delaware
corporation law could discourage potential acquisition proposals and delay,
defer or prevent a change in control of AIME, even if such events could be
beneficial, in the short term, to the interests of our stockholders. For
example, our Certificate of Incorporation allows us to issue preferred stock
with rights senior to those of the common stock without stockholder action. We
are also subject to provisions of Delaware corporation law that prohibit a
publicly-held Delaware corporation from engaging in a broad range of business
combinations with a person who, together with affiliates and associates, owns
15% or more of the corporation's common stock (an "interested stockholder") for
three years after the person became an interested stockholder, unless the
business combination is approved in a prescribed manner.
ITEM 2. Financial Information
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth as of and for the years
ended December 31, 1998 and 1997 are derived from the consolidated financial
statements of AIME that have been audited by KPMG LLP, which contains an
explanatory paragraph that states that AIME has suffered recurring losses from
operations, has a net capital deficiency, and has incurred accumulated losses
through December 31, 1998 which raise substantial doubt about AIME's ability to
continue as a going concern. The consolidated financial statements and the
selected consolidated financial data do not include any adjustments that might
result from the outcome of this uncertainty. The selected financial data set
forth for the years as of and ended December 31, 1996, 1995 and 1994 are derived
from the consolidated financial statements of AIME that have been audited by
Schiffman Hughes Brown. The consolidated financial statements as of and for the
years ended December 31, 1998 and 1997 and the report of KPMG LLP thereon are
included elsewhere in this Registration Statement. The consolidated financial
statements for the year ended December 31, 1996 and the report of Schiffman
Hughes Brown are also included elsewhere in this Registration Statement. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto appearing in Items 2 and
13, respectively.
25
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data
Revenues $ -- $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
Operating expenses:
Content production and development costs 2,369,921 245,758 -- -- --
Selling, general and administrative 4,161,785 772,291 -- -- --
------------ ------------ ------------ ------------ ------------
6,531,706 1,018,049 -- -- --
------------ ------------ ------------ ------------ ------------
Loss from operations (6,531,706) 1,018,049 -- -- --
------------ ------------ ------------ ------------ ------------
Other income (expenses):
Interest income 34,211 -- -- -- --
Interest expense (497,797) (20,520) -- -- --
------------ ------------ ------------ ------------ ------------
Loss from continuing operations (6,995,292) (1,038,569) -- -- --
Discontinued operations:
Loss from discontinued operations (12,524,144) (6,737,461) (3,749,394) (445,523) (20,351)
Loss on disposal (609,086) -- -- -- --
------------ ------------ ------------ ------------ ------------
Loss prior to extraordinary item (20,128,522) (7,776,030) (3,749,394) (445,523) (20,351)
Extraordinary loss on extinguishment of debt (15,749,817) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss (35,878,339) (7,776,030) (3,749,394) (445,523) (20,351)
Cumulative dividends and accretion of convertible
preferred stock 1,406,003 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss to common stockholders $(37,284,342) $ (7,776,030) $ (3,749,394) $ (445,523) $ (20,351)
============ ============ ============ ============ ============
Basic and diluted net loss per share from:
Continuing operations $ (0.58) $ (0.12) $ -- $ -- $ --
Discontinued operations (0.90) (0.78) (0.68) (0.17) (0.18)
Extraordinary item (1.07) -- -- -- --
------------ ------------ ------------ ------------ ------------
Basic and diluted net loss per common shareholder $ (2.55) $ (0.90) $ (0.68) $ (0.17) $ (0.18)
============ ============ ============ ============ ============
Basic and diluted weighted average number of common
shares outstanding 14,609,826 8,678,188 5,523,809 2,618,740 112,619
============ ============ ============ ============ ============
Consolidated Balance Sheet Data
Working capital (deficiency) $ 188,172 $ 1,355,482 $ 2,220,801 $ 852,797 $ (11,216)
Total assets 6,301,323 7,635,882 2,465,415 961,937 11,924
Current liabilities 1,446,334 1,218,263 244,614 88,676 23,140
Long-term liabilities 6,865,759 1,056,032 -- -- --
Series A Senior convertible preferred stock 10,163 -- -- -- --
Common stock 16,359 12,917 6,730 5,240 113
Additional paid-in capital 45,832,345 17,339,968 7,783,655 1,333,895 9,022
Accumulated deficit (47,869,637) (11,991,298) (4,215,268) (465,874) (20,351)
Total stockholders' (deficit) equity (2,010,770) 5,361,587 3,575,117 873,261 (11,216)
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, our consolidated financial
statements, including the notes thereto, which appear elsewhere in this
registration statement.
Overview
We are a media company engaged in the development and marketing of
entertainment program networks ("Program Networks" or "Networks") to be
distributed through the Internet and cable and satellite television. Each of our
Networks is comprised of a group of programs with a common theme, such as
comedy, crime and law enforcement, and romance, and is targeted towards a niche
audience. Initially, our Networks are formatted for the Web, the graphical,
multimedia-rich portion of the Internet, utilizing streaming video and audio
technology, a graphical environment and interactive features. Our strategy is to
establish brand identity and attract advertising support for our Networks on the
Web and migrate our Networks to other media platforms, including digital cable
and direct satellite.
Our company began operations in an unrelated business in 1986, and was
inactive from 1992 until March 1995, when our company acquired a direct
marketing company. Since 1995, we have focused exclusively on Internet-related
products and services. In September 1997, we acquired WebFeat, a company engaged
in the development and marketing of Networks. This acquisition has been
accounted for as a purchase. Until recently, a principal focus of our business
was the sale and distribution of our webPASSPORT System, a television set-top
box capable of providing Internet access to a standard television. In the first
quarter of 1999 we decided to redirect our focus exclusively towards the
development, marketing and distribution of entertainment Program Networks.
Accordingly, we have classified all prior period expenses associated with our
webPASSPORT and other discontinued operations as loss from discontinued
operations. Substantially all of our net losses prior to the September 1997
acquisition of WebFeat have been so classified.
From inception through December 31, 1998, we have not recognized any
revenues from continuing operations and we do not anticipate significant
revenues in the near future. From inception through December 31, 1998, we have
incurred significant losses and negative cash flow from operations. As of
December 31, 1998, we had an accumulated deficit of $47.9 million. This amount
represents a cumulative loss from continuing operations of $8,033,861, a
cumulative loss from discontinued operations of $24,085,959, and an
extraordinary loss on extinguishment of debt of $15,749,817. Our independent
auditors have included an explanatory paragraph in their report on our
consolidated financial statements as of and for the years ended December 31,
1998 and 1997, which states that our company has suffered recurring losses from
operations, has a net capital deficiency, and has incurred accumulated losses
through December 31, 1998 which raise substantial doubt about our ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
We cannot assure you that we will be successful in developing and marketing our
Networks or that we will ever be profitable.
Results of Operations
Years Ended December 31, 1998 and 1997
As a result of our decision to discontinue our webPASSPORT business
operations, a significant portion of our 1998 expenses, all of our 1998
revenues, substantially all of our 1997 expenses, and all of our 1997 revenues
have been attributed to discontinued operations.
For the years ended December 31, 1998 and December 31, 1997, we had no
revenues from continuing operations.
Content production and development costs for the year ended December 31,
1998 were $2,369,921 as compared to $245,758 for 1997. The increase in content
production expenses represents one full year of content production in comparison
to only three months of such costs incurred in 1997. Additionally, in 1998, we
increased the scope of our ComedyNet project, significantly expanding live-event
filming and studio productions, and we commenced work on a number of additional
content projects.
Selling, general and administrative costs for the year ended December 31,
1998 were $4,161,785 as compared to $772,291 for 1997. The increase in selling,
general, and administrative expenses represents one full year of such costs as
well as an overall increase in activity related to the development and marketing
of our Networks.
27
<PAGE>
Interest expense for the year ended December 31, 1998 was $497,797 as
compared to interest expense of $20,520 for 1997. The increase in interest
expense represents one full year of interest on the first debenture issued to
Hollinger in December 1997, as well as additional interest expense on the second
debenture issued to Hollinger in February 1998. Interest on the Hollinger
debentures is cumulative, and payable in cash only under an event of default or
at the Company's option. Interest income of $34,211 for the year ended December
31, 1998 was attributable to interest we earned on various cash and cash
equivalents holdings utilized in our cash management activities.
Due to the reasons set forth above, our loss from continuing operations was
$6,995,292 for the year ended December 31, 1998, as compared with a loss of
$1,038,569 in 1997.
Loss from discontinued operations and loss on disposal for the year ended
December 31, 1998 was $13,133,230 as compared to a loss of $6,737,461 for 1997.
The increase in loss from discontinued operations and loss on disposal
represents our increased efforts to complete development work, market, and
commercialize our webPASSPORT product line as well as the write off of
associated inventory items and various computer assets in connection with our
decision to discontinue these operations.
Due to the reasons set forth above, our loss prior to any extraordinary
item was $20,128,522 for the year ended December 31, 1998, as compared with our
net loss of $7,776,030 for 1997.
Extraordinary loss on extinguishment of debt was $15,749,817 for the year
ended December 31, 1998 as compared to $0 for 1997. The increase in
extraordinary loss on extinguishment of debt represents the non-cash impact of
the November 16, 1998 amendment to certain securities previously issued to
Hollinger Digital, Inc. No such amendments occurred in 1997.
Cumulative dividends and accretion of convertible preferred stock was
$1,406,003 for the year ended December 31, 1998 as compared to $0 for 1997. The
increase in cumulative dividends and accretion of convertible preferred stock
represents non-cash dividends and accretion associated with the November 16,
1998 issuance of Series A Convertible Preferred Stock. No such issuances
occurred in 1997.
Years Ended December 31, 1997 and 1996
As a result of our decision to discontinue our webPASSPORT business
operations, substantially all of our 1997 expenses and all of our 1997 revenues
have been attributed to discontinued operations. Likewise, all of our 1996
revenues and expenses have been so reclassified. Substantially all of our
content production and development costs, selling, general, and administrative
expenses that were not reclassified were incurred in our business subsequent to
our September 1997 acquisition of WebFeat or otherwise represented general
corporate expenditures and are properly classified as continuing operations.
Due to the reasons set forth above, our content production and development
costs, selling, general and administrative expenses, and interest expense were
$245,758, $772,291, and $20,520, respectively, for the year ended December 31,
1997, as compared with no amounts for 1996.
Loss from discontinued operations for the year ended December 31, 1997 was
$6,737,461 as compared to $3,749,394 for 1996. The increase in loss from
discontinued operations represents our early efforts to design, and market our
webPASSPORT product line. Further, in 1997 such efforts increased in scope and
took place over an entire fiscal year, whereas in 1996, such expenditures were
more limited in scope and occurred over a shorter period of time.
Due to the reasons set forth above, our net loss was $7,776,030 for the
year ended December 31, 1997, as compared with $3,749,394 for 1996.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through the
private placement of common stock, preferred stock and convertible secured
debentures. In addition, we have attempted to reduce cash flow requirements by
compensating key employees, consultants, suppliers and other vendors with Common
Stock and options to purchase Common Stock. As of December 31, 1998, we had $1.6
million in cash and cash equivalents. To date, we have experienced net losses
and negative cash flows from operating activities, and, as of December 31, 1998,
we had an
28
<PAGE>
accumulated deficit of $47.9 million. During the years ended December 31, 1998,
1997, and 1996 we utilized a total of $17.7 million of net cash in operating
activities.
Net cash used in operating activities was $10.5 million for the year ended
December 31, 1998 and $4.1 million for the year ended December 31, 1997. Net
cash used in operating activities for these periods was primarily attributable
to our net losses during these periods, adjusted for certain non-cash items. The
increase in net cash used in operating activities was due to a significant
increase in our activities associated with the discontinued webPASSPORT division
as well as an overall increase in our live event filming and studio productions
associated with ComedyNet and other content projects.
Net cash used in investing activities was $2.0 million for the year ended
December 31, 1998 and $605,358 for the year ended December 31, 1997. Net cash
used in investing activities related to the acquisition of property and
equipment, investment in AIM/New Tech LLC, and the license of certain
technology, copyrights, and computer programs.
Net cash provided by financing activities was $11.9 million for the year
ended December 31, 1998 and $5.6 million for the year ended December 31,1997.
Net cash provided by financing activities in 1998 was primarily attributable to
net proceeds received from the issuance of a convertible secured debenture, the
exercise of warrants by various investors, and the issuance of preferred stock.
Net cash provided by financing activities in 1997 was primarily attributable to
net proceeds received from the issuance of common stock, the exercise of
warrants by various investors, and the issuance of a convertible secured
debenture.
At December 31, 1998, we had working capital of approximately $188,000. We
expect to incur substantial additional expenses resulting in significant losses
at least through the period ending December 31, 1999 due to minimal revenues
associated with initial market entry, continued content production and
development costs as well as increased sales and marketing expenses associated
with market testing and roll-out. We anticipate that our existing capital
resources will be adequate to satisfy our capital requirements into the third
quarter of 1999. In order to continue operations, however, we will need to raise
additional funds through public or private financings. We have no current
commitments to obtain additional funds and we are unable to state the amount or
source of such additional funds.
Significant uncertainty currently exists with respect to the adequacy of
current funds to support our activities. This uncertainty will continue until a
positive cash flow from operations can be achieved. Additionally, we are
uncertain as to the availability of financing from other sources to fund any
cash deficiencies. These uncertainties raise doubt about our ability to continue
as a going concern.
We are currently evaluating financing options and may therefore elect to
raise additional capital, from time to time, through equity or debt financings
in order to capitalize on business opportunities and market conditions and
insure the continued development of our technology, products and services.
We presently have no material commitments for capital expenditures.
As of December 31, 1998, we had available net operating loss carryforwards
for federal income tax purposes of approximately $28.1 million. Because of the
"change in ownership" provisions of the Tax Reform Act of 1986, our net
operating loss carryforwards may be subject to an annual limitation on the
utilization of these carryforwards against taxable income in future periods if a
cumulative change in ownership of more than 50 percent occurs within any
three-year period. We have not made any determination concerning whether there
has been such a cumulative change in ownership. However, we believe that it is
likely that such a change in ownership occurred as a result of various equity
transactions occurring during 1996, 1997, and 1998.
Recent Accounting Pronouncements
The Financial Accounting Standards Board recently issued Statement of
Financial Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments and hedging, requiring recognition of all
derivatives as either assets or liabilities in the statement of financial
position measured at fair value. SFAS 133 will be effective for us in the year
2000. The effects of adopting SFAS 133 are not expected to have a material
impact on our financial condition, results of operations or cash flows.
The AICPA Accounting Standards Executive Committee recently issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement requires that
certain costs related to the development or purchase of internal-use software be
capitalized and amortized over the
29
<PAGE>
estimated useful life of the software, and is effective for fiscal years
beginning after December 15, 1998. The adoption of this SOP is not expected to
have a material impact on our financial position or results of operations.
The AICPA Accounting Standards Executive Committee recently issued SOP
98-5, "Reporting on the Costs of Start-Up Activities." This Statement requires
that costs incurred during start-up activities, including organization costs, be
expensed as incurred, and is effective for fiscal years beginning after December
15, 1998. The adoption of this SOP is expected to have no impact on our
financial position or results of operations.
Impact of Year 2000 Issue
The Year 2000 issue results from computer programs written using two digits
rather than four to define the applicable year. Any of our computer programs
that have date-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.
We have made an assessment of the Year 2000 readiness of our operating,
financial and administrative systems, including the hardware and software that
support its systems. Our assessment plan consists of contacting third-party
vendors and licensors of material hardware, software and services that are both
directly and indirectly related to the delivery of our content properties;
assessing repair or replacement requirements; implementing repair or replacement
procedures; and creating contingency plans in the event of Year 2000 failures.
To the extent we purchase additional systems, we require that such systems
are warranted by the vendors to be Year 2000 compliant. We continue to seek
assurances from our existing vendors whose systems are not warranted to be Year
2000 compliant that such systems will be Year 2000 compliant. We employ a
manager of management information systems, whose responsibilities include
oversight of Year 2000 compliance. We do not separately track the internal costs
incurred for Year 2000 projects, which are principally the related payroll costs
for our information systems personnel. Although we do not believe that any
additional Year 2000 compliance-related costs will be significant, there can be
no assurance that costs incurred to address unanticipated issues would not have
a material adverse effect on our business, operating results and financial
conditions. Any failure of third-party equipment or software comprising any part
of our systems to operate properly with regard to Year 2000 and thereafter could
require us to incur unanticipated expenses to address associated problems, which
could have a material adverse effect on our business, operating results and
financial condition.
We believe, based on the internal assessment, that the current versions of
the software products we utilize are Year 2000 compliant. We have no plan to
ascertain whether the internal systems and products of our potential future
customers are Year 2000 compliant. We may in the future be subject to claims
based on Year 2000 problems in others' products or issues arising from the
integration of multiple products within an overall system. Although we have not
been involved in any litigation or proceeding to date involving our products or
services related to Year 2000 issues, there can be no assurance that we will not
in the future be required to defend our products or services or to negotiate
resolutions of claims based on Year 2000 issues. The costs of defending and
resolving Year 2000-related disputes, and any liabilities for Year 2000-related
damages, including consequential damages, could have a material adverse effect
on our business, operating results and financial condition.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of our control will be Year 2000 compliant. The failure by those
entities to be Year 2000 compliant could result in a systemic failure beyond our
control, such as a prolonged Internet, telecommunications or electrical failure,
which could also prevent us from delivering our Network programming, decrease
the use of the Internet or prevent users from accessing our websites, any of
which would have a material adverse effect on our business, results of
operations and financial condition.
We do not have any specific contingency plans if any Year 2000 problems
develop with respect to our embedded systems or systems acquired from vendors.
Contingency plans will be developed if we identify instances of noncompliance
and such noncompliance is expected to have a material adverse impact on our
operations. The cost of developing and implementing such plans may itself be
material.
30
<PAGE>
The Year 2000 problem is pervasive and complex, as virtually every
computer operation will be affected in some way. Consequently, no assurance can
be given that Year 2000 compliance can be achieved without significant
additional costs.
Quantitative and Qualitative Disclosures About Market Risk
We do not believe that we are exposed to market risk with respect to
interest rates, currency exchange rates, commodity prices or other financial
instruments. Our investments are limited to highly liquid instruments with
maturities of three months or less. At December 31, 1998, we had approximately
$1.6 million of short-term investments classified as cash and cash equivalents.
At December 31, 1998, our outstanding debt consisted of the debentures issued to
Hollinger, which accrue interest at a fixed rate.
ITEM 3. PROPERTIES
As of March 31, 1999, AIME, including all subsidiaries, continued to
operate out of AIME's corporate headquarters in New York, New York. The office
space, which is made up of a number of suites, totals approximately 14,000
square feet. AIME's lease for all but one of the suites in the office expires
February, 2001. The lease for the remaining suite expires July, 2001. In
addition to AIME's executive offices, the New York property also houses AIME's
Internet Production Studio ("Studio"), which totals approximately 1,323 square
feet. The in-house Studio provides all audio and video services for AIME's
Networks' content and operations. AIME believes that the Studio is able to
accommodate its current Internet production needs. However, the capacity of this
Studio is limited, and AIME may require a larger studio in the future to produce
programming for distribution on television-based platforms. Accordingly, AIME
may be required to expend significant amounts of capital to expand its current
Studio or lease a larger one.
In addition to the New York office, AIME has a five-year lease commitment
expiring on October 24, 2001 for approximately 4,200 square feet of office space
in Cherry Hill, New Jersey.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 31, 1999 by (a) each person known by
us to beneficially own five percent or more of the outstanding shares of common
stock, (b) each director of the company, (c) each executive officer of the
company named in the "Summary Compensation Table" under Item 6 below, and (d)
all executive officers and directors as a group. As of March 31, 1999, there was
outstanding 16,896,834 shares of our common stock.
<TABLE>
<CAPTION>
Amount and Nature of Percentage
Name of Beneficial Owner Beneficially Ownership (1) of Class
- ------------------------ -------------------------- ----------
<S> <C> <C>
Mark Graff (2)...................... 3,995,000 23.64
James S. Hatch (3).................. 100,000 *
David Kopans (4).................... 150,000 *
William Zaccheo (5)................. 250,000 1.48
Richard Perle (6)................... 25,000 *
Robert Frost (7).................... 325,000 1.89
John Ferraro (8).................... 3,430,703 17.79
Philip Kunsberg (9)................. 0 0
Michael Salaman (10)................ 1,413,000 8.24
Hollinger Digital, Inc. (11)........ 3,388,079 17.19
Pioneer Ventures Associates Limited
Partnership (12).................... 2,930,703 15.60
Ventures Management
Partners LLC (13)................... 500,000 2.88
Michael Lauer (14) ................. 3,069,000 18.16
All executive officers and directors
as a group (eight persons) (15)..... 8,025,703 40.35
</TABLE>
* Less than one percent.
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<PAGE>
(1) Unless otherwise noted, each of the persons named has sole voting and
investment power with respect to the shares reported.
(2) Represents 2,620,000 shares of Common Stock owned individually and
1,375,000 shares as to which Mr. Graff exercises voting power pursuant to a
Voting Trust and Stockholders' Agreement dated January 1, 1997 (the "Voting
Trust Agreement"). Pursuant to that agreement, Mr. Graff has a right of
first refusal to purchase 1,375,000 shares if any of the owners of such
shares wishes to sell such shares pursuant to a bona fide offer. Pursuant
to a Voting and Shareholders Agreement, dated as of November 16, 1998, Mr.
Graff has agreed to vote these shares to elect as a director a designee of
Pioneer. Excludes 2,930,703 shares beneficially owned by Pioneer and
3,388,079 shares beneficially owned by Hollinger, which shares are subject
to a Shareholders Agreement, dated November 16, 1998 (the "Shareholders
Agreement"), pursuant to which Mr. Graff, Pioneer and Hollinger have agreed
to vote their shares, for a term of five years from the date of the
Agreement, in a manner which would ensure that AIME's Board of Directors
consists of Mr. Graff, two persons designated by Hollinger, and one
designee of Pioneer.
(3) Represents shares subject to stock options presently exercisable.
(4) Represents shares subject to stock options presently exercisable or
exercisable within 60 days.
(5) Pursuant to the Voting Trust Agreement, Mr. Graff exercises voting power
with respect to these shares, and these shares are subject to a right of
first refusal by Mr. Graff.
(6) Includes 25,000 shares subject to stock options presently exercisable.
Excludes 3,388,079 shares beneficially owned by Hollinger of which Mr.
Perle is Chairman and Chief Executive Officer.
(7) Represents shares subject to stock options presently exercisable or
exercisable within 60 days.
(8) Includes 2,930,703 shares beneficially owned by Pioneer and 500,000 shares
beneficially owned by Ventures Management Partners LLC. Mr. Ferraro is an
officer of Pioneer Ventures Corp., which is the managing member of Ventures
Management Partners LLC, which is the general partner of Pioneer. The
business address of Pioneer is 651 Day Hill Road, P.O. Box 40, Windsor, CT
06095. Mr. Ferraro disclaims beneficial ownership as to all of these
shares.
(9) Excludes 3,388,079 shares beneficially owned by Hollinger of which Mr.
Kunsberg is Executive Vice President and General Counsel.
(10) Based upon record ownership. Includes 1,163,000 shares owned jointly with
Mr. Salaman's wife. Also includes 250,000 shares subject to stock options
presently exercisable. Mr. Salaman's address is 1002 Smith Drive, Bala
Cynwyd, PA 19004.
(11) Includes 2,812,484 shares subject to an option held by Hollinger which
entitles Hollinger to purchase up to 15% of the company's outstanding
shares on a fully diluted basis. This number is based upon shares and
options outstanding as of March 31, 1999. Pioneer is entitled to
participate up to 50% in the purchase of shares upon the exercise of
Hollinger's option. Excludes 3,995,000 shares beneficially owned by Mr.
Graff and 2,930,703 shares beneficially owned by Pioneer, which shares are
subject to the Shareholders Agreement.
(12) Includes 1,391,703 shares issuable upon conversion of Series A Preferred
Stock and 500,000 shares issuable upon the exercise of warrants presently
exercisable. Excludes 3,995,000 shares beneficially owned by Mr. Graff and
3,388,079 shares beneficially owned by Hollinger, which shares are subject
to the Shareholders Agreement.
(13) Represents shares issuable upon the exercise of warrants presently
exercisable.
(14) Based upon record ownership. Includes 1,941,600 shares beneficially owned
by Lancer Offshore, Inc., 969,000 shares beneficially owned by Lancer
Partners, Limited Partnership, and 150,000 shares beneficially owned by
Lancer Voyager Fund. Lancer Offshore, Inc. is a British Virgin Islands
private investment corporation with its principal office located at c/o
CITCO Fund Service (Curacao) N.V., Kaya Flamboyan 9, P.O. Box 812, Curacao,
Netherlands Antilles. Lancer Partners, Limited Partnership is a Connecticut
private investment limited partnership with its principal office located at
980 Post Road East, Suite 3, Westport, CT 06880. Lancer
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<PAGE>
Voyager Fund is a British Virgin Islands private investment corporation
with its principal office located at c/o Mees Pierson, Windemere House, 404
East Bay Street, P.O. Box SS6238, Nassau Bahamas. Mr. Lauer's principal
business office is located at 980 Post Road East, Suite 3, Westport, CT
06880. Mr. Lauer is the sole manager and principal member of Lancer
Management Group, LLC, which is the sole investment manager of Lancer
Offshore, Inc. and Lancer Voyager Fund. Mr. Lauer is the sole manager and
principal member of Lancer Management Group II, LLC, which is the sole
general partner of Lancer Partners, Limited Partnership.
(15) Includes 600,000 shares which are subject to options presently exercisable
or exercisable within 60 days. Also includes shares subject to the Voting
Trust Agreement beneficially owned by Mr. Graff. Also includes 2,930,703
shares beneficially owned by Pioneer and 500,000 shares beneficially owned
by Ventures Management Partners LLC. Excludes 3,388,079 shares beneficially
owned by Hollinger.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each of
the directors and executive officers of AIME:
Name Age Position(s)
- ---- --- -----------
Mark Graff 48 Chief Executive Officer, President and
Director
William J. Zaccheo 44 Executive Vice President
James Stokes Hatch 55 Chief Operating Officer and Corporate
Secretary
David Kopans 30 Chief Financial Officer
John F. Ferraro 65 Director
Robert Frost 59 Director
Philip Kunsberg 49 Director
Richard N. Perle 57 Director
MARK GRAFF has been a Director and President of AIME since 1997, and Chief
Executive Officer since 1998. In 1987 he founded Graff Pay-Per-View Inc., which
he headed as President and Chief Operating Officer through 1995. Mr. Graff
founded WebFeat, Inc. in 1996, which was acquired by AIME in 1997.
WILLIAM J. ZACCHEO has been Executive Vice President of AIME since 1997.
Mr. Zaccheo served as President of WebFeat, Inc. from 1996 to 1997. Prior to his
tenure at WebFeat, Mr. Zaccheo was a consultant in the television and cable
industry and was President of Affiliate Sales and Marketing at E! Entertainment
Television.
JAMES STOKES HATCH has been AIME's Chief Operating Officer since 1998, and
Corporate Secretary since 1997. From 1994 to 1997 he served as Corporate
Secretary at Wave Systems Corp. a high-tech company developing secure chip-based
electronic commerce solutions.
DAVID KOPANS has been Chief Financial Officer since 1997. From 1995 until
joining AIME, he served as Head of Finance at Wave Systems Corp. Prior to that
time, Mr. Kopans was a Senior Associate with Coopers & Lybrand from 1991 to
1994.
JOHN F. FERRARO has been a Director since November, 1998. Since 1981 Mr.
Ferraro has been Chairman of the Board and Chief Executive Officer of
Thermodynetics, Inc., a company engaged in the design, manufacture and sale of
enhanced surface metal tubing and related assemblies. Mr. Ferraro has served as
President and Director of Pioneer Capital Corp. since 1988, and has been
Treasurer, Secretary and a Director of Pioneer Partners Corp. since 1993. In
1997 Mr. Ferraro became Secretary and a Director of Pioneer Ventures Management
Partners LLC, the general partner of Pioneer Ventures Associates Limited
Partnership.
ROBERT FROST has been an AIME Director since 1997. Since founding ECOM
Consultants, Inc. in 1974, he has served as President of the investor relations
and investment consulting firm. Mr. Frost is also a Director of Calamos Asset
Management and Bankers American Life Assurance Co.
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PHILIP KUNSBERG has been a Director since 1998. Mr. Kunsberg has been
Executive Vice President and General Counsel of Hollinger Digital since May,
1997. From 1992 to 1997 he worked at the Los Alamos National Laboratory in New
Mexico, primarily in the area of computer simulation and analysis of complex
organizations. During the same period Mr. Kunsberg served as Executive Director
of the Technology Institute, a non-profit organization dedicated to promoting
international collaboration in science and technology.
RICHARD N. PERLE has been a Director since 1997. Since 1997 he has served
as Chairman and Chief Executive Officer of Hollinger Digital, Inc. Mr. Perle has
served as a Resident Fellow of the American Enterprise Institute for Public
Policy Research since 1987. From 1981 to 1988 he was the Assistant Secretary for
the United States Department of Defense, International Security Policy. A member
of the International Advisory Board of Hollinger Inc., Mr. Perle also serves on
the Boards of Hollinger International,Inc., Hollinger Digital, Inc., and Morgan
Crucible PLC UK.
Mr. Ferraro was designated to serve on the Board of Directors by Pioneer
Ventures Associates Limited Partnership. Messrs. Perle and Kunsberg were
designated to serve on the Board of Directors by Hollinger Digital, Inc.
ITEM 6. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information with respect to the compensation
paid or awarded by the Company to the Chief Executive Officer and the other
executive officers whose compensation exceeded $100,000 for services rendered in
all capacities during 1998.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Number of Shares
Name and Principal Underlying All Other
Position Year Salary($) Bonus($) Options($) Compensation ($) (2)
- ------------------ ---- --------- -------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
Mark Graff 1998 $300,000 -0- -0- $2,328
Chief Executive
Officer and President
James S. Hatch 1998 $140,000 -0- -0- -0-
Chief Operating
Officer
David Kopans 1998 $140,000 -0- -0- -0-
Chief Financial
Officer
William J. Zaccheo 1998 $175,000 -0- -0- -0-
Executive Vice
President
Peter Yunich (1) 1998 $200,000 $81,729 -0- $113,361
</TABLE>
- ----------
(1) Effective August 28, 1998, Mr. Yunich's employment as Chairman and Chief
Executive Officer of the company terminated.
(2) In the case of Mr. Graff, represents company paid term life insurance. In
the case of Mr. Yunich, represents $15,361 for company paid term life
insurance and $98,000 in severance payments.
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<PAGE>
Fiscal Year End Option Value Table
The following table sets forth information regarding the aggregate number
and value of options held by the executive officers named in the Summary
Compensation Table as of December 31, 1998. No options were exercised by the
named executive officers during 1998.
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised Options In-The-Money Options
at December 31, 1998 (#) at December 31, 1998 ($)(1)
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark Graff 0 0 $ 0 $ 0
James S. Hatch 100,000 50,000 $ 237,500 $ 118,750
William J. Zaccheo 0 0 $ 0 $ 0
David Kopans 100,000 50,000 $ 262,500 $ 131,250
Peter Yunich 500,000 0 $1,687,500 $ 0
</TABLE>
(1) The closing price for AIME's Common Stock on the OTC Bulletin Board on
December 31, 1998 was $ 4.375 per share. Value is calculated on the basis
of the difference between the respective option exercise prices and $4.375,
multiplied by the number of shares of Common Stock underlying the
respective options.
Compensation of Directors
Directors who are employees of the company do not receive cash compensation
for serving on the Board of Directors. Directors who are not employees of the
company can elect to receive $1,500 for each Board meeting attended in addition
to reimbursement of expenses incurred in attending the Board meetings.
Non-employee directors can also elect to receive $1,000 per annual committee
chairmanship.
The company also pays a portion of director compensation in stock options.
Each non-employee director can elect to receive 25,000 stock options when first
elected to the Board. These option grants vest one year from the date of the
grant, and are issued with a strike price set to the closing market price of the
company Common Stock on the date of grant.
Employment Agreement
The company entered into an employment agreement with Mr. Mark Graff,
effective October 10, 1997, providing for a term of employment ending on January
2, 2002. The agreement provides an initial base salary of $250,000 per annum,
increasing to $300,000 in 1998 and thereafter, subject to increases determined
by good faith negotiations. The executive also is entitled to participate in any
bonus compensation plan that the company may establish in the future. In the
event of termination of employment without cause by the company, the executive
is entitled to receive two years' base salary, subject to reduction by the
amount of remuneration received by the executive through other employment in the
first year following termination.
Separation Agreement
The company entered into a separation agreement with Mr. Peter B. Yunich,
the company's former chairman and chief executive officer, effective August 28,
1998. Pursuant to the separation agreement, Mr. Yunich resigned his positions
with the company. The company agreed to continue to pay Mr. Yunich's base salary
for a period of six months, and agreed to provide for the continuation of
certain insurance benefits. Pursuant to the agreement, the parties agreed that
Mr. Yunich would relinquish his rights with respect to 1,000,000 options and
retain 500,000 vested options at an exercise price of $1.00 per share. As part
of the agreement, the parties agreed to mutual releases of claims.
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<PAGE>
1999 Stock Incentive Plan
In 1999, the Board of Directors authorized the establishment of a stock
incentive plan (the "Plan"). The total number of shares of Common Stock
available for issuance under the Plan is 6,500,000 shares, subject to adjustment
as described below. Under the terms of the Plan, the company is authorized to
grant stock options that qualify as incentive stock options ("ISOs") under
Section 422 of the Code of 1986 and nonqualified stock options ("NQSOs") to
salaried officers and other key employees of the company and its subsidiaries
and to outside consultants and advisors. The following summary of certain
features of the Plan is qualified in its entirety by reference to the full text
of the Plan, a copy of which is filed as an exhibit to this registration
statement.
Summary of the Plan
General. The Plan permits the company to grant ISOs and NQSOs
(collectively, "Awards") to salaried officers and other key employees and to
outside consultants and advisors. The Plan terminates on February 25, 2009 and
no Awards may be granted after the termination date. The Plan covers a maximum
of 6,500,000 shares of common stock (subject to share adjustments as described
below), which may be either authorized and unissued shares of common stock or
shares held in the company's treasury. When an Award lapses, expires, terminates
or is forfeited, the related shares of common stock may be available for
distribution in connection with future Awards. Adjustments may be made in the
number of shares reserved under the Plan, in the option price and in the number
of shares subject to stock options, in the event of a merger, reorganization,
consolidation, recapitalization or stock dividend, and in the event of certain
other changes described in the Plan or any other changes in the Company's
corporate structure that affect the common stock or has an effect similar to any
of the foregoing. No employee may be granted Awards covering, in the aggregate,
more than 500,000 shares of common stock in any fiscal year of the company
(subject to adjustment as provided above).
Administration. The Plan is administered by the Compensation Committee. The
Compensation Committee is comprised of directors who are non-employee directors
within the meaning of Rule 16b-3 promulgated under the Exchange Act. The
Compensation Committee has the sole and complete discretion, subject to the
terms of the Plan, to (i) select the individuals to whom Awards may be granted,
(ii) determine the type of Awards to be granted and the terms and conditions of
any Awards granted, and (iii) determine the number of shares of common stock
subject to each Award granted. In addition, the Compensation Committee is
authorized to interpret the Plan, to make and rescind rules and regulations
related thereto, and to make all determinations necessary or advisable for the
administration of the Plan.
Stock Options. Stock options granted under the Plan may be either ISOs or
NQSOs. The aggregate fair market value (determined as of the time of the grant
of an ISO) of the common stock with respect to which ISOs are exercisable for
the first time by a single optionee during any calendar year under the Plan and
any other stock option plan of the Company may not exceed $100,000.
The exercise price for stock options shall be determined by the
Compensation Committee and shall be set forth in an option agreement entered
into with the optionee, provided, however, that the exercise price for an ISO
shall not be less than the fair market value of a share of common stock on the
date of grant (110% in the case of an ISO granted to a 10% or more stockholder).
The Compensation Committee is to specify the time or times at which such
options will be exercisable, except that the termination date for any stock
option shall not exceed 10 years from the date of grant (five years in the case
of an ISO granted to a 10% or more stockholder). Options may be exercised within
90 days following the retirement or permanent disability of an optionee and
within twelve months following the death of an optionee; provided, that no
option may be exercised following the period of exercisability set forth in the
agreement related thereto. Stock options may provide for acceleration of
exercisability in the event of the death, disability or retirement of the
optionee.
Stock options may be exercised by an optionee in whole or in part by giving
notice to the Company and the exercise price therefor may be paid by delivering
cash or shares of unrestricted common stock having a fair market value equal to
the cash exercise price of the options being exercised. Optionees may also
utilize a cashless exercise feature which will enable them to exercise their
options without a concurrent payment of the option price, provided that the
purchased option shares are immediately sold by a designated broker and the
option price is paid directly to the Company out of the sale proceeds.
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<PAGE>
Stock options are nontransferable other than by will or by the laws of
descent and distribution, and stock options are exercisable during the
optionee's lifetime only by the optionee.
Change of Control. In the event of a "Change of Control," as defined in the
Plan, all options outstanding shall be immediately and fully exercisable.
Amendments. The Board of Directors may terminate, suspend or amend the
Plan, provided that such amendment, suspension, or termination may not affect
the validity of the then outstanding options and provided further that the Board
may not, without the approval of stockholders increase the maximum number of
shares which may be issued pursuant to the provisions of the Plan.
Withholding Taxes. The Plan provides that the Company may deduct from any
distribution to an employee an amount equal to all federal, state and local
income taxes or other amounts as may be required by law to be withheld with
respect to any Award. An employee exercising an NQSO may elect to have a
specified percentage of his shares withheld by the Company in order to satisfy
tax obligations.
Compensation Committee Interlocks and Insider Participation
During 1998, the members of the Board's Compensation Committee were Messrs.
Robert Frost, John F. Ferraro and Richard N. Perle. For a description of certain
transactions and relationships involving the company and each of Messrs. Ferraro
and Perle, see "Item 7. Certain Relationships and Related Transactions" below.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Investment Agreement with Pioneer Ventures Associates Limited Partnership
On November 16, 1998, we entered into an investment agreement (the "Pioneer
Investment Agreement") with Pioneer Ventures Associates Limited Partnership
("Pioneer") pursuant to which we issued to Pioneer 10,000 shares of our Series A
Senior Convertible Preferred Stock, par value $1.00 per share (the "Preferred
Stock"), and a warrant (the "Pioneer Warrant") to purchase 500,000 shares of our
Common Stock, par value $0.001 per share (the "Common Stock") for aggregate
consideration of $3,150,000. Pursuant to the Pioneer Investment Agreement, we
also issued a warrant to Ventures Management Partners LLC to purchase 500,000
shares of Common Stock (the "Ventures Warrant" and together with the Pioneer
Warrant, the "Pioneer Warrants"). The terms of the Preferred Stock are subject
to a Certificate of Designation filed with the Secretary of State of the State
of Delaware (the "Certificate of Designation").
In connection with the Pioneer Investment Agreement, we entered into a
Voting and Shareholders Agreement, dated as of November 16, 1998 (the "Pioneer
Voting Agreement") with Pioneer and certain of our company's shareholders.
Pursuant to the Pioneer Voting Agreement, certain of our company's shareholders,
who beneficially own an aggregate of 3,995,000 shares of our Common Stock,
agreed to vote their shares in a manner that would ensure that at least one
designee of Pioneer is elected as a director of our company so long as Pioneer
owns any Preferred Stock or Common Stock. Additionally, pursuant to the Pioneer
Voting Agreement, any proposed transfer or sale of Common Stock by any of the
shareholders party to the agreement is subject to Pioneer's participation right
of co-sale.
In connection with the Pioneer Investment Agreement, Mark Graff, Hollinger
and Pioneer (collectively, the "Shareholders") entered into a Shareholders
Agreement, dated November 16, 1998. Pursuant to the Shareholders Agreement, the
Shareholders have agreed to vote their shares, for a term of five years from the
date of the Shareholders Agreement, in a manner which would ensure that our
Board of Directors consists of Mark Graff, two persons designated by Hollinger,
and one designee of Pioneer.
Preferred Stock
Each share of Preferred Stock has a stated value of $315 (the "Stated
Value") and entitles the holder thereof to an 8% cumulative annual cash dividend
payable quarterly in arrears on each March 31, June 30, September 30 and
December 31, beginning December 31, 1998, which dividend may be paid, upon
approval of a majority of our Board of Directors at a rate of 13% in shares of
Preferred Stock. The Preferred Stock is redeemable at our option. Each share of
Preferred Stock is convertible at any time and from time to time into such
number of shares of Common Stock as equals
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<PAGE>
the Stated Value divided by $2.375 (the "Preferred Stock Conversion Price"). The
Preferred Stock Conversion Price is subject to customary adjustment provisions
(for example, in the event of a stock split, stock dividend and other specified
events) and a reset provision on February 29, 2000. Pursuant to the reset
provision, the Preferred Stock Conversion Price is adjusted to 75% of the
average price for the twenty trading days ending February 29, 2000, if that
average price is lower than $2.375. The Preferred Stock votes together with the
Common Stock on an as-converted basis as of the appropriate record date. The
Preferred Stock is senior to the Common Stock in liquidation, bankruptcy,
receivership, dissolution or winding up.
Pioneer Warrants
The Pioneer Warrants may be exercised to purchase an aggregate of 1,000,000
shares of our Common Stock at an exercise price of $2.00 per share, subject to
adjustment provisions and a reset provision effective February 29, 2000. The
original exercise price of the Pioneer Warrants was $3.52 per share, but the
price was subsequently reduced to $2.00 per share on March 22, 1999 in
connection with the increase by Pioneer of warrants to purchase 539,000 shares
of common stock at an exercise price of $1.86 per share. On December 31, 1998,
Pioneer purchased 500,000 shares of common stock at an exercise price of $1.00
per share. In May 1999, AIME issued 500,000 shares to Pioneer upon the exercise
of warrants at an exercise price of $2.00 per share. In connection with the
exercise of the warrants, the company issued additional warrants to purchase
500,000 shares to Pioneer and additional warrants to purchase 500,000 shares to
Ventures Management Partners LLC, in each case exercisable at $2.50 per share.
In connection with the Pioneer Investment Agreement, we entered into a
Consent and Waiver (the "Consent and Waiver") with Hollinger and Pioneer.
Pursuant to the Consent and Waiver, Pioneer is entitled to participate up to 50%
in the purchase of shares upon the exercise of an option held by Hollinger.
Mr. Ferraro, a director of AIME, is the Secretary of Pioneer Ventures
Corp., which is the managing member of Ventures Management LLC, which is the
general partner of Pioneer.
Securities Purchase Agreement with Hollinger Digital, Inc.
On December 3, 1997, we entered into a Securities Purchase Agreement (the
"Hollinger Agreement") with Hollinger pursuant to which we issued to Hollinger a
Floating Rate Convertible Secured Debenture dated December 4, 1997 (the "First
Debenture") and a Floating Rate Convertible Secured Debenture dated February 3,
1998 (the "Second Debenture" and together with the First Debenture, the
"Debentures"), a Common Stock Purchase Option dated December 4, 1997 (the
"Option") and a Warrant dated December 4, 1997 (the "Hollinger Warrant") for
aggregate consideration of $6,000,000. The Debentures are secured by all of our
assets pursuant to the terms of a Pledge and Security Agreement entered into
with Hollinger. On November 16, 1998, the Hollinger Agreement, the Debentures,
the Option and the Hollinger Warrant were modified by the Consent and Waiver, as
described below.
Debentures
The Debentures were issued in the aggregate principal amount of $6,000,000
and originally accrued interest at a floating rate equal to 3.5% in excess of
the prime rate as published in The Wall Street Journal. Pursuant to the Consent
and Waiver, the interest rate was fixed at 13% effective November 16, 1998. All
interest is compounded, accrues semi-annually and is subject to conversion. The
maturity dates of the First and Second Debentures are December 4, 2002 and
February 3, 2003, respectively. The Debentures are convertible on or after
December 3, 1999 into that number of shares of Common Stock determined by
dividing the principal amount to be converted plus accrued interest (the
"Conversion Amount") by the lower of $2.375 and the conversion price as
determined under the Pioneer Investment Agreement. The Debentures convert
automatically upon the consummation of a public offering of our securities.
Without the prior written consent of the holder, we may not prepay principal or
interest. The conversion price of the Debentures is subject to customary
anti-dilution provisions. In the event of an event of default under the
Debentures, all principal and accrued interest become immediately due and
payable.
Option
The Option may be exercised in one or several transactions for up to that
number of shares which after exercise equals 15% of the outstanding shares of
Common Stock and Preferred Stock plus all shares which are then and potentially
issuable pursuant to all then outstanding options, warrants and other securities
convertible into Common
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<PAGE>
Stock at the lower of $2.375 and the conversion price determined under the
Pioneer Investment Agreement. The Option expires on September 30, 2000. The
exercise price is subject to customary anti-dilution provisions. All shares
issued or issuable to Pioneer pursuant to the Pioneer Investment Agreement are
excluded from the calculation of the shares for which the Option is exercisable.
On June 4, 1998, Hollinger partially exercised the Option for 575,595 shares of
Common Stock.
Hollinger Warrant
The Hollinger Warrant must be exercised in a single transaction for that
number of shares (the "Warrant Shares") which after exercise equals 30% of the
outstanding shares of Common Stock and Preferred Stock plus all shares which are
then and potentially issuable pursuant to all then outstanding options, warrants
and other securities convertible into Common Stock at an exercise price per
share equal to the Current Market Price (as defined in the Hollinger Warrant).
Hollinger must exercise the Option and convert the Debentures before it can
exercise the Warrant. For the purposes of calculating the number of Warrant
Shares, any shares acquired by the holder of the Hollinger Warrant pursuant to
the Option and the conversion of the Debentures shall be included in the
calculation of the Warrant Shares. The exercise price is subject to customary
anti-dilution provisions. All shares issued or issuable to Pioneer pursuant to
the Pioneer Investment Agreement are excluded from the calculation of the shares
for which the Warrant is exercisable.
Hollinger Memorandum
In connection with Pioneer's exercise of certain warrants to purchase an
aggregate of 539,000 shares of Common Stock, we entered into a Memorandum with
Hollinger, dated March 26, 1999, pursuant to which Hollinger consented to our
reduction of the exercise price of the Pioneer Warrants. Additionally, Hollinger
agreed, at the closing of a financing by Pioneer of at least $10,000,000, or
consummated through Pioneer's active and substantial efforts, before AIME
receives financing independent of Pioneer of $10,000,000 or more, to retire both
the Option and the Hollinger Warrant in exchange for 2,000,000 shares of our
Common Stock.
Mr. Perle, a director of AIME, is Chairman and Chief Executive Officer of
Hollinger. Mr. Kunsberg, a director of AIME, is the Executive Vice President and
General Counsel of Hollinger.
Agreement with iConnect.com, Inc.
In March 1999, the Company assigned to iConnect.com, Inc. ("iConnect.com")
the Company's rights in certain contracts relating to the design and marketing
of custom Internet portals for affinity groups, in consideration for which the
Company received a 25% equity interest in iConnect.com. Michael Salaman, a
greater than 5% shareholder of the Company, is a director, officer and
controlling shareholder of iConnect.com. The Company believes that the terms of
the agreement were negotiated on an arm's-length basis.
ITEM 8. LEGAL PROCEEDINGS
AIME is party from time to time to legal proceedings generally incidental
to its business. Management believes the outcome of such litigation will not
have a material adverse effect on the consolidated financial position, operating
results or cash flows of the Company.
AIME has been named as a defendant in an action brought in the United
States District Court for the Eastern District of Pennsylvania by two former
employees. The action, filed in December 1998, alleges that AIME breached
certain terms in its employment agreements with the plaintiffs relating to
options to purchase Company stock. The plaintiffs seek monetary damages of
approximately $1.4 million. Also named as defendants are two executive officers
of AIME. AIME believes that the claims are without merit and intends to defend
against the claims vigorously.
39
<PAGE>
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
AIME's shares trade on the Over The Counter Bulletin Board (the "OTCBB")
under the symbol "AIME." The following table sets forth, for the periods
indicated, the high and low bid quotations for AIME's Common Stock obtained from
Prophet Information Services, Inc. Such quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
High Low
---- ---
1998
First Quarter................................... $4.75 $2.84
Second Quarter.................................. $8.88 $4.00
Third Quarter................................... $6.56 $2.31
Fourth Quarter.................................. $5.38 $2.00
1997
First Quarter................................... $6.25 $2.63
Second Quarter.................................. $3.38 $1.75
Third Quarter................................... $4.50 $2.75
Fourth Quarter.................................. $5.13 $3.44
There were 254 shareholders of record of the Common Stock as of March 31,
1999.
AIME has never declared or paid cash dividends on its Common Stock and does
not anticipate paying cash dividends on its Common Stock in the foreseeable
future. AIME intends to retain future earnings, if any, for reinvestment in the
future operation and expansion of its business and related development
activities. AIME has granted a covenant to Hollinger that it will not pay any
dividends on the Common Stock so long as the Debentures are outstanding. See
"Certain Relationships and Related Party Transactions--Securities Purchase
Agreement with Hollinger Digital, Inc." AIME has also granted a covenant to
Pioneer that it will not cash dividends on the Common Stock until it pays all
dividends on the Preferred Stock for all past dividend periods. See "Certain
Relationships and Related Party Transactions--Investment Agreement with Pioneer
Ventures Associates Limited Partnership." Any future determination to pay cash
dividends on the Common Stock will be at the discretion of the Board of
Directors and will be dependent upon AIME's financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors deems relevant, as well as the terms of any financing arrangement.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
From June to October 1996, AIME issued a total of 240,000 shares of Common
Stock to 16 "Accredited Investors" (as defined within Rule 501 of the Securities
Act). These shares were issued to various investors in a private offering
pursuant to an exemption under Section 4(2) of the Securities Act. The 240,000
shares were issued in connection with the purchase of certain unsecured
promissory notes. Each investor was issued 3,000 shares per $25,000 principal
amount loaned to AIME.
In October and November 1996, AIME issued a total of 1,024,000 shares of
Common Stock to various Accredited Investors for an aggregate cash consideration
of $4,520,000. These shares were sold to various investors in a private offering
pursuant to an exemption under Section 4(2) of the Securities Act. Of the
1,024,000 shares of Common Stock that were issued, 724,000 shares were issued to
16 Accredited Investors who converted their notes at a purchase price of $5 per
share. The remaining 300,000 shares were issued to three Accredited Investors
who converted their notes at a purchase price of $3 per share.
In October of 1996, AIME exchanged a total of 450,000 shares of Common
Stock for all the shares of The Brief Exchange. Of the 450,000 shares of Common
Stock that were issued during this period, 225,000 of these shares were placed
into escrow. In November of 1997, the 225,000 escrowed shares were transferred
back to AIME.
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<PAGE>
From May to September 1997, AIME issued a total of 2,037,500 shares of
Common Stock to various Accredited Investors at a purchase price of $1- $2 per
share, for an aggregate cash consideration of $2,412,500. These shares were sold
to various investors in a private offering pursuant to an exemption under
Section 4(2) of the Securities Act. Of the 2,037,500 shares of Common Stock that
were issued during this period, 1,662,500 of these shares were sold at a
purchase price of $2 per "Unit," which consisted of two shares Common Stock and
one warrant to purchase Common Stock at $2 per share. The sale of Units resulted
in an aggregate issuance of 831,250 warrants. The remaining 375,000 shares that
were issued during this period were issued upon the exercise by three accredited
investors of their $2 warrants for an aggregate cash consideration of $750,000.
In October of 1997, AIME issued a total of 150,000 shares of Common Stock
to three Accredited Investors at a purchase price of $2 per Unit for an
aggregate cash consideration of $150,000. These shares were sold to investors in
a private offering pursuant to an exemption under Section 4(2) of the Securities
Act. The sale of Units resulted in an aggregate issuance of 75,000 warrants.
On September 30, 1997, AIME exchanged 4,000,000 shares of Common Stock to
all the shareholders of WebFeat, Inc. pursuant to the merger of AIME's wholly
owned subsidiary with and into WebFeat.
On December 3, 1997 and February 3, 1998, AIME issued to Hollinger two
Floating Rate Convertible Secured Debentures, each with a principal amount of
$3,000,000, a Common Stock Purchase Option (the "Option") and a warrant (the
"Hollinger Warrant") in exchange for an aggregate cash consideration of
$6,000,000. The Debentures, Option and the Hollinger Warrant were sold to
Hollinger in a private offering pursuant to an exemption under Section 4(2) of
the Securities Act. The Debentures bear interest at a rate equal to 3.5% percent
per annum in excess of the prime rate, and are convertible at any time after
December 3, 1999 into that number of shares which equals the principal amount
plus all accrued dividends divided by $2.85. The Debentures mature and
automatically convert on December 4, 2002, and February 3, 2003, respectively.
The Option is exercisable, in whole or part, for up to that number of shares
which after exercise equals 10% of the fully diluted shares of Common Stock. The
Hollinger Warrant must be exercised in a single transaction for that number of
shares which after exercise equals 40% of the fully diluted shares of Common
Stock. The Hollinger Warrant cannot be exercised until the 10% Option and the
Debentures have been exercised.
On June 4, 1998, AIME issued 575,595 shares of Common Stock to Hollinger
upon its initial exercise of the Option at an exercise price of $2.606 per share
for an aggregate cash consideration of $1,500,000. These shares were sold to
Hollinger in a private offering pursuant to an exemption under Section 4(2) of
the Securities Act.
On May 6, 1998, AIME exchanged 560,000 shares of Common Stock in exchange
for a license. These securities were sold pursuant to an exemption under Section
4(2) of the Securities Act.
From April to May 1998, AIME sold a total of 1,144,000 shares to various
Accredited Investors who exercised their warrants to purchase Common Stock at an
exercise price of $2.73 per share, for an aggregate cash consideration of
$3,123,120. These shares were sold to various individual investors in a private
offering pursuant to an exemption under Section 4(2) of the Securities Act.
From June to November 1998, AIME issued a total of 376,250 shares of Common
Stock to various Accredited Investors who exercised their $2 and $3 warrants to
purchase Common Stock for an aggregate cash consideration of $797,500. These
shares were sold to various individual investors in a private offering pursuant
to an exemption under Section 4(2) of the Securities Act.
On July 1, 1998, AIME issued 25,000 shares of Common Stock to an Investment
Banking firm in exchange for the provision of financial advisory services. These
securities were sold in a private offering pursuant to an exemption under
Section 4(2) of the Securities Act.
On November 16, 1998, AIME issued 10,000 shares of Series A Senior
Convertible Preferred Stock ("Preferred Stock") to Pioneer in exchange for an
aggregate cash consideration of $3,150,000. In addition, AIME issued a warrant
to each of Pioneer and Ventures Management LLC for the purchase of 500,000
shares of Common Stock at an exercise price of $3.52 per share. AIME also issued
warrants to Mountain Ranch Partners for the purchase of 500,000 shares of Common
Stock at an exercise price of $1. The Preferred Stock and the warrants were sold
in a private offering pursuant to an exemption under Section 4(2) of the
Securities Act. Each share of Preferred Stock has a stated value of $315 and a
liquidation value of $1,000. The holder of the Preferred Stock is entitled to an
8% annual cash dividend, which dividend
41
<PAGE>
may be paid upon approval of the Board of Directors at a rate of 13% in shares
of Preferred Stock. The Preferred Stock is convertible at any time into that
number of shares equal to its stated value plus accrued dividends divided by
$2.375. The Preferred Stock matures on November 16, 2008 and converts
automatically into that number of shares equal to its stated value plus accrued
dividends divided by $2.375. The Preferred Stock is redeemable at AIME's option.
On December 31, 1998, AIME issued 500,000 shares of Common Stock to Pioneer
upon the exercise of certain warrants at an exercise price of $1.00 per share
for an aggregate cash consideration of $500,000. These securities were sold in a
private offering pursuant to an exemption under Section 4(2) of the Securities
Act.
On November 16, 1998, AIME, Hollinger and Pioneer entered into a Consent
and Waiver, whereby Hollinger's two Debentures, the Option and the Warrant were
modified. Pursuant to the Consent and Waiver, the Debentures were modified to
accrue interest at a rate of 13% per annum for purposes of determining the
amount of shares of Common Stock into which the Debentures are convertible. In
addition, certain prohibitive covenants were added to the Debentures. The
Hollinger Warrant was amended to lower the amount of shares into which it is
convertible to a number which equals 30% of the fully diluted shares of Common
Stock. The Option was amended to increase the amount of shares into which it is
convertible to a number which equals 15% of the fully diluted shares of Common
Stock. Additionally, the Option was amended to grant Pioneer the right, in the
event Pioneer exercises certain outstanding warrants to purchase 1,039,000
shares of Common Stock by May 16, 1999, to purchase half of the shares resulting
from any exercise of the Option. For purposes of determining the amount of
AIME's fully diluted shares into which the Debentures, the Option and the
Hollinger Warrant are convertible, the amount of shares usable to Pioneer upon
exercise of the Preferred Stock and the warrants to purchase 1,000,000 shares of
Common Stock shall be excluded.
On December 31, 1998, AIME issued 126,221 shares of Common Stock to a
strategic partner in exchange for consulting services. These shares were sold in
a private offering pursuant to an exemption under Section 4(2) of the Securities
Act.
On March 29, 1999, AIME issued 539,000 shares of Common Stock to Pioneer
upon the exercise of certain assigned warrants at an exercise price of $1.86 per
share for an aggregate cash consideration of $1,002,540. These shares were sold
to Pioneer in a private offering pursuant to an exemption under Section 4(2) of
the Securities Act. Additionally, on March 22, 1999, the exercise price of the
warrants issued to Pioneer and Ventures Management LLC on November 16, 1998 was
reduced from $3.52 to 2.00.
In May 1999, AIME issued 500,000 shares of Common Stock to Pioneer upon the
exercise of $2.00 warrants for an aggregate cash consideration of $1,000,000.
These shares were sold to Pioneer in a private offering pursuant to an exemption
under Section 4(2) of the Securities Act. In connection with the exercise of the
warrants, AIME issued additional warrants to purchase 500,000 shares to Pioneer
and additional warrants to purchase 500,000 shares to Ventures Management
Partners LLC, in each case exercisable at $2.50 per share.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
AIME's authorized capital stock consists of 50,000,000 shares of Common
Stock, par value $0.001 per share, and 100,000 shares of Preferred Stock, par
value $1.00 per share. As of March 31, 1999, there were 16,896,834 shares of
Common Stock outstanding which were held of record by approximately 254
registered stockholders, and the number of beneficial holders was unknown. As of
March 31, 1999, there were 10,493 shares of Preferred Stock outstanding, all
held by Pioneer Ventures Associates Limited Partnership.
The following summary description of the capital stock of AIME does not
purport to be complete and is qualified in its entirety by reference to AIME's
Certificate of Incorporation ("Certificate") and By-laws, copies of which are
filed as exhibits to this Registration Statement, and the Delaware General
Corporation Law ("DGCL"). Reference is made to such exhibits and the DGCL for a
detailed description of those provisions which are summarized below.
COMMON STOCK, PAR VALUE $0.001 PER SHARE
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders, including the
election of directors. Cumulative voting for the election of directors is not
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<PAGE>
permitted. Accordingly, holders of a majority of the shares entitled to vote in
any election of directors may elect all the directors standing for election.
Subject to the preferential rights of the holders of the Series A Preferred
Stock, holders of Common Stock are entitled to receive dividends when and as
declared by the Board of Directors out of the funds legally available therefor.
Currently, AIME is bound by a restrictive covenant in the Amended Debentures
which forbids the payment of dividends to the holders of the Common Stock so
long as the Amended Debentures are outstanding. AIME is also bound by a
restrictive covenant in the Series A Preferred Stock which forbids payment of
dividends to the holders of the Common Stock until all dividends on the Series A
Preferred Stock for all past dividend periods have been paid. Upon liquidation,
dissolution or winding-up of the Company, each share of Common Stock is entitled
to share on a pro rata basis in any distribution of AIME's assets after payment
of all liabilities, subject to the rights of holders of Preferred Stock. Holders
of Common Stock have no preemptive, conversion or redemption rights. The rights,
preferences and privileges of holders of Common Stock are subject to, and may be
adversely affected by, the rights of the holders of shares of the Series A
Preferred Stock and any other Series of Preferred Stock which AIME may designate
and issue in the future.
PREFERRED STOCK, PAR VALUE $1.00 PER SHARE
Under the Certificate, AIME is authorized to issue up to 100,000 shares of
Preferred Stock, par value $1.00 per share. The Board of Directors is
authorized, without any vote or action by the holders of Common Stock, to
determine the voting rights, dividend rights, dividend rates, liquidation
preferences, redemption provisions, sinking fund terms, conversion or exchange
rights and other rights, preferences, privileges and restrictions of any series
of Preferred Stock and the number of shares constituting any such series. In
addition, the Preferred Stock could have other rights, including economic rights
senior to the Common Stock, such that the issuance of Preferred Stock could
adversely effect the market value of the Common Stock. The issuance of Preferred
Stock may also have the effect of delaying, deferring or preventing a change in
control of the Company without any action by the stockholders. Currently, AIME
is bound by a restrictive covenant in the Amended Debentures which prevents the
issuance of any additional shares of Preferred Stock as long as the Amended
Debentures are outstanding.
By a Certificate of Designation filed with the Secretary of State of the
State of Delaware on November 16, 1998, the Board of Directors designated 15,000
shares of the authorized Preferred Stock as Series A Convertible Preferred
Stock, par value $1.00 (the "Series A Preferred Stock"). AIME has issued and
outstanding 10,493 shares of Series A Preferred Stock, all held by one
stockholder. Each share of Series A Preferred Stock has a stated value of $315
(the "Stated Value"). The holder of the Series A Preferred Stock is entitled to
receive, out of the funds legally available therefor, cumulative cash dividends
at the rate per share of 8% of its Stated Value, or 13% of its Stated Value if
paid in kind with additional shares of Series A Preferred Stock, payable
quarterly in arrears. If an event of default occurs, the cumulative dividend
rate is increased to 13% if paid in cash, and 18% if paid with additional shares
of Series A Preferred Stock so long as the event of default continues. In the
event of any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the holder of the Series A Preferred Stock is entitled
to receive a liquidation preference of $1,000 per share plus the accrued
dividends payable thereon. Each share of Series A Preferred Stock is convertible
into that number of shares of Common Stock equal to its Stated Value plus
accumulated dividends, divided by $2.375 (the "Conversion Price"). The
Conversion Price of the Series A Preferred Stock is subject to a reset provision
on February 29, 2000 (the "Reset Conversion Price"). In addition to certain
matters on which only the holders of the Series A Preferred Stock vote, holders
of the Series A Preferred Stock are entitled to vote on all matters on which
holders of Common Stock vote, as if the Series A Preferred Stock had been
converted into Common Stock. The Series A Preferred Stock converts into Common
Stock automatically on November 16, 2008 at the then applicable Conversion
Price. The Series A Preferred Stock is subject to certain anti-dilution
provisions. The Series A Preferred Stock is redeemable at the option of AIME, in
whole or in part, on any quarterly dividend date, at a price per share which is
determined pursuant to a formula set forth in the Certificate of Designation.
FLOATING RATE CONVERTIBLE SECURED DEBENTURES
AIME has issued and outstanding two Floating Rate Convertible Secured
Debentures, each with a principal amount of $3,000,000. The Debentures were
issued to Hollinger pursuant to the Securities Purchase Agreement dated December
3, 1997, and were amended by the Consent and Waiver dated November 16, 1998 (the
"Amended Debentures"). See "Securities Purchase Agreement with Hollinger
Digital, Inc." The Amended Debentures are dated December 4, 1997 and February 3,
1998, and mature on December 4, 2002, and February 3, 2003, respectively. The
Amended Debentures bear interest at a rate equal to 3.5% percent per annum in
excess of the prime rate as published in
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The Wall Street Journal. The Amended Debentures are convertible at any time
after December 3, 1999 into a number of shares of AIME's Common Stock determined
by dividing the outstanding principal balance and accrued interest (the
"Conversion Amount") by the lower of $2.375 or the Reset Conversion Price. For
purposes of determining the Conversion Amount, interest accrued after November
16, 1998 is calculated at 13% per annum. The Amended Debentures are subject to
certain anti-dilution provisions. The Amended Debentures are mandatorily
convertible at their maturity dates or upon a registered public offering by
AIME. The Amended Debentures are senior indebtedness and secured by all the
assets of AIME.
AIME is bound by restrictive covenants in the Amended Debentures, including
one which prohibits the payment of dividends on AIME's Common Stock so long as
the Debentures are outstanding.
CERTAIN PROVISIONS THAT MAY HAVE AN ANTI-TAKEOVER EFFECT
The provisions of AIME's Certificate and the DGCL summarized in the
succeeding paragraphs may have an anti-takeover effect, and may delay, defer, or
prevent a tender offer or takeover attempt, including those attempts that might
result in a premium over the market price for the shares held by stockholders.
Issuance of Preferred Stock
The Certificate provides the Board of Directors with the authority to issue
shares of Preferred Stock and to set the voting rights, preferences and other
terms thereof.
Section 203 of the DGCL
AIME is subject to Section 203 of the DGCL, which generally prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless (i)
prior to such date the Board of Directors of the corporation approved either the
business combination or the transaction in which the person became an interested
stockholder, (ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the outstanding voting stock of the corporation excluding shares
owned by directors who are also officers of the corporation and by certain
employee stock plans, or (iii) on or after such date the business combination is
approved by the Board of Directors of the corporation and by the affirmative
vote of at least 66 2/3% of the outstanding voting stock of the corporation that
is not owned by the interested stockholder. A "business combination" generally
includes mergers, asset sales and similar transactions between the corporation
and the interested stockholder, and other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns 15% or more of the corporation's
voting stock or who is an affiliate or associate of the corporation and,
together with his affiliates and associates, has owned 15% or more of the
corporation's voting stock within three years.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 102(b)(7) of the DGCL, the Certificate of AIME
contains a provision to limit the personal liability of the directors of AIME
for violations of their fiduciary duties. This provision eliminates each
director's liability to AIME or its stockholders for monetary damages except (i)
for any breach of the director's duty of loyalty to AIME or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL
providing for liability of directors for unlawful payment of dividends or
unlawful stock purchases or redemptions, or (iv) for any transaction from which
the director derived an improper personal benefit. The effect of this provision
is to eliminate the personal liability of directors for monetary damages for
actions involving a breach of their fiduciary duty of care, including any such
actions involving
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<PAGE>
gross negligence. Also, there may be certain liabilities, such as those under
the federal securities laws or other state or federal laws, which a court may
hold are unaffected by the Certificate.
The Certificate also provides that any repeal or modification of the
above-referenced provision shall not result in any liability for a director with
respect to any action or omission occurring prior to such repeal or
modification.
Section 145 of the DGCL provides that a corporation may indemnify any
person, including officers and directors, who are, or are threatened to be made,
parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person was an officer, director, employee or agent of such corporation, or
is or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such officer, director, employee or agent acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, for criminal proceedings, had no reasonable
cause to believe that his conduct was unlawful. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in defense of any action referred to above, the corporation
must indemnify him against the expenses which such officer or director actually
or reasonably incurred. The By-laws of AIME provide for indemnification of the
officers and directors to the fullest extent permitted by the DGCL. In addition,
AIME maintains officers' and directors' liability insurance which insures
against liabilities that officers and directors of the Company may incur in such
capacities.
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<PAGE>
ITEM 13. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
KPMG LLP Independent Auditors' Report..................................... 47
Schiffman Hughes Brown Independent Auditors' Report....................... 48
Consolidated Balance Sheets as of December 31, 1998 and 1997.............. 49
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................................... 50
Consolidated Statements of Stockholders' (Deficit) Equity
for the years ended December 31, 1998, 1997 and 1996...................... 51
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................................... 52
Notes to the Consolidated Financial Statements............................ 54
46
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
American Interactive Media, Inc.
We have audited the accompanying consolidated balance sheets of American
Interactive Media, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' (deficit)
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements of
American Interactive Media, Inc. and subsidiaries for the year ended December
31, 1996 were audited by other auditors whose report dated March 11, 1997
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Interactive
Media, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that American Interactive Media, Inc. and subsidiaries will continue as a going
concern. As discussed in note 1 to the consolidated financial statements, the
Company has suffered recurring losses from operations, has a net capital
deficiency, and has incurred accumulated losses through December 31, 1998. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regards to these matters are also described
in note 1. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
May 10, 1999
New York, New York
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<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders
of American Interactive Media, Inc. and Subsidiaries
New York, New York
We have audited the accompanying consolidated statements of operations,
accumulated deficit, and cash flows of American Interactive Media, Inc. and
Subsidiaries for the year ended December 31, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial condition of American
Interactive Media, Inc. and Subsidiaries at December 31, 1996, and the results
of its consolidated operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Schiffman Hughes Brown
Blue Bell, Pennsylvania
March 11, 1997
48
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,617,756 2,237,501
Product inventory -- 306,671
Prepaid expenses and other current assets 16,750 29,573
------------ ------------
Total current assets 1,634,506 2,573,745
------------ ------------
Property and equipment, net (note 5) 1,197,287 805,139
Technology license, net (note 2(f)) -- 365,735
Intangibles, net of accumulated amortization of
$1,008,729 in 1998 and $201,746 in 1997 (note 2(f)) 3,026,186 3,833,169
Partner advances (note 13) 200,000 --
Investment in Aim/New Tech LLC (note 3) 175,000 --
Other assets 68,344 58,094
------------ ------------
4,666,817 5,062,137
------------ ------------
Total assets $ 6,301,323 7,635,882
============ ============
Liabilities and Stockholders' (Deficit) Equity
Current liabilities:
Accounts payable $ 273,248 $ 164,660
Accrued expenses (note 6) 1,054,072 1,053,603
Current maturities of long-term capital lease obligations (note 11) 119,014 --
------------ ------------
Total current liabilities 1,446,334 1,218,263
------------ ------------
Convertible secured debentures, net of unamortized debt
discount of $-0- in 1998 and $1,970,968 in 1997 (note 7) 6,784,485 1,056,032
Capital lease obligations (note 11) 81,274 --
------------ ------------
Total liabilities 8,312,093 2,274,295
------------ ------------
Stockholders' (deficit) equity:
Preferred stock, $1 par value. Authorized 100,000 shares;
10,163 shares issued and outstanding as Series A Senior
Convertible Preferred Stock - aggregate liquidation 10,163 --
preference of $10,163,000
Common stock, $0.001 par value. Authorized 50,000,000
shares; issued outstanding 16,357,834 shares and
12,917,435 shares in 1998 and 1997, respectively 16,359 12,917
Additional paid-in capital 45,832,345 17,339,968
Accumulated deficit (47,869,637) (11,991,298)
------------ ------------
Total stockholders' (deficit) equity (2,010,770) 5,361,587
Commitments and contingencies
------------ ------------
Total liabilities and stockholder's (deficit) equity $ 6,301,323 7,635,882
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ -- -- --
------------ ------------ ------------
Expenses:
Content production and development costs 2,369,921 245,758 --
Selling, general and administrative 4,161,785 772,291 --
------------ ------------ ------------
6,531,706 1,018,049 --
------------ ------------ ------------
Loss from operations (6,531,706) (1,018,049) --
------------ ------------ ------------
Other income (expenses):
Interest income 34,211 -- --
Interest expense (497,797) (20,520) --
------------ ------------ ------------
Loss from continuing operations (6,995,292) (1,038,569) --
------------ ------------ ------------
Discontinued operations (note 14):
Loss from discontinued operations (12,524,144) (6,737,461) (3,749,394)
Loss on disposal (609,086) -- --
------------ ------------ ------------
(13,133,230) (6,737,461) (3,749,394)
------------ ------------ ------------
Loss prior to extraordinary item (20,128,522) (7,776,030) (3,749,394)
Extraordinary loss on extinguishment of debt (note 7) (15,749,817) -- --
------------ ------------ ------------
Net loss (35,878,339) (7,776,030) (3,749,394)
Cumulative dividends and accretion of
convertible preferred stock 1,406,003 -- --
------------ ------------ ------------
Net loss to common stockholders $(37,284,342) (7,776,030) (3,749,394)
============ ============ ============
Basic and diluted net loss per share from:
Continuing operations $ (0.58) (0.12) --
Discontinued operations (0.90) (0.78) (0.68)
Extraordinary item (1.07) -- --
------------ ------------ ------------
Basic and diluted net loss per common shareholder $ (2.55) (0.90) (0.68)
============ ============ ============
Basic and diluted weighted average number of
common shares outstanding $ 14,609,826 8,678,188 5,523,809
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' (Deficit) Equity
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Total
Additional stockholders'
Preferred Common paid-in Accumulated (deficit)
stock stock capital deficit equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ -- 5,240 1,333,895 (465,874) 873,261
Issuance of 450,935 common shares -- 451 1,649,549 -- 1,650,000
Issuance of 240,000 common shares
related to debt financing -- 240 1,199,760 -- 1,200,000
Issuance of 574,000 common shares
in exchange for notes payable -- 574 2,869,426 -- 2,870,000
Issuance of 225,000 common shares
related to purchase of The Brief Exchange -- 225 731,025 -- 731,250
Net loss -- -- -- (3,749,394) (3,749,394)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 -- 6,730 7,783,655 (4,215,268) 3,575,117
Issuance of 2,187,500 common shares -- 2,187 2,560,313 -- 2,562,500
Issuance of 4,000,000 common shares
in acquisition of WebFEAT -- 4,000 3,996,000 -- 4,000,000
Issuance of stock options as noncash
compensation for services rendered -- -- 1,000,000 -- 1,000,000
Issuance of option to purchase unregistered
common stock in conjunction with
the issuance of convertible debt -- -- 2,000,000 -- 2,000,000
Net loss -- -- -- (7,776,030) (7,776,030)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 -- 12,917 17,339,968 (11,991,298) 5,361,587
Issuance of 10,000 shares of preferred stock
and warrants 10,000 -- 3,140,000 -- 3,150,000
Dividends on preferred stock 163 -- (163) -- --
Issuance of 2,020,250 common shares related
to exercise of warrants -- 2,021 4,415,479 -- 4,417,500
Issuance of stock options and warrants as
non-cash compensation for services rendered -- -- 478,712 -- 478,712
Issuance of 284,554 common shares as non-cash
compensation for services rendered -- 285 1,045,530 -- 1,045,815
Issuance of 560,000 common shares in
exchange for various technology
and software licenses -- 560 3,779,440 -- 3,780,000
Issuance of 575,595 common shares due to
partial exercise of Hollinger option -- 576 1,499,424 -- 1,500,000
Issuance of option to purchase unregistered
common stock and beneficial conversion
feature associated with the extinguishment of
convertible secured debentures -- -- 14,133,955 -- 14,133,955
Net loss -- -- -- (35,878,339) (35,878,339)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 $ 10,163 16,359 45,832,345 (47,869,637) (2,010,770)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(35,878,339) (7,776,030) (3,749,394)
Less Loss from discontinued operations (12,524,144) (6,737,461) (3,749,394)
------------ ------------ ------------
Net Loss from continuing operations (23,354,195) (1,038,569) --
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash expenses included in net loss:
Loss on disposal of discontinued operations 609,086 -- --
Extraordinary loss on extinguishment of debt 15,749,817 -- --
Depreciation and amortization 1,026,491 -- --
Interest on secured debentures 317,703 -- --
Amortization of debt discount on secured
debentures 173,061 20,520 --
Changes in assets and liabilities:
Accounts receivable -- (6,945) --
Prepaid expenses and other current assets 12,823 19,670 --
Other assets (10,250) (39,804) --
Accounts payable and accrued expenses 109,057 515,946 --
------------ ------------ ------------
Net cash used in continuing operations (5,366,407) (529,182) --
Net cash used in discontinued operations (5,155,183) (3,589,269) (3,062,348)
------------ ------------ ------------
Net cash used in operating activities (10,521,590) (4,118,451) (3,062,348)
------------ ------------ ------------
Cash flows from investing activities:
Investment in Aim/New Tech LLC $ (175,000) -- --
Cash received from business acquisition -- 11,906 --
Purchases of property and equipment (716,400) (373,664) (135,739)
Technology licenses, net of recoupment (1,150,000) (243,600) (237,500)
------------ ------------ ------------
Net cash used in investing activities (2,041,400) (605,358) (373,239)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from exercise of options and warrants 5,917,500 -- --
Proceeds from sale of common stock -- 2,562,500 1,650,000
Proceeds from sale of preferred stock 3,150,000 -- --
Proceeds from stockholders' loans -- -- 1,045,000
Proceeds from issuance of convertible secured
debentures and loans 3,000,000 3,000,000 1,825,000
Principal payments under capital lease obligation (124,255) -- --
------------ ------------ ------------
</TABLE>
52
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
Cont'd
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net cash provided by financing activities 11,943,245 5,562,500 4,520,000
------------ ------------ ------------
Net (decrease) increase in cash and
cash equivalents (619,745) 838,691 1,084,413
Cash and cash equivalents at beginning of year 2,237,501 1,398,810 314,397
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,617,756 2,237,501 1,398,810
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 15,810 -- 47,234
============ ============ ============
State and local taxes $ 22,900 2,022 303
============ ============ ============
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock related to purchase of
various technology and software licenses $ 4,316,440 -- --
============ ============ ============
Property and equipment acquired under
capital leases $ 324,542 -- --
============ ============ ============
Issuance of common stock related to purchase
of WebFEAT $ -- 4,000,000 --
============ ============ ============
Issuance of options to purchase common stock in
conjunction with the issuance of convertible
secured debentures $ -- 2,000,000 --
============ ============ ============
Issuance of common stock in exchange for
notes payable - shareholders $ -- -- 1,045,000
============ ============ ============
Issuance of common stock in exchange
for notes payable $ -- -- 1,825,000
============ ============ ============
Issuance of common stock related to
debt financing $ -- -- 1,200,000
============ ============ ============
Issuance of common stock related to the
purchase of The Brief Exchange $ -- -- 731,250
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) Description of the Business
American Interactive Media, Inc. ("AIME" or "Company"), is a media company
engaged in the development, marketing and distribution of
entertainment-based programming initially formatted for the Internet but
designed for distribution across multiple media platforms. The Company's
entertainment-based product offerings are grouped into Program Networks
("Program Networks" or "Networks") which incorporate video, audio and
information in an interactive environment. Combining the entertainment of
television with the interactivity and community building properties of the
Internet these Networks target niche audiences.
The Company was originally incorporated under the laws of the State of
Nevada on April 10, 1986; on January 29, 1998, the Company, through a
merger of the Company with and into a wholly owned subsidiary of the
Company, changed the state of incorporation to Delaware. The merger was
accounted for in a manner similar to a pooling-of-interests. The Company
had been involved in previous business ventures, but was inactive and had
no business from 1992 until it acquired American Direct Media Inc. ("ADM")
as a wholly owned subsidiary on March 15, 1995.
ADM was incorporated under the laws of the State of New Jersey on or about
October 26, 1994, as a direct marketing company. In 1995, following the
acquisition of ADM by the Company, ADM reduced its direct marketing
activity to focus on Internet-related products and services. ADM ceased its
direct marketing activity in 1996.
On October 1, 1996, the Company acquired 100% of the stock of The Brief
Exchange Legal Network, Inc. ("The Brief Exchange"). The Brief Exchange was
incorporated under the laws of the State of California on June 4, 1996 and
was organized to engage in the business of providing legal information and
research services to the legal community. On September 30, 1997, the
Company and the management and original owners of The Brief Exchange
entered into an agreement whereby all of the shares of The Brief Exchange
were transferred back to the original owners (see note 2). As a result, the
Company accounted for this transaction as a disposition of a business and
recorded a $617,058 loss from discontinued operations in 1997.
On September 26, 1997, the Company, merged with WebFEAT (see note 4).
WebFEAT was incorporated under the laws of the State of Delaware on April
11, 1996 and was organized to engage in the development of unique
stand-alone web-based content offerings, to provide digital production
services to traditional media companies, and to create multi-platform
digital programming.
From 1995 until the end of 1998, AIME was primarily engaged in providing a
gateway to the Internet and the World Wide Web ("the Web") that organizes,
aggregates and delivers information to meet the needs of distribution
partners and their individual consumers. The Company's products and
services included, but were not limited to, a "set-top" device that when
connected to a television, phone line, and the Company's backend network
("webPASSPORT Network"), provided Internet access, Web browsing, e-mail,
personalized news delivery and chat capabilities. During this period,
substantially all of the Company's revenues and expenses were associated
with this business. In the first quarter of 1999, the Board of Directors
approved the Company's decision to focus its efforts exclusively on the
development and marketing of platform-neutral, entertainment-based
programming. On March 3, 1999, the Company executed a Letter of Intent with
PowerChannel, Inc. to license and sublicense certain technology rights and
to sell certain assets of its webPASSPORT division (see notes 14 and 15).
AIME's operations not related to developing and marketing of
platform-neutral, entertainment-based programming have been reflected as
discontinued operations for all years presented.
The Company has incurred significant losses in current and prior periods,
has a net capital deficiency, and has accumulated losses of $47,869,637
through December 31, 1998. These, among other factors, raise substantial
doubt about the Company's ability to continue as a going concern.
Management intends to continue to devote resources toward the research,
development and marketing of its products in order to generate future
revenues from advertising, e-commerce, and content licensing and
distribution. In addition, the Company is actively pursuing additional
short-and long-term financing sources, including debt and equity financing,
and will be required to raise capital, from time to time, in order to
capitalize on business opportunities and market conditions as well as to
insure the continued development and marketing of the Company's products
and services. Although management believes that it can successfully
research, develop and market its products and obtain additional financing,
there can be no assurance that it will be able to do so.
54
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The Company's consolidated financial statements include (i) the
consolidated accounts of the Company, (ii) its wholly owned inactive
subsidiaries, WebFEAT (from its acquisition date) and ADM, (iii) a 50%
interest in a limited liability company accounted for under the equity
method in 1998, and (iv) The Brief Exchange to September 30, 1997, the
date when the shares of The Brief Exchange were transferred back to
its original owners (see note 2 (f)). In 1999, the Company
discontinued its webPASSPORT Network operations; accordingly, such
operations have been reflected in the statements of operations as
discontinued for all years presented.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Certain reclassifications have been made to the 1997 and 1996
financial statements to conform with the 1998 financial statement
presentation.
(b) Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles 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 consolidated financial statements and
the reported amounts of expenses during the reporting period. Actual
results could differ from those estimates.
(c) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments with a maturity of three
months or less to be cash equivalents. There were no cash equivalents
as of December 31, 1998. Cash equivalents amounted to $2,005,548 of
U.S. Treasury securities at December 31, 1997.
(d) Property and Equipment
Property and equipment, including third-party computer software, are
stated at cost. Depreciation is computed using the straight-line
method over estimated useful lives ranging from three to seven years.
Leasehold improvements are amortized using the straight-line method
over the shorter of the estimated useful lives of the assets or the
remaining term of the related lease.
(e) Product Inventory
Inventory, in 1997, principally consisting of keyboards and set-top
boxes is recorded at the lower of cost or market using the FIFO
(first-in, first-out) method.
55
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(f) Intangible Assets and Technology Licenses
Intangible Assets
At December 31, 1996, goodwill related solely to the acquisition of
The Brief Exchange which was being amortized over 20 years; however,
in September 1997, such goodwill was included in the loss on
disposition of a business, included in loss from discontinued
operations, when the shares owned by the Company were transferred back
to The Brief Exchange's original owners.
In connection with the Company's acquisition of WebFEAT in 1997 (see
note 4), the excess purchase price over the fair value of net assets
and liabilities acquired was allocated to an employment agreement of a
key executive and is being amortized over its five-year term.
Technology Licenses
In 1996, the Company entered into a licensing agreement with a
technology company whereby the Company was granted certain exclusive
and nonexclusive rights to various technical information, copyrights
and computer programs related to a certain computer chip and software
for a period of ten years in exchange for a payment of $250,000.
During 1997, the Company provided an additional $250,000 in connection
with certain enhancements of the computer chip and software.
The Company was entitled to recoup $2.50 for each computer chip
purchased from the technology company until the total advances have
been recouped. The Company charged to expense, the greater of
recoupment or amortization over a period of three years; the
amortization exceeded recoupment by approximately $1,893,000 and
$115,000 in 1998 and 1997, respectively.
The 1996 agreement and its amendment were superseded on May 6, 1998,
when the Company acquired licenses and rights to certain software and
hardware technologies utilized in some of its products and services.
The Company acquired these licenses on an irrevocable, worldwide,
perpetual and royalty free basis.
In consideration for these licenses, the Company agreed to pay the
licensor $1,150,000 in cash, issued 560,000 shares of the Company's
common stock to the licensor and one of the licensor's creditors, to
forego the recoupment of $481,000 of prepaid license fees, and to
license back to the licensor some of the Company's own software
technology on a fee-per-unit basis.
During the fourth quarter of 1998, the Company wrote-off the value of
all technology licenses and acquired rights in the amount of
$3,402,607 due to the Company's decision to focus its efforts
exclusively on the development and marketing of platform-neutral,
entertainment-based programming (see note 1).
(g) Revenue Recognition
The Company recognizes revenue when products are delivered or when
services are rendered. The Company will recognize its share of revenue
sharing agreements proceeds upon notification from its partners of
sales attributable to the Company's activities or contractual rights.
(h) Research and Development
Research and development costs consist of expenditures incurred by the
Company during the course of planned research and investigation aimed
at the discovery of new knowledge which will be used to develop
products relating to the Internet. Research and development costs also
include costs for significant enhancement or improvements to these
Internet products. The Company expenses all such research and
development costs as they are incurred. Substantially all of the
Company's research and development expenditures related to the
discontinued operations.
56
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(i) Content Production and Development Costs
Content production and development costs consist of expenditures
incurred by the Company for the creation and development of its media
products.
In 1998 and 1997, these costs consisted primarily of personnel and
consulting services utilized in the creation of ComedyNet, Virtual
Cable, New Tech Projects (see note 3) and live internet auction
programming.
(j) Income Taxes
The Company accounts for income taxes under the asset and liability
method. As such, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.
(k) Stock Option Plan
The Company accounts for stock options under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of Accounting Principles Board ("APB") Opinion
No. 25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1995 and
future years as if the fair value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
(l) Net Loss Per Share
Basic EPS is computed by dividing income or loss to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution from the exercise or conversion of securities into common
stock.
Net loss to common stockholders and weighted average shares
outstanding used for computing diluted loss per common share were the
same as those used for computing basic loss per common share for each
of the years ended December 31, 1998, 1997 and 1996. The Company's
potentially dilutive common stock equivalents of approximately
4,000,000, 4,300,000 and 1,974,000 at December 31, 1998, 1997 and
1996, respectively, were not included in the computation of diluted
net loss per share because they were antidilutive for all periods
presented. Additionally, the Company is subject to further dilution
with respect to its issued and outstanding secured convertible
debentures and preferred stock financing (see notes 7 and 8).
Net loss to common stockholders for the year ended December 31, 1998
has been increased to give effect to cumulative dividends and
accretion of $73,003 and $1,333,000 on Series A Senior Convertible
Preferred Stock, respectively.
(m) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
57
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(n) Segments and Geographic Data
The Company's operations are in one segment: entertainment based
programming. In 1999, the Company decided not to continue its
WebPASSPORT operations and as such have reflected those operations as
discontinued. All of the Company's operations are in the United
States.
(o) New Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, by requiring recognition of
those instruments as assets and liabilities and to measure them at
fair value. SFAS No. 133 will be effective for the Company in 2000.
The Company has not yet determined the effects of the pronouncement on
its results of operations and financial position.
The AICPA Accounting Standards Executive Committee recently issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This
statement requires that certain costs related to the development or
purchase of internal-use software be capitalized and amortized over
the estimated useful life of the software, and is effective for fiscal
years beginning after December 15, 1998. The adoption of this SOP is
not expected to have a material impact on AIME's financial position or
results of operations.
The AICPA Accounting Standards Executive Committee recently issued SOP
98-5, "Reporting on the costs of start-up activities" which requires
organization costs to be expensed as incurred, and is effective for
fiscal years beginning after December 15, 1998. The adoption of this
SOP is not expected to have an impact on AIME's financial position or
results of operations.
(3) Investment in Aim/New Tech LLC
On August 27, 1998, the Company entered into an agreement with New Tech LLC
(New Tech) to form a limited liability company Aim/New Tech LLC (LLC). In
accordance with the agreement, New Tech contributed a number of joint
venture agreements with a variety of partners. These agreements gave the
LLC the right to develop, market, and distribute a number of
entertainment-based media projects ("NewTech Projects"). Under the terms of
the agreements, the Company has agreed to fund the development of these
projects in exchange for the right to one third share of all profits
subsequent to development funding recovery. The other two-thirds will be
split, with half going to New Tech and the other half to the Network's
talent/producer. The term of the joint venture is from August 27, 1998
until December 31, 2048, unless dissolved earlier in accordance with the
terms of the agreement. The Company and New Tech jointly manage the
operations of the joint venture. The Company accounts for its contributions
to the LLC under the equity method. The Company has funded 100% of the
joint venture's operations and the Company has accounted for 100% of its
losses which are included in content production and development costs.
(4) Business Combination
On September 26, 1997, the Company exchanged 4,000,000 shares of restricted
AIME common stock for 100% of the outstanding shares of WebFEAT. The
Company has accounted for this business combination under the purchase
method of accounting and, accordingly, the consolidated statements of
operations reflect the activity of WebFEAT since the date of acquisition.
Total consideration, including previously funded amounts and acquisition
related costs of approximately $240,000, amounted to approximately $4.2
million; the transaction was valued at $1.00 per share, the value of shares
issued in its then most recent equity transaction with a third party (see
note 8). The excess purchase price over the fair value of net assets and
liabilities acquired of approximately $4.0 million related to the
acquisition was allocated to an employment agreement of a key executive and
is being amortized over its five year term. Such amount is included in
intangibles on the consolidated balance sheet. The fair value of net assets
and liabilities acquired amount to approximately $205,000.
Assuming the Company and WebFEAT were combined as of January 1, 1996, total
revenues, net loss and net loss per share would have been $172,500,
$(8,581,595) and $(0.73), respectively, in 1997 and $10,000, $(4,700,013)
and $(0.49), respectively, in 1996.
58
<PAGE>
(5) Property and Equipment
Property and equipment as of December 31 consisted of the following:
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
1998 1997
----------- -----------
Computer equipment and software
licenses $ 859,044 367,814
Audio visual production
equipment and other 533,069 346,731
Furniture, fixtures and improvements 375,546 230,769
----------- -----------
1,767,659 945,314
Less accumulated depreciation (570,372) (140,175)
----------- -----------
Total $ 1,197,287 805,139
=========== ===========
Depreciation expense on property and equipment amounted to $430,197,
$129,730, and $9,938 for the years ended December 31, 1998, 1997 and 1996,
respectively. In 1998, the Company recorded a loss of $218,598 on the
disposal of certain equipment which is reflected as a loss of disposal
within discontinued operations.
(6) Accrued Expenses
Accrued expenses as of December 31, including operating liabilities related
to discontinued operations (see note 14), consisted of the following:
1998 1997
---------- ----------
Accrued consulting and professional fees $ 503,584 332,262
Accrued payroll and related costs 276,611 390,977
Other accrued liabilities 273,877 330,364
---------- ----------
Total $1,054,072 1,053,603
========== ==========
(7) Convertible Secured Debentures
In connection with the financing of the Company's operations, Hollinger
Digital, Inc. ("Hollinger"), the new media unit of publisher Hollinger
International Inc., entered into a Securities Purchase Agreement dated
December 3, 1997 and purchased various securities of the Company which
included: (i) a floating rate convertible secured debenture ("1997
debenture") in the aggregate principal amount of $3,000,000 due December 4,
2002 ("maturity date"); (ii) a floating rate convertible secured debenture
in the aggregate principal amount of $3,000,000 due February 3, 2003 ("1998
debenture"), (iii) an option, which was modified on June 4, 1998, to
purchase up to ten percent (10%) of the outstanding shares of common stock
of the Company on a fully diluted basis at a price equal to $2.606 per
share, for all exercises up to and including October 15, 1998, and for all
exercises from October 16, 1998 up to and including December 4, 1998, the
greater of $2.606 or the then current market price of the common stock of
the Company (the "Purchase Option"); and (iv) a warrant to purchase, in a
single transaction, that number of shares of common stock such that
Hollinger could control forty percent (40%) of their outstanding shares of
common stock of the Company on a fully diluted basis, at a price per share
equal to the then current market price of the Company's common stock ("the
Purchase Warrant"). The closing of the purchase and sale of the 1997
debenture, the Purchase Option and the Purchase Warrant occurred on
December 4, 1997 and the closing of the purchase and sale of the 1998
debenture occurred on February 3, 1998.
Hollinger has the right, at any time after December 3, 1999 and prior to
the maturity date, to convert the outstanding principal, and all accrued
interest at the time of conversion, of the 1997 and 1998 debentures into a
number of shares of the Company's common stock, determined by dividing the
principal amount and accrued interest by $2.85.
59
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
So long as an event of default has not occurred, Hollinger shall be
required to exercise the conversion right upon (1) the maturity date for
the full amount of shares of common stock or (2) a public offering by AIME
registered under the Securities Act of 1933. The Purchase Option was
exercisable by Hollinger at any time on or before December 4, 1998. This
Purchase Option, if not exercised prior thereto, would become void and of
no value. On June 15, 1998, Hollinger exercised a portion of the option to
the extent of 575,595 shares for an aggregate exercise price of $1,500,000.
The Purchase Warrant may be exercised at any time after Hollinger shall
have completed conversion of the 1997 and 1998 debentures in full and shall
have exercised the Purchase Option in full, until and including one year
after the date of the 1997 and 1998 debentures shall have been converted in
full. The Company has ascribed $2,000,000 to the Purchase Option and
Purchase Warrant as debt discount on the note using the Black-Scholes
Purchase Option valuation model; $392,340 and $29,032 has been recognized
as additional interest expense with respect to the amortization of the
discount for the years ended December 31, 1998 and 1997, respectively.
The 1997 and 1998 debentures accrue interest at a rate equal to 3.5% per
annum in excess of the prime rate and in addition to any accrued interest,
shall be deferred and automatically convert on the fifth anniversary and
become immediately due and payable upon an event of default as defined in
the Securities Purchase Agreement dated December 3, 1997. At December 31,
1998, accrued interest on the 1997 and 1998 debentures amounted to
$747,251. At December 31, 1997, accrued interest on the 1997 debenture
amounted to $27,000.
Concurrent with the Company's issuance of Preferred Stock (see note 8), the
agreement with Hollinger was amended as follows: (i) the percentage of
outstanding common stock Hollinger can purchase through the exercise of its
Purchase Option increased from 10% to 15%, (ii) the percentage of
outstanding common stock Hollinger can purchase through the exercise of its
Purchase Warrant decreased from 40% to 30%, (iii) the exercise price of the
Purchase Option and Purchase Warrant were adjusted to prices consistent
with the conversion feature of the Preferred Stock, (iv) the interest rate
on the debentures was fixed at 13% per annum and (v) the expiration date of
the Purchase Option was extended to September 30, 2000. Additionally, the
amended Hollinger agreement included forgiveness of certain debt convenants
that were determined by Hollinger to be breached. As a result of the
amended agreement and the significant value given to Hollinger related to
the reduction in conversion prices on the note and the increase in value
related to modified terms of the Purchase Option, the amendment is
accounted for as an extinguishment of the original debenture. As such, the
Company recognized an extinguishment loss in 1998 of $15,749,817
representing the difference between (i) the fair value of the amended
debenture, the related Purchase Option and Purchase Warrant, and the
beneficial conversion feature associated with the debenture and (ii) the
carrying value of the debenture at November 16, 1998.
(8) Capital Stock
(a) Preferred Stock
On November 16, 1998, the Company issued 10,000 shares of the
Company's Series A Convertible Preferred Stock plus warrants
("Preferred Stock") for $3,150,000 in a private placement to Pioneer
Ventures Associates Limited Partnership and affiliates ("Pioneer").
Pioneer is entitled to an 8% cumulative cash dividend payable
quarterly; however, if the Company elects to pay any dividend by the
issuance of Series A preferred stock in lieu of a cash dividend, the
amount of such dividend shall be 13%. The Preferred Stock is
redeemable at the Company's option. The Preferred Stock has a stated
value of $315 per share, a liquidation value of $1,000 per share, and
is convertible into the Company's common stock at a conversion price
of $2.375 per common share. Such conversion price will be reset on
February 29, 2000 ("Reset Date") to 75% of the average closing bid
price of the Company's common stock over the five day period preceding
the issuance of the Preferred Stock ("Average Share Price") if that
average closing price falls below $2.375 during the 20 trading days
prior to the Reset Date. In addition, warrants to purchase 1,000,000
shares of the Company's common stock at an exercise price of 110% of
the Average Share Price were also issued. The Company has allocated
the total proceeds of $1,333,000 and $1,817,000 to the preferred stock
and warrants, respectively, based on their relative fair values.
Concurrent with the issuance of Preferred Stock to Pioneer, the
Company issued 1,500,000 warrants. The first 1,000,000 warrants were
issued at an exercise price of $3.52, and the remaining 500,000
warrants were at an exercise price of $1.00 which were exercised on
December 31, 1998. Furthermore, the remaining 1,000,000 unexercised
warrants priced at $3.52 were subject to a reset provision whereby
their strike price could be reset at a lower value. In March 1999, the
1,000,000 warrants' exercise price was reduced to $2.00 per share,
subject to a reset at a lower value. Concurrent with the issuance of
the Preferred Stock issued
60
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
to Pioneer, 539,000 warrants held by various investors were
transferred to Pioneer with an exercise price of $2.50. These warrants
were originally issued in 1996 in connection with an earlier private
placement. In March 1999, the warrants' exercise price was reduced to
$1.86 per share and the warrants were exercised.
In connection with the Pioneer agreement, the Company entered into a
Voting and Shareholders Agreement, dated as of November 16, 1998 (the
"Pioneer Voting Agreement") with Pioneer and certain of the Company's
shareholders. Pursuant to the Pioneer Voting Agreement, certain of the
Company's shareholders, who beneficially own an aggregate of
3,995,000 shares of common stock, agreed to vote their shares in a
manner that would ensure that at least one designee of Pioneer is
elected as a director of the Company so long as Pioneer owns any
preferred stock or common stock. Additionally, pursuant to the Pioneer
Voting Agreement, any proposed transfer or sale of common stock by any
of the principal shareholders is subject to Pioneer's participation
right of co-sale.
In connection with the Pioneer agreement, the CEO, Hollinger and
Pioneer (collectively, the "Shareholders") entered into a Shareholders
Agreement dated November 16, 1998. Pursuant to the Shareholder
Agreement, the Shareholders agreed to vote their shares, for a term of
five years from the date of the Shareholders Agreement, in a manner
which would ensure that the Company's Board of Directors consist of
the Company's CEO, two persons designated by Hollinger, and one
designee of Pioneer.
(b) Common Stock
In 1996, 1,024,935 shares of the Company's common stock was issued to
investors at prices ranging from $0.50 per share to $5 per share
pursuant to various private offerings and the conversion of notes
previously issued.
In 1996, concurrent with the issuance of $2,000,000 of unsecured
promissory notes, the Company issued to each noteholder 3,000 shares
of common stock for every $25,000 block of notes purchased from the
Company. An additional 240,000 shares were issued to certain
noteholders in association with the conversion of the notes and were
subsequently recorded as financing costs in connection with the
conversion of such amounts into common stock. No notes were
outstanding as of December 31, 1996.
From May to September 1997, AIME issued a total of 2,037,500 shares of
Common Stock to various Accredited Investors at a purchase price of
$1- $2 per share, for an aggregate cash consideration of $2,412,500.
These shares were sold to various investors in a private offering
pursuant to an exemption under Section 4(2) of the Securities Act. Of
the 2,037,500 shares of Common Stock that were issued during this
period, 1,662,500 of these shares were sold at a purchase price of $2
per "Unit," which consisted of two shares Common Stock and one warrant
to purchase Common Stock at $2 per share. The sale of Units resulted
in an aggregate issuance of 831,250 warrants. The remaining 375,000
shares that were issued during this period were issued upon the
exercise by three accredited investors of their $2 warrants for an
aggregate cash consideration of $750,000.
In October of 1997, AIME issued a total of 150,000 shares of Common
Stock to three Accredited Investors at a purchase price of $2 per Unit
for an aggregate cash consideration of $150,000. These shares were
sold to investors in a private offering pursuant to an exemption under
Section 4(2) of the Securities Act. The sale of Units resulted in an
aggregate issuance of 75,000 warrants.
In February 1998, the Company issued 133,333 shares of common stock to
a technology partner at $3.00 per share, representing the closing
market price of the Company's stock on the date of issuance, in
exchange for payments in kind such as: (i) technical lead services,
(ii) services of an internet client-server
software/architecture/back-end interface expert, (iii) telephone
hardware/software engineering, (iv) third party testing fees, (v) user
design of interface and field evaluation, (vi) costs of usability
participants, (vii) test resources and (viii) miscellaneous expenses.
Prior to the completion of certain events which would release the
shares from escrow, the technology partner terminated the agreement.
Following this termination, the Company requested the return of the
shares from escrow; however, the technology partner disagreed with the
Company and believes it is entitled to the escrowed shares. Because of
this uncertainty, the shares have been deemed to be issued and
outstanding until resolved. Non-cash expense for the consulting
services rendered in the amount of $400,000 was recorded during 1998.
In December 1998, the Company issued 126,221 shares of common stock to
a strategic partner for consulting services rendered during the fourth
quarter. Content production and development costs of $536,400 were
recorded representing the closing market price of the Company's stock
on the date of issuance.
(c) Dividends
The Company has granted a covenant to Hollinger, such that the Company
cannot pay any dividends on common stock so long as certain
debentures, issued to Hollinger pursuant to a securities purchase
agreement between the Company and Hollinger dated December 3, 1997,
are outstanding. A similar covenant was granted to Pioneer with
respect to the Series A Senior Convertible Preferred Stock ("Series A
Preferred Stock") which was issued to Pioneer pursuant to an agreement
between the Company and Pioneer dated November 16, 1998. Upon approval
of 75% of the Board of Directors, the Company may pay cash dividends
to Pioneer on the Series A Preferred Stock. Alternatively, upon
approval of a majority of the Board of Directors, the Company may
elect to pay dividends upon the Series A Preferred Stock by the
issuance of additional shares of Series A Preferred Stock, which shall
have the terms and conditions identical to other shares of Series A
Preferred Stock. In lieu of payment in of cash dividends, on December
31, 1998, the Company paid stock dividends on Pioneer's preferred
stock of 163 shares of Series A Preferred Stock.
(9) Options and Warrants
1995 Plan
In 1995, the Board of Directors authorized the establishment of a stock
option plan (the "1995 Plan"). The total number of shares of common stock
subject to the 1995 Plan at that time was 1,000,000. In May 1997, the Board
of Directors approved an amendment to the Company's 1995 Plan to increase
the number of shares of common stock reserved for issuance to 1,500,000
shares. In October 1997, the Board of Directors approved another
61
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
amendment to the Company's 1995 Plan to increase the number of shares of
common stock reserved for issuance to 7,500,000, with no more than
1,500,000 shares available for grant to one individual in any year.
The Board shall from time to time at its discretion direct the Company to
grant options to purchase shares of the Company's common stock pursuant to
the terms of the 1995 Plan. The Board has the authority to determine the
persons or entities to whom and the times at which options shall be
granted, the number of option shares granted, the price, the vesting period
and other terms and conditions thereof, taking into account the nature of
the optionee's past services and responsibilities, present and potential
contribution to the Company's success, and such other factors as it may
deem relevant. All options generally expire five years from the date of
grant.
If any outstanding option granted under the 1995 Plan expires, lapses or is
terminated for any reason, the option shares allocable to the unexercised
portion of such option may again be the subject of an option granted
pursuant to the 1995 Plan.
Options terminate upon the earlier of the date of the expiration of the
option or three months after the termination of the employment relationship
between the Company or a subsidiary and the optionee for any reason other
than death, disability, or retirement.
In October 1997, the Board of Directors granted options to purchase
1,500,000 shares of common stock at an exercise price of $1 to an officer
of the Company for the officer's services beginning in January 1997. The
options vested, and became exercisable in increments of 500,000 options on
October 10, 1997, January 2, 1998 and January 2, 1999. No compensation
resulted from such option grant as the exercise price approximated fair
market value based upon the value of the common shares issued in the
Company's then most recent equity transaction with a third party (see note
8(b)). Subsequently, in August 1998, the officer and the Company entered
into a separation agreement and as a result, 1,000,000 of the officer's
stock options were canceled (see note 11).
In 1997, the Company granted 860,000 stock options to various consultants
as compensation for services rendered with exercise prices ranging from
$2.00 to $3.75 per share, their fair market value of the Company's common
stock at the respective dates of grant. Content production and development
costs of $21,973, selling, general and administrative costs of $69,580 and
discontinued operation costs of $908,447 have been recognized in the
accompanying 1997 statement of operations representing the fair value of
such options calculated using the Black-Scholes option valuation model.
These options expire five years from date of grant. The remaining $46,402
relating to these grants was recognized as content production and
development costs representing the services rendered to the Company during
1998.
In 1998, 550,000 stock options were granted to various consultants by the
Company as compensation for services rendered with exercise prices ranging
from $2.50 to $4.00 per share, the fair market value of the Company's
common stock at the date of grant. Content production and development costs
of $104,450, selling, general and administrative expenses of $161,254 and
discontinued operation costs of $13,240 have been recognized in the
accompanying 1998 statement of operations representing the option's fair
value of such option calculated using the Black-Scholes option valuation
model. These options expire five years from date of grant.
62
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Summary of Option Activity
A summary of option activity through December 31, 1998 follows:
Common Weighted
stock average
subject to exercise
option price
------ -----
Balance at January 1, 1996 250,000 $1.00
Options granted 100,000 5.00
----------
Balance at December 31, 1996 350,000 2.14
Options granted 3,718,588 2.35
----------
Balance at December 31, 1997 4,068,588 2.33
Options granted 812,508 4.03
Options canceled (1,553,566) 2.14
----------
Balance at December 31, 1998 3,327,530 2.83
==========
Shares available for grant
at December 31, 1998 4,172,470
==========
At December 31, 1998 and 1997, options to acquire 3,327,530 and 4,068,588
shares of common stock, respectively, were outstanding with 2,541,281 and
2,252,500 shares exercisable, respectively. The outstanding options are
exercisable at prices ranging from $1.00 to $5.00 for 1998 and 1997.
The Company applies APB Opinion No. 25 in accounting for its 1995 Plan and,
accordingly, no compensation cost has been recognized for stock options
granted to employees at fair market value in the consolidated financial
statements. Had the Company determined compensation cost based on the fair
value at the grant dates for all of its stock options under SFAS No. 123,
the Company's net loss to common stockholders would have been increased to
the pro forma amounts indicated below:
1998 1997 1996
------------ ---------- ----------
Net loss to common
stockholders - as reported $(37,284,342) (7,776,030) (3,749,394)
Net loss to common
stockholders - pro forma $(38,762,314) (9,133,863) (4,187,109)
Loss per share - as reported $ (2.55) (.90) (.68)
Loss per share - pro forma $ (2.65) (1.05) (.76)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
1998 1997 1996
------------- ------------- -------------
Expected life (years) 5 5 5
Interest rate 4.14% - 6.75% 5.77% - 6.30% 6.49% - 6.75%
Volatility 100% - 107.5% 100% 100%
Dividend yield 0% 0% 0%
The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996 was $2.83, $2.33 and $2.14.
The Black-Scholes option valuation model was developed for use in
estimating the fair market value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
63
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can
materially affect the fair market value estimate, in management's option,
actual results could differ from those estimates.
The following table summarizes information about stock options outstanding
at December 31, 1998:
Weighted
Weighted average
average remaining
Range of Number Number exercise contractual
exercise prices outstanding exercisable price life
--------------- --------- ----------- -------- ---------
$1.00 - 2.00 1,435,000 1,235,000 $1.45 3.0 years
2.50 - 3.19 547,896 513,723 2.95 4.0 years
3.63 - 3.91 692,591 384,197 3.84 4.0 years
4.00 - 4.63 411,560 252,000 4.30 4.0 years
4.69 - 5.94 210,183 156,361 5.12 3.1 years
7.31 - 7.44 30,300 -- 7.42 4.3 years
--------- ---------
3,327,530 2,541,281
========= =========
Warrants and Purchase Option
In 1998, warrants were issued by the Company to acquire 1,550,000 shares of
common stock at prices ranging from $1.00 to $3.52 per share; all warrants
are immediately exercisable. These warrants expire at a range of six months
to five years. Of the total warrants issued in 1998, 1,500,000 of these
warrants related to the Pioneer transaction (see note 8). Additionally, a
portion of the Purchase Option related to Hollinger's exercisable
conversion right for 575,595 shares of common stock was exercised (see
note 7).
In 1997 and 1996, the Company issued warrants to acquire a total of
1,881,250 and 1,624,000 shares of common stock, respectively, at prices
ranging from $1.33 to $3.00 per share, in conjunction with sales of the
Company's common stock to individuals and institutions. The 1997 and 1996
warrants both expire in approximately six months to two years.
The following table summarizes information about the warrants Purchase
Option outstanding all of which are currently exercisable, at December 31,
1998:
Weighted Weighted average
average remaining
Date of Number exercise contractual
issue outstanding price life
------- ----------- -------- -----------------
1996 539,000 $ 2.50 0.5 years
1997 50,000 2.00 0.6 years
1998 1,000,000 3.52 4.9 years
---------
1,589,000
The above information excludes the Purchase Option and Purchase Warrants to
purchase up to 15% and 30% of the Company respectively held by Hollinger
(see note 7).
64
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(10) Income Taxes
The difference between the statutory federal income tax rate and the
Company's effective tax rate for the period ended December 31, 1998 is
principally due to the Company's incurring net operating losses for which
no tax benefit was recorded.
For Federal income tax purposes, the Company has unused net operating loss
carryforwards of approximately $28,136,000 expiring in 2018.
The availability of the net operating loss carryforwards to offset income
in future years, if any, is limited by Internal Revenue Code Section 382 as
a result of certain changes in ownership that have occurred. Due to this
limitation, and the uncertainty regarding the ultimate utilization of the
net operating loss carryforward, no tax benefit for losses has been
recorded by the Company in 1997 and 1998, and a valuation allowance has
been recorded for the entire amount of the net deferred tax asset.
The tax effects of temporary differences that give rise to the deferred tax
asset December 31, 1998 and 1997 are as follows:
1998 1997
------------ ------------
Deferred tax assets and liabilities:
Accretion of Original Issue Discount $ 1,762,491 --
Stock Options for Services 705,059 420,000
Other Accrued Expenses 420,748 186,854
Net operating loss carryforwards 11,817,207 4,246,812
------------ ------------
Total gross deferred tax assets 14,705,505 4,853,666
Less valuation allowance (14,705,505) (4,853,666)
------------ ------------
Net deferred tax asset $ -- --
============ ============
The valuation allowance increased by $9,851,838 and $3,082,182 during the
years ended December 31, 1998 and 1997, respectively.
(11) Commitments and Contingencies
License Agreement Bid.Com International Inc.
In December 1998, the Company entered into a license agreement (the
"License Agreement") with Bid.Com, an Internet online auction company.
Pursuant to the License Agreement, the Company entered into a non-exclusive
license to use Bid.Com's online auction technology to develop auction
opportunities on the Web and other broadband platforms. The License
Agreement expires June 30, 2001. The Company also entered into a joint
venture with Bid.Com with plans to create a shopping channel based on
Bid.Com's state-of-the-art online auction and electronic commerce
("e-commerce") technology. Through this joint venture with Bid.Com, the
Company seeks to provide consumers with an entertaining shopping experience
in a variety of electronic media platforms. The Company has agreed with
Bid.Com to share in the gross margin created through the joint venture
pursuant to a formula set forth in the License Agreement. In exchange for
consulting services, the Company issued to Bid.Com an aggregate 126,221
shares of common stock. The Company has no obligation to fund the joint
venture nor was there any activity in the joint venture during 1998.
65
<PAGE>
Syndication Agreement with United Stations Radio Network
In December 1998, the Company entered into an agreement with United
Stations Radio Network, a radio program distributor, for the promotional
radio and Internet syndication of portions of ComedyNet's audio
programming. Pursuant to the agreement, United Stations Radio Network has
agreed to syndicate an audio version of "A ComedyNet Minute." The Company
shares in the cash compensation for the spots within the ComedyNet minute
and shall receive an announcement before and after each segment airs which
states, "Brought to you by ComedyNet.com."
Litigation
The Company is party from time to time to legal proceedings generally
incidental to its business. Management believes the outcome of such
litigation will not have a material adverse effect on the consolidated
financial position, operating results or cash flows of the Company.
The Company has been named as a defendant in an action brought in the
United States District Court for the Eastern District of Pennsylvania by
two former employees of the Company. The action, filed in December 1998,
alleges that the Company breached certain terms in its employment
agreements with the plaintiffs relating to options to purchase Company
stock. The plaintiffs seek monetary damages of approximately $1.4 million.
Also named as defendants are two executive officers of the Company. The
Company believes that the claims are without merit and intends to defend
against the claims vigorously.
Leases
The Company leases certain computer equipment, software licenses and audio
visual production equipment under agreements which are classified as
capital leases. The capital leases all expire within a six month to five
year span. All of the capital leases have bargain purchase options at the
end of the original lease term. Assets under capital leases are included in
the consolidated balance sheet as follows:
Computer equipment and software licenses $ 141,185
Audio visual production equipment and other 183,357
---------
324,542
Less accumulated depreciation (41,867)
---------
Total $ 282,675
=========
66
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
In addition, beginning in June 1996, the Company entered into various
operating leases with expiration dates through July 2002 for its offices
including certain office equipment in New York, New York. The Company also
has an operating lease obligation in Cherry Hill, New Jersey, which expires
October 2001.
Future minimum lease payments, by year and in the aggregate, under the
aforementioned leases and other noncancellable operating leases with
initial or remaining terms in excess of one year as of December 31, 1998
are as follows:
Capital Operating
Fiscal year ending leases leases
---------------------------------- --------- -----------
1999 $ 136,324 447,865
2000 57,606 430,664
2001 18,456 171,132
2002 13,024 7,211
2003 5,192 --
--------- -----------
Total minimum lease payments 230,602 $ 1,056,872
===========
Less amount representing interest (30,314)
---------
Present value of net minimum lease
payments 200,288
Less current installments 119,014
Capital lease obligations, excluding ---------
current installments $ 81,274
=========
Rent expense for the years ended December 31, 1998, 1997 and 1996 amounted
to $183,938, $102,468 and $12,102, respectively.
Employment Agreements
On October 10, 1997, the Company entered into five-year employment
agreements with two of its key executives. These agreements could be
terminated by the Company at any time, with or without cause. Each
agreement provides for a minimum fixed annual salary of $250,000, which
shall be increased in 1998 by $50,000. Each employee's base salary for the
years 1999, 2000, 2001 and 2002 shall be determined by good faith
negotiation between the employees and the Company, but in no event shall be
less than $300,000. The agreements also provide for participation for
bonuses and stock options as determined by the Company. The agreements
provide for severance pay in the event of a termination without cause,
death, disability or as a result of a change in control of the Company.
On August 28, 1998, the Chief Executive Officer (CEO) entered into a
separation agreement with the Company. As a result, the President of the
Company was elected CEO by the Board of Directors. Under this separation
agreement, the Company incurred severance of approximately $150,000. In
addition, 1,000,000 of the former CEO's stock options were canceled.
67
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(12) Disclosures about the Fair Value of Financial Instruments
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and
Accrued Expenses, and Convertible Secured Debentures
The convertible secured debentures approximate estimated fair value at
December 31, 1998 (see note 7). The carrying amounts of the various
instruments, other than the convertible secured debentures payable,
approximate fair value because of their short maturities.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
(13) Partner Advances
As part of its strategy to reduce cash expenditures, the Company from time
to time issues warrants in connection with various partner agreements.
Accordingly, the Company expenses or capitalizes such warrant issuances
based on the nature and timing of the services rendered.
In September of 1998, the Company entered into a five year agreement with
Off Hour Rockers, Inc. ("OHR") whereby the Company granted OHR 100,000
warrants with a strike price of $2.50 in exchange for certain revenue
sharing arrangements, non-exclusive rights to comedic content created by
Jackie "The Jokeman" Martling, and the ability to host and include OHR's
Jokeland.com website within the Company's ComedyNet site.
These warrants were valued at $200,000, using the Black-Scholes model and
the following assumptions:
Expected Life 5 years
Interest Rate 4.91%
Volatility 107.5%
Dividend Yield 0.0%
The value of the warrants issued has been recorded in the 1998 balance
sheet as partner advances and will be amortized ratably over the contract
term. No expense was recorded in 1998 as the Company did not launch the
Jokeland.com website until March 1999.
(14) Discontinued Operations
In the first quarter of 1999, the Board of Directors approved the Company's
decision to discontinue its webPASSPORT division (see note 15(a)). The
closing is expected to occur early in the second quarter of 1999.
Accordingly, operating results have been reclassified and reported in
discontinued operations. Operating results of the discontinued operations
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ -- 724,907 1,355,629
Expenses:
Cost of revenues -- 625,687 1,300,341
Research and development 9,160,076 1,637,290 595,351
Content production and development costs 325,847 208,256 583,058
Selling, general and administrative 2,449,250 4,370,044 1,403,413
Loss on disposition of business -- 617,058 --
------------ ------------ ------------
Operating loss (11,935,173) (6,733,428) (2,526,534)
Other income (expenses):
Interest income 41,728 31,479 24,374
Interest expense (630,699) (35,512) (47,234)
Financing costs -- -- (1,200,000)
------------ ------------ ------------
Net loss $(12,524,144) (6,737,461) (3,749,394)
============ ============ ============
</TABLE>
The above net loss excludes the loss on disposal of $609,086 in 1998.
68
<PAGE>
AMERICAN INTERACTIVE MEDIA, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Assets and liabilities of the discontinued operations are as follows at
December 31:
1998 1997
--------- ---------
Product inventory $ -- 306,671
Technology license, net -- 365,735
Net fixed assets -- 103,666
Other assets 2,365 2,445
Accrued expenses (569,251) (275,728)
--------- ---------
Net assets (liabilities) $(566,886) 502,789
========= =========
Interest expense of $630,699, $35,512 and $47,234 are included in
discontinued operations representing the percentage of the estimated
expenditures related to the webPASSPORT operations.
The following information reconciles the net loss to net cash used in
discontinued operations:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net loss from discontinued operations $(12,524,144) (6,737,461) (3,749,349)
Adjustments to reconcile net loss to net cash used in
discontinued operations:
Noncash expenses included in net loss:
Impairment loss on technology licenses 3,402,607 -- --
Depreciation and amortization 2,103,817 446,841 24,130
Common stock issued related to debt financing -- -- 1,200,000
Interest and debt discount on secured debentures 621,827 35,512 --
Stock options and common shares issued for services 1,324,527 1,000,000 --
Loss on disposition of business -- 617,058 --
Changes in assets and liabilities (83,817) 1,048,781 (537,084)
------------ ------------ ------------
Net cash used in discontinued operations $ (5,155,183) (3,589,269) (3,062,303)
------------ ------------ ------------
</TABLE>
(15) Subsequent Events - Unaudited
(a) Pursuant to the Company's Board approved plans to divest the
webPASSPORT system, on March 3, 1999, the Company signed a Letter of
Intent with PowerChannel, Inc. ("PowerChannel") for the sale of the
webPASSPORT server infrastructure and related equipment in conjunction
with the grant of a non-exclusive, worldwide license to operate and
use the webPASSPORT System. Pursuant to the Leter of Intent,
PowerChannel will take over the operations of the webPASSPORT System
and assume all attendant responsibilities. In consideration,
PowerChannel has agreed to (i) execute a promissory note in the
principal amount of $1 million, to mature December 31, 2000,
convertible at the Company's option into 200,000 shares of
PowerChannel common stock at a conversion price of $5.00 per share,
(ii) pay the Company a one-time license fee of $10.00 for each set-box
utilizing the webPASSPORT System that PowerChannel installs for its
customers.
Additionally, in exchange for all of the webPASSPORT related
inventory, the Company received from PowerChannel, Inc. a non-interest
bearing promissory note with a face value of $90,000. This short-term
note is due in three monthly installments beginning on or about June
1, 1999. As a result of the limited operating history of Power Channel
as of December 31, 1998, the Company wrote off the entire amount of
the webPASSPORT related inventory in connection with the Company's
decision to discontinue the webPASSPORT operations.
(b) On March 29, 1999, Pioneer exercised 539,000 warrants acquired as part
of the November 1998 purchase of Class A Preferred Stock. As an
inducement to Pioneer to exercise these warrants, the original strike
price of the warrants was reduced from $2.50 to $1.86. Additionally,
the strike price of the remaining 1,000,000 warrants issued in
connection with the purchase of the Class A Preferred Stock was
reduced from $3.52 to $2.00. Further, Hollinger agreed, at the closing
of a financing by Pioneer of at least $10,000,000, or consummated
through Pioneer's active and substantial efforts, before AIME receives
financing independent of Pioneer of $10,000,000 or more, to retire
both the Purchase Option and the Purchase Warrant in exchange for
2,000,000 shares of our Common Stock.
On May 12, 1999, Pioneer exercised 500,000 warrants required as part
of the November 1998 purchase of Class A Preferred Stock. As an
inducement to Pioneer to exercise these warrants, the Company granted
to Pioneer an additional 1,000,000 warrants. These warrants have a
strike price of $2.50 and expire on May 11, 2000.
(c) On March 31, 1999, the Company and iConnect, Inc. ("iConnect") entered
into an agreement whereby the Company was granted a 25% equity stake
in iConnect in exchange for the assignment of various vendor contracts
and the consent to allow iConnect and its primary shareholder to
pursue certain discontinued operations of the Company. Until March 31,
1999, iConnect's founder and primary shareholder was an employee of
the Company.
(d) In 1999, the Board of Directors authorized the establishment of a
stock incentive plan. The total number of shares of common stock for
issuance under the plan is 6,500,000 shares. Under the terms of the
plan, the company is authorized to grant stock options that qualify as
incentive stock options under Section 422 of the Code of 1986 and
nonqualified stock options to salaried officers and other key
employees of the Company and its subsidiaries and to outside
consultants and advisors.
69
<PAGE>
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Schiffman Hughes Brown was the principal accountants for AIME until October
10, 1997. On October 10, 1997, that firm's appointment as principal accountants
was terminated and KPMG LLP was engaged as principal accountants. The decision
to change accountants was approved by the Board of Directors.
During the registrant's two most recent fiscal years, there were no
disagreements with Schiffman Hughes Brown on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures
which disagreements if not resolved to their satisfaction would have caused them
to make reference thereof in connection with their reports.
None of the "reportable events" described under Item 304(a)(1)(v) of
Regulation S-K occurred within the registrant's two most recent fiscal years.
The audit report of Schiffman Hughes Brown on the consolidated financial
statements of AIME as of and for the year ended December 31, 1996 did not
contain any adverse opinion, or disclaimer of opinion nor was it qualified or
modified as to uncertainty, audit scope, or accounting principles. A letter from
Schiffman Hughes Brown is filed as Exhibit 16 to this Registration Statement.
During the registrant's two most recent fiscal years prior to October 10,
1997, KPMG LLP had not been engaged as an independent accountant to audit either
registrant's financial statements or the financial statements of any of its
subsidiaries, nor had it been consulted regarding the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the registrant's financial statements
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following Consolidated Financial Statements of American Interactive
Media, Inc. and the Independent Auditors' Reports are included in Item 13 of
this Form 10.
Independent Auditors' Reports.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Stockholders' (Deficit) Equity for the years
ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
Notes to the Consolidated Financial Statements.
70
<PAGE>
(b) Exhibit List
Exhibit
Number Description of Exhibit
- ------ ----------------------
2.1 Agreement and Plan of Merger dated September 26, 1997 among American
Interactive Media, Inc., AIME Merger Corp. and WebFeat, Inc.*
3.1 Certificate of Incorporation of Registrant
3.2 By-laws of Registrant
4.1 Floating Rate Convertible Secured Debenture dated December 4, 1997
4.2 Floating Rate Convertible Secured Debenture dated February 3, 1998
4.3 Securities Purchase Agreement dated December 3, 1997 between Hollinger
Digital, Inc. and American Interactive Media, Inc., as amended by a
Consent and Waiver between Hollinger Digital, Inc. and American
Interactive Media, Inc. dated as of November 16, 1998.
4.4 Consent and Waiver Agreement dated November 16, 1998 by and among
Hollinger Digital, Inc., Pioneer Ventures Associates Limited
Partnership and American Interactive Media, Inc.
4.5 Pledge and Security Agreement dated December 4, 1997 by and among
American Interactive Media, Inc. and Hollinger Digital, Inc.
4.6 Certificate of Designation of Series A Senior Convertible Preferred
Stock of American Interactive Media, Inc., dated November 16, 1998 as
filed with the Delaware Secretary of State on November 16, 1998
9.1 Voting Trust and Stockholders' Agreement dated January 1, 1997 by and
among WebFeat, Inc., Mark Graff and the Stockholders (as defined
therein)
9.2 Voting and Shareholders Agreement dated as of November 16, 1998 by and
among Pioneer Ventures Associates Limited Partnership and the
Principal Shareholders of American Interactive Media, Inc. (as defined
therein)
9.3 Shareholders Agreement dated as of November 16, 1998 by and among
Hollinger Digital, Inc., Pioneer Ventures Associates Limited
Partnership and Mark Graff
10.1 Employment Agreement dated as of October 10, 1997 by and among Peter
B. Yunich and American Interactive Media, Inc.
10.2 Separation Agreement dated as of August 28, 1998 by and among Peter B.
Yunich and American Interactive Media, Inc.
10.3 Employment Agreement dated October 10, 1997 by and among Mark Graff
and American Interactive Media, Inc.
10.4 1999 Stock Incentive Option Plan
10.5 Investment Agreement dated November 16, 1998 by and between Pioneer
Ventures Limited Partnership and American Interactive Media, Inc.
71
<PAGE>
10.6 AIM Stock Agreement dated as of December 30, 1998 by and among
American Interactive Media, Inc. and Bid.Com International Inc. +
10.7 AIM License Agreement dated as of December 30, 1998, by and among
American Interactive Media, Inc. and Bid.Com International Inc. +
10.8 Operating Agreement of AIM/New Tech LLC dated as of August 27, 1998 by
and among AIM/New Tech LLC, New Tech Entertainment, LLC and American
Interactive Media, Inc. +
10.9 Common Stock Purchase Option dated December 4, 1997 issued to
Hollinger Digital, Inc.
10.10 Warrant dated December 4, 1997 issued to Hollinger Digital, Inc.
10.11 Warrant dated November 16, 1998 issued to Pioneer Ventures Associates
Limited Partnership
10.12 Warrant dated November 16, 1998 issued to Ventures Management Partners
LLC
16.1 Letter re change in certifying accountant
27 Financial Data Schedule
- ----------
* Schedules are omitted and will be furnished upon request.
+ To be filed by amendment.
72
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
AMERICAN INTERACTIVE MEDIA, INC.
(Registrant)
Dated: May 14, 1999
By: /s/ Mark Graff
---------------------------------------------
Name: Mark Graff
Title: President and Chief Executive Officer
73
<PAGE>
Exhibit Sequential
Number Description of Exhibit Page Number
- ------- ------------------------------------------------------- -----------
2.1 Agreement and Plan of Merger dated September 26, 1997
among American Interactive Media, Inc., AIME Merger
Corp. and WebFeat, Inc.*
3.1 Certificate of Incorporation of the Registrant
3.2 By-laws of the Registrant
4.1 Floating Rate Convertible Secured Debenture dated
December 4, 1997
4.2 Floating Rate Convertible Secured Debenture dated
February 3, 1998
4.3 Securities Purchase Agreement dated December 3, 1997
between Hollinger Digital, Inc. and American
Interactive Media, Inc., as amended by a Consent and
Waiver between Hollinger Digital, Inc. and American
Interactive Media, Inc. dated as of November 16, 1998.
4.4 Consent and Waiver Agreement dated November 16, 1998 by
and among Hollinger Digital, Inc., Pioneer Ventures
Associates Limited Partnership and American Interactive
Media, Inc.
4.5 Pledge and Security Agreement dated December 4, 1997 by
and among American Interactive Media, Inc. and
Hollinger Digital, Inc.
4.6 Certificate of Designation of Series A Senior
Convertible Preferred Stock of American Interactive
Media, Inc., dated November 16, 1998 as filed with the
Delaware Secretary of State on November 16, 1998
9.1 Voting Trust and Stockholders' Agreement dated January
1, 1997 by and among WebFeat, Inc., Mark Graff and the
Stockholders (as defined therein)
9.2 Voting and Shareholders Agreement dated as of November
16, 1998 by and among Pioneer Ventures Associates
Limited Partnership and the Principal Shareholders of
American Interactive Media, Inc. (as defined therein)
9.3 Shareholders Agreement dated as of November 16, 1998 by
and among Hollinger Digital, Inc., Pioneer Ventures
Associates Limited Partnership and Mark Graff
10.1 Employment Agreement dated as of October 10, 1997 by
and among Peter B. Yunich and American Interactive
Media, Inc.
10.2 Separation Agreement dated as of August 28, 1998 by and
among Peter B. Yunich and American Interactive Media,
Inc.
10.3 Employment Agreement dated October 10, 1997 by and
among Mark Graff and American Interactive Media, Inc.
10.4 1999 Stock Incentive Option Plan
74
<PAGE>
Exhibit Sequential
Number Description of Exhibit Page Number
- ------- ------------------------------------------------------- -----------
10.5 Investment Agreement dated November 16, 1998 by and
between Pioneer Ventures Limited Partnership and
American Interactive Media, Inc.
10.6 AIM Stock Agreement dated as of December 30, 1998 by
and among American Interactive Media, Inc. and Bid.Com
International Inc. +
10.7 AIM License Agreement dated as of December 30, 1998, by
and among American Interactive Media, Inc. and Bid.Com
International Inc. +
10.8 Operating Agreement of AIM/New Tech LLC dated as of
August 27, 1998 by and among AIM/New Tech LLC, New Tech
Entertainment, LLC and American Interactive Media, Inc.
+
10.9 Common Stock Purchase Option dated December 4, 1997
issued to Hollinger Digital, Inc.
10.10 Warrant dated December 4, 1997 issued to Hollinger
Digital, Inc.
10.11 Warrant dated November 16, 1998 issued to Pioneer
Ventures Associates Limited Partnership
10.12 Warrant dated November 16, 1998 issued to Ventures
Management Partners LLC
16.1 Letter re change in certifying accountant
27 Financial Data Schedule
- --------
* Schedules are omitted and will be furnished upon request
+ To be filed by amendment
75
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of September 26,
1997, by and among American Interactive Media, Inc., a Nevada corporation
("Acquiror"), AIM Merger Corp., a Delaware corporation and a wholly-owned
subsidiary of Acquiror ("Merger Sub"), Webfeat Inc., a Delaware corporation
("Target") and Mark Graff (the "Shareholder"). Other shareholders of Target are
party to this Agreement only for the purpose of making the representations in
Section 5.28. Each of Target and Merger Sub is collectively referred to herein
as the "Constituent Corporations".
RECITALS
A. The respective Boards of Directors of Acquiror and Target each have
determined that a business combination between Acquiror and Target is in the
best interests of their respective companies and stockholders and presents an
opportunity for their respective companies to achieve long-term strategic and
financial benefits, and accordingly have approved this Agreement and the merger
provided for herein whereupon Merger Sub shall merge with and into Target upon
the terms, and subject to the conditions, set forth herein.
B. Acquiror owns all of the issued and outstanding capital stock of Merger
Sub.
C. The Shareholder owns 524 shares of the issued and outstanding capital
stock of Target.
D. Pursuant to the Merger (as hereinafter defined), among other things, the
outstanding shares of Target Common Stock, $.01 par value ("Target Common
Stock"), shall be converted into shares of Acquiror Common Stock, $.001 par
value ("Acquiror Common Stock"), at the rate set forth herein.
E. For federal income tax purposes, it is intended that the Merger provided
for herein shall qualify as a reorganization within the meaning of Section 368
of the Internal Revenue Code of 1986, as amended (the "Code"), and for financial
accounting purposes shall be accounted for as a "pooling of interests."
F. Each of Acquiror, Merger Sub, Target and the Shareholder desires to make
certain representations, warranties and agreements in connection with the
Merger.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE 1
THE MERGER
1.1 THE MERGER. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3), Merger Sub shall be merged with
and into Target in accordance with this Agreement and the separate corporate
existence of Merger Sub shall thereupon cease (the "Merger"). Target shall be
the surviving corporation in the Merger (sometimes hereinafter referred to as
the "Surviving Corporation") and shall continue to be governed by the laws of
the State of Delaware, and all rights, privileges, powers, immunities, purposes
and franchises of the Constituent Corporations shall continue unaffected by the
Merger. The Merger shall have the effects specified in Section 259 of the
Delaware General Corporation Law (the "DGCL").
1.2 THE CLOSING. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") shall take place at the offices of Curtis,
Mallet-Prevost, Colt & Mosle, 101 Park Avenue, New York, New York 10178, (i) at
9:00 a.m., local time, on the first business day immediately following the day
on which the last to be fulfilled or waived of the conditions set forth in
Article 9 shall be fulfilled or waived in accordance herewith or (ii) at such
other time, date or places as
<PAGE>
Acquiror and Target may agree. The date on which the Closing occurs is
hereinafter referred to as the "Closing Date."
1.3 EFFECTIVE TIME. If all the conditions to the Merger set forth in
Article 9 shall have been fulfilled or waived in accordance herewith and this
Agreement shall not have been terminated as provided in Article 10, the parties
hereto shall cause a Certificate of Merger meeting the requirements of Section
251 of the DGCL to be properly executed, and filed in accordance with such
Section on the Closing Date. The Merger shall become effective at the time of
the filing of the Certificate of Merger or at such later time which the parties
hereto shall have agreed upon and designated in such filing as the effective
time of the Merger (the "Effective Time").
1.4 TAX AND ACCOUNTING CONSEQUENCES. It is intended by the parties hereto
that the Merger shall (i) constitute a reorganization within the meaning of
Section 368 of the Code and (ii) qualify for accounting treatment as a "pooling
of interests."
1.5 TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Target and Merger Sub, the officers and directors of Target
and Merger Sub are fully authorized in the name of their respective corporations
or otherwise to take, and will take, all such lawful and necessary action, so
long as such action is not inconsistent with this Agreement.
ARTICLE 2
CERTIFICATE OF INCORPORATION AND BYLAWS
OF THE SURVIVING CORPORATION
2.1 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
Merger Sub in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation until duly amended in
accordance with applicable law; provided, however, that Article I of the
Certificate of Incorporation of the Surviving Corporation shall be amended to
read as follows: "The name of the corporation is WebFeat, Inc."
2.2 BYLAWS. The Bylaws of Merger Sub in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation until duly
amended in accordance with applicable law.
ARTICLE 3
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
3.1 DIRECTORS. The directors of Merger Sub immediately prior to the
Effective Time shall be the initial directors of the Surviving Corporation and
shall serve until their successors are duly elected or appointed and qualified.
3.2 OFFICERS. The officers of Merger Sub immediately prior to the Effective
Time shall be the initial officers of the Surviving Corporation and shall serve
until their respective successors are duly elected or appointed and qualified.
2
<PAGE>
ARTICLE 4
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS
4.1 EFFECT ON CAPITAL STOCK. By virtue of the Merger and without any action
on the part of Merger Sub, Target or the holders of any of the following
securities:
(a) CONVERSION OF TARGET COMMON STOCK. At the Effective Time, each
share of Target Common Stock issued and outstanding immediately prior to
the Effective Time (other than any shares of Target Common Stock to be
canceled pursuant to Section 4.1(b)) will be canceled and extinguished and
be converted automatically into the right to receive five thousand (5,000)
shares of Acquiror Common Stock (the "Exchange Ratio"), subject to a
maximum of four million (4,000,000) shares to be issued to Target
Shareholders.
(b) CANCELLATION OF TARGET COMMON STOCK OWNED BY ACQUIROR OR TARGET.
At the Effective Time, all shares of Target Common Stock that are owned by
Target as treasury stock and each share of Target Common Stock owned by
Acquiror or any direct or indirect wholly-owned subsidiary of Acquiror or
of Target immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof.
(c) CAPITAL STOCK OF MERGER SUB. At the Effective Time, each share of
Common Stock, $.01 par value, of Merger Sub ("Merger Sub Common Stock")
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
non-assessable share of Common Stock, $.01 par value, of the Surviving
Corporation. Each stock certificate of Merger Sub evidencing ownership of
any such shares shall continue to evidence ownership of such shares of
capital stock of the Surviving Corporation.
(d) ADJUSTMENTS TO EXCHANGE RATIO. The Exchange Ratio shall be
adjusted to reflect fully the effect of any stock split, reverse split,
stock dividend (including any dividend or distribution of securities
convertible into Acquiror Common Stock or Target Common Stock),
reorganization, recapitalization or other like change with respect to
Acquiror Common Stock or Target Common Stock occurring after the date
hereof and prior to the Effective Time.
4.2 SURRENDER OF CERTIFICATES.
(a) ACQUIROR TO PROVIDE COMMON STOCK. Promptly after the Effective
Time, Acquiror shall make available for exchange in accordance with this
Article 4, through such reasonable procedures as Acquiror may adopt, (i)
the shares of Acquiror Common Stock issuable pursuant to Section 4.1(a) in
exchange for shares of Target Common Stock outstanding immediately prior to
the Effective Time.
(b) EXCHANGE PROCEDURES. Promptly after the Effective Time, the
Surviving Corporation shall cause to be mailed or delivered to each holder
of record of a certificate or certificates (the "Certificates") which
immediately prior to the Effective Time represented outstanding shares of
Target Common Stock, whose shares were converted into the right to receive
shares of Acquiror Common Stock (and cash in lieu of fractional shares)
pursuant to Section 4.1, (i) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon receipt of the Certificates by Acquiror,
and shall be in such form and have such other provisions as Acquiror may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing
shares of Acquiror Common Stock (and cash in lieu of fractional shares).
Upon surrender of a Certificate for cancellation to Acquiror or to such
agent or agents as may be appointed by Acquiror, together with such letter
of transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing the number of whole
shares of Acquiror Common Stock and
3
<PAGE>
payment in lieu of fractional shares which such holder has the right to
receive pursuant to Section 4.1, and the Certificate so surrendered shall
forthwith be canceled. Until so surrendered, each outstanding Certificate
that, prior to the Effective Time, represented shares of Target Common
Stock will be deemed from and after the Effective Time, for all corporate
purposes, other than the payment of dividends, to evidence the ownership of
the number of full shares of Acquiror Common Stock into which such shares
of Target Common Stock shall have been so converted and the right to
receive an amount in cash in lieu of the issuance of any fractional shares
in accordance with Section 4.1.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions with respect to Acquiror Common Stock with a record
date after the Effective Time will be paid to the holder of any
unsurrendered Certificate with respect to the shares of Acquiror Common
Stock represented thereby until the holder of record of such Certificate
shall surrender such Certificate. Subject to applicable law, following
surrender of any such Certificate, there shall be paid to the record holder
of the certificates representing whole shares of Acquiror Common Stock
issued in exchange therefor, without interest, at the time of such
surrender, the amount of any such dividends or other distributions with a
record date after the Effective Time theretofore payable (but for the
provisions of this Section 4.2(c)) with respect to such shares of Acquiror
Common Stock.
(d) TRANSFERS OF OWNERSHIP. If any certificate for shares of Acquiror
Common Stock is to be issued in a name other than that in which the
Certificate surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the Certificate so surrendered will
be properly endorsed and otherwise in proper form for transfer and that the
person requesting such exchange will have paid to Acquiror or any agent
designated by it any transfer or other taxes required by reason of the
issuance of a certificate for shares of Acquiror Common Stock in any name
other than that of the registered holder of the Certificate surrendered, or
established to the satisfaction of Acquiror or any agent designated by it
that such tax has been paid or is not payable.
(e) NO LIABILITY. Notwithstanding anything to the contrary in this
Section 4.2, neither the Surviving Corporation nor any party hereto shall
be liable to any person for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
4.3 NO FURTHER OWNERSHIP RIGHTS IN TARGET COMMON STOCK. All shares of
Acquiror Common Stock issued upon the surrender for exchange of shares of Target
Common Stock in accordance with the terms hereof (including any cash paid in
lieu of fractional shares) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Target Common Stock, and
there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Target Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article 4.
4.4 LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificates
shall have been lost, stolen or destroyed, Acquiror shall issue in exchange for
such lost, stolen or destroyed Certificates, upon the making of an affidavit of
that fact by the holder thereof, such shares of Acquiror Common Stock (and cash
in lieu of fractional shares) as may be required pursuant to Section 4.1;
provided, however, that Acquiror may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed Certificates to deliver a bond in such sum as it may reasonably direct
as indemnity against any claim that may be made against Acquiror, the Surviving
Corporation or any agent with respect to the Certificates alleged to have been
lost, stolen or destroyed.
4.5 STOCK SUBJECT TO CONDITIONS. All shares of Acquiror Common Stock which
are received in the Merger in exchange for shares of Target Common Stock which,
under agreements with Target, are unvested and which, by its terms, does not
terminate due to the Merger will also be unvested, and the certificates
evidencing such shares will be marked with appropriate legends.
4
<PAGE>
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF TARGET AND SHAREHOLDER
In this Agreement, any reference to any event, change, condition or effect
being "material" with respect to any entity or group of entities means any
material event, change, condition or effect related to the condition (financial
or otherwise), properties, assets (including intangible assets), liabilities,
business, operations or results of operations of such entity or group of
entities. In this Agreement, any reference to a "Material Adverse Effect" with
respect to any entity or group of entities means any event, change or effect
that is materially adverse to the condition (financial or otherwise),
properties, assets, liabilities, business, operations or results of operations
of such entity and its subsidiaries, taken as a whole.
In this Agreement, any reference to an entity's "knowledge" means such
party's actual knowledge after due and diligent inquiry of officers, directors
and other employees of such party reasonably believed to have knowledge of such
matters. In this Agreement, any reference to the Shareholder's knowledge or
knowledge of the Shareholder or words of similar import shall mean the knowledge
of the Shareholder, whether acquired in his capacity as shareholder, director or
officer of Target or in any other manner.
Except as disclosed in a document of even date herewith and delivered by
Target to Acquiror prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Target
Disclosure Schedule"), Target and the Shareholder jointly and severally
represent and warrant to Acquiror and Merger Sub as follows:
5.1 ORGANIZATION, STANDING AND POWER. Target is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization. Target has the corporate power to own its
properties and to carry on its business as now being conducted and as proposed
to be conducted and is duly qualified to do business and is in good standing in
each jurisdiction in which the failure to be so qualified and in good standing
would have a Material Adverse Effect on Target. Target has delivered a true and
correct copy of the Certificate of Incorporation and Bylaws or other charter
documents, as applicable, of Target, each as amended to date, to Acquiror.
Target is not in violation of any of the provisions of its Certificate of
Incorporation or Bylaws. Target does not directly or indirectly own any equity
or similar interest in, or any interest convertible or exchangeable or
exercisable for, any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity.
5.2 CAPITAL STRUCTURE AND STOCKHOLDER'S EQUITY
(a) The authorized capital stock of Target consists of 1,000 shares of
Common Stock, $.01 par value of which there were issued and outstanding as
of the close of business on the date hereof, 800 shares of Common Stock.
There are no other outstanding shares of capital stock or voting securities
and no outstanding commitments to issue any shares of capital stock or
voting securities after the date hereof. All outstanding shares of Target
Common Stock are duly authorized, validly issued, fully paid and
non-assessable and are free of any liens or encumbrances other than any
liens or encumbrances created by or imposed upon the holders thereof and
are not subject to preemptive rights or rights of first refusal created by
statute, the Certificate of Incorporation, as amended, or Bylaws, as
amended, of Target or any agreement to which Target is a party or by which
it is bound.
(b) There are not outstanding as of the date hereof any options,
warrants or other rights to acquire capital stock from Target.
(c) There are no contracts, commitments or agreements relating to
voting, purchase or sale of Target's capital stock (i) between or among
Target and any of its stockholders and (ii) to the best of Target's and the
Shareholder knowledge, between or among any of Target's stockholders,
except for the stockholders named in Schedule 5.2(c) of the Target
Disclosure Schedule.
5
<PAGE>
(d) The shareholders listed on Schedule 5.2(d) (such shareholders
excluding Mark Graff are hereinafter called the "Other Target
Shareholders") are the sole and exclusive holders and owners of all the
issued and outstanding capital stock of Target indicated beside the name of
such shareholder on Schedule 5.2(d), as of the Closing Date, free and clear
of all liens, pledges, hypothecations, restrictions or encumbrances, and no
other person, firm or corporation will have at Closing any interest
whatsoever in any of such shares. Immediately following the Effective Time
of the Merger, Acquiror will be the sole and exclusive holder and owner of
all of the issued and outstanding capital stock of Target. Since the date
of incorporation of Target, there have been no redemptions by Target of any
shares of its capital stock except for the redemption of one share
belonging to William Zaccheo in August of 1996.
5.3 AUTHORITY AND ENFORCEABILITY
(a) Target has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Target. This Agreement has been duly
executed and delivered by Target and constitutes the valid and binding
obligation of Target enforceable against Target in accordance with its
terms. The execution and delivery of this Agreement by Target does not, and
the consummation of the transactions contemplated hereby will not, conflict
with, or result in any violation of, or default under (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any benefit under
(i) any provision of the Certificate of Incorporation or Bylaws or
equivalent organizational documents of Target, as amended, or (ii) any
mortgage, indenture, lease, contract or other agreement or instrument,
permit, concession, franchise, license, judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Target or any of its
properties or assets, except where such conflict, violation, default,
termination, cancellation or acceleration with respect to the foregoing
provisions of (ii) would not have and could not reasonably be expected to
have a Material Adverse Effect on Target. No consent, approval, order or
authorization of, or registration, declaration or filing with, any court,
administrative agency or commission or other governmental authority or
instrumentality ("Governmental Entity") is required by or with respect to
Target in connection with the execution and delivery of this Agreement or
the consummation of the transactions contemplated hereby, except for (i)
the filing of the Certificate of Merger as provided in Section 1.3 and (ii)
such other consents, authorizations, filings, approvals and registrations
which, if not obtained or made, would not have a Material Adverse Effect on
Target and would not prevent, or materially alter or delay any of the
transactions contemplated by this Agreement.
(b) This Agreement has been executed and delivered by the Shareholder
and constitutes the valid and legally binding obligation of the
Shareholder, enforceable against the Shareholder in accordance with its
terms. The Shareholder has the full right, power, legal capacity and
authority to enter into this Agreement, free and clear of any statutory,
contractual or other limitations and to enter into and perform such
Shareholder's obligations under this Agreement.
5.4 FINANCIAL STATEMENTS. The interim financial statement of Target for the
period (such interim financial statement is hereinafter referred to at times as
the "Target Financial Statements"), a copy of which is attached hereto as
Schedule 5.4, is true and correct and has been prepared in accordance with
generally accepted accounting principles ("GAAP"), and the balance sheets in the
Target Financial Statements fairly present the financial position of Target as
of its date and sets forth in full and reflects all liabilities, including
taxes, of Target as of such dates required to be reflected thereon in accordance
with GAAP; the income statements fairly present the results of the operations of
Target for the period indicated and covered thereby; and the Shareholders'
Equity of Target as of such date was as set forth in the Target Financial
Statements, after full provision and reserves for all taxes and other
liabilities for all periods up to the dates thereof. Except for liabilities
incurred after August 31, 1997, in the ordinary course of business and included
on the books and records of Target, neither Target nor the Shareholder knows or
has any reason to know of any liability or any basis for the assertion against
Target of any liability not reflected or reserved against in the balance sheets
required to be included thereon in accordance with GAAP.
6
<PAGE>
5.5 ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule 5.5, since
August 31, 1997 (the "Target Balance Sheet Date"), Target has conducted its
business in the ordinary course consistent with past practice, and there has
occurred:
(a) no material adverse change in the business, financial condition or
results of operations (the "Business Condition"), or to the knowledge of
Target or the Shareholder, the ability of Target to function in the future
at least at current business levels of activity ("Target's Prospects");
(b) no fire, explosion, accident, flood, smoke, water damage or other
catastrophe, embargo, lockout, strike, labor trouble, or other emergency,
which adversely affected the business or properties of Target as well as
the buildings occupied or used by Target;
(c) no sales of goods or services or other transactions of Target
other than those occurring in the ordinary course of business, none of
which has had or will have any Material Adverse Effect on Target's Business
Condition, or to the knowledge of Target or the Shareholder, Target's
Prospects;
(d) no material change in the manner of conducting the business of
Target;
(e) no adverse change in the working capital position of Target and no
buildup of its inventories out of the ordinary course of business and no
markup of its fixed assets or inventories;
(f) no financial or other commitments or obligations incurred by
Target, except such as may be incidental to carrying on the ordinary course
of business;
(g) except for trade accounts payable, no borrowing by Target of any
funds and no endorsing or guaranteeing payment by it of any loan or
obligation, contractual or otherwise, of any other individual, firm,
corporation or other entity, and there are no such borrowings, endorsements
or guarantees by Target presently outstanding;
(h) except for trade terms extended to customers in the ordinary
course of business, no loans or advances by Target to any individual, firm,
corporation or other entity at any time;
(i) no capital additions or improvements in excess of Twenty-Five
Thousand Dollars ($25,000) in the aggregate and no contracts or purchase
orders therefor, to the properties of Target;
(j) except for finished products and component parts sold by Target in
the ordinary course of business, no sale, retirement, abandonment or other
disposition of any property of Target, except the disposition of minor
equipment in the ordinary course of business with an aggregate value of
less than Ten Thousand Dollars ($10,000);
(k) no outstanding obligation by Target for money borrowed, other than
as set forth in the Target Financial Statements, except trade accounts
payable and other current expenses and taxes incurred and accrued on its
books and arising in the ordinary course of business, none of which
obligations is in default or arrears of payment;
(l) no dividend on Target's capital stock and no money or other
property set apart for payment in respect of Target's capital stock;
(m) except as contemplated hereby, no acquisition or contract to
acquire in any manner, directly or indirectly, any of the outstanding
capital stock of Target;
(n) no payment of or any obligation to pay any amounts either in cash
or other property to any person for cancellation of any outstanding options
or agreements to acquire shares of Target's capital stock;
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(o) no change in the capital structure or Certificate of Incorporation
or Bylaws of Target;
(p) no change in the accounting methods or practices followed by
Target in connection with the operations of Target;
(q) no payment by Target of any bonus or other distribution to any
officer or employee, sales representative, distributors or other sales
agent of Target;
(r) no notice of any violation by Target of any building, zoning code
or fire code, health code or the Occupational Safety and Health and Safety
Act of 1970, as amended ("OSHA"), Environmental Law (as hereinafter
defined) and no actual or to the knowledge of Target or the Shareholder,
threatened condemnation of the real properties currently owned or used by
the Target (the "Real Properties"); or
(s) any commitment or agreement by Target to do anything which would
make any of Sections 5.5(a) - 5.5(r) untrue (other than negotiations with
Acquiror and its representatives regarding the transactions contemplated by
this Agreement).
5.6 ABSENCE OF UNDISCLOSED LIABILITIES. Target has no material obligations
or liabilities of any nature (matured or unmatured, fixed or contingent) other
than (i) those set forth or adequately provided for in Target's unaudited
Balance Sheet for the period ended August 31, 1997, including the Notes thereto
(the "Target Balance Sheet"), (ii) those incurred in the ordinary course of
business and not required to be set forth in the Target Balance Sheet under
generally accepted accounting principles, (iii) those incurred in the ordinary
course of business since the Target Balance Sheet Date and consistent with past
practice and (iv) those incurred in connection with the execution of this
Agreement.
5.7 LITIGATION. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the knowledge of Target or the
Shareholder, threatened against Target or any of its respective properties or
any of its respective officers or directors (in their capacities as such) that,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect on Target. There is no judgment, decree or order against
Target, or, to the knowledge of Target or the Shareholder, any of its respective
directors or officers (in their capacities as such), that could prevent, enjoin,
alter or materially delay any of the transactions contemplated by this
Agreement, or that could reasonably be expected to have a Material Adverse
Effect on Target.
5.8 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no material agreement,
judgment, injunction, order or decree binding upon Target which has or
reasonably could be expected to have the effect of prohibiting or materially
impairing any current or future business practice of Target, any acquisition of
property by Target or the conduct of business by Target as currently conducted
or as proposed to be conducted by Target.
5.9 GOVERNMENTAL AUTHORIZATION. Target has obtained each federal, state,
county, local or foreign governmental consent, license, permit, grant, or other
authorization of a Governmental Entity (i) pursuant to which Target currently
operates or holds any interest in any of its properties or (ii) that is required
for the operation of Target's businesses or the holding of any such interest
((i) and (ii) herein collectively called "Target Authorizations"), and all of
such Target Authorizations are in full force and effect, except where the
failure to obtain or have any of such Target Authorizations could not reasonably
be expected to have a Material Adverse Effect on Target.
5.10 CERTAIN CONTRACTS AND ARRANGEMENTS. Except as disclosed in Schedule
5.10, Target is not a party to any material (i) employment agreement, (ii)
collective bargaining agreement, (iii) license agreement or arrangement, (iv)
indenture, mortgage, note, installment obligation,
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agreement or other instrument relating to the borrowing of money in excess of
Ten Thousand Dollars ($10,000) by Target or the guaranty of any obligation for
the borrowing of money by Target in excess of such amount or (v) other agreement
or arrangement.
5.11 TITLE TO PROPERTY. Target has good and valid title to all of its
properties, interests in properties and assets, real and personal, reflected in
the Target Balance Sheet or acquired after the Target Balance Sheet Date (except
properties, interests in properties and assets sold or otherwise disposed of
since the Target Balance Sheet Date in the ordinary course of business), or in
the case of leased properties and assets, valid leasehold interests in such
properties, free and clear of all mortgages, liens, pledges, charges or
encumbrances of any kind or character, except (i) the lien of current taxes not
yet due and payable, (ii) such imperfections of title, liens and easements as do
not and will not materially detract from or interfere with the use of the
properties subject thereto or affected thereby, or otherwise materially impair
business operations involving such properties and (iii) liens securing debt
which is reflected on the Target Balance Sheet. The plants, property and
equipment of Target that are used in the operations of its business are in good
operating condition and repair. All properties used in the operations of Target
are reflected in the Target Balance Sheet to the extent generally accepted
accounting principles require the same to be reflected. Schedule 5.11 identifies
each parcel of real property owned or leased by Target.
5.12 INTELLECTUAL PROPERTY.
(a) Target owns, or is licensed or otherwise possesses legally
enforceable rights to use, all patents, trademarks, trade names, service
marks, copyrights, and any applications therefor, maskworks, net lists,
schematics, technology, know-how, trade secrets, inventory, ideas,
algorithms, processes, computer software programs or applications (in both
source code and object code form) licenses, customer lists, formulae,
inventions, development tools, other proprietary rights, and tangible or
intangible proprietary information or material ("Intellectual Property")
that are used or proposed to be used in the business of Target as currently
conducted or as proposed to be conducted by Target, except to the extent
that the failure to have such rights have not and could not reasonably be
expected to have a Material Adverse Effect on Target. Intellectual Property
shall include all documentation and media constituting, describing or
relating to the above, including, but not limited to, manuals, memoranda,
know-how, notebooks, software, records and disclosures.
(b) Schedule 5.12 lists (i) all patents and patent applications and
all registered and unregistered trademarks, trade names and service marks,
registered and unregistered copyrights, and maskworks, which Target
considers to be material to its business and included in the Intellectual
Property, including the jurisdictions in which each such Intellectual
Property right has been issued or registered or in which any application
for such issuance and registration has been filed, (ii) all material
licenses, sublicenses and other agreements as to which Target is a party
and pursuant to which any person is authorized to use any Intellectual
Property, and (iii) all material licenses, sublicenses and other agreements
as to which Target is a party and pursuant to which Target is authorized to
use any third party patents, trademarks or copyrights, including software
("Third Party Intellectual Property Rights"), in each case which are
incorporated in, are, or form a part of any product or service of Target
that is material to Target.
(c) To the best knowledge of Target and the Shareholder, there is no
material unauthorized use, disclosure, infringement or misappropriation of
any Intellectual Property rights of Target, any trade secret material to
Target, or any Third Party Intellectual Property Right, by any third party,
including any employee or former employee of Target. Target has not entered
into any agreement to indemnify any other person against any charge of
infringement of any Intellectual Property, other than indemnification
provisions contained in purchase orders arising in the ordinary course of
business.
(d) Target is not, and Target will not be as a result of the execution
and delivery of this Agreement or the performance of Target's obligations
under this Agreement, in breach of any license, sublicense or other
agreement relating to the Intellectual Property or Third Party Intellectual
Property Rights, the breach of which could have a Material Adverse Effect
on Target.
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(e) All patents, registered trademarks, service marks and copyrights
held by Target are valid and subsisting. Target (i) has not been sued in
any suit, action or proceeding which involves a claim of infringement of
any patents, trademarks, service marks, copyrights or violation of any
trade secret or other proprietary right of any third party or (ii) has not
brought any action, suit or proceeding for infringement of Intellectual
Property or breach of any license or agreement involving Intellectual
Property against any third party. The manufacture, marketing, licensing or
sale of the products and services of Target do not infringe any patent,
trademark, service mark, copyright, trade secret or other proprietary right
of any third party, except where such infringement could not have a
Material Adverse Effect on Target.
(f) Target has secured valid written assignments from all consultants
and employees who contributed to the creation or development of
Intellectual Property of the rights to such contributions that Target does
not already own by operation of law.
(g) Target has taken all reasonable and appropriate steps to protect
and preserve the confidentiality of all Intellectual Property not otherwise
protected by patents, or patent applications or copyright ("Confidential
Information"). All use, disclosure or appropriation of Confidential
Information owned by Target by or to a third party has been pursuant to the
terms of a written agreement with such third party. All use, disclosure or
appropriation of Confidential Information not owned by Target has been
pursuant to the terms of a written agreement with the owner of such
Confidential Information, or is otherwise lawful.
(h) To the best knowledge of Target and the Shareholder, neither
Target's operations nor any of its Intellectual Property infringes or
provides any basis to believe that its operations or any of its
Intellectual Property would infringe upon any validly issued or pending
trademark, trade name, service mark, copyright or, to the knowledge of
Target or the Shareholder, any validly issued or pending patent or other
right of any other person.
5.13 ENVIRONMENTAL MATTERS.
(a) The following terms shall be defined as follows:
(i) "Environmental, Health and Safety Laws" shall mean all
federal, state or local laws, ordinances, codes, regulations, rules,
policies and orders regarding the protection of the environment,
requiring pollution control equipment, or that classify, regulate,
call for the remediation of, require reporting with respect to, or
list or define air, water, groundwater, solid waste, hazardous or
toxic substances, materials, wastes, pollutants or contaminants, or
regarding the safety of employees or workers.
(ii) "Hazardous Materials" shall mean any toxic or hazardous
substance, material or waste or any pollutant or contaminant, or
infectious or radioactive substance or material, including without
limitation, petroleum products and those substances, materials and
wastes defined in or regulated under any Environmental, Health and
Safety Law.
(iii) "Property" shall mean all real property leased or owned by
Target either currently or in the past.
(iv) "Facilities" shall mean all buildings and improvements on
the Property of Target.
(b) Target and the Shareholder jointly and severally represent and
warrant as follows with respect to the operations of Target: (i) to the
best of Target's and the Shareholder's knowledge, no friable asbestos is
contained in the Facilities; (ii) all Hazardous Materials have been
disposed of in accordance with all Environmental, Health and Safety Laws;
(iii) Target has received no notice (verbal or written) of any
noncompliance of the Facilities or its past or present operations with
Environmental, Health and Safety Laws; (iv) no notices, administrative
actions or suits are pending or, to the best of Target's and the
Shareholder's knowledge, threatened relating to a violation of any
Environmental, Health
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and Safety Law; (v) to the best of Target's and the Shareholder's
knowledge, Target is not a potentially responsible party under the federal
Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), or any state analog statute, arising out of events occurring
prior to the Closing Date which would have a Material Adverse Effect on
Target; (vi) to the best of Target's and the Shareholder's knowledge, there
have not been in the past, and are not now, any Hazardous Materials under
or migrating to or from the Facilities or Property; (vii) to the best of
Target's and the Shareholder's knowledge, there have not been in the past,
and are not now, any underground tanks or underground improvements at, on
or under the Property including without limitation, treatment or storage
tanks, sumps, or water, gas or oil wells; (viii) Target has not deposited,
stored, or disposed of polychlorinated biphenyls (PCBs) on the Property or
Facilities or any equipment on the Property containing PCBs at levels in
excess of 50 parts per million; (ix) to the best of Target's and the
Shareholder's knowledge, the Facilities and Target's uses and activities
therein have at all times complied with all Environmental, Health and
Safety Laws; and (x) Target has all the permits and licenses required to be
issued and are in full compliance with the terms and conditions of those
permits.
5.14 TAXES. Target, and any consolidated, combined, unitary or aggregate
group for Tax purposes of which Target is or has been a member have timely filed
all Tax Returns required to be filed by it taking into account extensions of due
dates, have paid all Taxes shown thereon to be due and has provided adequate
accruals in accordance with generally accepted accounting principles in its
financial statements for any Taxes that have not been paid, whether or not shown
as being due on any Tax Returns. (a) No material claim for Taxes has become a
lien against the property of Target or is being asserted against Target other
than liens for Taxes not yet due and payable, (b) no audit of any Tax Return of
Target is being conducted by a Tax authority, (c) no Tax authority is now
asserting, or to the best knowledge of Target or the Shareholder, threatening to
assert against Target any deficiency or claim for additional Taxes, and there
are no requests for information from a Tax authority currently outstanding that
could affect the Taxes of Target and (d) no extension of the statute of
limitations on the assessment of any Taxes has been granted by Target and is
currently in effect . Target will not be required to include any material
adjustment in Taxable income for any Tax period (or portion thereof) ending
after the Effective Time attributable to adjustments made prior to the Merger
pursuant to Section 481 or 263A of the Code or any comparable provision of any
state or foreign Tax law. Target is not a party to any tax sharing or tax
allocation agreement, and Target does not owe any amount under any such
agreement. For purposes of this Agreement, the following terms have the
following meanings:
"Tax" (and, with correlative meaning, "Taxes" and "Taxable") means (i) any
net income, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty, or other tax, governmental
fee or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
Governmental Entity (a "Tax authority") responsible for the imposition of any
such tax (domestic or foreign), (ii) any liability for the payment of any
amounts of the type described in (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any Taxable period and
(iii) any liability for the payment of any amounts of the type described in (i)
or (ii) as a result of any express or implied obligation to indemnify any other
person. As used herein, "Tax Return" shall mean any return, statement, report or
form (including, without limitation,) estimated Tax returns and reports,
withholding Tax returns and reports and information reports and returns required
to be filed with respect to Taxes. Target is in full compliance with all terms
and conditions of any Tax exemptions or other Tax-sparing agreement or order of
a foreign government and the consummation of the Merger shall not have any
adverse effect on the continued validity and effectiveness of such Tax
exemptions or other Tax-sparing agreement or order.
5.15 EMPLOYEE BENEFIT PLANS.
(a) Target does not maintain any pension, profit sharing, retirement,
fringe benefit, deferred compensation, stock purchase, stock option,
incentive, bonus, vacation, severance, disability,
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hospitalization, medical insurance, life insurance or any other type of
employee benefit plan, program or arrangement within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), including, without limitation, any defined benefit plan
("Defined Benefit Plan") within the meaning of Section 3(35) of ERISA or
Section 414(j) of the Code or any defined contribution plan ("Defined
Contribution Plan") within the meaning of Section 3(34) of ERISA or Section
414(i) of the Code or any multi-employer plan ("Multi-employer Plan")
within the meaning of Section 3(37) and 4001(a)(3) of ERISA (hereinafter
each individually referred to as a "Plan" and collectively referred to as
the "Plans") on behalf of any current or former officers or employees of
Target or their beneficiaries or dependents (whether on an active or frozen
basis).
(b) Target has not in the past and does not currently sponsor,
maintain, contribute to or otherwise have any obligation with respect to
any Plan.
5.16 CERTAIN AGREEMENTS AFFECTED BY THE MERGER. Neither the execution and
delivery of this Agreement nor the consummation of the transaction contemplated
hereby will (i) result in any payment (including, without limitation, severance,
unemployment compensation, golden parachute, bonus or otherwise) becoming due to
any director or employee of Target, (ii) materially increase any benefits
otherwise payable by Target or (iii) result in the acceleration of the time of
payment or vesting of any such benefits.
5.17 EMPLOYEE MATTERS. Target is in compliance in all respects with all
current applicable laws and regulations respecting employment, discrimination in
employment, terms and conditions of employment, wages, hours and occupational
safety and health and employment practices, and is not engaged in any unfair
labor practice, except where the failure to be in compliance or the engagement
in such unfair labor practices would not have a Material Adverse Effect on
Target. There are no pending claims against Target under any workers
compensation plan or policy or for long term disability. Target does not have
any obligations under the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA") with respect to any former employees or qualifying beneficiaries
thereunder, except for obligations that would not have a Material Adverse Effect
on Target. There are no controversies pending or, to the best knowledge of
Target and the Shareholder, threatened, between Target and any of its employees,
which controversies have or could reasonably be expected to have a Material
Adverse Effect on Target. Target is not a party to any collective bargaining
agreement or other labor union contract. Target does not know of any activities
or proceedings of any labor union to organize any such employees.
Schedule 5.17 contains a list of all current employees of Target as well as
their current salaries, last calendar year bonus or incentive payments, if any,
and starting dates of employment
5.18 INTERESTED PARTY TRANSACTIONS. Except as disclosed in Schedule 5.18,
Target is not indebted to any director, officer, employee or agent of Target
(except for amounts due as normal salaries and bonuses and in reimbursement of
ordinary expenses), and no such person is indebted to Target, and there have
been no other transactions between Target and any director, officer or principal
shareholder of Target.
5.19 INSURANCE. Target has policies of insurance and bonds of the type and
in amounts customarily carried by persons conducting businesses or owning assets
similar to those of Target. There is no material claim pending under any of such
policies or bond as to which Target has received a denial, or to the best of
Target's knowledge, which coverage has been questioned, denied or disputed by
the underwriters of such policies or bonds. All premiums due and payable under
all such policies and bonds have been paid and Target is otherwise in compliance
in all material respects with the terms of such policies and bonds. Target has
no knowledge of any threatened termination of, or material premium increase with
respect to, any of such policies.
5.20 COMPLIANCE WITH LAWS. Target has complied with, is not in violation
of, and has not received any notices of violation with respect to, any federal,
state, local or foreign statute, law or regulation with respect to the conduct
of its business, or the ownership or operation of its business,
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except for such violations or failures to comply as, singly or in the aggregate,
could not be reasonably expected to have a Material Adverse Effect on Target.
5.21 [intentionally omitted]
5.22 COMPLETE COPIES OF MATERIALS. Target has delivered or made available
true and complete copies of each document that has been requested by Acquiror or
its counsel in connection with their legal and accounting review of Target.
5.23 POOLING OF INTERESTS. Neither Target nor, to the best knowledge of
Target or the Shareholder, any of Target's directors, officers or stockholders
has taken any action which would interfere with Acquiror's ability to account
for the Merger as a pooling of interests.
5.24 BROKERS' AND FINDERS' FEES. Neither Target nor the Shareholder has
incurred, nor will it incur, directly or indirectly, any liability for brokerage
or finders' fees or agents' commissions or investment bankers' fees or any
similar charges in connection with this Agreement or any transaction
contemplated hereby.
5.25 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the shares of Target Common Stock outstanding is the only vote of the holders of
any of Target's capital stock necessary to approve this Agreement and the
transactions contemplated hereby.
5.26 BOARD APPROVAL. The Board of Directors of Target has (i) approved this
Agreement and the Merger, (ii) determined that the Merger is in the best
interests of the stockholders of Target and is on terms that are fair to such
stockholders and (iii) recommended that the stockholders of Target approve this
Agreement and the Merger.
5.27 CUSTOMERS AND SUPPLIERS. As of the date hereof, no material supplier
of Target has indicated to Target that it will stop, or decrease the rate of,
supplying materials, products or service to Target. Target has not knowingly
breached, so as to provide a benefit to Target that was not intended by the
parties, any agreement with, or engaged in any fraudulent conduct with respect
to, any customer or supplier of Target.
5.28 PRIVATE PLACEMENT; RESTRICTIONS ON ACQUIROR COMMON STOCK
(a) The Shareholder represents and warrants to Acquiror that the
Shareholder has such knowledge and experience in financial and business
matters so that he is capable of evaluating the merits and risks of her or
his prospective investment and that the Acquiror Common Stock to be issued
and delivered to him hereunder are being acquired for his own account for
investment for an indefinite period of time, not as nominee or agent for
any other person, firm or corporation and not for distribution or resale to
others in contravention of the Securities Act of 1933, as amended, (the
"Securities Act") and the rules and regulations promulgated thereunder. The
Shareholder understands that the Acquiror Common Stock received by him has
not been, and will not be upon issuance, registered under the Securities
Act for sale to Shareholder by reason of a specific exemption from the
registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of Shareholder's investment intent and
the accuracy of Shareholder's representations in this Section 5.28. The
Shareholder agrees that he will not sell or otherwise transfer the Acquiror
Common Stock unless it is registered under the Securities Act or unless an
exemption from such registration is available.
(b) The Shareholder consents to the placement of a legend on any
certificate or other document evidencing the Acquiror Common Stock stating
that such Acquiror Common Stock has not been registered under the
Securities Act or any state securities or "Blue Sky" laws and setting forth
or referring to the restrictions on transferability and sale thereof,
including the restrictions set forth herein.
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The Shareholder is aware that Acquiror will make a notation in its
appropriate records with respect to the restrictions on the transferability
of such Acquiror Common Stock. The Shareholder also consents and
acknowledges that "stop transfer" instructions may be noted against the
Acquiror Common Stock received by her or him as consideration hereunder.
Acquiror hereby undertakes to remove any legend described in this Section
5.28 or to rescind any `stop transfer' instructions described in this
Section 5.28 as to any Acquiror Common Stock (i) if the Shareholder
furnishes Acquiror with an opinion of counsel or other written information
satisfactory in form and content to Acquiror that such legend or any such
instructions are no longer required (as applicable) or (ii) with respect to
and at the time of the disposition of any such Acquiror Common Stock
pursuant to an effective registration statement under the Securities Act.
(c) Shareholder has relied solely upon an independent investigation
made by him and his representatives, if any. In making Shareholder's
investment decision to participate in the Merger, the Shareholder is not
relying on any oral or written representations or assurances from the
Acquiror or any other person other than as set forth in this Agreement
5.29 ACTION BY STOCKHOLDERS. Prior to the date hereof Target's shareholders
listed on Schedule 5.2(d) have taken all requisite action to authorize and
approve this Agreement and the Merger.
5.30 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by Target or the Shareholder herein or in the Target Disclosure Schedule,
or in any certificate furnished by Target or the Shareholder pursuant to this
Agreement when all such documents are read together in their entirety, contains
or will contain at the Effective Time any untrue statement of a material fact,
or omits or will omit at the Effective Time to state any material fact necessary
in order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB
Except as disclosed in a document of even date herewith and delivered by
Acquiror to Target prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Acquiror
Disclosure Schedule"), Acquiror and Merger Sub represent and warrant to Target
as follows:
6.1 ORGANIZATION, STANDING AND POWER. Each of Acquiror and its
subsidiaries, including Merger Sub, is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization. Each of Acquiror and its subsidiaries has the corporate power to
own its properties and to carry on its business as now being conducted and as
proposed to be conducted and is duly qualified to do business and is in good
standing in each jurisdiction in which the failure to be so qualified and in
good standing would have a Material Adverse Effect on Acquiror. Acquiror has
delivered a true and correct copy of the Articles of Incorporation and Bylaws or
other charter documents, as applicable, of Acquiror and each of its
subsidiaries, each as amended to date, to Target. Neither Acquiror nor any of
its subsidiaries is in violation of any of the provisions of its Articles of
Incorporation or Bylaws or equivalent organizational documents. Acquiror is the
owner, directly or indirectly through its subsidiaries, of all outstanding
shares of capital stock of each of its subsidiaries and all such shares are duly
authorized, validly issued, fully paid and nonassessable. Except as disclosed in
Schedule 6.1, all of the outstanding shares of capital stock of each such
subsidiary are owned by Acquiror, directly or indirectly through its
subsidiaries, free and clear of all liens, charges, claims or encumbrances or
rights of others. There are no outstanding subscriptions, options, warrants,
puts, calls, rights, exchangeable or convertible securities or other commitments
or agreements of any character relating to the issued or unissued capital stock
or other securities of any such subsidiary, or otherwise obligating Acquiror or
any such subsidiary to issue, transfer, sell, purchase, redeem or otherwise
acquire any such securities. Except as disclosed in Schedule 6.1, Acquiror does
not directly or indirectly own any
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equity or similar interest in, or any interest convertible or exchangeable or
exercisable for, any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity.
6.2 CAPITAL STRUCTURE. The authorized capital stock of Acquiror consists of
50,000,000 shares of Common Stock, $.001 par value, and 100,000 shares of
Preferred Stock, $1.00 par value, of which there were issued and outstanding as
of the close of business on September 19, 1997 8,992,435 shares of Common Stock
and no shares of Preferred Stock. There are no other outstanding shares of
capital stock or voting securities of Acquiror other than shares of Acquiror
Common Stock issued after September 19, 1997 upon the exercise options issued
under Acquiror's 1995 Incentive Stock Option Plan ("Acquiror Stock Option
Plan"). The authorized capital stock of Merger Sub consists of 1,000 shares of
Common Stock, $.01 par value, all of which are issued and outstanding and are
held by Acquiror. All outstanding shares of Acquiror and Merger Sub have been
duly authorized, validly issued, fully paid and are non-assessable and free of
any liens or encumbrances other than any liens or encumbrances created by or
imposed upon the holders thereof. As of the close of business on September 19,
1997, Acquiror has granted options and warrants for 3,990,250 shares of Common
Stock. Other than this Agreement and as disclosed in the immediately preceding
sentence, there are no other options, warrants, calls, rights, commitments or
agreements of any character to which Acquiror or Merger Sub is a party or by
which either of them is bound obligating Acquiror or Merger Sub to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, or
repurchased, any shares of the capital stock of Acquiror or Merger Sub or
obligating Acquiror or Merger Sub to grant, extend or enter into any such
option, warrant, call, right, commitment or agreement. The shares of Acquiror
Common Stock to be issued pursuant to the Merger will, when issued, be duly
authorized, validly issued, fully paid, and non-assessable.
6.3 AUTHORITY. Acquiror and Merger Sub have all requisite corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Acquiror and Merger Sub. This
Agreement has been duly executed and delivered by Acquiror and Merger Sub and
constitutes the valid and binding obligations of Acquiror and Merger Sub. The
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of, or default under (with or without notice or lapse of time, or
both), or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of a benefit under (i) any provision of the Articles of
Incorporation or Bylaws or equivalent organizational documents of Acquiror or
any of its subsidiaries, as amended, or (ii) any mortgage, indenture, lease,
contract or other agreement or instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Acquiror or any of its subsidiaries or their properties or assets,
except where such conflict, violation, default, termination, cancellation or
acceleration with respect to the foregoing provisions of (ii) would not have and
could not reasonably be expected to have a Material Adverse Effect on Acquiror.
No consent, approval, order or authorization of, or registration, declaration or
filing with, any Governmental Entity, is required by or with respect to Acquiror
or any of its subsidiaries in connection with the execution and delivery of this
Agreement by Acquiror and Merger Sub or the consummation by Acquiror and Merger
Sub of the transactions contemplated hereby, except for (i) the filing of the
Certificate of Merger as provided in Section 1.3, and (ii) such other consents,
authorizations, filings, approvals and registrations which, if not obtained or
made, would not have a Material Adverse Effect on Acquiror and would not prevent
or materially alter or delay any of the transactions contemplated by this
Agreement.
6.4 FINANCIAL STATEMENTS. The audited financial statements of Acquiror for
the period from January 1, 1995 to and including December 31, 1995, January 1,
1996 to and including December 31, 1996 (the "Audited Financials") and the
interim financial statements of Acquiror for the period from January 1, 1997
through August 31, 1997 (such interim financial statements and the Audited
Financials are hereinafter collectively referred to at times as the "Acquiror
Financial Statements"), copies of which are attached hereto as Schedule 6.4, are
true and correct and have been prepared in accordance with generally accepted
accounting principles ("GAAP"), and except for such changes as may be disclosed
in the notes to the Acquiror Financial Statements, consistently followed for
three (3) years by
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Acquiror; the balance sheets in the Financial Statements fairly present the
financial position of Acquiror as of their respective dates and set forth in
full and reflect all liabilities, including taxes, of Acquiror as of such dates
required to be reflected thereon in accordance with GAAP; the income statements
fairly present the results of the operations of Acquiror for the periods
indicated and covered thereby; and the Shareholders' Equity of Acquiror as of
such dates was as set forth in the Financial Statements, after full provision
and reserves for all taxes and other liabilities for all periods up to the dates
thereof. Except for liabilities incurred after August 31, 1997, in the ordinary
course of business and included on the books and records of Acquiror, Acquiror
does not know and has no reason to know of any liability or any basis for the
assertion against Acquiror of any liability not reflected or reserved against in
the balance sheets required to be included thereon in accordance with GAAP.
6.5 ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule 6.5, since
August 31, 1997 (the "Acquiror Balance Sheet Date"), Acquiror has conducted its
business in the ordinary course consistent with past practice, and there has
occurred:
(a) no material adverse change in the business, financial condition or
results of operations (the "Business Condition"), or to the knowledge of
Acquiror, the ability of Acquiror to function in the future at least at
current business levels of activity ("Acquiror's Prospects");
(b) no fire, explosion, accident, flood, smoke, water damage or other
catastrophe, embargo, lockout, strike, labor trouble, or other emergency,
which adversely affected the business or properties of Acquiror as well as
the buildings occupied or used by Acquiror;
(c) no sales of goods or services or other transactions of Acquiror
other than those occurring in the ordinary course of business, none of
which has had or will have any Material Adverse Effect on Acquiror's
Business Condition, or to the knowledge of Acquiror, Acquiror's Prospects;
(d) no material change in the manner of conducting the business of
Acquiror;
(e) no adverse change in the working capital position of Acquiror and
no buildup of its inventories out of the ordinary course of business and no
markup of its fixed assets or inventories;
(f) no financial or other commitments or obligations incurred by
Acquiror, except such as may be incidental to carrying on the ordinary
course of business;
(g) except for trade accounts payable, no borrowing by Acquiror of any
funds and no endorsing or guaranteeing payment by it of any loan or
obligation, contractual or otherwise, of any other individual, firm,
corporation or other entity, and there are no such borrowings, endorsements
or guarantees by Acquiror presently outstanding;
(h) except for trade terms extended to customers in the ordinary
course of business, no loans or advances by Acquiror to any individual,
firm, corporation or other entity at any time;
(i) no capital additions or improvements in excess of Twenty-Five
Thousand Dollars ($25,000) in the aggregate and no contracts or purchase
orders therefor, to the properties of Acquiror;
(j) except for finished products and component parts sold by Acquiror
in the ordinary course of business, no sale, retirement, abandonment or
other disposition of any property of Acquiror, except the disposition of
minor equipment in the ordinary course of business with an aggregate value
of less than Ten Thousand Dollars ($10,000);
(k) no outstanding obligation by Acquiror for money borrowed, other
than as set forth in the Acquiror Financial Statements, except trade
accounts payable and other current expenses and taxes incurred and accrued
on its books and arising in the ordinary course of business, none of which
obligations is in default or arrears of payment;
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(l) no dividend on Acquiror's capital stock and no money or other
property set apart for payment in respect of Acquiror's capital stock;
(m) except as contemplated hereby, no acquisition or contract to
acquire in any manner, directly or indirectly, any of the outstanding
capital stock of Acquiror;
(n) no payment of or any obligation to pay any amounts either in cash
or other property to any person for cancellation of any outstanding options
or agreements to acquire shares of Acquiror's capital stock;
(o) no change in the capital structure or Articles of Incorporation or
Bylaws of Acquiror;
(p) no change in the accounting methods or practices followed by
Acquiror in connection with the operations of Acquiror;
(q) no payment by Acquiror of any bonus or other distribution to any
officer or employee, sales representative, distributors or other sales
agent of Acquiror;
(r) no notice of any violation by Acquiror of any building, zoning
code or fire code, health code or OSHA, Environmental Law and no actual or
to the knowledge of Acquiror, threatened condemnation of the real
properties currently owned or used by the Acquiror (the "Real Properties");
or
(s) any commitment or agreement by Acquiror to do anything which would
make any of Sections 6.5(a) - 6.5(r) untrue (other than negotiations with
Target and its representatives regarding the transactions contemplated by
this Agreement).
6.6 ABSENCE OF UNDISCLOSED LIABILITIES. Neither Acquiror nor any of its
subsidiaries has any material obligations or liabilities of any nature (matured
or unmatured, fixed or contingent) other than (i) those set forth or adequately
provided for in the Acquiror's unaudited Balance Sheet for the period ended
August 31, 1997, including the Notes thereto (the "Acquiror Balance Sheet"),
(ii) those incurred in the ordinary course of business and not required to be
set forth in the Acquiror Balance Sheet under generally accepted accounting
principles, (iii) those incurred in the ordinary course of business since the
Acquiror Balance Sheet Date and consistent with past practice; and (iv) those
incurred in connection with the execution of this Agreement.
6.7 LITIGATION. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency, court
or tribunal, foreign or domestic, or, to the best knowledge of Acquiror or any
of its subsidiaries, threatened against Acquiror or any of its subsidiaries or
any of their respective properties or any of their respective officers or
directors (in their capacities as such) that, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect on Acquiror.
There is no judgment, decree or order against Acquiror or any of its
subsidiaries, or, to the knowledge of Acquiror and its subsidiaries, any of
their respective directors or officers (in their capacities as such), that could
prevent, enjoin, alter or materially delay any of the transactions contemplated
by this Agreement, or that could reasonably be expected to have a Material
Adverse Effect on Acquiror.
6.8 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no material agreement,
judgment, injunction, order or decree binding upon Acquiror or any of its
subsidiaries which has or reasonably could be expected to have the effect of
prohibiting or materially impairing any current or future business practice of
Acquiror or any of its subsidiaries, any acquisition of property by Acquiror or
any of its subsidiaries or the conduct of business by Acquiror or any of its
subsidiaries as currently conducted or as proposed to be conducted by Acquiror
or any of its subsidiaries except as previously disclosed to the Shareholder
with respect to the MSU (UK) Limited and Zilog, Inc. agreements.
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6.9 GOVERNMENTAL AUTHORIZATION. Acquiror and each of its subsidiaries have
obtained each federal, state, county, local or foreign governmental consent,
license, permit, grant, or other authorization of a Governmental Entity (i)
pursuant to which Acquiror or any of its subsidiaries currently operates or
holds any interest in any of its properties or (ii) that is required for the
operation of Acquiror's or any of its subsidiaries' businesses or the holding of
any such interest ((i) and (ii) herein collectively called "Acquiror
Authorizations"), and all of such Acquiror Authorizations are in full force and
effect, except where the failure to obtain or have any of such Acquiror
Authorizations could not reasonably be expected to have a Material Adverse
Effect on Acquiror.
6.10 TITLE TO PROPERTY. Acquiror and its subsidiaries have good and valid
title to all of their respective properties, interests in properties and assets,
real and personal, reflected in the Acquiror Balance Sheet or acquired after the
Acquiror Balance Sheet Date (except properties, interests in properties and
assets sold or otherwise disposed of since the Acquiror Balance Sheet Date in
the ordinary course of business), or in the case of leased properties and
assets, valid leasehold interests in such properties, free and clear of all
mortgages, liens, pledges, charges or encumbrances of any kind or character,
except (i) the lien of current taxes not yet due and payable, (ii) such
imperfections of title, liens and easements as do not and will not materially
detract from or interfere with the use of the properties subject thereto or
affected thereby, or otherwise materially impair business operations involving
such properties and (iii) liens securing debt which is reflected on the Acquiror
Balance Sheet. The plants, property and equipment of Acquiror and its
subsidiaries that are used in the operations of their business are in good
operating condition and repair. All properties used in the operations of
Acquiror and its subsidiaries are reflected in the Acquiror Balance Sheet to the
extent generally accepted accounting principles require the same to be
reflected.
6.11 INTELLECTUAL PROPERTY.
(a) Acquiror owns, or is licensed or otherwise possesses legally
enforceable rights to use, all patents, trademarks, trade names, service
marks, copyrights, and any applications therefor, maskworks, net lists,
schematics, technology, know-how, trade secrets, inventory, ideas,
algorithms, processes, computer software programs or applications (in both
source code and object code form) licenses, customer lists, formulae,
inventions, development tools, other proprietary rights, and tangible or
intangible proprietary information or material ("Intellectual Property")
that are used or proposed to be used in the business of Acquiror as
currently conducted or as proposed to be conducted by Acquiror, except to
the extent that the failure to have such rights have not and could not
reasonably be expected to have a Material Adverse Effect on Acquiror.
Intellectual Property shall include all documentation and media
constituting, describing or relating to the above, including, but not
limited to, manuals, memoranda, know-how, notebooks, software, records and
disclosures.
(b) Schedule 6.11 lists (i) all patents and patent applications and
all registered and unregistered trademarks, trade names and service marks,
registered and unregistered copyrights, and maskworks, which Acquiror
considers to be material to its business and included in the Intellectual
Property, including the jurisdictions in which each such Intellectual
Property right has been issued or registered or in which any application
for such issuance and registration has been filed, (ii) all material
licenses, sublicenses and other agreements as to which Acquiror is a party
and pursuant to which any person is authorized to use any Intellectual
Property, and (iii) all material licenses, sublicenses and other agreements
as to which Acquiror is a party and pursuant to which Acquiror is
authorized to use any third party patents, trademarks or copyrights,
including software ("Third Party Intellectual Property Rights"), in each
case which are incorporated in, are, or form a part of any product or
service of Acquiror that is material to Acquiror.
(c) To the best knowledge of Acquiror, there is no material
unauthorized use, disclosure, infringement or misappropriation of any
Intellectual Property rights of Acquiror, any trade secret material to
Acquiror, or any Third Party Intellectual Property Right, by any third
party, including any employee or former employee of Acquiror. Acquiror has
not entered into any agreement to indemnify any other person against any
charge of infringement of any Intellectual Property, other than
indemnification provisions contained in purchase orders arising in the
ordinary course of business.
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(d) Acquiror is not, and Acquiror will not be as a result of the
execution and delivery of this Agreement or the performance of Acquiror's
obligations under this Agreement, in breach of any license, sublicense or
other agreement relating to the Intellectual Property or Third Party
Intellectual Property Rights, the breach of which could have a Material
Adverse Effect on Acquiror.
(e) All patents, registered trademarks, service marks and copyrights
held by Acquiror are valid and subsisting. Acquiror (i) has not been sued
in any suit, action or proceeding which involves a claim of infringement of
any patents, trademarks, service marks, copyrights or violation of any
trade secret or other proprietary right of any third party or (ii) has not
brought any action, suit or proceeding for infringement of Intellectual
Property or breach of any license or agreement involving Intellectual
Property against any third party. The manufacture, marketing, licensing or
sale of the products and services of Acquiror do not infringe any patent,
trademark, service mark, copyright, trade secret or other proprietary right
of any third party, except where such infringement could not have a
Material Adverse Effect on Acquiror.
(f) Acquiror has secured valid written assignments from all
consultants and employees who contributed to the creation or development of
Intellectual Property of the rights to such contributions that Acquiror
does not already own by operation of law.
(g) Acquiror has taken all reasonable and appropriate steps to protect
and preserve the confidentiality of all Intellectual Property not otherwise
protected by patents, or patent applications or copyright ("Confidential
Information"). All use, disclosure or appropriation of Confidential
Information owned by Acquiror by or to a third party has been pursuant to
the terms of a written agreement with such third party. All use, disclosure
or appropriation of Confidential Information not owned by Acquiror has been
pursuant to the terms of a written agreement with the owner of such
Confidential Information, or is otherwise lawful.
(h) To the best knowledge of Acquiror, neither Acquiror's operations
nor any of its Intellectual Property infringes or provides any basis to
believe that its operations or any of its Intellectual Property would
infringe upon any validly issued or pending trademark, trade name, service
mark, copyright or, to the knowledge of Acquiror, any validly issued or
pending patent or other right of any other person.
6.12 TAXES. Acquiror and each of its subsidiaries and any consolidated,
combined, unitary or aggregate group for Tax purposes of which Acquiror or any
of its subsidiaries is or has been a member have timely filed all Tax Returns
required to be filed by it taking into account extensions of due dates, have
paid all Taxes shown thereon to be due and has provided adequate accruals in
accordance with generally accepted accounting principles in its financial
statements for any Taxes that have not been paid, whether or not shown as being
due on any Tax returns. Except as disclosed in Schedule 6.12, (i) no material
claim for Taxes has become a lien against the property of Acquiror or any of its
subsidiaries or is being asserted against Acquiror or any of its subsidiaries
other than liens for Taxes not yet due and payable, (ii) no audit of any Tax
Return of Acquiror or any of its subsidiaries is being conducted by a Tax
authority, (iii) no Tax authority is now asserting, or to the best knowledge of
Acquiror, threatening to assert against Acquiror or any of its subsidiaries any
deficiency or claim for additional Taxes, and there are no requests for
information from a Tax authority currently outstanding that could affect the
Taxes of Acquiror or any of its subsidiaries and (iv) no extension of the
statute of limitations on the assessment of any Taxes has been granted by
Acquiror or any of its subsidiaries and is currently in effect.
6.13 EMPLOYEE BENEFIT PLANS.
(a) Other than the Acquiror Stock Option Plan, Acquiror does not
maintain any pension, profit sharing, retirement, fringe benefit, deferred
compensation, stock purchase, stock option, incentive, bonus, vacation,
severance, disability, hospitalization, medical insurance, life insurance
or any other type of employee benefit plan, program or arrangement within
the meaning of Section 3(3) ERISA, including, without limitation, any
Defined Benefit Plan or any Defined Contribution or Multi-Employer Plan
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on behalf of any current or former officers or employees of Acquiror or
their beneficiaries or dependents (whether on an active or frozen basis).
(b) Acquiror has not in the past and does not currently sponsor,
maintain, contribute to or otherwise have any obligation with respect to
any Plan.
6.14 EMPLOYEE MATTERS. Acquiror and each of its subsidiaries are in
compliance in all respects with all current applicable laws and regulations
respecting employment, discrimination in employment, terms and conditions of
employment, wages, hours and occupational safety and health and employment
practices, and is not engaged in any unfair labor practice, except where the
failure to be in compliance or the engagement in such unfair labor practices
would not have a Material Adverse Effect on Acquiror. There are no pending
claims against Acquiror or any of its subsidiaries under any workers'
compensation plan or policy or for long term disability. Neither Acquiror nor
any of its subsidiaries has any obligations under COBRA with respect to any
former employees or qualifying beneficiaries thereunder except for obligations
that would not have a Material Adverse Effect on Acquiror. There are no
controversies pending or, to the best knowledge of Acquiror and its
subsidiaries, threatened, between Acquiror or any of its subsidiaries and any of
their respective employees, which controversies have or could reasonably be
expected to have a Material Adverse Effect on Acquiror. Neither Acquiror nor any
of its subsidiaries is a party to any collective bargaining agreement or any
labor union contract nor does Acquiror nor any of its subsidiaries know of any
activities or proceedings of any labor union to organize any such employees.
6.15 INTERESTED PARTY TRANSACTIONS. Neither Acquiror nor any of its
subsidiaries is indebted to any director, officer, employer or agent of Acquiror
or any of its subsidiaries (except for amounts due as normal salaries and
bonuses and in reimbursement of ordinary expenses), and no such person is
indebted to Acquiror or any of its subsidiaries, and there have been no other
material transactions between Acquiror and any director, officer or principal
shareholder or Acquiror.
6.16 INSURANCE. Acquiror and each of its subsidiaries have policies of
insurance and bonds of the type and in amounts customarily carried by persons
conducting businesses or owning assets similar to those of Acquiror and its
subsidiaries. There is no material claim pending under any of such policies or
bond as to which Acquiror has received a denial, or to the best of Acquiror's
knowledge, which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds. All premiums due and payable under all
such policies and bonds have been paid and Acquiror and its subsidiaries are
otherwise in compliance in all material respects with the terms of such policies
and bonds. Acquiror has no knowledge of any threatened termination of, or
material premium increase with respect to, any of such policies.
6.17 COMPLIANCE WITH LAWS. Each of Acquiror and its subsidiaries has
complied with, is not in violation of and has not received any notices of
violation with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for such violations or failures to comply as,
singly or in the aggregate, could not be reasonably expected to have a Material
Adverse Effect on Acquiror.
6.18 [intentionally omitted]
6.19 COMPLETE COPIES OF MATERIALS. Acquiror has delivered or made available
true and complete copies of each document that has been requested by Target or
its counsel in connection with their legal and accounting review of Acquiror and
its subsidiaries.
6.20 POOLING OF INTERESTS. Neither Acquiror nor any of its subsidiaries
nor, to the best knowledge of Acquiror, any of their respective directors,
officers or stockholders has taken any action which would interfere with
Acquiror's ability to account for the Merger as a pooling of interests.
6.21 BROKERS' AND FINDERS' FEES. Acquiror has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment
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bankers' fees or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
6.22 BOARD APPROVAL. The Boards of Directors of Acquiror and Merger Sub
have unanimously (i) approved this Agreement and the Merger, (ii) determined
that the Merger is in the best interests of their respective stockholders and is
on terms that are fair to such stockholders and (iii) recommended that the
stockholders of Merger Sub approve this Agreement and the Merger.
6.23 INTERNAL REVENUE CODE SECTION 368(c). Acquiror does not have any plan
or intention to (i) reaquire any of its stock issued in the transaction, (ii)
cause Target to issue additional shares of its stock that would cause Acquiror
to lose control of Target within the meaning of Section 368(c) of the Code,
(iii) liquidate Target or merge Target with or into another corporation, (iv)
sell or otherwise dispose of any of the stock of Target, (v) cause Target to
sell or otherwise dispose of any of its assets, except for dispositions made in
the ordinary course of business or transfers of assets to a corporation
controlled (within the meaning of Section 368(c)) of the Code by Target or (vi)
cause Target to discontinue its historic business or fail to continue to use a
significant portion of its historic business assets in a business.
6.24 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by Acquiror or Merger Sub herein or the Acquiror Disclosure Schedule, or in
any certificate furnished by Acquiror or Merger Sub pursuant to this Agreement,
when all such documents are read together in their entirety, contains or will
contain at the Effective Time any untrue statement of a material fact, or omits
or will omit at the Effective Time to state any material fact necessary in order
to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
ARTICLE 7
CONDUCT PRIOR TO THE EFFECTIVE TIME
7.1 CONDUCT OF BUSINESS OF TARGET AND ACQUIROR. During the period from the
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, each of Target and Acquiror agrees (except
to the extent expressly contemplated by this Agreement or as consented to in
writing by the other), to carry on its and its subsidiaries' business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay and to cause its subsidiaries to pay debts and
Taxes when due subject (i) to good faith disputes over such debts or taxes, and
(ii) in the case of Taxes of Target or any of its subsidiaries, to Acquiror's
consent to the filing of material Tax Returns if applicable, to pay or perform
other obligations when due, and to use all reasonable efforts consistent with
past practice and policies to preserve intact its and its subsidiaries' present
business organizations, use its best efforts consistent with past practice to
keep available the services of its and its subsidiaries' present officers and
key employees and use its best efforts consistent with past practice to preserve
its and its subsidiaries' relationships with customers, suppliers, distributors,
licensors, licensees, and others having business dealings with it or its
subsidiaries, to the end that its and its subsidiaries' goodwill and ongoing
businesses shall be unimpaired at the Effective Time. Each of Target and
Acquiror agrees to notify promptly the other of any event or occurrence not in
the ordinary course of its or its subsidiaries' business, and of any event which
could have a Material Adverse Effect. Without limiting the foregoing, except as
expressly contemplated by this Agreement, neither Target nor Acquiror shall do,
cause or permit any of the following, or allow, cause or permit any of its
subsidiaries to do, cause or permit any of the following, without the prior
written consent of the other:
(a) CHARTER DOCUMENTS. Cause or permit any amendments to its
Certificate of Incorporation or Bylaws or equivalent organizational
documents;
(b) ISSUANCE OF SECURITIES. Issue, deliver or sell or authorize or
propose the issuance, delivery or sale of, or purchase or propose the
purchase of, any shares of its capital stock or securities convertible
into, or subscriptions, rights, warrants or options to acquire, or other
agreements or
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commitments of any character obligating it to issue any such shares or
other convertible securities, other than (i) the issuance of shares of its
Common Stock pursuant to the exercise of stock options, warrants or other
rights therefor outstanding as of the date of this Agreement (ii) any
issuance of options by Acquiror in the ordinary course of business
consistent with past practice and (iii) the issuance by Acquiror of
securities in capital raising transactions consistent with past practice;
(c) DIVIDENDS; CHANGES IN CAPITAL STOCK. Declare or pay any dividends
on or make any other distributions (whether in cash, stock or property) in
respect of any of its capital stock, or split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or repurchase or otherwise acquire, directly or indirectly,
any shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of
shares in connection with any termination of service to it or its
subsidiaries;
(d) POOLING. Take any action, which would interfere with Acquiror's
ability to account for the Merger as a pooling of interests; or
(e) OTHER. Take, or agree in writing or otherwise to take, any of the
actions described in Sections 7.1(a) through (d) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder.
7.2 CONDUCT OF BUSINESS OF TARGET. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as expressly contemplated by this Agreement,
Target shall not do, cause or permit any of the following, without the prior
written consent of Acquiror, which consent shall not be unreasonably withheld:
(a) MATERIAL CONTRACTS. Enter into any material contract or
commitment, or violate, amend or otherwise modify or waive any of the terms
of any of its material contracts;
(b) INTELLECTUAL PROPERTY. Transfer to any person or entity any rights
to its Intellectual Property;
(c) EXCLUSIVE RIGHTS. Enter into or amend any agreements pursuant to
which any other party is granted exclusive marketing or other exclusive
rights of any type or scope with respect to any of its products or
technology;
(d) DISPOSITIONS. Sell, lease, license or otherwise dispose of or
encumber any of its properties or assets which are material, individually
or in the aggregate, to its and its subsidiaries' business, taken as a
whole;
(e) INDEBTEDNESS. Incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or
guarantee any debt securities of others;
(f) LEASES. Enter into any operating lease providing for payments in
excess of an aggregate of $25,000;
(g) PAYMENT OF OBLIGATIONS. Pay, discharge or satisfy in an amount in
excess of $10,000 in any one case or $50,000 in the aggregate, any claim,
liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of
business, other than the payment, discharge or satisfaction of liabilities
reflected or reserved against in the Target Financial Statements and other
than the expenses related to this Agreement or any of the transactions
contemplated hereby;
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(h) CAPITAL EXPENDITURES Make any capital expenditures, capital
additions or capital improvements except in the ordinary course of business
and consistent with past practice;
(i) INSURANCE. Reduce the amount of any insurance coverage provided by
existing insurance policies;
(j) EMPLOYEE BENEFIT PLANS; NEW HIRES; PAY INCREASES. Adopt any
employee benefit or stock purchase or option plan, or hire any new director
level or officer level employee (other than in the ordinary course of
business), pay any special bonus or special remuneration to any employee or
director or increase the salaries or wage rates of its employees;
(k) SEVERANCE ARRANGEMENTS. Grant any severance or termination pay (i)
to any director or officer or (ii) to any other employee except payments
made pursuant to standard written agreements outstanding on the date
hereof;
(l) LAWSUITS. Commence a lawsuit other than (i) for the routine
collection of bills, (ii) in such cases where it in good faith determines
that failure to commence suit would result in the material impairment of a
valuable aspect of its business, provided that it consults with Acquiror
prior to the filing of such a suit or (iii) for a breach of this Agreement;
(m) ACQUISITIONS. Acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets, other than in the
ordinary course of business consistent with past practice;
(n) TAXES. Other than in the ordinary course of business, make or
change any material election in respect of Taxes, adopt or change any
accounting method in respect of Taxes, file any material Tax Return or any
amendment to a material Tax Return, enter into any closing agreement,
settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(o) NOTICES. Target shall give all notices and other information
required to be given to the employees of Target, any collective bargaining
unit representing any group of employees of Target, and any applicable
government authority under the Worker Adjustment and Retraining
Notification Act, the National Labor Relations Act, the Code, the
Consolidated Omnibus Budget Reconciliation Act, and other applicable law in
connection with the transactions provided for in this Agreement;
(p) REVALUATION. Revalue any of its assets, including without
limitation writing down the value of inventory or writing off notes or
accounts receivable other than in the ordinary course of business; or
(q) OTHER. Take or agree in writing or otherwise to take, any of the
actions described in Sections 7.2(a) through (p) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder.
7.3 NO SOLICITATION. Target and the officers, directors and employees of
Target will not, and Target will use its best efforts to insure that agents of
Target will not, directly or indirectly, (i) take any action to solicit,
initiate or encourage any Takeover Proposal (defined below), or (ii) engage in
negotiations with, or disclose any non-public information relating to Target to,
or afford access to the properties, books or records of Target to, any person
that has advised Target that it may be considering making, or that has made, a
Takeover Proposal. For purposes of this Agreement, "Takeover Proposal" means any
offer or proposal for, or any indication of interest in, a merger or other
business combination
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involving Target or the acquisition of any significant equity interest in, or a
significant portion of the assets of, Target, other than the transactions
contemplated by this Agreement.
ARTICLE 8
ADDITIONAL AGREEMENTS
8.1 ACCESS TO INFORMATION.
(a) Target shall afford Acquiror and its accountants, counsel and
other representatives, reasonable access during normal business hours
during the period prior to the Effective Time to (i) all of Target's
properties, books, contracts, commitments and records, and (ii) all other
information concerning the business, properties and personnel of Target as
Acquiror may reasonably request. Target agrees to provide to Acquiror and
its accountants, counsel and other representatives copies of internal
financial statements promptly upon request. Acquiror shall afford Target
and its accountants, counsel and other representatives, reasonable access
during normal business hours during the period prior to the Effective Time
to (i) all of Acquiror's and its subsidiaries' properties, books,
contracts, commitments and records, and (ii) all other information
concerning the business, properties and personnel of Acquiror and its
subsidiaries as Target may reasonably request. Acquiror agrees to provide
to Target and its accountants, counsel and other representatives copies of
internal financial statements promptly upon request.
(b) Subject to compliance with applicable law, from the date hereof
until the Effective Time, each of Acquiror and Target shall confer on a
regular and frequent basis with one or more representatives of the other
party to report operational matters of materiality and the general status
of ongoing operations.
(c) No information or knowledge obtained in any investigation pursuant
to this Section 8.1 shall affect or be deemed to modify any representation
or warranty contained herein or the conditions to the obligations of the
parties to consummate the Merger.
8.2 EXCHANGE ACT FILINGS. Acquiror shall use its reasonable business
efforts to become a reporting company under the Securities Exchange Act of 1934,
as amended, within six (6) months of the Effective Time.
8.3 PUBLIC DISCLOSURE. Unless otherwise permitted by this Agreement,
Acquiror and Target shall consult with each other before issuing any press
release or otherwise making any pubic statement or making any other public (or
non-confidential) disclosure (whether or not in response to an inquiry)
regarding the terms of this Agreement and the transactions contemplated hereby,
and neither shall issue any such press release or make any such statement or
disclosure without the prior approval of the other (which approval shall not be
unreasonably withheld), except as may be required by law or by obligations
pursuant to any listing agreement with the National Association of Securities
Dealers, Inc.
8.4 CONSENTS; COOPERATION.
(a) Each of Acquiror and Target shall promptly apply for or otherwise
seek, and use its best efforts to obtain, all consents and approvals
required to be obtained by it for the consummation of the Merger, and shall
use its best efforts to obtain all necessary consents, waivers and
approvals under any of its material contracts in connection with the Merger
for the assignment thereof or otherwise.
8.5 POOLING ACCOUNTING. Acquiror and Target shall each use their best
efforts to cause the business combination to be effected by the Merger to be
accounted for as a pooling of interests. Each of Acquiror and Target shall use
its best efforts to cause its "Affiliates" (as defined in Section 8.6) not to
take any action that would adversely affect the ability of Acquiror to account
for the business combination to be effected by the Merger as a pooling of
interests.
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8.6 AFFILIATE AGREEMENTS.
(a) Schedule 8.6(a) sets forth those persons who may be deemed
"Affiliates" of Target within the meaning of Rule 144 promulgated under the
Securities Act ("Rule 144"). Target shall provide Acquiror such information
and documents as Acquiror shall reasonably request for purposes of
reviewing such list. Target shall use its best efforts to deliver or cause
to be delivered to Acquiror, concurrently with the execution of this
Agreement (and in each case prior to the Effective Time) from each of the
Affiliates of Target, an executed Affiliate Agreement in the form attached
hereto as Exhibit A-1. Acquiror and Merger Sub shall be entitled to place
appropriate legends on the certificates evidencing any Acquiror Common
Stock to be received by such Affiliates of Target pursuant to the terms of
this Agreement, and to issue appropriate stop transfer instructions to the
transfer agent for Acquiror Common Stock, consistent with the terms of such
Affiliates Agreements.
(b) Schedule 8.6(b) sets forth those persons who may be deemed
"Affiliates" of Acquiror within the meaning of Rule 144. Acquiror shall
provide Target such information and documents as Target shall reasonably
request for purposes of reviewing such list. Acquiror shall use its best
efforts to deliver or cause to be delivered to Target, concurrently with
the execution of this Agreement (and in each case prior to the Effective
Time) from each of the Affiliates of Acquiror, an executed Affiliate
Agreement in the form attached hereto as Exhibit A-2.
8.7 PIGGYBACK REGISTRATION; DEMAND REGISTRATION
(a) If at any time or times after Acquiror becomes a reporting company
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
Acquiror proposes to make a registered public offering of Common Stock, par
value $0.001, (whether for its own account or for the account of others)
under the Securities Act, other than an offering registered on Form S-8,
Form S-4, or other Securities and Exchange Commission ("SEC") registration
form which does not permit inclusion of shares of selling stockholders for
offer to the public, Acquiror shall promptly give written notice of the
proposed registration to the shareholders listed on Schedule 5.2(d) (the
"5.2 Shareholders") prior to the proposed filing date of the registration
statement, and at the written request of the any of the 5.2 Shareholders,
delivered to Acquiror within 30 days after the receipt of such notice,
Acquiror shall include in such registration and offering all of her or his
Acquiror Common Stock that have been designated for registration in the 5.2
Shareholder's request (a "Piggyback Registration"), provided, however, that
(i) Acquiror will not be required to effect a Piggyback Registration with
respect to Acquiror Common Stock which have already been registered on
another registration statement; and (ii) Acquiror may withdraw any proposed
registration statement or offering of securities that gave rise to the
Piggyback Registration at any time without liability to the 5.2
Shareholder. If, however, after two (2) years or more after Closing, a
majority in interest of the 5.2 Shareholders demands that the Acquiror
register an offering of the Acqiror Common Stock which have not already
been registered on another registration statement held by the 5.2
Shareholders making such demand, Acquiror shall register an offering of
such Acquiror Common Stock (a "Demand Registration", and such Demand
Registration or Piggyback Registration referred to as a "Registration").
(b) If a Piggyback Registration is an underwritten primary
registration on behalf of Acquiror, and the lead underwriter advises
Acquiror in writing that in its opinion the number of securities requested
to be included in such registration exceeds the number that can be sold in
such offering without adversely affecting the marketability of the
offering, Acquiror shall include in such offering first, the securities of
Acquiror proposed to be sold by Acquiror, second, the Acquiror Common Stock
requested to be included in such registration by the 5.2 Shareholder and
third, other securities proposed to be included in such registration. If a
Piggyback Registration is an underwritten secondary registration on behalf
of selling stockholders, and the lead underwriter advises Acquiror in
writing that in its opinion the number of securities requested to be
included in such registration exceeds the number that can be sold in such
offering without adversely affecting the marketability of the offering,
then Acquiror shall include in such offering first, the securities of
Acquiror proposed to be sold by the stockholders requiring or demanding
that Acquiror effect such registration, second, the Acquiror Common Stock
requested to be included in
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such registration by the 5.2 Shareholder and third, other securities (if
any) proposed to be included in such registration. If a Piggyback
Registration is with respect to an underwritten primary registration on
behalf of Acquiror, 5.2(d) Shareholder agrees to sell her or his Acquiror
Common Stock, if Acquiror so requests, on the same basis as the other
securities included in such registration are being sold, and the
underwriter or underwriters for such registration shall be selected by
Acquiror.
(c) Acquiror shall have no obligation to include Acquiror Common Stock
owned by a 5.2(d) Shareholder in a registration statement for a
Registration, unless and until the 5.2(d) Shareholder has furnished to
Acquiror all information and statements about or pertaining to the 5.2(d)
Shareholder in such reasonable detail and on such timely basis as is
reasonably deemed by Acquiror to be necessary or appropriate for the
preparation of the registration statement.
(d) Whenever a request for a Registration is properly made in
accordance with Section 8.7(a), Acquiror shall, as expeditiously as
reasonably possible:
(i) prepare and file with the SEC a registration statement with
respect to such Acquiror Common Stock and use its best efforts
(subject to Section 8.7(a)) to cause such registration statement to
become effective as soon as practicable thereafter and the 5.2(d)
Shareholder shall have the opportunity to object to any information
pertaining solely to such 5.2(d) Shareholder that is contained therein
and Acquiror will make the corrections reasonably requested by the
5.2(d) Shareholder with respect to such information;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and prospectus contained
therein as may be necessary to keep such registration statement
effective for a period of not less than six (6) months and comply with
the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement during such
period in accordance with the intended methods of disposition by the
sellers thereof set forth in such registration statement;
(iii) furnish to the 5.2(d) Shareholder the number of copies of
such registration statement, each amendment and supplement thereto,
the prospectus contained in such registration statement (including
each preliminary prospectus), and such other documents as the 5.2(d)
Shareholder may reasonably request in order to facilitate the
disposition of the Acquiror Common Stock owned by such 5.2(d)
Shareholder;
(iv) use its best efforts to register or qualify such shares
under the state blue sky or securities ("Blue Sky") laws of such
jurisdictions as the 5.2(d) Shareholder reasonably requests, and to do
any and all other acts and things that may be reasonably necessary or
advisable to enable the 5.2(d) Shareholder to consummate the
disposition of such shares in such jurisdictions; provided, however,
that Acquiror will not be required to do any of the following: (i)
qualify generally to do business in any jurisdiction where it would
not be required but for this Section 8.7(d), (ii) subject itself to
taxation in any such jurisdiction or (iii) file any general consent to
service of process in any such jurisdiction; and
(v) notify the 5.2(d) Shareholder, at any time when a prospectus
relating to the Acquiror Common Stock is required to be delivered
under the Securities Act, of the occurrence of any event as a result
of which the prospectus included in any such registration statement
contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein in the light of the
circumstances under which they were made, not misleading, and prepare
a supplement or amendment to the prospectus so that, as thereafter
delivered to the purchasers of such shares, the prospectus will not
contain an untrue statement of a material fact or omit to state any
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(e) If, after a registration statement becomes effective, Acquiror
advises the 5.2(d) Shareholder that Acquiror considers it appropriate for
the registration statement to be amended, the 5.2(d) Shareholder shall
suspend any further sales of their registered shares until Acquiror advises
her or him that the registration statement has been amended. The six (6)
month time period referred to herein during which
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the registration statement must be kept current after its effective date
shall be extended for an additional number of business days during which
the rights to sell shares was suspended pursuant to the preceding sentence,
but in no event will Acquiror be required to update the registration
statement after the first anniversary of the date hereof.
(f) With respect to any Registration, the 5.2 Shareholder shall pay
all transfer taxes, if any, relating to the sale of its Acquiror Common
Stock and its pro rata portion of any underwriting discounts or commissions
or the equivalent thereof.
(g) With respect to any Registration, except for the fees and expenses
specified in Section 8.7(f) hereof and except as provided below in this
Section 8.7(g), regardless of whether any registration statement becomes
effective, Acquiror shall pay all expenses incident to a Registration,
including, without limitation, all registration and filing fees, fees and
expenses of compliance with Blue Sky laws, underwriting discounts, fees,
and expenses (other than the 5.2(d) Shareholder's pro rata portion of any
underwriting discounts or commissions or the equivalent thereof), printing
expenses, messenger and delivery expenses, and fees and expenses of counsel
for Acquiror and all independent certified public accountants and other
persons retained by Acquiror.
(h) Acquiror agrees to indemnify, to the extent permitted by law, each
holder of Acquiror Common Stock, against all losses, claims, damages,
liabilities and expenses, joint or several (or actions in respect thereof)
("Losses") arising out of or based upon any untrue or alleged untrue
statement of material fact contained in any registration statement,
prospectus or preliminary prospectus or any amendment thereof or supplement
thereto or other document and any omission or alleged omission of a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, and any violation by the Acquiror of the Securities
Act or any rule or regulation promulgated thereunder, or of any Blue Sky or
other state securities laws or any rule or regulation promulgated
thereunder, except insofar as the same are caused by any untrue or alleged
untrue statement or any omission or alleged omission made in reliance upon
and in conformity with information furnished in writing to the Acquiror by
such holder expressly for use therein or by such holder's failure to
deliver a copy of the registration statement or prospectus or any
amendments or supplements thereto after the Acquiror has furnished such
holder with a sufficient number of copies of the same and except insofar as
the same are caused by or contained in any prospectus if such holder failed
to send or deliver a copy of any subsequent prospectus or prospectus
supplement which would have corrected such untrue or alleged untrue
statement of material fact or such omission or alleged omission of a
material fact with or prior to the delivery of written confirmation of the
sale by such holder after Acquiror has furnished such holder with a
sufficient number of copies of the same.
(i) In connection with any registration statement in which the holder
of Acquiror Common Stock is participating, such holder will furnish to the
Acquiror in writing such information and affidavits as the Acquiror
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law, severally and not jointly,
will indemnify the Acquiror, each person, which may be an individual,
partnership, corporation, limited liability company, association, joint
stock company, trust, joint venture, unincorporated organization or
governmental entity or any department, agency or political subdivision
thereof ("Person"), who controls the Acquiror (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) and
their respective officers, directors, partners, employees, agents and
representatives against any Losses arising out of or based upon any untrue
or alleged untrue statement of a material fact contained in any
registration statement, prospectus, or form of prospectus, or any omission
or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, to the extent, but only to the
extent, that such untrue or alleged untrue statement is contained in, or
such omission or alleged omission is required to be contained in and in
conformity with, any information so furnished in writing by such holder or
its representatives to the Acquiror expressly for use in such registration
statement or prospectus and that such statement or omission was relied upon
by the Acquiror in preparation of such registration statement, prospectus
or form of prospectus; provided, however, that such holder of Acquiror
Common Stock shall not be liable in any such case to the extent that the
holder has furnished in writing to the Acquiror prior to the filing of any
such registration statement
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or prospectus or amendment or supplement thereto information expressly for
use in such registration statement or prospectus or any amendment or
supplement thereto which corrected or made not misleading, information
previously furnished to the Acquiror, and the Acquiror failed to include
such information therein. In no event shall the liability of the selling
holder of Acquiror Common Stock hereunder be greater in amount than the
dollar amount of the proceeds (net of payment of all expenses) received by
such holder upon the sale of the Acquiror Common Stock giving rise to such
indemnification obligation. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of such
indemnified party.
(j) If any Person shall be entitled to indemnity hereunder, such
indemnified party shall give prompt notice to the party or parties from
which such indemnity is sought of the commencement of any action, suit,
proceeding or investigation or written threat thereof ("Proceeding"') with
respect to which such indemnified party seeks indemnification or
contribution pursuant hereto; provided, however, that the failure to so
notify the indemnifying parties shall not relieve the indemnifying parties
from any obligation or liability hereunder except to the extent that the
indemnifying parties have been prejudiced by such failure. The indemnifying
parties shall have the right, exercisable by giving written notice to an
indemnified party promptly after the receipt of written notice from such
indemnified party of such Proceeding, to assume, at the indemnifying
parties' expense, the defense of any such Proceeding, with counsel
reasonably satisfactory to such indemnified party; provided, however, that
an indemnified party or parties (if more than one such indemnified party is
named in any Proceeding) shall have the right to employ separate counsel in
any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such indemnified
party or parties unless the indemnifying party or parties, and there
exists, in the opinion of counsel for the indemnified parties, legal
defenses available to the indemnified parties which are different from or
in addition to those available to the indemnifying party, or a conflict
exists between one or more indemnifying parties and one or more indemnified
parties, in which case the indemnifying parties shall, in connection with
any one such Proceeding or separate but substantially similar or related
Proceedings in the same jurisdiction, arising out of the same general
allegations or circumstances, be liable for the fees and expenses of not
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for such indemnified party or parties. If an
indemnifying party assumes the defense of such Proceeding, the indemnifying
parties will not be subject to any liability for any settlement made by the
indemnified party without its or their consent (such consent not to be
unreasonably withheld).
(k) If the indemnification provided for in Sections 8.7(h), (i), (j)
and (k) is unavailable to an indemnified party or is insufficient to hold
such indemnified party harmless for any Losses in respect of which Sections
8.7(h), (i), (j) and (k) would otherwise apply by its terms, then each
applicable indemnifying party, in lieu of indemnifying such indemnified
party, shall have a joint and several obligation to contribute to the
amount paid or payable by such indemnified party as a result of such
Losses, in such proportion as is appropriate to reflect the relative fault
of the indemnifying party, on the one hand, and such indemnified party, on
the other hand, in connection with the actions, statements or omissions
that resulted in such Losses as well as any other relevant equitable
considerations. The relative fault of such indemnifying party, on the one
hand, and indemnified party, on the other hand, shall be determined by
reference to, among other things, whether any action in question, including
any untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact, has been taken by, or relates to
information supplied by, such indemnifying party or indemnified party, and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent any such action, statement or omission.
The amount paid or payable by a party as a result of any Losses shall be
deemed to include any legal or other fees or expenses incurred by such
party in connection with any Proceeding, to the extent such party would
have been indemnified for such expenses under Section 8.7(j) if the
indemnification provided for in Section 8.7(h) or 8.7(i) was available to
such party. The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 8.7(k) were determined
by pro rata allocation or by any other method of allocation that does not
take account of the equitable considerations referred to in this paragraph.
Notwithstanding the provision of this Section 8.7(k), an indemnifying party
that is a selling holder of Acquiror Common Stock shall not be required to
contribute any amount in excess of the amount by which the net proceeds
received by such indemnifying party exceeds the amount of any damages that
such indemnifying party has otherwise been required to
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pay by reason of such untrue or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
The provisions of Sections 8.7(h), (i), (j) and (k) shall be in addition to
any other rights to indemnification or contribution which an indemnified party
may have pursuant to law, contract or otherwise and shall remain in full force
and effect and shall survive the transfer of the Acquiror Common Stock.
8.8 LEGAL REQUIREMENTS. Each of Acquiror, Merger Sub and Target will, and
will cause their respective subsidiaries to, take all reasonable actions
necessary to comply promptly with all legal requirements which may be imposed on
them with respect to the consummation of the transactions contemplated by this
Agreement and will promptly cooperate with and furnish information to any party
hereto necessary in connection with any such requirements imposed upon such
other party in connection with the consummation of the transactions contemplated
by this Agreement and will take all reasonable actions necessary to obtain (and
will cooperate with the other parties hereto in obtaining) any consent,
approval, order or authorization of, or any registration, declaration or filing
with, any Governmental Entity or other person, required to be obtained or made
in connection with the taking of any action contemplated by this Agreement.
8.9 BLUE SKY LAWS. Acquiror shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Acquiror Common Stock in connection with the
Merger. Target shall use its best efforts to assist Acquiror as may be necessary
to comply with the securities and blue sky laws of all jurisdictions which are
applicable in connection with the issuance of Acquiror Common stock in
connection with the Merger.
8.10 INDEMNIFICATION.
(a) Shareholder's Indemnity. The Shareholder hereby indemnifies and
agrees to defend and hold Acquiror, Merger Sub and their respective
successors and assigns (the "Acquiror Indemnified Parties") harmless from
and against and agrees to pay or cause to be paid to the Acquiror
Indemnified Party all amounts equal to the sum of any and all claims,
demands, costs, expenses or other liabilities of any kind that the Acquiror
Indemnified Party may incur or suffer (including, without limitation, all
professional fees (including attorneys' fees, accountants, consultants and
engineering fees), remediation costs, fines, investigation, clean-up,
restoration or mitigating measures or other expenses), which arise or
result from any breach of or failure by the Shareholders or Target to
perform any of their respective representations, warranties, covenants or
agreements in this Agreement or in any schedule, certificate, exhibit, or
other instrument furnished or to be furnished by it under this Agreement.
Notwithstanding the foregoing, Acquiror and Merger Sub agree that the
personal liability hereunder of the Shareholder shall be limited to the
consideration received by the Shareholder as a result of the transactions
contemplated hereby. In the case of any reference to the Shareholder under
this indemnity, Shareholder shall be referred to at times as the
"Shareholder Indemnifying Party."
(b) Acquiror's Indemnity. Acquiror hereby agrees to defend and hold
the Shareholder (hereinafter referred to as a "Shareholder Indemnified
Party") harmless from and against and agrees to pay or cause to be paid to
the Shareholder Indemnified Parties all amounts equal to the sum of any and
all claims, demands, costs, expenses or other liabilities of any kind that
the Shareholder Indemnified Party may incur or suffer (including, without
limitation, all professional fees) which arise or result from any breach of
or failure by the Acquiror or Merger Sub to perform any of their
representations, warranties, covenants or agreements in this Agreement or
in any schedule, exhibit, or other instrument furnished or to be furnished
by it under this Agreement. In the case of any reference to Acquiror under
this indemnity, Acquiror shall be referred to at times as the "Acquiror
Indemnifying Party."
(c) Procedures; Limitation. In this Paragraph 10 of Article 8,
Acquiror Indemnified Parties and Shareholder Indemnified Parties shall be
referred to at times as the "Indemnified Parties" or "Indemnified Party,"
and the Shareholder Indemnifying Party and the Acquiror Indemnifying Party
shall be referred to at times herein as the "Indemnifying Parties" or
"Indemnifying Party," as the case may be. If a third party
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shall notify an Indemnified Party with respect to any matter that may give
rise to a claim for indemnification under the indemnity set forth above in
Section 8.10(a), the procedure set forth below shall be followed.
(d) Indemnity Basket. Notwithstanding any other provision of this
Agreement to the contrary, neither of the Indemnifying Parties shall be
liable to any Indemnified Party with respect to any amount arising out any
provision of this Paragraph 10 of Article 8 ("8.10 Losses") unless and
until the aggregate of 8.10 Losses incurred by the Indemnified Party shall
exceed the sum of twenty-five thousand dollars ($25,000) (the "Indemnity
Basket"). In the event and to the extent that any such 8.10 Losses shall be
in excess of the Indemnity Basket, the Shareholder pursuant to 8.10(a) and
Acquiror pursuant to 8.10(b) shall thereafter be liable in full for all
8.10 Losses in excess of such Indemnity Basket.
(e) Notice. Indemnified Party shall give to the Indemnifying Party
written notice of any claim, suit, judgment or matter for which indemnity
may be sought under Sections 8.10(a) or (b), promptly but in any event
within twenty (20) business days after the Indemnified Party receives
notice thereof; provided, however, that failure by Indemnified Party to
give such notice shall not relieve Indemnifying Party from any liability it
shall otherwise have pursuant to this Agreement except to the extent
Indemnifying Party is actually prejudiced by such failure. Such notice
shall set forth in reasonable detail (i) the basis for such potential
claim, (ii) the Sections of the Agreement pursuant to which the claim is
made, and (iii) the dollar amount of such claim, and shall be given in
accordance with Article Eleven below. Indemnifying Party shall have a
period of twenty (20) business days within which to respond thereto. If
Indemnifying Party does not respond within such twenty (20) business day
period, Indemnifying Party shall be deemed to have accepted responsibility
for such indemnity. The indemnification period provided for in Section 11.1
shall be tolled solely with respect to a particular claim for the period
beginning on the date the Indemnifying Party receives written notice of
that claim until the final resolution of such claim so long as such claim
is made within the indemnification period set forth in Section 11.1. The
indemnification provided for herein shall apply to any claim made prior to
the end of the indemnification period set forth in Section 11.1.
(f) Defense of Claim. The Indemnifying Party shall have the right, at
its option, to be represented by counsel of its choice and to assume the
defense or otherwise control the handling of any claim, suit, judgment or
matter for which indemnity is sought, which is set forth in the notice sent
by the Indemnified Party, by notifying the Indemnified Party in writing to
such effect within twenty (20) business days of receipt of such notice. If
the Indemnified Party does not give timely notice in accordance with the
preceding sentence, the Indemnifying Party shall be deemed to have given
notice that it does not wish to control the handling of such claim, suit or
judgment. In the event the Indemnifying Party elects (by notice in writing
within such twenty (20) business day period) to assume the defense of or
otherwise control the handling of any such claim, suit, judgment or matter
for which indemnity is sought, subject to the limitations provided herein,
the Indemnifying Party shall indemnify and hold harmless the Indemnified
Party from and against any and all costs, demands, losses, liabilities,
obligations, claims, causes of action and expenses suffered,
notwithstanding the fact that the Indemnifying Party may not have been so
liable to the Indemnified Party had the Indemnifying Party not elected to
assume the defense of or to otherwise control the handling of such claim,
suit, judgment or other matter. In the event that the Indemnifying Party
does not assume the defense or otherwise control the handling of such
matter, the Indemnified Party may retain counsel, as an indemnification
expense, to defend such claim, suit, judgment or matter.
(g) Final Authority. The parties shall cooperate in the defense of any
such claim or litigation, and each shall make available all books and
records which are relevant in connection with such claim or litigation. The
Indemnifying Party will not consent to the entry of any judgment or enter
into any settlement with respect to any matter which does not include a
provision whereby the plaintiff or claimant in the matter releases the
Indemnified Party from all liability with respect thereto, without the
written consent of the Indemnified Party.
(h) Claims Between Indemnifying Party and the Indemnified Party. Any
claim for indemnification under this Agreement which does not result from
the assertion of a claim by a third party shall be asserted by written
notice given by the Indemnified Party to the Indemnifying Party. The
Indemnifying
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Party shall have a period of thirty (30) days within which to respond
thereto. If the Indemnifying Party does not respond within such thirty (30)
day period, the Indemnifying Party shall be deemed to have accepted
responsibility for such indemnity, and shall have no further right to
contest the validity of such claim. If the Indemnifying Party does respond
within such thirty (30) day period and rejects such claim in whole or in
part, the Indemnified Party shall submit the dispute to arbitration in
accordance with clause (i) below.
(i) Arbitration. Either party shall submit a dispute arising under the
indemnification provisions contained herein to a panel of three (3)
arbitrators chosen pursuant to the rules of the American Arbitration
Association. The parties hereto hereby submit and consent to the
jurisdiction of the American Arbitration Association for any dispute
arising pursuant to the indemnification provisions contained herein. Any
arbitration hereunder shall take place in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, such arbitration
to take place in New York City and the award rendered by the arbitrators
shall be final and binding and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
(j) Payment. Any and all amounts determined from time to time to be
paid hereunder (i) by the Shareholder by reason of his indemnity
obligations under Section 8.10(a) of this Agreement shall be paid to
Acquiror in cash, on demand; and (ii) by Acquiror by reason of its
indemnity obligations under Section 8.10 of this Agreement shall be paid to
the Shareholder in cash, on demand.
8.11 DIRECTOR NOMINEE. At the Effective Time, Acquiror shall take such
action as is necessary in order to enable one individual designated by Target to
be elected to Acquiror's Board of Directors (the "Designee"). Target has
selected as the Designee Mark Graff. Immediately after the Effective Time,
Acquiror's Board of Directors shall consist of the following four directors:
Peter Yunich, Mark Graff, Robert Frost and Michael Salaman.
8.12 EXECUTIVE MANAGEMENT COMMITTEE. At the Effective Time, Acquiror shall
establish an Executive Management Committee which shall include, but not be
limited to Mark Graff and Peter Yunich. The Executive Management Committee shall
direct the business plans of Target.
8.13 BEST EFFORTS AND FURTHER ASSURANCES. Each of the parties to this
Agreement shall use its best efforts to effectuate the transactions contemplated
hereby and to fulfill and cause to be fulfilled the conditions to closing under
this Agreement as promptly as practicable. Each party hereto, at the reasonable
request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
ARTICLE 9
CONDITIONS TO THE MERGER
9.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to this agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of all the
parties hereto.
(a) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger, nor any proceeding
brought by an administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign, seeking any of the
foregoing, shall be pending; nor shall there be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, which makes the consummation of the Merger
illegal. In the event an injunction or other order shall have been issued,
each party agrees to use its reasonable diligent efforts to have such
injunction or other order lifted.
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(b) GOVERNMENTAL APPROVAL. Acquiror, Target and Merger Sub and their
respective subsidiaries shall have timely obtained from each Governmental
Entity all approvals, waivers and consents, if any, necessary for
consummation of or in connection with the Merger and the several
transactions contemplated hereby.
9.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF TARGET. The obligations of
Target to consummate and effect this Agreement and the transactions contemplated
hereby shall be subject to the satisfaction at or prior to the Effective Time of
each of the following conditions, any of which may be waived, in writing, by
Target:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. (i) The representations
and warranties of Acquiror and Merger Sub in this Agreement shall be true
and correct in all material respects (except for such representations and
warranties that are qualified by their terms by a reference to materiality
which representations and warranties as so qualified shall be true in all
respects) on and as of the Effective Time as though such representations
and warranties were made on and as of such time and (ii) Acquiror and
Merger Sub shall have performed and complied in all material respects with
all covenants, obligations and conditions of this Agreement required to be
performed and complied with by them as of the Effective Time.
(b) CERTIFICATE OF ACQUIROR. Target shall have been provided with a
certificate executed on behalf of Acquiror by its Chairman and its Chief
Financial Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by Acquiror and
Merger Sub under this Agreement are true and complete in all material
respects; and
(ii) all covenants, obligations and conditions of this Agreement
to be performed by Acquiror and Merger Sub on or before such date have
been so performed in all material respects.
(c) NO MATERIAL ADVERSE CHANGES. There shall not have occurred any
material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations, results of operations or prospects of Acquiror and its
subsidiaries, taken as a whole.
(d) AFFILIATE AGREEMENTS. Target shall have received from each of the
Affiliates of Acquiror an executed Affiliate Agreement in substantially the
form attached hereto as Exhibit A-2.
(e) THIRD PARTY CONSENTS. Target shall have been furnished with
evidence satisfactory to it of the consent or approval of those persons
whose consent or approval shall be required in connection with the Merger
under any material contract of Acquiror or any of its subsidiaries or
otherwise.
(f) INJUNCTIONS OR RESTRAINTS ON CONDUCT OF BUSINESS. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting Acquiror's business following
the Merger shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other Governmental Entity, domestic
or foreign, seeking the foregoing be pending.
(g) OTHER CERTIFICATES. Target shall have received such other
certificates and documents (customary in similar transactions) relating to
the satisfaction of the conditions to the obligations of Target as Target
or its counsel reasonably request.
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9.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF ACQUIROR AND MERGER SUB.
The obligations of Acquiror and Merger Sub to consummate and effect this
Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by Acquiror:
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. (i) The representations
and warranties of Target and the Shareholder in this Agreement shall be
true and correct in all material respects (except for such representations
and warranties that are qualified by their terms by a reference to
materiality, which representations and warranties as so qualified shall be
true in all respects) on and as of the Effective Time as though such
representations and warranties were made on and as of such time and (ii)
Target shall have performed and complied in all material respects with all
covenants, obligations and conditions of this Agreement required to be
performed and complied with by it as of the Effective Time.
(b) CERTIFICATE OF TARGET. Acquiror shall have been provided with a
certificate executed on behalf of Target by its President and Chief
Financial Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by Target and the
Shareholders under this Agreement are true and complete in all
material respects; and
(ii) all covenants, obligations and conditions of this Agreement
to be performed by Target on or before such date have been so
performed in all material respects.
(c) THIRD PARTY CONSENTS. Acquiror shall have been furnished with
evidence satisfactory to it of the consent or approval of those persons
whose consent or approval shall be required in connection with the Merger
under any material contract of Target or otherwise.
(d) INJUNCTIONS OR RESTRAINTS ON CONDUCT OF BUSINESS. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal or regulatory
restraint provision limiting or restricting Acquiror's conduct or operation
of the business of Target, following the Merger shall be in effect, nor
shall any proceeding brought by an administrative agency or commission or
other Governmental Entity, domestic or foreign, seeking the foregoing be
pending.
(e) NO MATERIAL ADVERSE CHANGES. There shall not have occurred any
material adverse change in the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations, results of operations or prospects of Target.
(f) AFFILIATE AGREEMENTS. Acquiror shall have received from each of
the Affiliates of Target, an executed Affiliate Agreement in substantially
the form attached hereto as Exhibit A-1.
(g) GRAFF EMPLOYMENT AGREEMENT. Acquiror and Mark Graff shall have
entered into an employment agreement the terms of which shall have been
mutually acceptable to both parties.
(h) RESIGNATIONS. Acquiror shall have received letters of resignation,
effective as of the Effective Time, executed and tendered by each of the
then incumbent directors of Target.
(i) OTHER CERTIFICATES. Acquiror shall have received such other
certificates and documents (customary in similar transactions) relating to
the satisfaction of the conditions to the obligations of Acquiror and
Merger Sub as Acquiror or its counsel reasonably request, including without
limitation, agreements of holders of Target Common Stock whereby such
holders waive the applicability of any registration rights in respect of
Acquiror Common Stock to be received in the Merger.
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ARTICLE 10
TERMINATION, AMENDMENT AND WAIVER
10.1 TERMINATION. At any time prior to the Effective Time, whether before
or after approval of the matters presented in connection with the Merger by the
stockholders of Target and Acquiror, this Agreement may be terminated:
(a) by mutual consent of Acquiror and Target;
(b) by either Acquiror or Target, if, without fault of the terminating
party, the Closing shall not have occurred on or before December 31, 1997
(or such later date as may be agreed upon in writing by the parties
hereto);
(c) by Acquiror, if Target or the Shareholder shall breach any of its
or his respective representations, warranties or obligations hereunder in
any material respect (except for such representations, warranties and
obligations that are qualified by their terms by a reference to
materiality, which representations, warranties and obligations as so
qualified shall not be breached in any respect) and such breach shall not
have been cured within ten business days of receipt by Target of written
notice of such breach.
(d) by Target, if (i) Acquiror shall breach any of its
representations, warranties or obligations hereunder in any material
respect (except for such representations, warranties and obligations that
are qualified by their terms by a reference to materiality, which
representations, warranties and obligations as so qualified shall not be
breached in any respect) and such breach shall not have been cured within
ten days following receipt by Acquiror of written notice of such breach.
(e) by either Acquiror or Target if (i) any permanent injunction or
other order of a court or other competent authority preventing the
consummation of the Merger shall have become final and nonappealable.
10.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
as provided in Section 10.1, this Agreement shall forthwith become void and
there shall be no liability or obligation on the part of Acquiror, Merger Sub or
Target or their respective officers, directors, stockholders or affiliates,
except to the extent that such termination results from the breach by a party
hereto of any of its representations, warranties or covenants set forth in this
Agreement; provided that, the provisions of, Section 10.3 (Expenses and
Termination Fees) and this Section 10.2 shall remain in full force and effect
and survive any termination of this Agreement.
10.3 EXPENSES AND TERMINATION FEES.
(a) Subject to subsections (b) and (c) of this Section 10.3, whether
or not the Merger is consummated, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby
(including, without limitation, the fees and expenses of its advisers,
accountants and legal counsel) shall be paid by the party incurring such
expense provided, however, that if the Closing occurs Acquiror will assume
all costs and expenses of Target incurred in connection with this Agreement
and the transactions contemplated hereby (including without limitation, the
fees and expenses of its advisers, accountants and legal counsel).
(b) In the event that (i) Acquiror shall terminate this Agreement
pursuant to Section 10.1(c) Target shall promptly reimburse Acquiror for
all of the out-of-pocket costs and expenses incurred by Acquiror in
connection with this Agreement and the transactions contemplated hereby
(including, without limitation, the fees and expenses of its advisors,
accountants and legal counsel.)
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(c) In the event that Target shall terminate this Agreement pursuant
to Section 10.1(d), Acquiror shall promptly reimburse Target for all of the
out-of-pocket costs and expenses incurred by Target in connection with this
Agreement and the transactions contemplated hereby (including, without
limitation, the fees and expenses of its advisors, accountants and legal
counsel).
10.4 AMENDMENT. The respective Boards of Directors of the parties hereto
may cause this Agreement to be amended at any time by execution of an instrument
in writing signed on behalf of each of the parties hereto; provided that an
amendment made subsequent to adoption of the Agreement by the stockholders of
Target or Merger Sub shall not (i) alter or change the amount or kind of
consideration to be received on conversion of the Target Common Stock, (ii)
alter or change any term of the Certificate of Incorporation of the Surviving
Corporation to be effected by the Merger, or (iii) alter or change any of the
terms and conditions of this Agreement if such alteration or change would
adversely affect the holders of Target Common Stock or Merger Sub Common Stock.
10.5 EXTENSION; WAIVER. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE 11
GENERAL PROVISIONS
11.1 EFFECT OF CLOSING. All representations, warranties, covenants, and
agreements of the parties contained in this Agreement, or in any instrument,
certificate, opinion, or other writing provided for in it, shall survive Closing
for a period of 3 years except for items covered in Section 5.14 (and 8.10 with
respect thereto) which shall survive until the expiration of the applicable
statute of limitations period, and except for Sections 5.2(d) and 5.3 (and
8.10(a) with respect thereto) and 6.3 (and 8.10(b) with respect thereto), which
shall survive without limitation.
11.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the following address (or at such other address for a party as shall be
specified by like notice):
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(a) if to Acquiror or Merger Sub, to:
American Interactive Media, Inc.
611 Broadway, Suite 308
New York, NY 10012
Attention: James Stokes Hatch
Facsimile No.: (212) 358-8380
with a copy to:
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, NY 10178-0061
Attention: Jeffrey N. Ostrager
Facsimile No.: (212) 697-1559
(b) if to Target, to:
WebFeat, Inc.
611 Broadway, Suite 418
New York, NY 10012
Attention: Mark Graff
Facsimile No.: (212) 358-0189
with a copy to:
Epstein, Becker & Green, P.C.
250 Park Avenue
New York, NY 10177
Attention: Joseph Smith
Facsimile No.: (212) 661-0989
11.3 INTERPRETATION. When a reference is made in this Agreement to Exhibits
or Schedules, such reference shall be to an Exhibit or Schedule to this
Agreement unless otherwise indicated. The words "include," "includes" and
"including" when used herein shall be deemed in each case to be followed by the
words "without limitation." The phrase "made available" in this Agreement shall
mean that the information referred to has been made available if requested by
the party to whom such information is to be made available. The phrases "the
date of this Agreement", "the date hereof", and terms of similar import, unless
the context otherwise requires, shall be deemed to refer to September 26, 1997.
The table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
11.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
11.5 ENTIRE AGREEMENT; NONASSIGNABILITY; PARTIES IN INTEREST. This
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits, the
Target Disclosure Schedule and the Acquiror Disclosure Schedule (a) constitute
the entire agreement among the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof, and shall survive
any termination of this Agreement or
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the Closing, in accordance with its terms; (b) are not intended to confer upon
any other person any rights or remedies hereunder; and (c) shall not be assigned
by operation of law or otherwise except as otherwise specifically provided.
11.6 SEVERABILITY. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
11.7 REMEDIES CUMULATIVE; NO WAIVER. Except as otherwise provided herein,
any and all remedies herein expressly conferred upon a party will be deemed
cumulative with and not exclusive of any other remedy conferred hereby, or by
law or equity upon such party, and the exercise by a party of any one remedy
will not preclude the exercise of any other remedy. No failure or delay on the
part of any party hereto in the exercise of any right hereunder shall impair
such right or be construed to be a waiver of, or acquiescence in, any breach of
any representation, warranty or agreement herein, nor shall any single or
partial exercise of any such right preclude other or further exercise thereof or
of any other right.
11.8 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (without regard to the
principles of conflicts of law thereof).
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11.9 RULES OF CONSTRUCTION. The parties hereto agree that they have been
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
IN WITNESS WHEREOF, Target, Acquiror and Merger Sub have caused this
Agreement to be executed and delivered by their respective officers thereunto
duly authorized, and the Shareholder has duly executed and delivered this
Agreement, all as of the date first written above.
AMERICAN INTERACTIVE MEDIA, INC.
By: ________________________________
Name:
Title:
AIM MERGER CORP.
By: ________________________________
Name:
Title:
WEBFEAT INC.
By: ________________________________
Name:
Title:
MARK GRAFF
____________________________________
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IN WITNESS WHEREOF, the undersigned join as parties to this Agreement for
the sole purpose of making the representations and warranties in Section 5.28
above.
Dated: September 26, 1997
WILLIAM J. ZACCHEO
____________________________________
RICHARD SCOTT FEIFER
____________________________________
ROBERT M. GYURE
____________________________________
ROBERT P. PERNA
____________________________________
JERILYN KESSEL
____________________________________
DAVID A. DANIELS
____________________________________
FREDERICK E. SMITHLINE
____________________________________
JOSEPH P. TERRANOVA
____________________________________
39
CERTIFICATE OF INCORPORATION
OF
AMERICAN INTERACTIVE MEDIA, INC.
THE UNDERSIGNED, in order to form a corporation pursuant to the provisions
of the General Corporation Law of the State of Delaware, hereby certifies as
follows:
FIRST. The name of the Corporation is:
American Interactive Media, Inc.
SECOND. The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, 19805,
and the name of the registered agent thereat is Corporation Service Company.
THIRD. The nature of the business of the Corporation and the purpose to be
conducted or promoted by it are:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware.
FOURTH. The aggregate number of shares of all classes of stock which the
Corporation is authorized to issue is fifty million one hundred thousand
(50,100,000) shares of which fifty million (50,000,000) are shares of common
stock having a par value of $0.001 per share; and one hundred thousand (100,000)
are shares of preferred stock having a par value of $1.00 per share and are to
be issued in such series and with such designations, preferences and relative,
participating, voting, optional or other special rights, and qualifications,
limitations or restrictions thereof, as determined by the Corporation's board of
directors in the resolution or resolutions providing for the issue of any such
stock adopted by the board of directors pursuant to the authority expressly
vested in it by the provision hereof.
FIFTH. For the management of the business and for the conduct of the
affairs of the corporation, and in further definition, limitation and regulation
of the powers of the corporation, of its directors and of its stockholders, as
the case maybe, it is further provided that:
(a) The management of the business and the conduct of the affairs of
the Corporation shall be vested in its board of directors. The number of
directors of the Corporation shall be such as from time to time may be
fixed by, or in the manner provided in, the By-laws, but in no case shall
the number be less than the minimum number authorized by the laws of the
State of Delaware. Directors need not be stockholders.
(b) The board of directors may from time to time make, amend,
supplement or repeal the By-laws.
(c) The election of directors need not be by ballot unless the By-laws
so provide.
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SIXTH. A director of the Corporation shall not be liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the General Corporation Law of Delaware, as the
same exists or hereafter may be amended or (iv) for any transaction from which
the director derived an improper personal benefit. If the General Corporation
Law of the State of Delaware hereafter is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the Corporation, in addition to the limitations on personal
liability provided herein, shall be limited to the fullest extent permitted by
the amended General Corporation Law of the State of Delaware. Any repeal or
modification of this Article Sixth shall not result in any liability for a
director with respect to any action or omission occurring prior to such repeal
or modification.
SEVENTH. The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have power
to indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any By-law, agreement,
vote of the stockholders or disinterested directors or otherwise, both as to
action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
EIGHTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation or any
amendment hereto and the rights conferred on the stockholders hereunder are
granted subject to this reservation.
NINTH. The name and mailing address of the incorporator are as follows:
James Stokes Hatch
American Interactive Media, Inc.
611 Broadway, Suite 308
New York, New York 10012
IN WITNESS WHEREOF, I have made and signed this certificate this 12th day
of January, 1998.
/s/ James Stokes Hatch
----------------------------------
James Stokes Hatch
Sole Incorporator
2
BY-LAWS
OF
AMERICAN INTERACTIVE MEDIA, INC.,
a Delaware corporation
ARTICLE I:
Stockholders' Meetings
1. Places of meetings. All meetings of stockholders shall be held at such
place or places in or outside of Delaware as the Board of Directors may from
time to time determine or as may be designated in the notice of meeting or
waiver of notice thereof, subject to any provisions of the laws of Delaware.
2. Annual meetings. Unless otherwise determined from time to time by the
Board of Directors, the annual meeting of stockholders for the election of
directors and the transaction of such other business as may properly come before
the meeting shall be held each year on the first Monday in the fourth month
following the close of the fiscal year commencing at some time between 10 A.M.
and 4 P.M., if not a legal holiday and if a legal holiday, then on the day
following at the same time. If the annual meeting is not held on the date
designated, it may be held as soon thereafter as convenient and shall be called
the annual meeting. Written notice of the time and place of the annual meeting
shall be given by mail to each stockholder entitled to vote, at such
stockholder's address as it appears on the records of the Corporation, not less
than the minimum nor more than the maximum number of days permitted under the
laws of Delaware prior to the scheduled date thereof, unless such notice is
waived as provided by Article VIII of these By-Laws.
3. Special meetings. A special meeting of the stockholders (i0) may be
called at any time by order of the Board of Directors or the executive committee
and, (ii0) shall be called by the Chief Executive Officer, the President or
Secretary or an assistant secretary at the written request of the holders of at
least 25% of the total number of shares of stock then outstanding and entitled
to vote, which request shall state the specific purposes thereof. Written notice
of the time, place and specific purposes of such meetings shall be given by mail
to each stockholder entitled to vote thereat, at his address as it appears on
the records of the Corporation, not less than the minimum nor more than the
maximum number of days prior to the scheduled date thereof permitted under the
laws of Delaware, unless such notice is waived as provided in Article VIII of
these By-Laws.
4. Meetings without notice. Meetings of the stockholders may be held at any
time without notice when all the stockholders entitled to vote thereat are
present in person or by proxy.
5. Voting. At all meetings of stockholders, each stockholder entitled to
vote thereat as determined under Article V Section 3 of these By-Laws, or if not
so determined as prescribed under the laws of Delaware, shall be entitled to one
vote for each share of stock standing on record in his name, subject to any
restrictions or qualifications set forth in the Certificate of Incorporation or
any amendment thereto.
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6. Quorum. At any stockholders' meeting, a majority of the number of shares
of stock outstanding and entitled to vote thereat, whether present in person or
by proxy shall constitute a quorum, but a smaller interest may adjourn any
meeting from time to time, and the meeting may be held as adjourned without
further notice, subject to such limitation as may be imposed under the laws of
Delaware. When a quorum is present at any meeting, a majority of the number of
shares of stock entitled to vote and which are present at such meeting shall
decide any question brought before such meeting unless the question is one upon
which a different vote is required by express provision of the laws of Delaware,
the Certificate of Incorporation or these By-Laws, in which case such express
provisions shall govern.
7. List of stockholders. At least ten days before every meeting, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of and the number of shares
registered in the name of each stockholder, shall be prepared by the Secretary
or the transfer agent in charge of the stock ledger of the Corporation. Such
list shall be open for examination by any stockholder as required by the laws of
Delaware. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine such list or the books of the Corporation or to
vote in person or by proxy at such meeting.
8. Consents in lieu of meeting. Unless otherwise provided in the
Certificate of Incorporation or any amendment thereto or by the laws of
Delaware, any action required by the laws of Delaware to be taken at any annual
or special meeting of stockholders, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if: (i0) a consent in writing, setting
forth the action so taken, shall be signed by the holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted; and (ii0) prompt notice of the taking of such
action by less than unanimous written consent is given to the other stockholders
to the extent and in the manner required by the laws of Delaware.
ARTICLE II:
Board of Directors
1. (a) Number and qualification. A Board of Directors shall be elected at
each annual meeting of stockholders, each director so elected to serve until the
election and qualification of his successor or until his earlier resignation or
removal as provided in these By-Laws. The initial number of directors shall be
such as may be determined by the incorporators unless such number is already
determined in the Certificate of Incorporation, and thereafter the number of
directors shall be five unless such number shall be increased under Section 1(b)
hereof or by a vote of at least 75% of the entire Board of Directors. In case of
any increase in the number of directors between elections by the stockholders,
the additional directorships shall be considered vacancies and shall be filled
in the manner prescribed in Article IV of these By-Laws. Directors need not be
stockholders. The initial Board of Directors shall be elected by the
incorporators, unless such directors are named in the Certificate of
Incorporation. Any stockholder who holds a contractual right to designate a
representative to the Board of Directors shall have the right to have his/her
nominee to the Board of Directors presented to the stockholders in the same
manner in which a nominee to the Board of Directors would customarily be
presented to the stockholders for the election of directors.
(b) Additional Nominees of the Pioneer Partnership and Hollinger On Certain
Events of Default. In the event that (i) the Corporation shall default in the
due and punctual payment of any installment of the cumulative dividends on the
Series A Senior Convertible Preferred Stock, par value
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$1.00 per share (the "Series A Preferred Stock") when and as the same shall
become due and payable, (ii) such default shall continue for 30 days and (iii)
provided the Pioneer Ventures Associates Limited Partnership (the "Pioneer
Partnership") and/or its limited partners shall be the holder(s) of an aggregate
of at least five (5%) percent of the outstanding Series A Preferred Stock
(included in such 5% calculation for the denominator shall be any Preferred
Stock which has then been converted into Common Stock of the Corporation) the
Pioneer Partnership shall have the right to nominate, and the Board of Directors
of Company shall use its best efforts to have promptly elected or appointed,
such number of individuals nominated by the Pioneer Partnership as shall be
equal to the number of Directors who are designees of Hollinger Digital, Inc.
("Hollinger"); provided, however, that the aggregate number of Directors that
are designees of the Pioneer Partnership or Hollinger shall then constitute a
simple majority of the Corporation's Board of Directors. If this is not the
case, the Board of Directors shall appoint as Directors such additional number
of designees of the Pioneer Partnership and Hollinger as shall be necessary to
ensure that (i) Pioneer and Hollinger shall have an equal number of designees
duly appointed as Directors and (ii) the Pioneer and Hollinger designees on the
Board shall constitute a simple majority of the Board of Directors, for so long
thereafter as the Pioneer Partnership shall own any Series A Preferred Stock or
Common Stock of the Corporation.
2. Powers. The business and affairs of the Corporation shall be carried on
by or under the direction of the Board of Directors, which shall have all the
powers authorized by the laws of Delaware, subject to such limitations as may be
provided by the Certificate of Incorporation or these By-Laws.
3. Compensation. The Board of Directors may from time to time by resolution
authorize the payment of fees or other compensation to the directors for
services as such to the Corporation, including, but not limited to, fees for
attendance at all meetings of the Board or of the executive or other committees,
and determine the amount of such fees and compensation. Directors shall in any
event be paid their traveling expenses for attendance at all meetings of the
Board or of the executive or other committees. Nothing herein contained shall be
construed to preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor in amounts authorized or otherwise
approved from time to time by the Board or the executive committee.
4. Meetings and quorum. Meetings of the Board of Directors may be held
either in or outside of Delaware. A quorum shall be one-third the then
authorized total number of directors, but not less than two directors. A
director will be considered present at a meeting, even though not physically
present, if such director participates in the meeting to the extent and in the
manner authorized by the laws of Delaware.
The Board of Directors elected at any annual stockholders' meeting shall,
at the close of that stockholders' meeting, without further notice if a quorum
of directors be then present or as soon thereafter as may be convenient, hold a
meeting for the election of officers and the transaction of any other business.
At such meeting the directors shall elect a Chief Executive Officer, a
President, a Secretary and a Treasurer, and such other officers as they may deem
proper, provided that the directors may elect a Chairman of the Board in lieu of
a Chief Executive Officer or President. None of the officers so elected, except
the Chairman of the Board, if elected, need be members of the Board of
Directors.
The Board of Directors may from time to time provide for the holding of
regular meetings with or without notice and may fix the times and places at
which such meetings are to be held. Meetings other than regular meetings may be
called at any time by the President, the Chief Executive Officer or the
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Chairman of the Board and must be called by the Chief Executive Officer, the
President or by the Secretary or an assistant secretary upon the request of any
director.
Notice of each meeting, other than a regular meeting (unless required by
the Board of Directors), shall be given to each director by mailing the same to
each director at his residence or business address at least two days before the
meeting or by delivering the same to him personally or by telephone or telegraph
to him at least one day before the meeting unless, in case of exigency, the
Chairman of the Board, the Chief Executive Officer, the President or Secretary
shall prescribe a shorter notice to be given personally or by telephone,
telegraph, cable or wireless to all or any one or more of the directors at their
respective residences or places of business.
Notice of any meeting shall state the time and place of such meeting, but
need not state the purpose thereof unless otherwise required by the laws of
Delaware, the Certificate of Incorporation, the By-Laws, or the Board of
Directors.
5. Executive Committee. The Board of Directors may by resolution passed by
a majority of the whole Board provide for an executive committee of two or more
directors and shall elect the members thereof to serve during the pleasure of
the Board and may designate one of such members to act as Chairman. The Board
may at any time change the membership of the committee, fill vacancies in it,
designate alternate members to replace any absent or disqualified members at any
meeting of the committee, or dissolve it.
During the intervals between the meetings of the Board of Directors, the
executive committee shall possess and may exercise any or all of the powers of
the Board of Directors in the management or direction of the business and
affairs of the Corporation and under the By-Laws to the extent authorized by
resolution adopted by a majority of the entire Board of Directors, subject to
such limitations as may be imposed by the laws of Delaware.
The executive committee may determine its rules of procedure and the notice
to be given of its meetings, and it may appoint such committees and assistants
as it shall from time to time deem necessary. A majority of the members of the
committee shall constitute a quorum.
6. Compensation Committee. The Board of Directors has established the
Compensation Committee which shall have a maximum of three members from the
Board of Directors: (a) designee of the Pioneer Partnership, (b) a designee of
Hollinger and (c) one other independent person selected by the Board of
Directors. The Compensation Committee shall consider and recommend to the Board
of Directors matters concerning the compensation of executives, awards of stock
options and other incentive compensation. The Corporation shall not grant any
options, warrants or rights to purchase any securities of the Corporation to any
employee of or consultant to the Corporation or grant any salary increase in
excess of ten percent (10%) on an annual basis to any employee without the
affirmative vote of a majority of the Compensation Committee.
7. Audit Committee. The Board of Directors has established the Audit
Committee which shall have a maximum of three members from the Board of
Directors: (a) designee of the Pioneer Partnership, (b) a designee of Hollinger
and (c) one other independent person selected by the Board of Directors
8. Other committees. The Board of Directors may by resolution provide for
such other committees as it deems desirable and may discontinue the same at its
pleasure. Each such committee
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shall have the powers and perform such duties, not inconsistent with law, as may
be assigned to it by the Board.
9. Action without meetings. Any action required or permitted to be taken at
any meeting of the Board of Directors or any committee thereof may be taken by
signed written consent of all of the directors entitled to vote with respect to
the subject matter thereof, which consent shall set forth the action so taken,
and shall be filed with the minutes of the Corporation.
ARTICLE III:
Officers
1. Titles and election. The officers of the Corporation shall be a Chief
Executive Officer (or in the absence of a Chief Executive Officer, a Chairman of
the Board who shall have all the powers and authority of a Chief Executive
Officer), a President, a Secretary and a Treasurer, each of whom shall initially
be elected by the Board of Directors as soon as convenient, and thereafter, in
the absence of earlier resignations or removals, shall be elected at the first
meeting of the Board following each annual stockholders' meeting, each of whom
shall hold office at the pleasure of the Board except as may otherwise be
approved by the Board or executive committee, or until his earlier resignation,
removal under these By-Laws or other termination of his employment. Any person
may hold more than one office if the duties can be consistently performed by the
same person, and to the extent permitted by the laws of Delaware.
The Board of Directors, in its discretion, may also at any time elect or
appoint a Chairman of the Board of Directors who shall be a director, and one or
more vice presidents, assistant secretaries and assistant treasurers and such
other officers as it may deem advisable, each of whom shall hold office at the
pleasure of the Board, except as may otherwise be approved by the Board or
executive committee, or until the earlier resignation, removal or other
termination of employment of such officer, and shall have such authority and
shall perform such duties as may be prescribed or determined from time to time
by the Board or in case of officers other than the Chairman of the Board, if not
so prescribed or determined by the Board, as the Chief Executive Officer or the
then-senior executive officer may prescribe or determine.
The Board of Directors may require any officer or other employee or agent
to give bond for the faithful performance of his duties in such form and with
such sureties as the Board may require.
2. Duties. Subject to such extension, limitations, and other provisions as
the Board of Directors or the By-Laws may from time to time prescribe or
determine, the following officers shall have the following powers and duties:
(a) Chairman of the Board. The Chairman of the Board, when present,
shall preside at all meetings of the stockholders and of the Board of
Directors and shall be charged with general supervision of the management
and policy of the Corporation, and shall have such other powers and perform
such other duties as the Board of Directors may prescribe from time to
time.
(b) Chief Executive Officer. Subject to the Board of Directors and
the provisions of these By-Laws, the Chief Executive Officer shall be the
chief executive officer of the Corporation, shall exercise the powers and
authority and perform all of the duties commonly incident to his office,
shall in the absence of the Chairman of the Board preside at all meetings
of the stockholders and of the Board of Directors if he is a director, and
shall perform such other duties as the Board of Directors or
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executive committee shall specify from time to time. The Chief Executive
Officer or the President or a vice president, unless some other person is
thereunto specifically authorized by the Board of Directors or executive
committee, shall sign all bonds, debentures, promissory notes, deeds and
contracts of the Corporation.
(c) President. The President shall perform such duties as may be
assigned to them from time to time by the Board of Directors or by the
Chief Executive Officer if the Board does not do so. In the absence or
disability of the Chief Executive Officer, the President may, unless
otherwise determined by the Board, exercise the powers and perform the
duties pertaining to the office of Chief Executive Officer.
(d) Vice President. The Vice President or vice presidents shall
perform such duties as may be assigned to them from time to time by the
Board of Directors or by the Chief Executive Officer if the Board does not
do so or by the President if the Board and the Chief Executive Officer do
not do so. In the absence or disability of the Chief Executive Officer and
the President, the vice presidents in order of seniority may, unless
otherwise determined by the Board, exercise the powers and perform the
duties pertaining to the offices of Chief Executive Officer and President,
except that if one or more executive vice presidents has been elected or
appointed, the person holding such office in order of seniority shall
exercise the powers and perform the duties of the offices of Chief
Executive Officer and President.
(e) Secretary. The Secretary or in his absence an assistant secretary
shall keep the minutes of all meetings of stockholders and of the Board of
Directors, give and serve all notices, attend to such correspondence as may
be assigned to him, keep in safe custody the seal of the Corporation, and
affix such seal to all such instruments properly executed as may require
it, and shall have such other duties and powers as may be prescribed or
determined from time to time by the Board of Directors or by the Chief
Executive Officer if the Board does not do so or by the President if the
Board and the Chief Executive Officer do not do so.
(f) Treasurer. The Treasurer, subject to the order of the Board of
Directors, shall have the care and custody of the moneys, funds, valuable
papers and documents of the Corporation (other than his own bond, if any,
which shall be in the custody of the President), and shall have, under the
supervision of the Board of Directors, all the powers and duties commonly
incident to his office. He shall deposit all funds of the Corporation in
such bank or banks, trust company or trust companies, or with such firm or
firms doing a banking business as may be designated by the Board of
Directors or by the Chief Executive Officer if the Board does not do so or
by the President if the Board and the Chief Executive Officer do not do so.
He may endorse for deposit or collection all checks, notes, etc., payable
to the Corporation or to its order. He shall keep accurate books of account
of the Corporation's transactions, which shall be the property of the
Corporation, and together with all its property in his possession, shall be
subject at all times to the inspection and control of the Board of
Directors. The Treasurer shall be subject in every way to the order of the
Board of Directors, and shall render to the Board of Directors and/or the
Chief Executive Officer of the Corporation and/or the President of the
Corporation, whenever they may require it, an account of all his
transactions and of the financial condition of the Corporation. In addition
to the foregoing, the Treasurer shall have such duties as may be prescribed
or determined from time to time by the Board of Directors or by the Chief
Executive Officer if the Board does not do so or by the President if the
Board and the Chief Executive Officer do not do so.
3. Delegation of authority. The Board of Directors or the executive
committee may at any time delegate the powers and duties of any officer for the
time being to any other officer, director or employee.
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4. Compensation. The compensation of the of the Board, the Chief Executive
Officer, the President, all vice presidents, the Secretary and the Treasurer
shall be fixed by the Board of Directors or the executive committee, and the
fact that any officer is a director shall not preclude him from receiving
compensation or from voting upon the resolution providing the same.
ARTICLE IV:
Resignations, Vacancies and Removals
1. Resignations. Any director or officer may resign at any time by giving
written notice thereof to the Board of Directors, the Chief Executive Officer,
the President or the Secretary. Any such resignation shall take effect at the
time specified therein or, if the time be not specified, upon receipt thereof;
and unless otherwise specified therein, the acceptance of any resignation shall
not be necessary to make it effective.
2. Vacancies.
(a) Directors. When the office of any directors, becomes vacant or
unfilled whether by reason of death, resignation, removal, increase in the
authorized number of directors or otherwise, such vacancy or vacancies may
be filled by the remaining director or directors, although less than a
quorum. In the event that Pioneer and Hollinger shall have the contractual
right to require the Corporation to appoint additional directors pursuant
to Section 1(b) of these By-laws, such additional director positions shall
be deemed to be vacancies under this Section 2(a) and shall be filled in
accordance herewith. Any director so elected by the Board shall serve until
the election and qualification of his successor or until his earlier
resignation or removal as provided in these By-Laws. The directors may also
reduce their authorized number by the number of vacancies in the Board,
provided such reduction does not reduce the Board to less than the minimum
authorized by the Certificate of Incorporation or the laws of Delaware.
(b) Officers. The Board of Directors may at any time or from time to
time fill any vacancy among the officers of the Corporation.
3. Removals.
(a) Directors. Except as may otherwise be prohibited or restricted
under the laws of Delaware, the stockholders may, at any meeting called for
the purpose or by written consent of the stockholders in lieu of a meeting,
remove any director from office, with or without cause, and may elect his
successor. Except as may otherwise be prohibited or restricted under the
laws of Delaware, the Board of Directors at any meeting called for the
purpose, by vote of a majority of the then total authorized number of
directors may remove from office for cause any director and may elect such
director's successor, and by similar action may remove from office without
cause any director elected by the Board, and may elect such director's
successor.
(b) Officers. Subject to the provisions of any validly existing
agreement, the Board of Directors may at any meeting, remove from office
any officer, with or without cause, and may elect or appoint a successor;
provided that if action is to be taken to remove the Chief Executive
Officer or the President the notice of meeting or waiver of notice thereof
shall state that one of the purposes thereof is to consider and take action
on his removal.
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ARTICLE V:
Capital Stock
1. Certificate of stock. Every stockholder shall be entitled to a
certificate or certificates for shares of the capital stock of the Corporation
in such form as may be prescribed or authorized by the Board of Directors, duly
numbered and setting forth the number and kind of shares represented thereby.
Such certificates shall be signed by the Chairman of the Board, the Chief
Executive Officer, the President or a vice president and by the Treasurer or an
assistant Treasurer or by the Secretary or an assistant secretary. Any or all of
such signatures may be in facsimile if and to the extent authorized under the
laws of Delaware.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate has ceased to be such
officer, transfer agent or registrar before the certificate has been issued,
such certificate may nevertheless be issued and delivered by the Corporation
with the same effect as if he were such officer, transfer agent or registrar at
the date of issue.
2. Transfer of stock. Shares of the capital stock of the Corporation shall
be transferable only upon the books of the Corporation upon the surrender of the
certificate or certificates properly assigned and endorsed for transfer. If the
Corporation has a transfer agent or agents or transfer clerk and registrar of
transfers acting on its behalf, the signature of any officer or representative
thereof may be in facsimile.
The Board of Directors may appoint a transfer agent and one or more
co-transfer agents and a registrar and one or more co-registrars of transfer and
may make or authorize the transfer agents to make all such rules and regulations
deemed expedient concerning the issue, transfer and registration of shares of
stock.
3. Record dates.
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights
in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix in
advance a record date which, in the case of a meeting, shall be not less
than the minimum nor more than the maximum number of days prior to the
scheduled date of such meeting permitted under the laws of Delaware and
which, in the case of any other action, shall be not more than the maximum
number of days prior to any such action permitted by the laws of Delaware.
(b) If no such record date is fixed by the Board, the record date
shall be that prescribed by the laws of Delaware.
(c) A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of
such meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
4. Lost certificates. In case of loss or mutilation or destruction of a
stock certificate, a duplicate certificate may be issued upon such terms as may
be determined or authorized by the Board of
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Directors or executive committee or by the Chief Executive Officer if the Board
or the executive committee does not do so.
ARTICLE VI:
Fiscal Year, Bank Deposits, Checks, etc.
1. Fiscal Year. The fiscal year of the Corporation shall commence or end at
such time as the Board of Directors may designate.
2. Bank deposits, checks, etc. The funds of the Corporation shall be
deposited in the name of the Corporation or of any division thereof in such
banks or trust companies in the United States or elsewhere as may be designated
from time to time by the Board of Directors or executive committee, or by such
officer or officers as the Board or executive committee may authorize to make
such designations.
All checks, drafts or other orders for the withdrawal of funds from any
bank account shall be signed by such person or persons as may be designated from
time to time by the Board of Directors or executive committee or as may be
designated by an officer or officers authorized by the Board of Directors or
executive committee to make such designations. The signatures on checks, drafts
or other orders for the withdrawal of funds may be in facsimile if authorized in
the designation.
ARTICLE VII:
Books and Records
1. Place of keeping books. Unless otherwise expressly required by the laws
of Delaware, the books and records of the Corporation may be kept outside of
Delaware.
2. Examination of books. Except as may otherwise be provided by the laws of
Delaware, the Certificate of Incorporation or these By-Laws, the Board of
Directors shall have power to determine from time to time whether and to what
extent and at what times and places and under what conditions any of the
accounts, records and books of the Corporation are to be open to the inspection
of any stockholder. No stockholder shall have any right to inspect any account
or book or document of the Corporation except as prescribed by statute or
authorized by express resolution of the stockholders or of the Board of
Directors.
ARTICLE VIII:
Notices
1. Requirements of notice. Whenever notice is required to be given by
statute, the Certificate of Incorporation or these By-Laws, it shall not mean
personal notice unless so specified, but such notice may be given in writing by
depositing the same in a post office, letter box, or mail chute, postpaid and
addressed to the person to whom such notice is directed at the address of such
person on the records of the Corporation, and such notice shall be deemed given
at the time when the same shall be thus deposited.
2. Waivers. Any stockholder, director or officer may, in writing or by
telegram or cable, at any time waive any notice or other formality required by
statute, the Certificate of Incorporation
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or these By-Laws. Such waiver of notice, whether given before or after any
meeting or action, shall be deemed equivalent to notice. Presence of a
stockholder either in person or by proxy at any stockholders' meeting and
presence of any director at any meeting of the Board of Directors shall
constitute a waiver of any notice as may be required by any statute, the
Certificate of Incorporation or these By-Laws, except when such stockholder or
director, as the case may be, is present for the purpose of objecting, at the
beginning of the meeting, to the transaction of business thereat on the grounds
that the meeting was not lawfully called or convened.
ARTICLE IX:
Seal
The corporate seal of the Corporation shall consist of two concentric
circles between which shall be the name of the Corporation and in the center of
which shall be inscribed "Corporate Seal, Delaware."
ARTICLE X:
Powers of Attorney
The Board of Directors or the executive committee may authorize one or more
of the officers of the Corporation to execute powers of attorney delegating to
named representatives or agents power to represent or act on behalf of the
Corporation, with or without power of substitution.
In the absence of any action by the Board or the executive committee, the
President, any vice president, the Secretary or the Treasurer of the Corporation
may execute for and on behalf of the Corporation waivers of notice of
stockholders' meetings and proxies for such meetings in any company in which the
Corporation may hold voting securities.
ARTICLE XI:
Indemnification of Directors and Officers
1. Definitions. As used in this article, the term "person" means any past,
present or future director or officer of the Corporation or a designated officer
of an operating division of the Corporation.
2. Indemnification granted. The Corporation shall indemnify, to the full
extent and under the circumstances permitted by the General Corporation Law of
the State of Delaware in effect from time to time, any person made or threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative by reason
of the fact that such person is or was a director or officer of the Corporation
or a designated officer of an operating division of the Corporation, or is or
was an employee or agent of the Corporation serving as a director, officer,
employee or agent of another company or other enterprise in which the
Corporation owns, directly or indirectly, an equity interest or of which it is a
creditor.
This right of indemnification shall not be deemed exclusive of any other
rights to which a person indemnified herein may be entitled by law, agreement,
vote of stockholders or disinterested directors or otherwise, and shall continue
as to a person who has ceased to be a director, officer, designated officer,
employee or agent and shall inure to the benefit of the heirs, executors,
administrators and other legal
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representatives of such person. It is not intended that the provisions of this
article be applicable to, and they are not to be construed as granting indemnity
with respect to, matters as to which indemnification would be in contravention
of the laws of Delaware or of the United States of America whether as a matter
of public policy or pursuant to statutory provision.
3. Miscellaneous. The Board of Directors may also on behalf of the
Corporation grant indemnification to any individual other than a person defined
herein to such extent and in such manner as the Board in its sole discretion may
from time to time and at any time determine.
ARTICLE XII:
Amendments
These By-Laws may be amended or repealed either:
(a) at any meeting of stockholders at which a quorum is present, by
vote of a majority of the number of shares of stock entitled to vote which
is present in person or by proxy at such meeting as provided in Article I
Sections 5 and 6 of these By-Laws, or
(b) at any meeting of the Board of Directors by a majority vote of
the directors then in office;
provided the notice of such meeting of stockholders or directors or waiver of
notice thereof contains a statement of the substance of the proposed amendment
or repeal.
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THIS CONVERTIBLE DEBENTURE NOTE AND THE SHARES ISSUABLE UPON CONVERSION HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE
"ACT") OR ANY STATE SECURITIES LAWS AND NEITHER THIS DEBENTURE NOTE, SUCH
SHARES, NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR
OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO
IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE OR SUCH
SHARES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY,
THAT THIS NOTE OR SUCH SHARES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR
TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS.
AMERICAN INTERACTIVE MEDIA, INC.
Floating Rate Convertible Secured Debenture Note
$3,000,000.00 December 4, 1997
New York, New York
AMERICAN INTERACTIVE MEDIA, INC., a Nevada corporation, (the "Company") for
value received, hereby promises to pay to HOLLINGER DIGITAL, INC. or its
designee, with an address at 270 Lafayette Street, New York, New York 10012 or
registered assigns (the "Holder"), the principal amount of Three Million and
00/100 ($3,000,000.00) Dollars on the Maturity Date (as defined below), together
with all interest on the unpaid principal balance hereof at the rate equal to
three and one-half (3.5%) percent per annum in excess of the prime rate as
published in the Wall Street Journal from time to time during the term hereof.
Interest shall be compounded and shall accrue on the first day of each June and
December and on the Maturity Date, each such date being an "Interest Accrual
Date" (calculated on the basis of a 360-day year consisting of twelve 30-day
months), all as hereafter further provided. This Floating Rate Convertible
Secured Debenture Note shall be referred to hereafter as the "Note."
If, after December 31, 1999, the Company establishes, to the reasonable
satisfaction of Holder, the Company's ability to borrow $6,000,000 from an
institutional lender on substantially the terms and conditions of this Note but
at a lower interest rate than herein set forth, the Company and the Holder shall
renegotiate the herein interest rate, on a prospective basis, to a mutually
agreeable rate which shall be reflective of the Company's then borrowing
ability.
In no event shall any interest to be paid hereunder exceed the maximum rate
permitted by law. In any such event, this Note shall automatically be deemed
amended to permit interest charges at an amount equal to, but no greater than,
the maximum rate permitted by law.
<PAGE>
This Note is being issued by the Company pursuant to that Securities
Purchase Agreement of even date herewith between the Company and Hollinger
Digital, Inc. or its designee (the "Securities Purchase Agreement").
1. Payments.
(a) Subject to the mandatory conversion provisions of Section 3 (or
earlier exercise of the Conversion Right), principal of, and all accrued
and unpaid interest on, this Note shall be due and payable in full on the
Maturity Date. The "Maturity Date" shall be the date which is the earliest
of (i) December 4, 2002 and (ii) the date upon which a Conversion Event is
consummated. As used herein, a Conversion Event shall mean an initial
public offering of securities of the Company pursuant to a registration
statement filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
(b) Interest on this Note shall accrue on each Interest Accrual Date
and be payable on the Maturity Date.
(c) If any Interest Accrual Date or the Maturity Date would fall on a
day that is not a Business Day (as defined below), the payment due or to be
accrued on such Interest Accrual Date or Maturity Date will be made on the
next succeeding Business Day with the same force and effect as if made on
the Interest Accrual Date or the Maturity Date, as the case may be.
"Business Day" means any day which is not a Saturday or Sunday and is not a
day on which banking institutions are generally authorized or obligated to
close in the City of New York, New York.
(d) The Company shall not have the right to prepay all or any part of
the principal or interest of this Note without the prior written consent of
Holder in its discretion. All payments on this Note shall be applied first
to accrued interest hereon and the balance to the payment of principal
hereof. However, in the event that Holder does not exercise in full the
Common Stock Purchase Option (as defined in the Securities Purchase
Agreement) on or prior to the expiration date thereof, the Company shall
have the right to prepay the full amount of outstanding principal and
accrued interest of this Note upon thirty (30) days' notice not later than
one hundred-eighty (180) days from expiration of the unexercised Common
Stock Purchase Option, and Holder shall lose its Conversion Right with
respect to the full amount prepaid.
(e) Subject to the mandatory conversion provisions of Section 3 (or
earlier exercise of the Conversion Right), payments of principal and
interest on this Note shall be made by check sent to the Holder's address
set forth above or to such other address as the Holder may designate for
such purpose from time to time by written notice to the Company, in such
coin or currency of the United States of America as at the time of payment
shall be legal tender for the payment of public and private debts.
(f) Subject to the mandatory conversion provisions of Section 3 (or
earlier exercise of the Conversion Right), the obligations to make the
payments provided for in this Note are absolute and unconditional and not
subject to any defense, set-off, counterclaim,
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rescission, recoupment or adjustment whatsoever. The Company hereby
expressly waives demand and presentment for payment, notice of non-payment,
notice of dishonor, protest, notice of protest, bringing of suit and
diligence in taking any action to collect any amount called for hereunder,
and shall be directly and primarily liable for the payment of all sums
owing and to be owing hereon, regardless of and without any notice,
diligence, act or omission with respect to the collection of any amount
called for hereunder.
2. Ranking of Note.
(a) The Company covenants and agrees that the indebtedness represented
by this Note and the payment of principal and interest on this Note when
due shall be expressly senior to any and all indebtedness of the Company
and any subsidiary except for indebtedness of the Company relating to the
purchase of equipment and machinery pursuant to a written business plan
approved in advance by the Holder (the "Business Plan"). The term
"indebtedness" shall mean (A) any liability of the Company (x) for borrowed
money, (y) evidenced by a note, debenture, bond or other instrument of
indebtedness (including, without limitation, a purchase money obligation),
including any given in connection with the acquisition of property, assets
or service, or (z) for the payment of rent or other amounts relating to
capitalized lease obligations; (B) any liability of others which the
Company has guaranteed or which is otherwise its legal liability; and (C)
any modification, renewal, extension, replacement or refunding of any such
liability; provided, that indebtedness does not include unsecured trade
credit.
(b) Nothing contained in this Note is intended to or shall impair, as
between the Company, its creditors, and the holder of this Note, the
obligation of the Company, which is absolute and unconditional, to pay to
the Holder the principal of and interest on this Note as and when the same
shall become due and payable in accordance with its terms, or affect the
relative rights of the Holder and the creditors of the Company, nor shall
anything herein or therein prevent the Holder from exercising all remedies
otherwise permitted by applicable law upon default under this Note.
(c) Upon any payment or distribution of assets of the Company referred
to in this Note, the Holder shall be entitled to rely upon any order or
decree made by any court of competent jurisdiction in which any such
dissolution, winding up, liquidation or reorganization proceeding affecting
the affairs of the Company is pending, or upon a certificate of the
liquidating trustee or agent or other person making any payment or
distribution to the Holder for the purpose of ascertaining the persons
entitled to participate in such payment or distribution, the holder of any
other indebtedness of the Company, the amount thereof or payable thereon,
the amount paid or distributed thereon and all other facts pertinent
thereto or to this Note.
3. Conversion.
(a) Conversion Right. The Holder shall have the right (the "Conversion
Right"), at any time after December 3, 1999 and prior to the Maturity Date,
on the terms set forth in this Section 3, to convert the outstanding
principal balance, and all accrued interest at the time of conversion, of
this Note into a number of shares of the Company's common
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stock, par value $.001 per share, (the "Common Stock") determined by
dividing the principal amount and accrued interest so converted (the
"Conversion Amount") by $2.85 (as adjusted in accordance herewith, the
"Conversion Price"). The Conversion Price and the number of shares of
Common Stock issuable upon conversion of this Note are subject to
adjustment as hereafter provided.
(b) Mandatory Conversion. So long as an Event of Default has not
occurred, the Holder shall be required to exercise the Conversion Right
upon the Maturity Date for the full amount of shares of Common Stock then
subject to the Conversion Right.
(c) To exercise the Conversion Right, the Holder, on or before the
Maturity Date, shall deliver to the Company, at its office at 611 Broadway,
Suite 308, New York, New York 10012, or at such other place as is
designated in writing by the Company, a notice (the "Conversion Notice")
stating that the Holder is exercising the Conversion Right, the intended
Conversion Amount and the name or names in which the Holder wishes the
certificates for shares of Common Stock to be issued. The Conversion
Notice, once given, shall be irrevocable; provided, however, that a
Conversion Notice given after notice of a proposed Conversion Event may be
made expressly conditional upon the consummation of such Conversion Event,
in which event the Conversion Right shall be deemed to have been exercised
if and only if such Conversion Event is actually consummated. The
Conversion Amount, unless equal to the maximum amount eligible for
conversion, shall be an integral multiple of $1,000 and, if the Conversion
Notice (i) shall specify a desired Conversion Amount other than an amount
permitted by the foregoing, the Conversion Amount shall be equal to the
greatest amount so permitted which does not exceed the amount stated in the
Conversion Notice, or (ii) does not specify a desired Conversion Amount,
the Conversion Amount shall be equal to the maximum permitted Conversion
Amount.
(d) Upon exercise of the Conversion Right (or in the case of the
exercise of a Conversion Right made expressly conditional upon the
occurrence of a Conversion Event, the consummation of such Conversion
Event), the Holder shall be deemed to be the holder of record of the shares
of Common Stock issuable upon such exercise (the "Conversion Shares"),
notwithstanding that the transfer books of the Company shall then be closed
or certificates representing such Conversion Shares shall not then have
been actually delivered to the Holder. As soon as practicable after
exercise of the Conversion Right, the Company shall issue and deliver to
the Holder a certificate or certificates for the Conversion Shares issuable
upon such exercise registered in the name of the Holder or its designee;
provided, that the Company, by notice given to the Holder promptly after
receipt of the Conversion Notice, may require the Holder, as a condition to
the delivery of such certificate or certificates, to present this Note to
the Company for the placement hereon of a legend indicating that the
Conversion Right has been exercised and of the Conversion Amount, and this
Note (unless thereby paid in full) shall be immediately returned to the
Holder. In the event the Conversion Right is not exercised with respect to
the entire outstanding principal balance of this Note, interest shall
accrue thereafter only on the remaining outstanding principal balance under
this Note.
(e) The issuance of any shares or other securities upon the exercise
of the Conversion Right, and the delivery of certificates or other
instruments representing such shares or other securities, shall be made
without charge to the Holder for any tax (other than
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<PAGE>
income taxes, if any) or other charge in respect of such issuance. The
Company shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of any
certificate in a name other than that of the Holder and the Company shall
not be required to issue or deliver any such certificate unless and until
the person or persons requesting the issue thereof shall have paid to the
Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
(f) The Company shall at all times reserve and keep available out of
its authorized and unissued Common Stock, solely for the purpose of
providing for the exercise of the Conversion Right, such number of shares
of Common Stock as shall, from time to time, be sufficient for the exercise
of the Conversion Right in full. The Company covenants that all shares of
Common Stock issuable upon exercise of the Conversion Right shall be
validly issued, fully paid, nonassessable, and free of preemptive rights.
4. Adjustments to Conversion Rate.
(a) In case the Company shall at any time after the date this Note is
first issued (i) declare a dividend on the outstanding Common Stock payable
in shares of its capital stock, (ii) subdivide the outstanding Common
stock, (iii) combine the outstanding Common Stock into a smaller number of
shares, or (iv) issue any shares of its capital stock by reclassification
of the Common Stock (including any such reclassification in connection with
a consolidation or merger in which the Company is the continuing
corporation), then, in each case, the Conversion Price, and the number and
kind of shares issuable upon conversion of this Note, in effect at the time
of the record date for such dividend or of the effective date of such
subdivision, combination, or reclassification, shall be proportionately
adjusted so that the Holder after such time shall be entitled to receive
the aggregate number and kind of shares which, if the Conversion Right had
been exercised immediately prior to such time, it would have owned upon
such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination, or reclassification. Such adjustment shall be
made successively whenever any event listed above shall occur.
(b) In case the Company shall issue or fix a record date for the
issuance to all holders of Common Stock of rights, options, or warrants to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a conversion
or exchange price per share, if a security convertible into or exchangeable
for Common Stock) less than the Current Market Price (as hereinafter
defined) per share of Common Stock on such record date, then, in each case,
the number of shares of Common Stock into which this Note shall be
convertible after such record date shall be determined by multiplying the
number of shares of Common Stock into which this Note was theretofore
convertible by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding on such record date plus the number of
additional shares of Common Stock to be offered for subscription or
purchase (or into which the convertible or exchangeable securities so to be
offered are initially convertible or exchangeable) and the denominator of
which shall be the number of shares of Common Stock outstanding on such
record date plus the number of shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so to be
offered (or the aggregate initial conversion or
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<PAGE>
exchange price of the convertible or exchangeable securities so to be
offered) would purchase at such Current Market Price. Such adjustment shall
become effective at the close of business on such record date; provided,
however, that, to the extent the shares of Common Stock (or securities
convertible into or exchangeable for shares of Common Stock) are not
delivered, the number of shares of Common Stock issuable upon conversion of
this Note shall be readjusted after the expiration of such rights, options,
or warrants (but only with respect to any portion of this Note converted
after such expiration), to the number of shares which would have been
issuable upon conversion of this Note had the adjustments made upon the
issuance of such rights, options, or warrants been made upon the basis of
delivery of only the number of shares of Common Stock (or securities
convertible into or exchangeable for shares of Common Stock) actually
issued. In case any subscription price may be paid in a consideration part
or all of which shall be in a form other than cash, the value of such
consideration shall be as determined in good faith by the board of
directors of the Company, whose determination shall be conclusive absent
manifest error. Shares of Common Stock owned by or held for the account of
the Company or any majority-owned subsidiary shall not be deemed
outstanding for the purpose of any such computation.
(c) In case the Company shall distribute to all holders of Common
Stock (including any such distribution made to the stockholders of the
Company in connection with a consolidation or merger in which the Company
is the continuing corporation) evidences of its indebtedness or assets
(other than cash dividends or distributions and dividends payable in shares
of Common Stock), or rights, options, or warrants to subscribe for or
purchase Common Stock, or securities convertible into or exchangeable for
shares of Common Stock (excluding those with respect to the issuance of
which an adjustment is provided for pursuant to Section 4(b) of this Note),
then, in each case, the number of shares of Common Stock into which this
Note shall be convertible shall be determined by multiplying the number of
shares of Common Stock into which this Note was convertible immediately
prior to the record date for the determination of stockholders entitled to
receive such distribution by a fraction, the numerator of which shall be
the Current Market Price per share of Common Stock on such record date, and
the denominator of which shall be such Current Market Price per share of
Common Stock less the fair market value (as reasonably determined in good
faith by the board of directors of the Company) of the portion of the
evidences of indebtedness or assets so to be distributed, or of such
rights, options, or warrants or convertible or exchangeable securities,
applicable to one share. Such adjustment shall be made whenever any such
distribution is made, and shall become effective on the date of such
distribution retroactive to the record date for the determination of
stockholders entitled to receive such distribution.
(d) In case the Company shall issue shares of Common Stock or rights,
options, or warrants to subscribe for or purchase Common Stock, or
securities convertible into or exchangeable for Common Stock (excluding
shares, rights, options, warrants, or convertible or exchangeable
securities issued or issuable (i) in a private placement of shares or
convertible securities of up to $6,000,000 provided that the Company shall
consult with Holder with respect to such issuance or in private placements
of shares or convertible securities over the $6,000,000 amount if Holder
has approved such transaction, (ii) in any of the transactions with respect
to which an adjustment is provided for pursuant to Sections 4(a), (b) or
(c) of this Note, or (iii) upon conversion of this Note or the second Note
to be issued to Holder pursuant to the Securities
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<PAGE>
Purchase Agreement or exercise of the Common Stock Purchase Option and
Warrant issued pursuant to the Securities Purchase Agreement or exercise or
conversion of any other options, warrants or securities outstanding on the
date hereof) at a price per share (determined, in the case of such rights,
options, warrants, or convertible or exchangeable securities, by dividing
(x) the total amount received or receivable by the Company in consideration
of the sale and issuance of such rights, options, warrants, or convertible
or exchangeable securities, plus the minimum aggregate consideration
payable to the Company upon exercise, conversion, or exchange thereof, by
(y) the maximum number of shares covered by such rights, options, warrants,
or convertible or exchangeable securities) lower than the Current Market
Price per share of Common Stock in effect immediately prior to such
issuance, then the number of shares of Common Stock into which this Note
shall be convertible shall be determined by multiplying the number of
shares of Common Stock into which this Note was convertible immediately
prior to such issuance by a fraction, the numerator of which shall be the
total number of shares of Common Stock outstanding immediately after such
issuance and the denominator of which shall be an amount equal to the sum
of (A) the number of shares of Common Stock outstanding immediately prior
to such issuance, plus (B) the quotient obtained by dividing the
consideration received by the Company upon such issuance by such Current
Market Price. For the purposes of such adjustments, the maximum number of
shares which the holders of any such rights, options, warrants, or
convertible or exchangeable securities shall be entitled to initially
subscribe for or purchase or convert or exchange such securities into shall
be deemed to be issued and outstanding as of the date of such issuance, and
the consideration received by the Company therefor shall be deemed to be
the consideration received by the Company for such rights, options,
warrants, or convertible or exchangeable securities, plus the minimum
aggregate consideration or premiums stated in such rights, options,
warrants, or convertible or exchangeable securities to be paid for the
shares covered thereby. No further adjustment shall be made as a result of
the actual issuance of shares of Common Stock on exercise of such rights,
options, or warrants or on conversion or exchange of such convertible or
exchangeable securities. On the expiration or the termination of such
rights, options, or warrants, or the termination of such right to convert
or exchange, the number of shares of Common Stock issuable upon conversion
of this Note shall be readjusted to such number of shares as would have
been issuable had the adjustments made upon the issuance of such rights,
options, warrants, or convertible or exchangeable securities been made upon
the basis of the delivery of only the number of shares of Common Stock
actually delivered upon the exercise of such rights, options, or warrants
or upon the conversion or exchange of any such securities; and on any
change of the number of shares of Common Stock deliverable upon the
exercise of any such rights, options, or warrants or conversion or exchange
of such convertible or exchangeable securities or any change in the
consideration to be received by the Company upon such exercise, conversion,
or exchange, including, but not limited to, a change resulting from the
antidilution provisions thereof, the number of shares of Common Stock
issuable upon conversion of this Note, as then in effect, shall forthwith
be readjusted to such number of shares as would have been issuable had an
adjustment been made upon the issuance of such rights, options, or warrants
not exercised prior to such change, or securities not converted or
exchanged prior to such change, on the basis of such change. In case the
Company shall issue shares of Common Stock or any such rights, options,
warrants, or convertible or exchangeable securities for a consideration
consisting, in whole or in part, of property other than cash or its
equivalent, then the "price per share" and the "consideration received by
the Company" for purposes of the first
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<PAGE>
sentence of this Section 4(d) shall be as determined in good faith by the
board of directors of the Company, whose determination shall be conclusive
absent manifest error. Shares of Common Stock owned by or held for the
account of the Company or any majority-owned subsidiary shall not be deemed
outstanding for the purpose of any such computation.
(e) For the purpose of any computation under this Section 4, the
Current Market Price per share of Common Stock on any date shall be deemed
to be the average of the daily closing prices for the 30 consecutive
trading days immediately preceding the date in question. The closing price
for each day shall be the last reported sales price regular way or, in case
no such reported sale takes place on such day, the closing bid price
regular way, in either case on the principal national securities exchange
(including, for purposes hereof, the NASDAQ National Market System) on
which the Common Stock is listed or admitted to trading or, if the Common
Stock is not listed or admitted to trading on any national securities
exchange, the highest reported bid price for the Common Stock as furnished
by the National Association of Securities Dealers, Inc. through NASDAQ or a
similar organization if NASDAQ is no longer reporting such information or
if the Common Stock is not reported on NASDAQ, as quoted on the OTC
Bulletin Board. If on any such date the Common Stock is not listed or
admitted to trading on any national securities exchange and is not quoted
by NASDAQ or any similar organization, the fair value of a share of Common
Stock on such date, as reasonably determined in good faith by the board of
directors of the Company shall be used. The foregoing provisions shall also
be applied to determine the Current Market Price of any shares of capital
stock of the Company issued by the Company by reclassification of the
Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the surviving corporation).
(f) No adjustment in the number of shares of Common Stock into which
this Note is convertible shall be required unless such adjustment would
require an increase or decrease of at least 1/20th of a share in the number
of shares of Common Stock into which this Note is convertible; provided,
however, that any adjustments which by reason of this Section 4(f) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment.
(g) Upon each adjustment to the number of shares of Common Stock
issuable upon conversion of this Note as a result of the calculations made
in Sections 4(b), (c) and (d) hereof, the Conversion Price shall
simultaneously be adjusted to the price obtained by multiplying the
Conversion Price in effect immediately prior to such adjustment by a
fraction, the numerator of which shall be the number of shares of Common
Stock into which this Note was convertible immediately prior to such
adjustment and the denominator of which shall be the number of shares of
Common Stock into which this Note is convertible immediately after such
adjustment.
(h) Whenever there shall be an adjustment as provided in this Section
4, the Company shall promptly cause written notice thereof to be sent to
the Holder, which notice shall be accompanied by an officer's certificate
setting forth the number of Conversion Shares issuable upon the exercise of
the Conversion Right and the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment and
the
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<PAGE>
computation thereof, which officer's certificate shall be conclusive
evidence of the correctness of any such adjustment absent manifest error.
(i) The Company shall not be required to issue fractions of shares of
Common Stock or other capital stock of the Company upon the exercise of the
Conversion Right. If any fraction of a share would be issuable on any
exercise of the Conversion Right (or specified portions thereof), the
Company shall purchase such fraction for an amount in cash equal to the
same fraction of the Current Market Price of such share of Common Stock or
other capital stock on the date of exercise of the Conversion Right.
5. Registration Rights.
The Holder and any holder of Conversion Shares issuable upon conversion of
this Note shall have registration rights with respect to the Conversion Shares
as provided with respect to the Company Common Stock pursuant to the Securities
Purchase Agreement.
6. Covenants.
The Company covenants and agrees with the Holder that, so long as any
amount remains unpaid on the Note, unless the prior written consent of the
Holder in its discretion is obtained, the Company:
(a) Shall not create, incur or suffer to exist, or permit any
subsidiary to create, incur or suffer to exist, any indebtedness except (i)
the indebtedness represented by this Note (or any other Note issued
pursuant to the Securities Purchase Agreement), (ii) any other indebtedness
of the Company outstanding on the date hereof, (iii) capital lease
obligations of the Company outstanding on the date hereof and any
subsequent capital lease obligations pursuant to a Business Plan of the
Company as agreed to by the Holder, and (iv) purchase money indebtedness
incurred by the Company pursuant to the Business Plan of December, 1997
annexed hereto.
(b) Shall not create, incur or suffer to exist, or permit any
subsidiary to create, incur or suffer to exist, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind on any of its property
or assets (collectively, "Liens"), except (i) Liens for taxes not yet due
or contested in good faith with appropriate reserves maintained on the
books of the Company or a subsidiary, (ii) carriers', warehousemen's,
mechanics', and similar Liens arising in the ordinary course of business
which are not overdue for more than 90 days or are being contested in good
faith, (iii) easements, rights of way, zoning restrictions, and similar
Liens on real property, which in the aggregate are not material and do not
materially detract from the use of such property, (iv) Liens for
indebtedness permitted to be incurred or in existence under Section 6(a).
(c) Shall not pay any dividend or make any distribution on, or
purchase, redeem, or retire, any shares of its capital stock or any
warrants, options, or other rights to reacquire any such shares other than
dividends payable solely in shares of its capital stock.
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(d) Shall not change, or permit any subsidiary to change, its primary
line of business.
(e) Shall not, and shall not permit any subsidiary to, (i) enter into
any merger or consolidation (other than a merger between the Company and
any subsidiary in which the Company is the surviving corporation or a
merger pursuant to which the Company reincorporates in the State of
Delaware), (ii) liquidate, wind up its affairs or dissolve, or (iii) except
in the ordinary course of business, convey, sell, lease, transfer or
otherwise dispose of, or purchase or acquire, any business, assets, capital
stock or other property.
(f) Shall not, and shall not permit any subsidiary, directly or
indirectly, to enter into any transaction with or for the benefit of an
Affiliate (other than reasonable compensation for services as an officer,
director or employee).
(g) Shall not, and shall not permit any subsidiary to, in any manner
increase the compensation of its existing officers and directors from the
levels in effect on the date of issuance of this Note, except that this
restriction shall not apply to (1) performance bonuses which may be payable
to current executives pursuant to existing written employment agreements,
(2) compensation increases to executives earning less than $150,000 per
year or (3) compensation increases to executives earning $150,000 or more
per year if such increases are not greater than 5% in the aggregate for all
such executives in any calendar year during the term hereof.
(h) Shall not file for or conduct a public offering of any securities
pursuant to the Act.
(i) Shall deliver to the Holder the financial statements referred to
in Section 5.b of the Securities Purchase Agreement.
(j) Shall consult with the Holder as to the periodic preparation of
Business Plans for the Company and as to any funding requirements of the
Company in addition to those referred to in the Securities Purchase
Agreement.
(k) Shall not issue any shares of preferred stock.
In addition, during the term of this Note, the Company covenants and agrees
that:
(l) Without the prior consent of Holder, which shall not be
unreasonably withheld, the Company's budgeted and actual expenses for
content production shall not exceed ten percent (10%) of the Company's
operating expenses for any year during the term of this Note.
(m) Without the prior consent of Holder, which shall not be
unreasonably withheld, the Company's operating and capital expenses in each
year during the term of this Note shall not exceed the expenses set forth
in the applicable Business Plan for that year, as approved in advance by
Holder.
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<PAGE>
(n) Without the prior consent of Holder, which shall not be
unreasonably withheld, no additional executive employees shall be hired,
retained or employed by the Company.
(o) Without the prior consent of Holder, which shall not be
unreasonably withheld, the Company shall not conduct any private placement
for the sale of, or sell, any Common Stock in excess of that permitted in
Section 5.2(b) of the Securities Purchase Agreement.
7. Events of Default.
The occurrence of any of the following events shall constitute an event of
default (an "Event of Default"):
(a) A material default in the performance, or a breach, of any of the
covenants of the Company contained in Section 6 of this Note.
(b) A default in the performance, or a breach, of any other covenant
or agreement of the Company in this Note and the continuance of such
default or breach for a period of ten (10) days after receipt of notice
from the Holder as to such breach.
(c) A default or event of default which remains uncured following any
applicable cure period shall have occurred with respect to any indebtedness
of the Company or subsidiary in an amount greater than $250,000.
(d) A final judgment or judgments for the payment of money in excess
of $250,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals or other bodies having jurisdiction
against the Company and the same shall not be discharged (or provision
shall not be made for such discharge), or a stay of execution thereof shall
not be procured, within 60 days from the date of entry thereof and the
Company shall not, within such 60-day period, or such longer period during
which execution of the same shall have been stayed, appeal therefrom and
cause the execution thereof to be stayed during such appeal.
(e) The entry of a decree or order by a court having jurisdiction
adjudging the Company or any subsidiary a bankrupt or insolvent, or
approving a petition seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company or any subsidiary, under
federal bankruptcy law, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency or other similar law,
and the continuance of any such decree or order unstayed and in effect for
a period of 60 days; or the commencement by the Company or any subsidiary
of a voluntary case under federal bankruptcy law, as now or hereafter
constituted, or any other applicable federal or state bankruptcy,
insolvency, or other similar law, or the consent by it to the institution
of bankruptcy or insolvency proceedings against it, or the filing by it of
a petition or answer or consent seeking reorganization or relief under
federal bankruptcy law or any other applicable federal or state law, or the
consent by it to the filing of such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator or similar official
of the Company or any subsidiary or of any substantial part of its
property, or the
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making by it of an assignment for the benefit of creditors, or the
admission by it in writing of its inability to pay its debts generally as
they become due, or the taking of corporate action by the Company or any
subsidiary in furtherance of any such action.
(f) Peter Yunich shall no longer be employed as the chief executive
officer of the Company other than due to his death, disability or
termination at the request of Holder.
8. Remedies Upon Default.
(a) Upon the occurrence of an Event of Default referred to in Section
7, the Holder, by notice in writing given to the Company, may declare the
entire principal amount then outstanding of, and the accrued interest on,
this Note to be due and payable immediately, and upon any such declaration
the same shall become and be due and payable immediately, without
presentation, demand, protest or other formalities of any kind, all of
which are expressly waived by the Company.
(b) The Holder may institute such actions or proceedings in law or
equity as it shall deem expedient for the protection of its rights and may
prosecute and enforce its claims against all assets of the Company, and in
connection with any such action or proceeding shall be entitled to receive
from the Company payment of the principal amount of this Note plus accrued
interest to the date of payment plus reasonable expenses of collection,
including, without limitation, attorneys' fees and expenses or the Holder
may proceed to enforce the provisions of the Security Agreement described
in Section 9 either simultaneously or in such order as the Holder shall
elect.
9. Security.
This Note is secured by that certain Pledge and Security Agreement of even
date herewith made by the Company to the Holder (the "Security Agreement"),
pursuant to which the Company has granted to the Holder a first priority lien
upon and security interest in certain property more particularly described in
the Security Agreement. All of the covenants, conditions, provisions and
agreements contained in the Security Agreement are by this reference
incorporated herein and made a part hereof.
10. Transfer.
(a) Any Notes issued upon the transfer of this Note shall be numbered
and shall be registered in a Note Register as they are issued. The Company
shall be entitled to treat the registered holder of any Note on the Note
Register as the owner in fact thereof for all purposes and shall not be
bound to recognize any equitable or other claim to or interest in such Note
on the part of any other person, and shall not be liable for any
registration or transfer of Notes which are registered or to be registered
in the name of a fiduciary or the nominee of a fiduciary unless made with
the actual knowledge that a fiduciary or nominee is committing a breach of
trust in requesting such registration or transfer, or with the knowledge of
such facts that its participation therein amounts to bad faith. This Note
shall be transferable only on
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the books of the Company upon delivery thereof duly endorsed by the Holder
or by his duly authorized attorney or representative, or accompanied by
proper evidence of succession, assignment, or authority to transfer. In all
cases of transfer by an attorney, executor, administrator, guardian, or
other legal representative, duly authenticated evidence of his or its
authority shall be produced. Upon any registration of transfer, the Company
shall deliver a new Note or Notes to the person entitled thereto. This Note
may be exchanged, at the option of the Holder thereof, for another Note, or
other Notes of different denominations, of like tenor and representing in
the aggregate a like principal amount, upon surrender to the Company or its
duly authorized agent. Notwithstanding the foregoing, the Company shall
have no obligation to cause Notes to be transferred on its books to any
person if, in the opinion of counsel to the Company, such transfer does not
comply with the provisions of the Act and the rules and regulations
thereunder.
(b) The Holder acknowledges that it has been advised by the Company
that neither this Note nor the Conversion Shares have been registered under
the Act, that the Note is being or has been issued and the Conversion
Shares may be issued on the basis of the statutory exemption provided by
Section 4(2) of the Act or Regulation D promulgated thereunder, or both,
relating to transactions by an issuer not involving any public offering,
and that the Company's reliance thereon is based in part upon the
representations made by the original Holder in the Securities Purchase
Agreement. The Holder acknowledges that it has been informed by the Company
of, or is otherwise familiar with, the nature of the limitations imposed by
the Act and the rules and regulations thereunder on the transfer of
securities. In particular, the Holder agrees that no sale, assignment or
transfer of the Note or Conversion Shares shall be valid or effective, and
the Company shall not be required to give any effect to any such sale,
assignment or transfer, unless (i) the sale, assignment or transfer of the
Note or Conversion Shares is registered under the Act, or (ii) the Note or
Conversion Shares are sold, assigned or transferred in accordance with all
the requirements and limitations of Rule 144 under the Act, it being
understood that Rule 144 is not available at the time of the original
issuance of this Note for the sale of the Note or the Conversion Shares and
that there can be no assurance that Rule 144 sales will be available at any
subsequent time, or (iii) such sale, assignment, or transfer is otherwise
exempt from registration under the Act.
(c) Unless registered pursuant to the provisions of Section 5 hereof,
or otherwise, the Conversion Shares issued upon exercise of the Conversion
Right shall be subject to a stop transfer order and the certificate or
certificates evidencing such Conversion Shares shall bear the following
legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "ACT")
OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY
INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO
IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS,
OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE
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<PAGE>
HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY
SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED,
SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS."
11. Miscellaneous.
(a) Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail or similar
overnight delivery or courier service or delivered (in person or by
telecopy, telex or similar telecommunications equipment) against receipt to
the party to whom it is to be given, (i) if to the Company, at its address
at 611 Broadway, Suite 308, New York, New York 10012, Attention: James S.
Hatch, Secretary, (ii) if to the Holder, at its address set forth on the
first page hereof; or (iii) in either case, to such other address as the
party shall have furnished in writing in accordance with the provisions of
this Section 11(a). Any notice or other communication given by certified
mail shall be deemed given at the time of certification thereof, except for
a notice changing a party's address which shall be deemed given at the time
of receipt thereof. Any notice given by other means permitted by this
Section 11(a) shall be deemed given at the time of receipt thereof.
(b) Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of this Note (and upon surrender of this
Note, if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses, the Company shall execute and deliver to the Holder a
new Note of like date, tenor and denomination. In the case of a lost or
stolen Note, the Company may require the Holder to execute an indemnity
agreement.
(c) No course of dealing and no delay or omission on the part of the
Holder in exercising any right or remedy shall operate as a waiver thereof
or otherwise prejudice the Holder's rights, powers or remedies. No right,
power or remedy conferred by this Note upon the Holder shall be exclusive
of any other right, power or remedy referred to herein or now or hereafter
available at law, in equity, by statute or otherwise, and all such remedies
may be exercised singly or concurrently.
(d) This Note may be amended only by a written instrument executed by
the Company and the Holder hereof. Any amendment shall be endorsed upon
this Note, and all future Holders shall be bound thereby.
(e) This Note has been negotiated and consummated in the State of New
York and shall be governed by and construed in accordance with the laws of
the State of New York, without giving effect to principles governing
conflicts of law.
(f) The Company irrevocably consents to the jurisdiction of the courts
of the State of New York and of any federal court located in such State in
connection with any
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<PAGE>
action or proceeding arising out of or relating to this Note, any document
or instrument delivered pursuant to, in connection with or simultaneously
with this Note, or a breach of this Note or any such document or
instrument. In any such action or proceeding, the Company waives personal
service of any summons, complaint or other process and agrees that service
thereof may be made in accordance with Section 11(a). Within 30 days after
such service, or such other time as may be mutually agreed upon in writing
by the attorneys for the parties to such action or proceeding, the Company
shall appear or answer for the parties to such action or proceeding, the
Company shall appear or answer such summons, complaint, or other process.
Should the Company so served fail to appear or answer within such 30-day
period or such extended period, as the case may be, the Company shall be
deemed in default and judgment may be entered against the Company for the
amount as demanded in any summons, complaint or other process so served.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
dated the day and year first above written.
AMERICAN INTERACTIVE MEDIA, INC.
By: _____________________________
Name:
Title:
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THIS CONVERTIBLE DEBENTURE NOTE AND THE SHARES ISSUABLE UPON CONVERSION HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE
"ACT") OR ANY STATE SECURITIES LAWS AND NEITHER THIS DEBENTURE NOTE, SUCH
SHARES, NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR
OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO
IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS NOTE OR SUCH
SHARES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY,
THAT THIS NOTE OR SUCH SHARES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR
TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS.
AMERICAN INTERACTIVE MEDIA, INC.
Floating Rate Convertible Secured Debenture Note
$3,000,000.00 February 3, 1998
New York, New York
AMERICAN INTERACTIVE MEDIA, INC., a Nevada corporation, (the "Company") for
value received, hereby promises to pay to HOLLINGER DIGITAL, INC. or its
designee, with an address at 270 Lafayette Street, New York, New York 10012 or
registered assigns (the "Holder"), the principal amount of Three Million and
00/100 ($3,000,000.00) Dollars on the Maturity Date (as defined below), together
with all interest on the unpaid principal balance hereof at the rate equal to
three and one-half (3.5%) percent per annum in excess of the prime rate as
published in the Wall Street Journal from time to time during the term hereof.
Interest shall be compounded and shall accrue on the first day of each June and
December and on the Maturity Date, each such date being an AInterest Accrual
Date" (calculated on the basis of a 360-day year consisting of twelve 30-day
months), all as hereafter further provided. This Floating Rate Convertible
Secured Debenture Note shall be referred to hereafter as the ANote."
If, after December 31, 1999, the Company establishes, to the reasonable
satisfaction of Holder, the Company's ability to borrow $6,000,000 from an
institutional lender on substantially the terms and conditions of this Note but
at a lower interest rate than herein set forth, the Company and the Holder shall
renegotiate the herein interest rate, on a prospective basis, to a mutually
agreeable rate which shall be reflective of the Company's then borrowing
ability.
In no event shall any interest to be paid hereunder exceed the maximum rate
permitted by law. In any such event, this Note shall automatically be deemed
amended to permit interest charges at an amount equal to, but no greater than,
the maximum rate permitted by law.
<PAGE>
This Note is being issued by the Company pursuant to that Securities
Purchase Agreement of even date herewith between the Company and Hollinger
Digital, Inc. or its designee (the "Securities Purchase Agreement").
1. Payments.
(a) Subject to the mandatory conversion provisions of Section 3 (or
earlier exercise of the Conversion Right), principal of, and all accrued
and unpaid interest on, this Note shall be due and payable in full on the
Maturity Date. The "Maturity Date" shall be the date which is the earliest
of (i) February 3, 2003 and (ii) the date upon which a Conversion Event is
consummated. As used herein, a Conversion Event shall mean an initial
public offering of securities of the Company pursuant to a registration
statement filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
(b) Interest on this Note shall accrue on each Interest Accrual Date
and be payable on the Maturity Date.
(c) If any Interest Accrual Date or the Maturity Date would fall on a
day that is not a Business Day (as defined below), the payment due or to be
accrued on such Interest Accrual Date or Maturity Date will be made on the
next succeeding Business Day with the same force and effect as if made on
the Interest Accrual Date or the Maturity Date, as the case may be.
ABusiness Day" means any day which is not a Saturday or Sunday and is not a
day on which banking institutions are generally authorized or obligated to
close in the City of New York, New York.
(d) The Company shall not have the right to prepay all or any part of
the principal or interest of this Note without the prior written consent of
Holder in its discretion. All payments on this Note shall be applied first
to accrued interest hereon and the balance to the payment of principal
hereof. However, in the event that Holder does not exercise in full the
Common Stock Purchase Option (as defined in the Securities Purchase
Agreement) on or prior to the expiration date thereof, the Company shall
have the right to prepay the full amount of outstanding principal and
accrued interest of this Note upon thirty (30) days' notice not later than
one hundred-eighty (180) days from expiration of the unexercised Common
Stock Purchase Option, and Holder shall lose its Conversion Right with
respect to the full amount prepaid.
(e) Subject to the mandatory conversion provisions of Section 3 (or
earlier exercise of the Conversion Right), payments of principal and
interest on this Note shall be made by check sent to the Holder's address
set forth above or to such other address as the Holder may designate for
such purpose from time to time by written notice to the Company, in such
coin or currency of the United States of America as at the time of payment
shall be legal tender for the payment of public and private debts.
(f) Subject to the mandatory conversion provisions of Section 3 (or
earlier exercise of the Conversion Right), the obligations to make the
payments provided for in this Note are absolute and unconditional and not
subject to any defense, set-off, counterclaim,
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<PAGE>
rescission, recoupment or adjustment whatsoever. The Company hereby
expressly waives demand and presentment for payment, notice of non-payment,
notice of dishonor, protest, notice of protest, bringing of suit and
diligence in taking any action to collect any amount called for hereunder,
and shall be directly and primarily liable for the payment of all sums
owing and to be owing hereon, regardless of and without any notice,
diligence, act or omission with respect to the collection of any amount
called for hereunder.
2. Ranking of Note.
(a) The Company covenants and agrees that the indebtedness represented
by this Note, together with the indebtedness represented by the Note dated
December 4, 1997 also issued by the Company to the Holder (the AFirst
Note") and the payment of principal and interest on this Note and the First
Note when due shall be expressly senior to any and all indebtedness of the
Company and any subsidiary except for indebtedness of the Company relating
to the purchase of equipment and machinery pursuant to a written business
plan approved in advance by the Holder (the ABusiness Plan"). The term
Aindebtedness" shall mean (A) any liability of the Company (x) for borrowed
money, (y) evidenced by a note, debenture, bond or other instrument of
indebtedness (including, without limitation, a purchase money obligation),
including any given in connection with the acquisition of property, assets
or service, or (z) for the payment of rent or other amounts relating to
capitalized lease obligations; (B) any liability of others which the
Company has guaranteed or which is otherwise its legal liability; and (C)
any modification, renewal, extension, replacement or refunding of any such
liability; provided, that indebtedness does not include unsecured trade
credit.
(b) Nothing contained in this Note is intended to or shall impair, as
between the Company, its creditors, and the holder of this Note, the
obligation of the Company, which is absolute and unconditional, to pay to
the Holder the principal of and interest on this Note as and when the same
shall become due and payable in accordance with its terms, or affect the
relative rights of the Holder and the creditors of the Company, nor shall
anything herein or therein prevent the Holder from exercising all remedies
otherwise permitted by applicable law upon default under this Note.
(c) Upon any payment or distribution of assets of the Company referred
to in this Note, the Holder shall be entitled to rely upon any order or
decree made by any court of competent jurisdiction in which any such
dissolution, winding up, liquidation or reorganization proceeding affecting
the affairs of the Company is pending, or upon a certificate of the
liquidating trustee or agent or other person making any payment or
distribution to the Holder for the purpose of ascertaining the persons
entitled to participate in such payment or distribution, the holder of any
other indebtedness of the Company, the amount thereof or payable thereon,
the amount paid or distributed thereon and all other facts pertinent
thereto or to this Note.
3. Conversion.
(a) Conversion Right. The Holder shall have the right (the "Conversion
Right"), at any time after December 3, 1999 and prior to the Maturity Date,
on the terms set forth in this Section 3, to convert the outstanding
principal balance, and all accrued
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interest at the time of conversion, of this Note into a number of shares of
the Company's common stock, par value $.001 per share, (the "Common Stock")
determined by dividing the principal amount and accrued interest so
converted (the "Conversion Amount") by $2.85 (as adjusted in accordance
herewith, the AConversion Price"). The Conversion Price and the number of
shares of Common Stock issuable upon conversion of this Note are subject to
adjustment as hereafter provided.
(b) Mandatory Conversion. So long as an Event of Default has not
occurred, the Holder shall be required to exercise the Conversion Right
upon the Maturity Date for the full amount of shares of Common Stock then
subject to the Conversion Right.
(c) To exercise the Conversion Right, the Holder, on or before the
Maturity Date, shall deliver to the Company, at its office at 611 Broadway,
Suite 308, New York, New York 10012, or at such other place as is
designated in writing by the Company, a notice (the "Conversion Notice")
stating that the Holder is exercising the Conversion Right, the intended
Conversion Amount and the name or names in which the Holder wishes the
certificates for shares of Common Stock to be issued. The Conversion
Notice, once given, shall be irrevocable; provided, however, that a
Conversion Notice given after notice of a proposed Conversion Event may be
made expressly conditional upon the consummation of such Conversion Event,
in which event the Conversion Right shall be deemed to have been exercised
if and only if such Conversion Event is actually consummated. The
Conversion Amount, unless equal to the maximum amount eligible for
conversion, shall be an integral multiple of $1,000 and, if the Conversion
Notice (i) shall specify a desired Conversion Amount other than an amount
permitted by the foregoing, the Conversion Amount shall be equal to the
greatest amount so permitted which does not exceed the amount stated in the
Conversion Notice, or (ii) does not specify a desired Conversion Amount,
the Conversion Amount shall be equal to the maximum permitted Conversion
Amount.
(d) Upon exercise of the Conversion Right (or in the case of the
exercise of a Conversion Right made expressly conditional upon the
occurrence of a Conversion Event, the consummation of such Conversion
Event), the Holder shall be deemed to be the holder of record of the shares
of Common Stock issuable upon such exercise (the "Conversion Shares"),
notwithstanding that the transfer books of the Company shall then be closed
or certificates representing such Conversion Shares shall not then have
been actually delivered to the Holder. As soon as practicable after
exercise of the Conversion Right, the Company shall issue and deliver to
the Holder a certificate or certificates for the Conversion Shares issuable
upon such exercise registered in the name of the Holder or its designee;
provided, that the Company, by notice given to the Holder promptly after
receipt of the Conversion Notice, may require the Holder, as a condition to
the delivery of such certificate or certificates, to present this Note to
the Company for the placement hereon of a legend indicating that the
Conversion Right has been exercised and of the Conversion Amount, and this
Note (unless thereby paid in full) shall be immediately returned to the
Holder. In the event the Conversion Right is not exercised with respect to
the entire outstanding principal balance of this Note, interest shall
accrue thereafter only on the remaining outstanding principal balance under
this Note.
(e) The issuance of any shares or other securities upon the exercise
of the Conversion Right, and the delivery of certificates or other
instruments representing such
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<PAGE>
shares or other securities, shall be made without charge to the Holder for
any tax (other than income taxes, if any) or other charge in respect of
such issuance. The Company shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of any certificate in a name other than that of the Holder and the
Company shall not be required to issue or deliver any such certificate
unless and until the person or persons requesting the issue thereof shall
have paid to the Company the amount of such tax or shall have established
to the satisfaction of the Company that such tax has been paid.
(f) The Company shall at all times reserve and keep available out of
its authorized and unissued Common Stock, solely for the purpose of
providing for the exercise of the Conversion Right, such number of shares
of Common Stock as shall, from time to time, be sufficient for the exercise
of the Conversion Right in full. The Company covenants that all shares of
Common Stock issuable upon exercise of the Conversion Right shall be
validly issued, fully paid, nonassessable, and free of preemptive rights.
4. Adjustments to Conversion Rate.
(a) In case the Company shall at any time after the date this Note is
first issued (i) declare a dividend on the outstanding Common Stock payable
in shares of its capital stock, (ii) subdivide the outstanding Common
stock, (iii) combine the outstanding Common Stock into a smaller number of
shares, or (iv) issue any shares of its capital stock by reclassification
of the Common Stock (including any such reclassification in connection with
a consolidation or merger in which the Company is the continuing
corporation), then, in each case, the Conversion Price, and the number and
kind of shares issuable upon conversion of this Note, in effect at the time
of the record date for such dividend or of the effective date of such
subdivision, combination, or reclassification, shall be proportionately
adjusted so that the Holder after such time shall be entitled to receive
the aggregate number and kind of shares which, if the Conversion Right had
been exercised immediately prior to such time, it would have owned upon
such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination, or reclassification. Such adjustment shall be
made successively whenever any event listed above shall occur.
(b) In case the Company shall issue or fix a record date for the
issuance to all holders of Common Stock of rights, options, or warrants to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a conversion
or exchange price per share, if a security convertible into or exchangeable
for Common Stock) less than the Current Market Price (as hereinafter
defined) per share of Common Stock on such record date, then, in each case,
the number of shares of Common Stock into which this Note shall be
convertible after such record date shall be determined by multiplying the
number of shares of Common Stock into which this Note was theretofore
convertible by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding on such record date plus the number of
additional shares of Common Stock to be offered for subscription or
purchase (or into which the convertible or exchangeable securities so to be
offered are initially convertible or exchangeable) and the denominator of
which shall be the number of shares of Common Stock outstanding on such
record date plus the number of shares of Common Stock which the aggregate
offering price of the
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<PAGE>
total number of shares of Common Stock so to be offered (or the aggregate
initial conversion or exchange price of the convertible or exchangeable
securities so to be offered) would purchase at such Current Market Price.
Such adjustment shall become effective at the close of business on such
record date; provided, however, that, to the extent the shares of Common
Stock (or securities convertible into or exchangeable for shares of Common
Stock) are not delivered, the number of shares of Common Stock issuable
upon conversion of this Note shall be readjusted after the expiration of
such rights, options, or warrants (but only with respect to any portion of
this Note converted after such expiration), to the number of shares which
would have been issuable upon conversion of this Note had the adjustments
made upon the issuance of such rights, options, or warrants been made upon
the basis of delivery of only the number of shares of Common Stock (or
securities convertible into or exchangeable for shares of Common Stock)
actually issued. In case any subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the
value of such consideration shall be as determined in good faith by the
board of directors of the Company, whose determination shall be conclusive
absent manifest error. Shares of Common Stock owned by or held for the
account of the Company or any majority-owned subsidiary shall not be deemed
outstanding for the purpose of any such computation.
(c) In case the Company shall distribute to all holders of Common
Stock (including any such distribution made to the stockholders of the
Company in connection with a consolidation or merger in which the Company
is the continuing corporation) evidences of its indebtedness or assets
(other than cash dividends or distributions and dividends payable in shares
of Common Stock), or rights, options, or warrants to subscribe for or
purchase Common Stock, or securities convertible into or exchangeable for
shares of Common Stock (excluding those with respect to the issuance of
which an adjustment is provided for pursuant to Section 4(b) of this Note),
then, in each case, the number of shares of Common Stock into which this
Note shall be convertible shall be determined by multiplying the number of
shares of Common Stock into which this Note was convertible immediately
prior to the record date for the determination of stockholders entitled to
receive such distribution by a fraction, the numerator of which shall be
the Current Market Price per share of Common Stock on such record date, and
the denominator of which shall be such Current Market Price per share of
Common Stock less the fair market value (as reasonably determined in good
faith by the board of directors of the Company) of the portion of the
evidences of indebtedness or assets so to be distributed, or of such
rights, options, or warrants or convertible or exchangeable securities,
applicable to one share. Such adjustment shall be made whenever any such
distribution is made, and shall become effective on the date of such
distribution retroactive to the record date for the determination of
stockholders entitled to receive such distribution.
(d) In case the Company shall issue shares of Common Stock or rights,
options, or warrants to subscribe for or purchase Common Stock, or
securities convertible into or exchangeable for Common Stock (excluding
shares, rights, options, warrants, or convertible or exchangeable
securities issued or issuable (i) in a private placement of shares or
convertible securities of up to $6,000,000 provided that the Company shall
consult with Holder with respect to such issuance or in private placements
of shares or convertible securities over the $6,000,000 amount if Holder
has approved such transaction, (ii) in any of the transactions with respect
to which an adjustment is provided for pursuant to Sections 4(a), (b) or
(c) of this Note, or (iii) upon
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conversion of this Note or the First Note or exercise of the Common Stock
Purchase Option and Warrant issued pursuant to the Securities Purchase
Agreement or exercise or conversion of any other options, warrants or
securities outstanding on the date hereof) at a price per share
(determined, in the case of such rights, options, warrants, or convertible
or exchangeable securities, by dividing (x) the total amount received or
receivable by the Company in consideration of the sale and issuance of such
rights, options, warrants, or convertible or exchangeable securities, plus
the minimum aggregate consideration payable to the Company upon exercise,
conversion, or exchange thereof, by (y) the maximum number of shares
covered by such rights, options, warrants, or convertible or exchangeable
securities) lower than the Current Market Price per share of Common Stock
in effect immediately prior to such issuance, then the number of shares of
Common Stock into which this Note shall be convertible shall be determined
by multiplying the number of shares of Common Stock into which this Note
was convertible immediately prior to such issuance by a fraction, the
numerator of which shall be the total number of shares of Common Stock
outstanding immediately after such issuance and the denominator of which
shall be an amount equal to the sum of (A) the number of shares of Common
Stock outstanding immediately prior to such issuance, plus (B) the quotient
obtained by dividing the consideration received by the Company upon such
issuance by such Current Market Price. For the purposes of such
adjustments, the maximum number of shares which the holders of any such
rights, options, warrants, or convertible or exchangeable securities shall
be entitled to initially subscribe for or purchase or convert or exchange
such securities into shall be deemed to be issued and outstanding as of the
date of such issuance, and the consideration received by the Company
therefor shall be deemed to be the consideration received by the Company
for such rights, options, warrants, or convertible or exchangeable
securities, plus the minimum aggregate consideration or premiums stated in
such rights, options, warrants, or convertible or exchangeable securities
to be paid for the shares covered thereby. No further adjustment shall be
made as a result of the actual issuance of shares of Common Stock on
exercise of such rights, options, or warrants or on conversion or exchange
of such convertible or exchangeable securities. On the expiration or the
termination of such rights, options, or warrants, or the termination of
such right to convert or exchange, the number of shares of Common Stock
issuable upon conversion of this Note shall be readjusted to such number of
shares as would have been issuable had the adjustments made upon the
issuance of such rights, options, warrants, or convertible or exchangeable
securities been made upon the basis of the delivery of only the number of
shares of Common Stock actually delivered upon the exercise of such rights,
options, or warrants or upon the conversion or exchange of any such
securities; and on any change of the number of shares of Common Stock
deliverable upon the exercise of any such rights, options, or warrants or
conversion or exchange of such convertible or exchangeable securities or
any change in the consideration to be received by the Company upon such
exercise, conversion, or exchange, including, but not limited to, a change
resulting from the antidilution provisions thereof, the number of shares of
Common Stock issuable upon conversion of this Note, as then in effect,
shall forthwith be readjusted to such number of shares as would have been
issuable had an adjustment been made upon the issuance of such rights,
options, or warrants not exercised prior to such change, or securities not
converted or exchanged prior to such change, on the basis of such change.
In case the Company shall issue shares of Common Stock or any such rights,
options, warrants, or convertible or exchangeable securities for a
consideration consisting, in whole or in part, of property other than cash
or its equivalent, then the "price per share" and the
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<PAGE>
"consideration received by the Company" for purposes of the first sentence
of this Section 4(d) shall be as determined in good faith by the board of
directors of the Company, whose determination shall be conclusive absent
manifest error. Shares of Common Stock owned by or held for the account of
the Company or any majority-owned subsidiary shall not be deemed
outstanding for the purpose of any such computation.
(e) For the purpose of any computation under this Section 4, the
Current Market Price per share of Common Stock on any date shall be deemed
to be the average of the daily closing prices for the 30 consecutive
trading days immediately preceding the date in question. The closing price
for each day shall be the last reported sales price regular way or, in case
no such reported sale takes place on such day, the closing bid price
regular way, in either case on the principal national securities exchange
(including, for purposes hereof, the NASDAQ National Market System) on
which the Common Stock is listed or admitted to trading or, if the Common
Stock is not listed or admitted to trading on any national securities
exchange, the highest reported bid price for the Common Stock as furnished
by the National Association of Securities Dealers, Inc. through NASDAQ or a
similar organization if NASDAQ is no longer reporting such information or
if the Common Stock is not reported on NASDAQ, as quoted on the OTC
Bulletin Board. If on any such date the Common Stock is not listed or
admitted to trading on any national securities exchange and is not quoted
by NASDAQ or any similar organization, the fair value of a share of Common
Stock on such date, as reasonably determined in good faith by the board of
directors of the Company shall be used. The foregoing provisions shall also
be applied to determine the Current Market Price of any shares of capital
stock of the Company issued by the Company by reclassification of the
Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the surviving corporation).
(f) No adjustment in the number of shares of Common Stock into which
this Note is convertible shall be required unless such adjustment would
require an increase or decrease of at least 1/20th of a share in the number
of shares of Common Stock into which this Note is convertible; provided,
however, that any adjustments which by reason of this Section 4(f) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment.
(g) Upon each adjustment to the number of shares of Common Stock
issuable upon conversion of this Note as a result of the calculations made
in Sections 4(b), (c) and (d) hereof, the Conversion Price shall
simultaneously be adjusted to the price obtained by multiplying the
Conversion Price in effect immediately prior to such adjustment by a
fraction, the numerator of which shall be the number of shares of Common
Stock into which this Note was convertible immediately prior to such
adjustment and the denominator of which shall be the number of shares of
Common Stock into which this Note is convertible immediately after such
adjustment.
(h) Whenever there shall be an adjustment as provided in this Section
4, the Company shall promptly cause written notice thereof to be sent to
the Holder, which notice shall be accompanied by an officer's certificate
setting forth the number of Conversion Shares issuable upon the exercise of
the Conversion Right and the Conversion Price after such
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<PAGE>
adjustment and setting forth a brief statement of the facts requiring such
adjustment and the computation thereof, which officer's certificate shall
be conclusive evidence of the correctness of any such adjustment absent
manifest error.
(i) The Company shall not be required to issue fractions of shares of
Common Stock or other capital stock of the Company upon the exercise of the
Conversion Right. If any fraction of a share would be issuable on any
exercise of the Conversion Right (or specified portions thereof), the
Company shall purchase such fraction for an amount in cash equal to the
same fraction of the Current Market Price of such share of Common Stock or
other capital stock on the date of exercise of the Conversion Right.
5. Registration Rights.
The Holder and any holder of Conversion Shares issuable upon conversion of
this Note shall have registration rights with respect to the Conversion Shares
as provided with respect to the Company Common Stock pursuant to the Securities
Purchase Agreement.
6. Covenants.
The Company covenants and agrees with the Holder that, so long as any
amount remains unpaid on the Note, unless the prior written consent of the
Holder in its discretion is obtained, the Company:
(a) Shall not create, incur or suffer to exist, or permit any
subsidiary to create, incur or suffer to exist, any indebtedness except (i)
the indebtedness represented by this Note (or any other Note issued
pursuant to the Securities Purchase Agreement), (ii) any other indebtedness
of the Company outstanding on the date hereof, (iii) capital lease
obligations of the Company outstanding on the date hereof and any
subsequent capital lease obligations pursuant to a Business Plan of the
Company as agreed to by the Holder, and (iv) purchase money indebtedness
incurred by the Company pursuant to the Business Plan of December, 1997
annexed hereto.
(b) Shall not create, incur or suffer to exist, or permit any
subsidiary to create, incur or suffer to exist, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind on any of its property
or assets (collectively, ALiens"), except (i) Liens for taxes not yet due
or contested in good faith with appropriate reserves maintained on the
books of the Company or a subsidiary, (ii) carriers', warehousemen's,
mechanics', and similar Liens arising in the ordinary course of business
which are not overdue for more than 90 days or are being contested in good
faith, (iii) easements, rights of way, zoning restrictions, and similar
Liens on real property, which in the aggregate are not material and do not
materially detract from the use of such property, (iv) Liens for
indebtedness permitted to be incurred or in existence under Section 6(a).
(c) Shall not pay any dividend or make any distribution on, or
purchase, redeem, or retire, any shares of its capital stock or any
warrants, options, or other rights to reacquire any such shares other than
dividends payable solely in shares of its capital stock.
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<PAGE>
(d) Shall not change, or permit any subsidiary to change, its primary
line of business.
(e) Shall not, and shall not permit any subsidiary to, (i) enter into
any merger or consolidation (other than a merger between the Company and
any subsidiary in which the Company is the surviving corporation or a
merger pursuant to which the Company reincorporates in the State of
Delaware), (ii) liquidate, wind up its affairs or dissolve, or (iii) except
in the ordinary course of business, convey, sell, lease, transfer or
otherwise dispose of, or purchase or acquire, any business, assets, capital
stock or other property.
(f) Shall not, and shall not permit any subsidiary, directly or
indirectly, to enter into any transaction with or for the benefit of an
Affiliate (other than reasonable compensation for services as an officer,
director or employee).
(g) Shall not, and shall not permit any subsidiary to, in any manner
increase the compensation of its existing officers and directors from the
levels in effect on the date of issuance of this Note, except that this
restriction shall not apply to (1) performance bonuses which may be payable
to current executives pursuant to existing written employment agreements,
(2) compensation increases to executives earning less than $150,000 per
year or (3) compensation increases to executives earning $150,000 or more
per year if such increases are not greater than 5% in the aggregate for all
such executives in any calendar year during the term hereof.
(h) Shall not file for or conduct a public offering of any securities
pursuant to the Act.
(i) Shall deliver to the Holder the financial statements referred to
in Section 5.b of the Securities Purchase Agreement.
(j) Shall consult with the Holder as to the periodic preparation of
Business Plans for the Company and as to any funding requirements of the
Company in addition to those referred to in the Securities Purchase
Agreement.
(k) Shall not issue any shares of preferred stock.
In addition, during the term of this Note, the Company covenants and agrees
that:
(l) Without the prior consent of Holder, which shall not be
unreasonably withheld, the Company's budgeted and actual expenses for
content production shall not exceed ten percent (10%) of the Company's
operating expenses for any year during the term of this Note.
(m) Without the prior consent of Holder, which shall not be
unreasonably withheld, the Company's operating and capital expenses in each
year during the term of this Note shall not exceed the expenses set forth
in the applicable Business Plan for that year, as approved in advance by
Holder.
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<PAGE>
(n) Without the prior consent of Holder, which shall not be
unreasonably withheld, no additional executive employees shall be hired,
retained or employed by the Company.
(o) Without the prior consent of Holder, which shall not be
unreasonably withheld, the Company shall not conduct any private placement
for the sale of, or sell, any Common Stock in excess of that permitted in
Section 5.2(b) of the Securities Purchase Agreement.
7. Events of Default.
The occurrence of any of the following events shall constitute
an event of default (an AEvent of Default"):
(a) A material default in the performance, or a breach, of any of the
covenants of the Company contained in Section 6 of this Note or Section 6
of the First Note.
(b) A default in the performance, or a breach, of any other covenant
or agreement of the Company in this Note or the First Note and the
continuance of such default or breach for a period of ten (10) days after
receipt of notice from the Holder as to such breach.
(c) A default or event of default which remains uncured following any
applicable cure period shall have occurred with respect to any indebtedness
of the Company or subsidiary in an amount greater than $250,000.
(d) A final judgment or judgments for the payment of money in excess
of $250,000 in the aggregate shall be rendered by one or more courts,
administrative or arbitral tribunals or other bodies having jurisdiction
against the Company and the same shall not be discharged (or provision
shall not be made for such discharge), or a stay of execution thereof shall
not be procured, within 60 days from the date of entry thereof and the
Company shall not, within such 60-day period, or such longer period during
which execution of the same shall have been stayed, appeal therefrom and
cause the execution thereof to be stayed during such appeal.
(e) The entry of a decree or order by a court having jurisdiction
adjudging the Company or any subsidiary a bankrupt or insolvent, or
approving a petition seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company or any subsidiary, under
federal bankruptcy law, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency or other similar law,
and the continuance of any such decree or order unstayed and in effect for
a period of 60 days; or the commencement by the Company or any subsidiary
of a voluntary case under federal bankruptcy law, as now or hereafter
constituted, or any other applicable federal or state bankruptcy,
insolvency, or other similar law, or the consent by it to the institution
of bankruptcy or insolvency proceedings against it, or the filing by it of
a petition or answer or consent seeking reorganization or relief under
federal bankruptcy law or any other applicable federal or state law, or the
consent by it to the filing of such petition or to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator or similar official
of the Company or any subsidiary or of any substantial part of its
property, or the
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<PAGE>
making by it of an assignment for the benefit of creditors, or the
admission by it in writing of its inability to pay its debts generally as
they become due, or the taking of corporate action by the Company or any
subsidiary in furtherance of any such action.
(f) Peter Yunich shall no longer be employed as the chief executive
officer of the Company other than due to his death, disability or
termination at the request of Holder.
8. Remedies Upon Default.
(a) Upon the occurrence of an Event of Default referred to in Section
7, the Holder, by notice in writing given to the Company, may declare the
entire principal amount then outstanding of, and the accrued interest on,
this Note to be due and payable immediately, and upon any such declaration
the same shall become and be due and payable immediately, without
presentation, demand, protest or other formalities of any kind, all of
which are expressly waived by the Company.
(b) The Holder may institute such actions or proceedings in law or
equity as it shall deem expedient for the protection of its rights and may
prosecute and enforce its claims against all assets of the Company, and in
connection with any such action or proceeding shall be entitled to receive
from the Company payment of the principal amount of this Note plus accrued
interest to the date of payment plus reasonable expenses of collection,
including, without limitation, attorneys' fees and expenses or the Holder
may proceed to enforce the provisions of the Security Agreement described
in Section 9 either simultaneously or in such order as the Holder shall
elect.
9. Security.
This Note is secured by that certain Pledge and Security Agreement of even
date herewith made by the Company to the Holder (the ASecurity Agreement"),
pursuant to which the Company has granted to the Holder a first priority lien
upon and security interest in certain property more particularly described in
the Security Agreement. All of the covenants, conditions, provisions and
agreements contained in the Security Agreement are by this reference
incorporated herein and made a part hereof.
10. Transfer.
(a) Any Notes issued upon the transfer of this Note shall be numbered
and shall be registered in a Note Register as they are issued. The Company
shall be entitled to treat the registered holder of any Note on the Note
Register as the owner in fact thereof for all purposes and shall not be
bound to recognize any equitable or other claim to or interest in such Note
on the part of any other person, and shall not be liable for any
registration or transfer of Notes which are registered or to be registered
in the name of a fiduciary or the nominee of a fiduciary unless made with
the actual knowledge that a fiduciary or nominee is committing a breach of
trust in requesting such registration or transfer, or with the knowledge of
such facts that its participation therein amounts to bad faith. This Note
shall be transferable only on
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<PAGE>
the books of the Company upon delivery thereof duly endorsed by the Holder
or by his duly authorized attorney or representative, or accompanied by
proper evidence of succession, assignment, or authority to transfer. In all
cases of transfer by an attorney, executor, administrator, guardian, or
other legal representative, duly authenticated evidence of his or its
authority shall be produced. Upon any registration of transfer, the Company
shall deliver a new Note or Notes to the person entitled thereto. This Note
may be exchanged, at the option of the Holder thereof, for another Note, or
other Notes of different denominations, of like tenor and representing in
the aggregate a like principal amount, upon surrender to the Company or its
duly authorized agent. Notwithstanding the foregoing, the Company shall
have no obligation to cause Notes to be transferred on its books to any
person if, in the opinion of counsel to the Company, such transfer does not
comply with the provisions of the Act and the rules and regulations
thereunder.
(b) The Holder acknowledges that it has been advised by the Company
that neither this Note nor the Conversion Shares have been registered under
the Act, that the Note is being or has been issued and the Conversion
Shares may be issued on the basis of the statutory exemption provided by
Section 4(2) of the Act or Regulation D promulgated thereunder, or both,
relating to transactions by an issuer not involving any public offering,
and that the Company's reliance thereon is based in part upon the
representations made by the original Holder in the Securities Purchase
Agreement. The Holder acknowledges that it has been informed by the Company
of, or is otherwise familiar with, the nature of the limitations imposed by
the Act and the rules and regulations thereunder on the transfer of
securities. In particular, the Holder agrees that no sale, assignment or
transfer of the Note or Conversion Shares shall be valid or effective, and
the Company shall not be required to give any effect to any such sale,
assignment or transfer, unless (i) the sale, assignment or transfer of the
Note or Conversion Shares is registered under the Act, or (ii) the Note or
Conversion Shares are sold, assigned or transferred in accordance with all
the requirements and limitations of Rule 144 under the Act, it being
understood that Rule 144 is not available at the time of the original
issuance of this Note for the sale of the Note or the Conversion Shares and
that there can be no assurance that Rule 144 sales will be available at any
subsequent time, or (iii) such sale, assignment, or transfer is otherwise
exempt from registration under the Act.
(c) Unless registered pursuant to the provisions of Section 5 hereof,
or otherwise, the Conversion Shares issued upon exercise of the Conversion
Right shall be subject to a stop transfer order and the certificate or
certificates evidencing such Conversion Shares shall bear the following
legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE AACT")
OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY
INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO
IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS,
OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE
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<PAGE>
HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY
SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED,
SOLD, PLEDGED, ASSIGNED OR TRANSFERRED IN THE MANNER CONTEMPLATED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS."
11. Miscellaneous.
(a) Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or by Federal Express, Express Mail or similar
overnight delivery or courier service or delivered (in person or by
telecopy, telex or similar telecommunications equipment) against receipt to
the party to whom it is to be given, (i) if to the Company, at its address
at 611 Broadway, Suite 308, New York, New York 10012, Attention: James S.
Hatch, Secretary, (ii) if to the Holder, at its address set forth on the
first page hereof; or (iii) in either case, to such other address as the
party shall have furnished in writing in accordance with the provisions of
this Section 11(a). Any notice or other communication given by certified
mail shall be deemed given at the time of certification thereof, except for
a notice changing a party's address which shall be deemed given at the time
of receipt thereof. Any notice given by other means permitted by this
Section 11(a) shall be deemed given at the time of receipt thereof.
(b) Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction or mutilation of this Note (and upon surrender of this
Note, if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses, the Company shall execute and deliver to the Holder a
new Note of like date, tenor and denomination. In the case of a lost or
stolen Note, the Company may require the Holder to execute an indemnity
agreement.
(c) No course of dealing and no delay or omission on the part of the
Holder in exercising any right or remedy shall operate as a waiver thereof
or otherwise prejudice the Holder's rights, powers or remedies. No right,
power or remedy conferred by this Note upon the Holder shall be exclusive
of any other right, power or remedy referred to herein or now or hereafter
available at law, in equity, by statute or otherwise, and all such remedies
may be exercised singly or concurrently.
(d) This Note may be amended only by a written instrument executed by
the Company and the Holder hereof. Any amendment shall be endorsed upon
this Note, and all future Holders shall be bound thereby.
(e) This Note has been negotiated and consummated in the State of New
York and shall be governed by and construed in accordance with the laws of
the State of New York, without giving effect to principles governing
conflicts of law.
(f) The Company irrevocably consents to the jurisdiction of the courts
of the State of New York and of any federal court located in such State in
connection with any
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<PAGE>
action or proceeding arising out of or relating to this Note, any
document or instrument delivered pursuant to, in connection with or
simultaneously with this Note, or a breach of this Note or any such
document or instrument. In any such action or proceeding, the Company
waives personal service of any summons, complaint or other process and
agrees that service thereof may be made in accordance with Section
11(a). Within 30 days after such service, or such other time as may be
mutually agreed upon in writing by the attorneys for the parties to
such action or proceeding, the Company shall appear or answer for the
parties to such action or proceeding, the Company shall appear or
answer such summons, complaint, or other process. Should the Company
so served fail to appear or answer within such 30-day period or such
extended period, as the case may be, the Company shall be deemed in
default and judgment may be entered against the Company for the amount
as demanded in any summons, complaint or other process so served.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
dated the day and year first above written.
AMERICAN INTERACTIVE MEDIA, INC.
By: _______________________________
Name:
Title:
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SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT is made as of the 3rd day of December,
1997, by and between American Interactive Media, Inc., a Nevada corporation (the
"Company"), and Hollinger Digital, Inc., a Delaware corporation, or a designated
affiliate ("Purchaser").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Securities.
1.1 Initial Sale and Issuance of Securities. Subject to the terms and
conditions of this Agreement, the Company agrees to issue to Purchaser: (a)
(i) a floating rate convertible secured debenture (the "First Convertible
Debenture"), a copy of which is attached hereto as Exhibit A-1, (ii) a
floating rate convertible secured debenture (the "Second Convertible
Debenture" and together with the First Convertible Debenture, the
"Convertible Debenture"), a copy of which is attached hereto as Exhibit
A-2, (b) a common stock purchase option (the "Option"), a copy of which is
attached hereto as Exhibit B and (c) a warrant (the "Warrant"), a copy of
which is attached hereto as Exhibit C. The Convertible Debenture, the
Option and the Warrant are referred to collectively as the "Securities."
1.2 First Closing. The first closing for the purchase and sale of the
First Convertible Debenture, the Option and the Warrant shall take place at
the offices of Curtis, Mallet-Prevost, Colt & Mosle, 101 Park Avenue, New
York, New York on December 4, 1997, provided that the conditions set forth
in Section 4.1 below shall have been satisfied as of such date, or at such
other time and place as the Company and Purchaser mutually agree upon
orally or in writing (which time and place are designated as the "First
Closing"). At the First Closing, the Company shall deliver to Purchaser the
First Convertible Debenture, the Option and the Warrant.
1.3 Second Closing. The second closing for the purchase and sale of
the Second Convertible Debenture shall take place at the offices of Curtis,
Mallet-Prevost, Colt & Mosle, 101 Park Avenue, New York, New York on
February 3, 1998, provided that the conditions set forth in Section 4.1
below shall have been satisfied as of such date, or at such other time and
place as the Company and Purchaser mutually agree upon orally or in writing
(which time and place are designated as the "Second Closing"). At the
Second Closing, the Company shall deliver to Purchaser the Second
Convertible Debenture.
1.4 Legend. The certificate or certificates issued pursuant to
conversion or exercise of the Convertible Debenture, the Option or the
Warrant evidencing shares of Common Stock of the Company, par value $0.001
("Company Common Stock") shall be subject to a legend restricting transfer
under the Securities Act of 1933, as amended (the "Securities Act"), such
legend to be substantially as follows:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended.
<PAGE>
Such shares may not be sold or transferred in the absence of such
registration or an opinion of counsel reasonably satisfactory to
American Interactive Media, Inc., as to the availability of an
exemption from registration."
2. Representations and Warranties of the Company. Except as specifically
disclosed by the Company in the Exhibits attached hereto, the Company hereby
represents and warrants to Purchaser that:
2.1 Organization, Good Standing and Qualification. The Company and its
subsidiaries are corporations duly organized, validly existing and in good
standing under the laws of their respective states of incorporation and
have all requisite corporate power and authority to carry on their
businesses as now conducted and as proposed to be conducted. The Company
and its subsidiaries are duly qualified to transact business and are in
good standing in each jurisdiction in which the failure so to qualify would
have a material adverse effect on their businesses or properties.
2.2 Authorization. The Company has all corporate right, power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The transactions contemplated hereby shall include,
but not be limited to, the execution and delivery of the Securities. The
execution and delivery of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby have
been duly authorized by all necessary corporate action, and stockholder
action if required, on behalf of the Company. This Agreement has been duly
executed and delivered by the Company and constitutes a legal, valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms, subject to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or
affecting creditors' rights and to general equity and public policy
principles. The Company has obtained or shall obtain prior to the Closing
all required consents, authorizations and approvals, and shall have made
all filings with all governmental authorities required to be made prior to
the Closing and shall make in a timely manner all filings required to be
made subsequent to the Closing in connection with the consummation of the
transactions contemplated hereby.
2.3 Compliance. The Company has complied with, and is not in default
under or in violation of its Amended Articles of Incorporation, By-laws or
any and all laws, ordinances and regulations or other governmental
restrictions, orders, judgments or decrees, applicable to the Company's
business as now conducted and as proposed to be conducted, where any such
default or violation would have a material adverse effect on the business,
operations or financial condition of the Company. The Company has not
received notice of any possible or actual violation of any applicable law,
ordinance, regulation, or order, the result of which violation would have a
material adverse effect on the business, operations, or financial condition
of the Company. The Company is not a party to any agreement, instrument,
mortgage, indenture, loan, lease or license, or subject to any charter or
other corporate restriction, or any judgment, order, decree, law,
ordinance, regulation or other governmental restriction which would prevent
or impede, or be breached or violated by, or would result in the creation
of any lien or
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encumbrance upon any assets of the Company as a result of, the transactions
contemplated by this Agreement.
2.4 Capitalization. The authorized capital stock of the Company
consists of fifty million one hundred thousand (50,100,000) shares of which
fifty million (50,000,000) shares are Common Stock, par value $0.001 and
one hundred thousand (100,000) shares are Preferred Stock, par value $1.00.
As of the close of business on December 3, 1997, there were issued and
outstanding 13,017,435 shares of Common Stock and no shares of Preferred
Stock. All such issued and outstanding shares have been duly authorized and
validly issued, and are fully paid and nonassessable. As of the close of
business on December 1, 1997 the Company has granted options, warrants and
other convertible securities for 7,055,250 shares of Company Common Stock.
Attached as Exhibit 2.4 is an accurate list of the holders of record of the
Company's outstanding securities (including without limitation all options,
warrants and other convertible securities) as of December 1, 1997. As of
December 3, 1997, the Company is not aware of any 5% or greater Shareholder
of record intending to dispose of its shares of Company Common Stock.
2.5 Valid Issuance of Shares. The shares issued pursuant to exercise
or conversion of the Securities, when issued, sold and delivered in
accordance with the terms of the Securities for the consideration expressed
in the Securities, will be duly and validly issued, fully paid and
nonassessable, subject only in the case of shares issued upon exercise of
the Option to payment of the consideration with payments in kind as
provided for in the Option. Based in part upon representations of Purchaser
in this Agreement, the shares issued upon exercise or conversion of the
Securities will be issued in compliance with all applicable federal and
state securities laws and shall not be subject to restrictions on transfer
arising through the Company other than under applicable federal and state
securities laws.
2.6 Financial Statements. The audited financial statements of the
Company for the period from January 1, 1995 to and including December 31,
1995, January 1, 1996 to and including December 31, 1996 (the "Audited
Financials") and the interim financial statements of the Company for the
period from January 1, 1997 through September 30, 1997 (such interim
financial statements and the Audited Financials are hereinafter
collectively referred to at times as the "Company Financial Statements"),
copies of which have been previously provided by the Company to the
Purchaser, are true, complete and correct in all material respects and have
been prepared in accordance with generally accepted accounting principles
("GAAP"), and except for such changes as may be disclosed in the notes to
the Company Financial Statements, consistently followed for three (3) years
by the Company; the balance sheets in the Company Financial Statements
fairly present the financial position of the Company as of their respective
dates and set forth in full and reflect all liabilities, including taxes,
of the Company as of such dates required to be reflected thereon in
accordance with GAAP; the income statements fairly present in all material
respects the results of the operations of the Company for the periods
indicated and covered thereby; and the Shareholders' Equity of the Company
as of such dates was as set forth in the Company Financial Statements,
after full provision and reserves for all taxes and other liabilities for
all periods up to the
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dates thereof. Except for liabilities incurred after September 30, 1997, in
the ordinary course of business and included on the books and records of
the Company, the Company does not know and has no reason to know of any
liability or any basis for the assertion against the Company of any
liability not reflected or reserved against in the balance sheets required
to be included thereon in accordance with GAAP.
2.7 Intellectual Property. To the Company's best knowledge, the
Company holds valid and enforceable licenses for the use of all patents
necessary to conduct the business of the Company. Except as disclosed in
Exhibit 2.7 to the Company's best knowledge, the Company has valid,
unrestricted, exclusive and enforceable rights in copyrights, trademarks,
trademark registrations and trade names necessary to conduct the business
of the Company. To the Company's best knowledge, the Company has valid,
unrestricted and enforceable rights in trade secrets, know-how and other
intellectual property necessary to conduct the business of the Company.
Except as disclosed in Exhibit 2.7 to the best of the Company's knowledge,
the Company is not infringing on the intellectual property rights of any
third party, nor is any third party infringing on the Company's
intellectual property rights. There are no restrictions in any agreements,
licenses, franchises, or other instruments that are necessary for the
conduct of the Company's business as presently conducted or as planned to
be conducted in the future that materially interfere with the conduct of
such business. Each current and former employee and consultant of the
Company with access to confidential or proprietary information of material
value to the Company has executed a proprietary information agreement with
the Company. Each consultant of the Company who has developed intellectual
property of material value to the Company on behalf of the Company has
executed a work for hire agreement with the Company.
2.8 Use of Funds; Activities in Support of Strategic Relationship. The
Company hereby represents, warrants and agrees to use the funds from the
transactions contemplated hereby for the support and expansion of its
marketing activities, research and development, working capital needs and
general corporate purposes consistent with the full commercialization of
the webPASSPORT network, the development and commercialization of the
Virtual Cable and ComedyNet products and the creation of any other products
or services that are in keeping with the mission and goals of the Company
as presently defined by current activities. Purchaser acknowledges,
however, that the Company's plans and intentions must of necessity be
subject to change based on numerous factors, including the degree of market
acceptance of the Company's current and future products, technological
developments, competitive conditions and other factors which require the
Company to keep the interests of all of its stockholders in mind.
2.9 Disclosure. The Company Financial Statements are true, complete
and correct at the respective dates thereof, in all material respects.
Without limiting the foregoing, there are no material liabilities,
contingent or actual, that are not disclosed in the Company Financial
Statements. The Company has paid all taxes which are due, except for taxes
which it reasonably disputes. There is no material claim, litigation, or
administrative proceeding pending, or to the best of the Company's
knowledge, threatened against the Company, except as disclosed in the
Company Financial Statements. No representation or warranty made in this
Agreement or in any exhibit or
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schedule hereto and no statement, certificate, memorandum or instrument
furnished or to be furnished by the Company pursuant hereto or in
connection with the transactions hereby (excluding, however, the Business
Plan annexed to the Convertible Debenture) contains or will contain any
untrue statement of a material fact or omits or will omit any material
fact.
2.10 Contractual Obligations. Exhibit 2.10 contains a correct and complete
list of all material contracts, agreements, leases, licenses or other
commitments of any kind, made directly or indirectly by the Company
("Contracts"), including, without limitation, all of the following, true and
complete copies of which have been furnished to Purchaser:
(a) All collective bargaining agreements, employment and bonus
agreements, consulting agreements (which have directly produced
confidential or proprietary information or intellectual property
of material value to the Company), and pension, profit sharing,
deferred compensation, stock option, stock purchase, welfare or
incentive plans or agreements;
(b) All Contracts under which the Company is restricted from carrying
on any business, venture or other activities anywhere in the
world;
(c) All Contracts to sell or lease (as lessor) any of the assets or
properties of the Company, except in the ordinary course of
business, or to purchase or lease any real property;
(d) All Contracts pursuant to which the Company guarantees any
liability of any person;
(e) All Contracts pursuant to which the Company provides goods or
services involving payments in excess of $50,000;
(f) All Contracts with any affiliate of the Company;
(g) All Contracts pursuant to which any person has the ability to
cause the Company to register any shares of Company Common Stock
under the Securities Act, or to cause the Company to commence
filing reports under the Securities Exchange Act of 1934;
(h) All Contracts pursuant to which the Company licenses any patent,
trademark, trade name, technology or other intellectual property
right (whether as licensor or licensee) and any other Contract
which provides for the payment or receipt of royalties or other
fees related to the use of any intellectual property rights; and
(i) All Contracts relating to the borrowing of money or the
mortgaging or pledging of, or otherwise placing a lien on, any
asset of the Company.
All of the Contracts are enforceable against the Company and, to its
knowledge, the other parties thereto in accordance with their terms, except
as stated in Exhibit 2.10. The Company is not now in material default under
nor, to the Company's knowledge, are
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there any material liabilities arising from any breach or default by
Company prior to the date of this Agreement, under any of the Contracts.
2.11 Title to Assets. The Company has good and marketable title to all
of its properties and assets, in each case subject to no mortgage, pledge,
lien, lease, encumbrance or charge, other than (i) the lien granted
pursuant to the Pledge and Security Agreement in favor of Purchaser, (ii)
liens for current taxes not yet due and payable and (iii) possible minor
liens and encumbrances which do not in any case materially detract from the
value of the property subject thereto or materially impair the operations
of the Company, and which have not arisen otherwise than in the ordinary
course of business.
2.12 Litigation. There is no action, suit, proceeding or investigation
pending or currently threatened against the Company or its properties that
might result in a material adverse effect on the Company or its business,
taken as a whole. The Company is not charged with or, to the knowledge of
the Company, threatened with a charge or violation, nor is it under
investigation with respect to any actual, alleged, possible or potential
violation of any provision, of any federal, state or local law or
administrative ruling or regulation relating to any aspect of the business
being carried on by the Company.
2.13 Taxes. The Company has filed all tax and information returns
which are required to be filed by it and has paid, or made adequate
provision for the payment of, all taxes which have or may become due. The
Company has no knowledge of any additional assessments or any basis
therefor. The Company has withheld or collected from each payment made to
its employees the amount of all taxes required to be withheld or collected
therefrom, and has paid over such amounts to the appropriate taxing
authorities.
2.14 Environmental Matters.
(a) The following terms shall be defined as follows:
(i) "Environmental, Health and Safety Laws" shall mean all
federal, state or local laws, ordinances, codes, regulations, rules,
policies and orders regarding the protection of the environment,
requiring pollution control equipment, or that classify, regulate,
call for the remediation of, require reporting with respect to, or
list or define air, water, groundwater, solid waste, hazardous or
toxic substances, materials, wastes, pollutants or contaminants, or
regarding the safety of employees or workers.
(ii) "Hazardous Materials" shall mean any toxic or hazardous
substance, material or waste or any pollutant or contaminant, or
infectious or radioactive substance or material, including without
limitation, petroleum products and those substances, materials and
wastes defined in or regulated under any Environmental, Health and
Safety Law.
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<PAGE>
(iii) "Property" shall mean all real property leased or owned by
the Company either currently or in the past.
(iv) "Facilities" shall mean all buildings and improvements on
the Property of the Company.
(b) The Company represents and warrants as follows with respect to the
operations of the Company: (i) to the best of the Company's knowledge, no
friable asbestos is contained in the Facilities; (ii) all Hazardous
Materials have been disposed of in accordance with all Environmental,
Health and Safety Laws; (iii) the Company has received no notice (verbal or
written) of any noncompliance of the Facilities or its past or present
operations with Environmental, Health and Safety Laws; (iv) no notices,
administrative actions or suits are pending or, to the best of the
Company's knowledge, threatened relating to a violation of any
Environmental, Health and Safety Law; (v) to the best of the Company's
knowledge, the Company is not a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation and Liability
Act, or any state analog statute, arising out of events occurring prior to
the Closing Date which would have a material adverse effect on the Company;
(vi) to the best of the Company's knowledge, there have not been in the
past, and are not now, any Hazardous Materials under or migrating to or
from the Facilities or Property; (vii) to the best of the Company's
knowledge, there have not been in the past, and are not now, any
underground tanks or underground improvements at, on or under the Property
including without limitation, treatment or storage tanks, sumps, or water,
gas or oil wells; (viii) the Company has not deposited, stored, or disposed
of polychlorinated biphenyls (PCBs) on the Property or Facilities or any
equipment on the Property containing PCBs at levels in excess of 50 parts
per million; (ix) to the best of the Company's knowledge, the Facilities
and the Company's uses and activities therein have at all times complied
with all Environmental, Health and Safety Laws; (x) the Company has all the
permits and licenses required to be issued and is in full compliance with
the terms and conditions of those permits.
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2.15 Employee Benefit Plans.
Except for the plans listed on Exhibit 2.15, the Company does not
maintain any pension, profit sharing, retirement, fringe benefit, deferred
compensation, stock purchase, stock option, incentive, bonus, vacation,
severance, disability, hospitalization, medical insurance, life insurance
or any other type of employee benefit plan, program or arrangement within
the meaning of Section 3(3) Employee Retirement Income Security Act of
1974, as amended ("ERISA"), including, without limitation, any defined
benefit plan within the meaning of Section 3(34) of ERISA or any defined
contribution or multi-employer plan within the meaning of Section 3(37) of
ERISA on behalf of any current or former officers or employees of the
Company or their beneficiaries or dependents (whether on an active or
frozen basis).
3. Representations and Warranties of the Purchaser. Purchaser hereby
represents and warrants to Company that:
3.1 Organization, Good Standing and Qualification. Purchaser is a
corporation duly organized, validly existing and in good standing under the
laws of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted.
3.2 Authorization. Purchaser has all corporate right, power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by
Purchaser and the consummation by Purchaser of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on behalf of Purchaser. This Agreement has been duly executed and
delivered by Purchaser and constitutes the legal, valid and binding
obligation of Purchaser, enforceable against Purchaser in accordance with
its respective terms, subject to bankruptcy, insolvency, reorganization and
other laws of general applicability relating to or affecting creditors'
rights and to general equity and public policy principles. The execution
and delivery of this Agreement does not, and the consummation of the
transactions contemplated hereby will not, conflict with or result in any
violation of any obligation under any provision of the Certificate of
Incorporation or By-laws (or corresponding instruments) of Purchaser or any
mortgage, indenture, lease or other agreement or instrument, license,
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Purchaser, its properties or assets, the effect of which
would materially impair or restrict its power to perform its obligations as
contemplated hereby.
3.3 Government Consents, etc.. No consent, approval or authorization
of or designation, declaration or filing with any governmental authority on
the part of Purchaser is required in connection with the valid execution
and delivery of this Agreement, or the purchase of the Securities, or the
consummation of any other transaction contemplated hereby.
3.4 Investment. Purchaser will acquire the Securities and any shares
acquired pursuant to the exercise or conversion of the Securities for
investment for its
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own account, not as a nominee or agent, and not with a view to, or for
resale in connection with, any distribution thereof. Purchaser understands
that the Securities and any shares acquired pursuant to the exercise or
conversion of the Securities have not been, and will not be, registered
under the Securities Act for sale to Purchaser by reason of a specific
exemption from the registration provisions of the Securities Act which
depends upon, among other things, the bona fide nature of Purchaser's
investment intent and the accuracy of Purchaser's representations as
expressed herein. Should Purchaser in the future decide to offer to dispose
of any of the Securities or shares acquired pursuant to the exercise or
conversion of any of the Securities, or any interest therein, it agrees to
do so only in compliance with the Securities Act and this Agreement.
3.5 Purchaser's Independent Investigation. Purchaser, in offering to
purchase the Securities hereunder, has relied solely upon an independent
investigation made by it and its representatives, if any, and upon the
representations made by Company in this Agreement and the other documents
listed in the Exhibits hereto and has, prior to the date hereof, been given
access to and the opportunity to examine all books and records of the
Company, and all material contracts and documents of the Company. In making
its investment decision to purchase the Securities, the Purchaser is not
relying on any oral or written representations or assurances from the
Company or any other person other than as set forth in this Agreement and
the Exhibits hereto, or on any information other than that contained or
incorporated by reference in the Company Financial Statements. Purchaser
has such experience in business and financial matters that it is capable of
evaluating the risk of its investment and determining the suitability of
its investment. Purchaser is an accredited investor as defined in Rule 501
of Regulation D of the Securities Act.
4. Conditions to the Closings.
4.1 Conditions to Obligations of Purchaser. Purchaser's obligation to
purchase the First Convertible Debenture, the Option and the Warrant at the
First Closing and the Second Convertible debenture at the Second Closing is
at the option of Purchaser which may waive any such conditions to the
extent permitted by law, subject to the fulfillment on or prior to the
respective closing of the following conditions:
(a) Representations and Warranties Correct. The representations
and warranties made by the Company in Section 2 hereof shall be true
and correct in all material respects when made, and shall be true and
correct in all material respects on the respective Closing with the
same force and effect as if they had been made on and as of said date.
(b) Performance. All covenants and agreements contained in this
Agreement to be performed by the Company on or prior to the respective
Closing shall have been performed or complied with in all respects.
(c) No Order Pending. There shall not then be in effect any order
enjoining or restraining, or any pending proceeding seeking to enjoin
or restrain,
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the transactions contemplated by this Agreement or the effect of which
could reasonably be anticipated to have an adverse effect on the
prospects of the Company.
(d) No Law Prohibiting or Restricting Such Sale. There shall not
be in effect any law, rule or regulation prohibiting or restricting
such sale or requiring any consent or approval of any person which
shall not have been obtained to issue any of the Securities.
(e) Compliance Certificate. The Company shall have delivered to
the Purchaser a certificate, executed on behalf of the Company by the
President of the Company, dated the respective Closing date, and
certifying to the fulfillment of the conditions specified in Section
4.1(a), Section 4.1(b) and Section 4.1(c). .
(f) Bankruptcy. The Company shall not (i) have filed a voluntary
petition in bankruptcy, (ii) been declared insolvent or bankrupt, or
have made a general assignment for the benefit of creditors, or
similar arrangement for the benefit of its creditors, (iii) been the
subject of proceedings in bankruptcy or insolvency, which have not
been dismissed within 60 days thereafter, or (iv) have had a receiver
appointed by a court for the Company or a substantial portion of its
assets, which receiver has not been discharged within 60 days.
(g) Voting Agreement. The Voting and Standstill Agreement shall
have been executed and delivered by Company, Purchaser and the other
parties thereto in the form attached hereto as Exhibit 4.1(g).
(h) Opinion. Purchaser shall have received from Curtis,
Mallet-Prevost, Colt & Mosle, counsel to the Company, an opinion
addressed to Purchaser, dated the Closing Date, substantially in the
form attached hereto as Exhibit 4.1(h).
4.2 Conditions to Obligations of the Company. The Company's obligation
to sell and issue the First Convertible Debenture, the Option and the
Warrant at the First Closing and the Second Convertible Debenture at the
Second Closing is at the option of the Company which may waive any such
conditions to the extent permitted by law, subject to the fulfillment on or
prior to the respective closing of the following conditions:
(a) Representations and Warranties. The representations and
warranties made by Purchaser in Section 3 hereof shall be true and
correct in all material respects when made, and shall be true and
correct in all material respects on the respective Closing date with
the same force and effect as if they had been made on and as of said
date.
(b) No Order Pending. There shall not then be in effect any order
enjoining or restraining the transactions contemplated by this
Agreement.
(c) No Law Prohibiting or Restricting Such Sale. There shall not
be in effect any law, rule or regulation prohibiting or restricting
such sale or requiring any
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consent or approval of any person which shall not have been obtained
to issue any of the Securities.
(d) Compliance Certificate. Purchaser shall have delivered to the
Company a certificate, executed on behalf of Purchaser by an officer
of Purchaser, dated the respective Closing, and certifying to the
fulfillment of the conditions specified in Section 4.2(a) amd Section
4.2(b).
(e) The Company and Purchaser shall have entered into the Voting
and Standstill Agreement.
5. Additional Agreements.
5.1 Director Nominee and Voting Agreement. As soon as practicable
following the Closing, the Company shall use its reasonable efforts to
cause an individual designated (the "Purchaser Designee") by Purchaser to
be elected to the Company's Board of Directors. The initial Purchaser
Designee is Richard Perle, and the Company agrees that Mr. Perle may send a
non-voting representative of Purchaser to, or be accompanied by an
additional observer for Purchaser at, meetings of the Company's Board of
Director. The Company also shall be obligated to take all action necessary
to implement the voting agreements contained in the Voting and Standstill
Agreement.
5.2 (a) Rights of First Refusal. At any time following the First
Closing, if the Company offers, issues or sells additional Company Common
Stock or securities exchangeable or convertible into Company Common Stock
or if the Company enters into any agreements or commitments pursuant to
which the Company may become obligated to issue any shares of capital
stock, warrants, options, rights or securities convertible into or
exchangeable into Company Common Stock, the Company shall offer to sell to
Purchaser on the same terms and conditions the Purchaser's pro rata share
of such proposed sale based on the number of shares of Company Common Stock
held by the Purchaser or subject to issuance upon exercise or conversion of
the Securities at the time of and immediately prior to such sale relative
to the total outstanding shares of Company Common Stock on a fully diluted
basis immediately prior to such sale. The offer shall be effected by
delivery of written notice thereof by the Company to the Purchaser, and
such offer shall remain open for a period of thirty (30) calendar days from
receipt thereof. This Section 5.2(a) shall not apply to (i) shares issued
upon the exercise of the Option or Warrant or the conversion of the
Convertible Debenture or shares issued pursuant to the exercise of options,
warrants or other securities outstanding on the Closing Date, (ii) shares
of Company Common Stock issued pursuant to compensatory plans or
arrangements which are approved by the Company's Board of Directors and are
for the Company's employees, officers, directors or consultants or any
shares of Company Common Stock issued pursuant to the exercise of warrants,
options, rights or securities convertible into or exchangeable for capital
stock of the Company issued to such persons or the issuance of such
Warrants, options, rights or securities, (iii) any shares of Company Common
Stock or warrants, options, rights or securities convertible into or
exchangeable for capital stock of the Company in connection with any stock
split, stock dividend or equivalent event affecting the Company Common
Stock or (iv) any
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offering of capital stock of the Company which is registered under the
Securities Act. For the purpose of this Section 5.2 the term "pro rata"
shall mean the fraction for which the numerator shall be the number of
shares of Company Common Stock owned by Purchaser or subject to issuance
upon exercise or conversion of the Securities and the denominator for which
shall be the number of shares of Company Common Stock on a fully diluted
basis immediately prior to the transaction. The provisions of this Section
5.2(a) shall not apply to a private placement of shares or convertible
securities of up to $6,000,000 provided that the Company shall consult with
Purchaser with respect to such issuance. For private placements of shares
or convertible securities over the $6,000,000 amount, the Company must
receive approval of such transaction from Purchaser.
(b) In addition, without Hollinger's approval, from and after the
First Closing until 90 days following the conversion of the Convertible
Debenture, the Company may not issue or sell additional Company Common
Stock or securities exchangeable for or convertible into Company Common
Stock, provided that this Section 5.2(b) shall not apply to (i) shares
issued upon the exercise of the Option or Warrant or the conversion of the
Convertible Debenture or shares issued pursuant to the exercise of options,
warrants or other securities outstanding on the Closing Date, (ii) shares
of Company Common Stock issued pursuant to compensatory plans or
arrangements which are approved by the Company's Board of Directors and are
for the Company's employees, officers, directors or consultants or any
shares of Company Common Stock issued pursuant to the exercise of warrants,
options, rights or securities convertible into or exchangeable for capital
stock of the Company issued to such persons or the issuance of such
warrants, options, rights or securities, (iii) any shares of Company Common
Stock or warrants, options, rights or securities convertible into or
exchangeable for capital stock of the Company in connection with any stock
split, stock dividend or similar event affecting the Company Common Stock
or (iv) any offering of capital stock of the Company which is registered
under the Securities Act. The provisions of this Section 5.2(b) shall not
apply to a private placement of shares or convertible securities of up to
$6,000,000 provided that the Company shall consult with Purchaser with
respect to such issuance. For private placements of shares or convertible
securities over the $6,000,000 amount, the Company must receive approval of
such transaction from Purchaser.
5.3 [intentionally omitted]
5.4 Change in Control. If the Company receives a bona fide proposal
from a third party which could result in a change in control of the
Company, the Company shall provide Purchaser with notice of such proposal
and give Purchaser 30 days during which Purchaser shall have the exclusive
right to negotiate with the Company with respect to a mutually-agreeable
counter proposal by the Purchaser. During such 30 day period the Company
shall not discuss or negotiate any third party proposal with the third
party proposing the transactions. A "Change of Control" shall mean for the
purposes of this Agreement:
(a) a merger or consolidation with any other Person in which all
voting securities of the Company outstanding immediately prior thereto
represent (either by remaining outstanding or being converted into
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voting securities of the surviving corporation) less than 50% of the
actual voting power of such corporation or the surviving entity
outstanding immediately after such merger or consolidation; or
(b) the sale or disposition by the Company (in one transaction or
a series of transactions) of all or substantially all the Company's
assets; or
(c) any person (other than a person owned directly or indirectly
by the Company's stockholders in substantially the same proportions as
their ownership of stock of the Company) becoming the beneficial
owner, directly or indirectly, of voting securities of the Company
representing greater than 40% of the actual voting power of the
Company, as a result of a tender or exchange offer, open market
purchases, privately negotiated purchases or otherwise.
Notwithstanding the foregoing, Purchaser's rights under this
Section 5.4 shall terminate if either (i) the Option is not exercised
in full prior to expiration, (ii) the Warrant is not exercised in full
prior to expiration or (iii) Purchaser disposes of any amount of the
Convertible Debenture or any of the shares issued upon conversion
thereof. In addition, notwithstanding the foregoing, the Company shall
not be required to negotiate with Purchaser on an exclusive basis if
to do so would violate the Board of Directors' fiduciary duty to its
stockholders.
5.5 Piggyback Registration; Demand Registration; Exchange Act
Registration.
(a) If at any time the Company proposes to make a registered
public offering of Company Common Stock, or Securities convertible
therefor (whether for its own account or for the account of others)
under the Securities Act, other than an offering registered on Form
S-8, Form S-4, or other Securities and Exchange Commission ("SEC")
registration form which does not permit inclusion of shares of selling
stockholders for offer to the public, the Company shall promptly give
written notice of the proposed registration to Purchaser reasonably
prior to the proposed filing date of the registration statement, and
at the written request of the Purchaser, delivered to the Company
within 30 days after the receipt of such notice, the Company shall
include in such registration and offering all of the Purchaser's
Company Common Stock that have been designated for registration in the
Purchaser's request (a "Piggyback Registration"), provided, however,
that (i) the Company will not be required to effect a Piggyback
Registration with respect to Company Common Stock which have already
been registered for sale on another registration statement; and (ii)
the Company may withdraw any proposed registration statement or
offering of securities that gave rise to the Piggyback Registration at
any time without liability to Purchaser. If, however, after one (1)
year or more after Closing, Purchaser demands that the Company
register an offering of the Company Common Stock which have not
already been registered for sale on another registration statement
held by Purchaser, the Company shall register an
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offering of such Company Common Stock (a "Demand Registration", and
such Demand Registration or Piggyback Registration referred to as a
"Registration"). Purchaser shall be entitled to two Demand
Registrations per year.
(b) If a Piggyback Registration is an underwritten primary
registration on behalf of the Company, and the lead underwriter
advises the Company in writing that in its opinion the number of
securities requested to be included in such registration exceeds the
number that can be sold in such offering without adversely affecting
the marketability of the offering, the Company shall include in such
offering first, the securities of the Company proposed to be sold by
the Company, second, the Company Common Stock requested to be included
in such registration by Purchaser and third, other securities proposed
to be included in such registration. If a Piggyback Registration is an
underwritten secondary registration on behalf of selling stockholders,
and the lead underwriter advises the Company in writing that in its
opinion the number of securities requested to be included in such
registration exceeds the number that can be sold in such offering
without adversely affecting the marketability of the offering, then
the Company shall include in such offering first, the securities of
the Company proposed to be sold by the stockholders requiring or
demanding pursuant to a contractual right that the Company effect such
registration, second, the Company Common Stock requested to be
included in such registration by Purchaser and third, other securities
(if any) proposed to be included in such registration. If a Piggyback
Registration is with respect to an underwritten primary registration
on behalf of the Company and if Purchaser exercises its Piggyback
rights, Purchaser agrees to sell its Company Common Stock, if the
Company so requests, on the same basis as the other securities
included in such registration are being sold, and the underwriter or
underwriters for such registration shall be selected by the Company.
(c) The Company shall have no obligation to include Company
Common Stock owned by Purchaser in a registration statement for a
Registration, unless and until Purchaser has furnished to the Company
all information and statements about or pertaining to Purchaser in
such reasonable detail and on such timely basis as is reasonably
deemed by the Company to be necessary or appropriate for the
preparation of the registration statement.
(d) Whenever a request for a Registration is properly made in
accordance with Section 5.5(a), the Company shall, as expeditiously as
reasonably possible:
(i) prepare and file with the SEC a registration statement
with respect to such Company Common Stock and use its best
efforts (subject to Section 5.5(a)) to cause such registration
statement to become effective as soon as practicable thereafter
and Purchaser shall have the opportunity to object to any
information pertaining solely to Purchaser that is contained
therein and the Company will make the corrections reasonably
requested by Purchaser with respect to such information;
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<PAGE>
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and prospectus
contained therein as may be necessary to keep such registration
statement effective for a period of not less than six (6) months
and comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration
statement during such period in accordance with the intended
methods of disposition by the sellers thereof set forth in such
registration statement;
(iii) furnish to Purchaser the number of copies of such
registration statement, each amendment and supplement thereto,
the prospectus contained in such registration statement
(including each preliminary prospectus), and such other documents
as Purchaser may reasonably request in order to facilitate the
disposition of the Company Common Stock owned by Purchaser;
(iv) use its best efforts to register or qualify such shares
under the state blue sky or securities ("Blue Sky") laws of such
jurisdictions as Purchaser reasonably requests, and to do any and
all other acts and things that may be reasonably necessary or
advisable to enable Purchaser to consummate the disposition of
such shares in such jurisdictions; provided, however, that the
Company will not be required to do any of the following: (1)
qualify generally to do business in any jurisdiction where it
would not be required but for this Section 5.5(d), (2) subject
itself to taxation in any such jurisdiction or (3) file any
general consent to service of process in any such jurisdiction;
and
(v) notify Purchaser, at any time when a prospectus relating
to Company Common Stock is required to be delivered under the
Securities Act, of the occurrence of any event as a result of
which the prospectus included in any such registration statement
contains an untrue statement of a material fact or omits any fact
necessary to make the statements therein in the light of the
circumstances under which they were made, not misleading, and
prepare a supplement or amendment to the prospectus so that, as
thereafter delivered to the purchasers of such shares, the
prospectus will not contain an untrue statement of a material
fact or omit to state any fact necessary to make the statements
therein, in the light of the circumstances under which they were
made, not misleading.
(e) If, after a registration statement becomes effective, the
Company advises Purchaser that the Company considers it appropriate
for the registration statement to be amended, Purchaser shall suspend
any further sales of its registered shares until the Company advises
Purchaser that the registration statement has been amended. The six
(6) month time period referred to herein during which the registration
statement must be kept current after its effective date shall be
extended for an additional number of business days during which the
rights to sell shares was suspended pursuant to
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<PAGE>
the preceding sentence, but in no event will the Company be required
to update the registration statement after the first anniversary of
the date hereof.
(f) With respect to any Registration, Purchaser shall pay all
transfer taxes, if any, relating to the sale of its Company Common
Stock and its pro rata portion of any underwriting discounts or
commissions or the equivalent thereof.
(g) With respect to any Registration, except for the fees and
expenses specified in Section 5.5(f) hereof and except as provided
below in this Section 5.5(g), regardless of whether any registration
statement becomes effective, the Company shall pay all expenses
incident to a Registration, including, without limitation, all
registration and filing fees, fees and expenses of compliance with
Blue Sky laws, underwriting discounts, fees, and expenses (other than
Purchaser's pro rata portion of any underwriting discounts or
commissions or the equivalent thereof), printing expenses, messenger
and delivery expenses, and fees and expenses of counsel for the
Company and all independent certified public accountants and other
persons retained by the Company.
(h) The Company agrees to indemnify, to the extent permitted by
law, each holder of Company Common Stock, against all losses, claims,
damages, liabilities and expenses, joint or several (or actions in
respect thereof) ("Losses") arising out of or based upon any untrue or
alleged untrue statement of material fact contained in any
registration statement, prospectus or preliminary prospectus or any
amendment thereof or supplement thereto or other document and any
omission or alleged omission of a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and any
violation by the Company of the Securities Act or any rule or
regulation promulgated thereunder, or of any Blue Sky or other state
securities laws or any rule or regulation promulgated thereunder,
except insofar as the same are caused by any untrue or alleged untrue
statement or any omission or alleged omission made in reliance upon
and in conformity with information furnished in writing to the Company
by such holder expressly for use therein or by such holder's failure
to deliver a copy of the registration statement or prospectus or any
amendments or supplements thereto after the Company has furnished such
holder with a sufficient number of copies of the same and except
insofar as the same are caused by or contained in any prospectus if
such holder failed to send or deliver a copy of any subsequent
prospectus or prospectus supplement which would have corrected such
untrue or alleged untrue statement of material fact or such omission
or alleged omission of a material fact with or prior to the delivery
of written confirmation of the sale by such holder after the Company
has furnished such holder with a sufficient number of copies of the
same.
(i) In connection with any registration statement in which the
holder of Company Common Stock is participating, such holder will
furnish to the Company in writing such information and affidavits as
the Company requests for use in connection with any such registration
statement or prospectus and, to the extent permitted by law, severally
and not jointly, will indemnify the Company, each person, which may be
an individual, partnership, corporation, limited liability company,
association, joint stock company, trust, joint venture, unincorporated
organization or governmental entity
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<PAGE>
or any department, agency or political subdivision thereof ("Person"),
who controls the Company (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) and their respective
officers, directors, partners, employees, agents and representatives
against any Losses arising out of or based upon any untrue or alleged
untrue statement of a material fact contained in any registration
statement, prospectus, or form of prospectus, or any omission or
alleged omission of a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, to the
extent, but only to the extent, that such untrue or alleged untrue
statement is contained in, or such omission or alleged omission is
required to be contained in and in conformity with, any information so
furnished in writing by such holder or its representatives to the
Company expressly for use in such registration statement or prospectus
and that such statement or omission was relied upon by the Company in
preparation of such registration statement, prospectus or form of
prospectus; provided, however, that such holder of Company Common
Stock shall not be liable in any such case to the extent that the
holder has furnished in writing to the Company prior to the filing of
any such registration statement or prospectus or amendment or
supplement thereto information expressly for use in such registration
statement or prospectus or any amendment or supplement thereto which
corrected or made not misleading, information previously furnished to
the Company, and the Company failed to include such information
therein. In no event shall the liability of the selling holder of
Company Common Stock hereunder be greater in amount than the dollar
amount of the proceeds (net of payment of all expenses) received by
such holder upon the sale of the Company Common Stock giving rise to
such indemnification obligation. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf
of such indemnified party.
(j) If any Person shall be entitled to indemnity hereunder, such
indemnified party shall give prompt notice to the party or parties
from which such indemnity is sought of the commencement of any action,
suit, proceeding or investigation or written threat thereof
("Proceeding"') with respect to which such indemnified party seeks
indemnification or contribution pursuant hereto; provided, however,
that the failure to so notify the indemnifying parties shall not
relieve the indemnifying parties from any obligation or liability
hereunder except to the extent that the indemnifying parties have been
prejudiced by such failure. The indemnifying parties shall have the
right, exercisable by giving written notice to an indemnified party
promptly after the receipt of written notice from such indemnified
party of such Proceeding, to assume, at the indemnifying parties'
expense, the defense of any such Proceeding, with counsel reasonably
satisfactory to such indemnified party; provided, however, that an
indemnified party or parties (if more than one such indemnified party
is named in any Proceeding) shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the
expense of such indemnified party or parties unless there exists, in
the opinion of counsel for the indemnified parties, legal defenses
available to the indemnified parties which are different from or in
addition to those available to the indemnifying party, or a conflict
exists between one or more indemnifying parties and one or more
indemnified parties, in which case the indemnifying parties shall, in
connection with any one such Proceeding or separate but substantially
similar or related Proceedings in the same jurisdiction, arising
-17-
<PAGE>
out of the same general allegations or circumstances, be liable for
the fees and expenses of not more than one separate firm of attorneys
(together with appropriate local counsel) at any time for such
indemnified party or parties. If an indemnifying party assumes the
defense of such Proceeding, the indemnifying parties will not be
subject to any liability for any settlement made by the indemnified
party without its or their consent (such consent not to be
unreasonably withheld).
(k) If the indemnification provided for in Sections 5.5(h), (i)
and (j) is unavailable to an indemnified party or is insufficient to
hold such indemnified party harmless for any Losses in respect of
which Sections 5.5(h), (i) and (j) would otherwise apply by its terms,
then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, shall have a joint and several obligation to
contribute to the amount paid or payable by such indemnified party as
a result of such Losses, in such proportion as is appropriate to
reflect the relative fault of the indemnifying party, on the one hand,
and such indemnified party, on the other hand, in connection with the
actions, statements or omissions that resulted in such Losses as well
as any other relevant equitable considerations. The relative fault of
such indemnifying party, on the one hand, and indemnified party, on
the other hand, shall be determined by reference to, among other
things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged
omission to state a material fact, has been taken by, or relates to
information supplied by, such indemnifying party or indemnified party,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent any such action, statement or
omission. The amount paid or payable by a party as a result of any
Losses shall be deemed to include any legal or other fees or expenses
incurred by such party in connection with any Proceeding, to the
extent such party would have been indemnified for such expenses under
Section 5.5(j) if the indemnification provided for in Section 5.5(h)
or 5.5(i) was available to such party. The parties hereto agree that
it would not be just and equitable if contribution pursuant to this
Section 5.5(k) were determined by pro rata allocation or by any other
method of allocation that does not take account of the equitable
considerations referred to in this paragraph. Notwithstanding the
provision of this Section 5.5(k), an indemnifying party that is a
selling holder of Company Common Stock shall not be required to
contribute any amount in excess of the amount by which the net
proceeds received by such indemnifying party exceeds the amount of any
damages that such indemnifying party has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
(l) Within nine (9) months of Closing, the Company shall cause a
registration statement registering the Company Common Stock to become
effective under the Securities Exchange Act of 1934, as amended.
The provisions of Sections 5.5(h), (i), (j) and (k) shall be in
addition to any other rights to indemnification or contribution which
an indemnified party may have pursuant to law, contract or otherwise
and shall remain in full force and effect
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<PAGE>
and shall survive the transfer of the shares issued pursuant to the
exercise or conversion of the Securities.
Notwithstanding anything to the contrary, the registration rights
granted under this Section 5.5 (i) shall terminate if there is a
change in control of the Company pursuant to a public tender offer or
merger or similar transaction and (ii) the registration rights granted
in this Section 5.5 shall be pari passu with all rights granted to the
shareholders listed on Exhibit 5.5
5.6 Financial Information. (a) For so long as Purchaser shall hold any
shares of Company Common Stock, as soon as practicable after the end of
each fiscal year of the Company, and in any event within 90 days
thereafter, the Company will furnish Purchaser a consolidated balance sheet
of the Company, as at the end of such fiscal year, and a consolidated
statement of income and a consolidated statement of cash flows of the
Company, for such year, all prepared in accordance with generally accepted
accounting principles consistently applied and setting forth in each case
in comparative form the figures for the previous fiscal year, all in
reasonable detail. Such financial statements shall be accompanied by a
report and opinion thereon by independent public accountants selected by
the Company's Board of Directors.
(b) As soon as practicable after the end of the first, second and
third quarterly accounting periods in each fiscal year of the Company, and
in any event within 45 days thereafter, the Company will furnish Purchaser
a consolidated balance sheet of the Company as of the end of each such
quarterly period, and a consolidated statement of income and a consolidated
statement of cash flows of the Company for such period and for the current
fiscal year to date, prepared in accordance with generally accepted
accounting principles consistently applied, with the exception that no
notes need be attached to such statements and year-end audit adjustments
may not have been made.
(c) As soon as practicable after the end of each calendar month, and
in any event within 30 days thereafter, the Company will furnish Purchaser
the financial reports as of the end of such month in the form customarily
prepared by management for internal use, together with a discussion and
analysis of the Company's financial condition and results of operations as
of and for such period.
(d) From time to time upon the request of Purchaser, Company will
furnish to Purchaser such information regarding the business, assets or
financial condition of Company as Purchaser may reasonably request.
Purchaser shall have the right during normal business hours upon reasonable
notice to examine the books and records of Company, to make copies and
notes therefrom, and at its expense to make an independent examination of
the books and records of Company.
(e) The covenants provided in this Section 5.6 shall terminate upon
the first date that the Company shall become subject to the reporting
requirements of the Exchange Act.
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<PAGE>
6. Miscellaneous.
6.1 Survival of Representations and Warranties. The Company's
representations and warranties contained in Section 2 hereof and
Purchaser's representations and warranties set forth in Section 3 hereof
shall survive each Closing for a period of three (3) years.
6.2 Assignment. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
assigns. Purchaser may assign any or all of its rights hereunder and under
any of the Securities to be acquired pursuant to to this Agreement to any
entity affiliated with Purchaser and may assign or pledge any of the
Securities to institutional creditors of any such affiliate, except that
any such pledgee shall not have any rights under Sections 5.2(b) and 5.4 of
this Agreement. Except as otherwise provided in this Agreement, this
Agreement may not be transferred or assigned by operation of law or
otherwise without the prior written consent of the other party.
6.3 Notice. All notices, communications and demands required or
permitted to be given or made hereunder or pursuant hereto shall be in
writing and shall be effective when delivered in person or transmitted by
telegram or telecopier (confirmed by mail), addressed as follows:
If to Purchaser:
Hollinger Digital, Inc.
270 Lafayette Street, Suite 600
New York, NY 10012
Attn: Philip Kunsberg
Telecopy Number: 212-334-5957
If to the Company:
American Interactive Media, Inc.
611 Broadway
Suite 308
New York, New York 10012
Attention: James Stokes Hatch, Secretary
Telecopy Number: (212) 358-8380
Either party may change the address designated by notice given by such
party. The parties agree to acknowledge in writing the receipt of any such
notice delivered in person.
6.4 Governing Law. This Agreement is deemed to have been entered into
in the State of New York, and its interpretation, construction, and the
remedies for its enforcement or breach are to be applied pursuant to and in
accordance with the laws of the State of New York (without regard to the
conflict of laws principles thereof).
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<PAGE>
6.5 Validity of Agreement. If any provision of this Agreement is,
becomes, or is deemed invalid or unenforceable in any jurisdiction, such
provision shall be deemed amended to conform to applicable law so as to be
valid, legal and enforceable in such jurisdiction so deeming. The validity,
legality and enforceability of such provision shall not in any way be
affected or impaired thereby in any other jurisdiction. If such provision
cannot be so amended without materially altering the intention of the
parties, it shall be stricken in the jurisdiction so deeming, and the
remainder of this Agreement shall remain in full force and effect.
6.6 Waiver. No waiver of any right under this Agreement shall be
deemed effective unless contained in a writing signed by the party charged
with such waiver, and no waiver of any right arising from any breach or
failure to perform shall be deemed to be a waiver of any future such right
or of any other right arising under this Agreement.
6.7 Headings and References; Incorporation of Schedules. The headings
contained in this Agreement are inserted for convenience of reference only
and shall not be a part, control or affect the meaning hereof. All
references herein to Sections are to the Sections of this Agreement.
6.8 No Third Party Rights. Nothing in this Agreement shall create or
be deemed to create any rights in any person or entity not a party to this
Agreement.
6.9 Entire Agreement. This Agreement sets forth and constitutes the
entire agreement between the parties hereto with respect to the subject
matter hereof, and supersedes any and all prior agreements, understandings,
promises and representations made by either party to the other concerning
the subject matter hereof and the terms applicable hereto.
6.10 Other Business Interests. Purchaser and any affiliate of
Purchaser shall be entitled to hold interests in any other business,
investment or undertaking without regard to this Agreement, and Purchaser
and its affiliates shall have no obligation to offer any business
opportunity of any nature to the Company, and the Company shall have no
right to participate in, or have any claim with respect to or right to
block for any reason, any other business, investment or undertaking of any
nature in which Purchaser and its affiliates now participates or may in the
future participate in any way. The provisions of this Section 6.10 are
absolute and are intended to by agreement eliminate any right or claim of
the Company under any "business opportunity" or related doctrine. Purchaser
and its affiliates are to be completely and absolutely free to pursue
business and investment interests of all manners and kinds without the
Company having any right to participate in any way in any such businesses
or investments.
6.11 Dispute Resolution.
(a) Any claim, controversy or dispute, whether sounding in
contract, statute, tort, fraud, misrepresentation or other legal
theory, whenever brought and whether between the Parties to this
Agreement or between one of the Parties of this
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<PAGE>
Agreement and the employees, agents or affiliated businesses of the
other Party, shall be resolved by arbitration as prescribed in this
Section 6.11. The Federal Arbitration Act, 9 U.S.C. ss. 1-15, not
state law, shall govern the arbitrability of all claims.
(b) A single arbitrator engaged in the practice of law and
experienced in transactions of the sort contemplated hereby shall
conduct the arbitration under the then current rules of the American
Arbitration Association (AAA), unless otherwise provided herein. The
arbitrator shall be selected in accordance with AAA procedures from a
list of qualified people maintained by AAA. The arbitration shall be
conducted in the regional AAA office closest to the principal office
of the Company, and all expedited procedures prescribed by AAA rules
shall apply.
(c) Except as provided in Section 6.11(e), the arbitrator shall
only have authority to award compensatory damages and shall not have
authority to award punitive damages, other non-compensatory damages or
any other form of relief. Each party shall bear its own costs and
attorneys' fees and the Parties shall share equally the fees and
expenses of the arbitration; provided that the arbitrator may provide
for the reimbursement by one Party of the costs and attorneys' fees of
the other Party incurred in enforcing such Party's rights under this
Agreement. The arbitrator's decision and award shall be final and
binding, and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
(d) If any Party files a judicial or administrative action
asserting claims subject to arbitration, as prescribed herein, and
another Party successfully stays such action and/or compels
arbitration of said claims, the Party filing said action shall pay the
other Party's costs and expenses incurred in seeking such stay and/or
compelling arbitration, including reasonable attorneys' fees.
(e) The Parties each acknowledge and agree that Purchaser will be
irreparably harmed as a result of a breach by Company of Sections 5.1,
5.2 or 5.4 of this Agreement and that it would be difficult, if not
impossible, to measure the damages resulting from such a breach.
Accordingly, in the event of any actual or threatened breach by the
Company of Section 5.1, the Purchaser shall, in addition to any other
legal remedies permitted hereunder or by applicable law, be entitled
to obtain equitable remedies from a court of competent jurisdiction,
without the need for any bond or security, including, without
limitation, specific performance, a temporary restraining order or a
permanent injunction to prevent or otherwise restrain a breach hereof
and to recover all costs and expenses, including, without limitation,
reasonable attorneys' fees, incurred in enforcing this Agreement. Such
relief shall be in addition to and not in substitution for any other
remedies available to Purchaser. Notwithstanding anything herein to
the contrary, the Parties agree that the Purchaser may seek a
temporary restraining order or a preliminary injunction or other
equitable relief from any court of competent jurisdiction in order to
prevent or restrain a breach hereof pending the selection of an
arbitrator to render a decision on the ultimate merits of any dispute,
controversy or claim.
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6.12 Publicity. The Company and the Purchaser shall consult with each
other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby, and neither party
shall issue any such press release or otherwise make any such public
statement without the prior written consent of the other, which consent
shall not be unreasonably withheld or delayed.
IN WITNESS WHEREOF, the parties hereunto have executed this Agreement as to
be effective as of the date first written above.
HOLLINGER DIGITAL, INC. AMERICAN INTERACTIVE MEDIA, INC.
/s/ Phillip Kunsberg /s/ Mark Graff
- -------------------------- ---------------------------------
Name: Name:
Title: Title:
-23-
AGREEMENT BETWEEN
AMERICAN INTERACTIVE MEDIA, INC.
AND
HOLLINGER DIGITAL INC.
This agreement (the "Agreement") is made and entered into as of November
16, 1998, by and between American Interactive Media, Inc., a Delaware
corporation (the "Company"), and Hollinger Digital Inc., a Delaware corporation
("Holder"). Capitalized terms used but not defined herein shall have the
respective meanings given them in the Debentures (as defined herein).
WHEREAS, the Company has issued to Holder a floating rate convertible
secured debenture dated December 4, 1997 and a floating rate convertible secured
debenture dated February 3, 1998 (together, the "Debentures");
WHEREAS, the Company desires to enter into an arrangement with Pioneer
Ventures Associates Limited Partnership ("Pioneer") in which it will issue
preferred stock and warrants to Pioneer;
WHEREAS, the Debentures restrict the issuance of preferred stock by the
Company;
WHEREAS, Holder believes that through both the Company's actions and
inactions, the Company has breached numerous covenants in Section 6 of the
Debentures and thus caused numerous Events of Default, including, but not
limited to, the following:
(a) The Company has changed its primary line of business;
(b) The Company's budgeted and actual expenses for content production
have exceeded ten percent (10%) of the Company's operating expenses during
the terms of the Debentures, without the prior consent of Holder; and
(c) Additional executive employees have been hired, retained or
employed by the Company, without the prior consent of Holder; and
WHEREAS, Peter Yunich is no longer employed as the chief executive officer
of the Company for reasons other than his death, disability or termination at
the request of Holder, which is an Event of Default under Section 7 of the
Debentures; and
WHEREAS, under Section 8 of the Debentures, the Holder is entitled to
certain remedies upon an Event of Default.
NOW THEREFORE, the Company and Holder, for good and valuable consideration,
and intending to be legally bound, hereby agree as follows:
<PAGE>
COMPANY ACTIONS
To induce Holder to permit the Company to issue preferred stock to Pioneer
and to waive any remedies that it may have under Section 8 of the Debentures,
and conditioned on the termination of the Voting and Standstill Agreement by and
among the Company, Holder and the additional signatories thereto, dated December
4, 1997, and on the investment by Pioneer of at least $3.1 million in the
Company, on terms and conditions reasonably satisfactory to Holder, at the
closing contemplated by Section 1 of the Investment Agreement (the "Investment
Agreement"), a copy of which is attached hereto, by and between Pioneer and the
Company dated November 16, 1998 (the "Effective Date"), the Company shall
provide that:
Board of Directors. As of the Effective Date, the authorized number of directors
on the Board of Directors of the Company (the "Board") shall be increased from
three to five, and one of the new members of the Board shall be a representative
designated by Holder. Holder shall not have the right thereafter to have an
observer at Board meetings. At each election for directors after the Effective
Date, Holder shall have the right to designate two representatives to the Board,
and the Board shall consist of five members; provided that the Board may be
increased by a vote of 75% of the entire Board or pursuant to Section 1.10(b) of
the Investment Agreement and Article II, Section 1(b) of the Company's By-Laws.
Any new directors (other than any Pioneer designee) shall be approved by Holder.
Holder acknowledges that Pioneer shall have the right to designate one or under
certain circumstances more representatives to the Board.
By-laws. As of the Effective Date, to effectuate the preceding paragraph 1(a),
the Board shall amend the Company's by-laws by:
inserting the following sentence at the end of Article II, Section 1 of the
Company's by-laws:
"Nomination Procedure. Any stockholder who holds a contractual right
to designate a representative to the Board of Directors shall have the
right to have his/her nominee to the Board of Directors presented to
the stockholders in the same manner in which a nominee to the Board of
Directors would customarily be presented to the stockholders for the
election of directors."; and
deleting the second clause of the second sentence of Article II, Section 1 of
the Company's by-laws and replacing it with the following:
"and thereafter the number of directors shall be five unless such
number shall be increased by a vote of at least 75% of the entire
Board of Directors,".
Voting Agreement. As of the Effective Date, the Company shall cause an
appropriate voting agreement to be entered into by Mark Graff, Holder and
Pioneer in order to effectuate paragraph 1(a) above, and the Company shall take
all action necessary to implement such voting agreement.
Common Stock Purchase Option. As of the Effective Date, the Common Stock
Purchase Option dated December 4, 1997, issued by the Company to Holder, as
amended by the letter agreement
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<PAGE>
(the "Letter Agreement") dated June 4, 1998 (as amended, the "Option"), shall
automatically, and without further action by the parties hereto, be amended by:
changing the reference in Section 2 of the Letter Agreement from "ten percent
(10%)" to "fifteen percent (15%)";
deleting Section 2(i) through the end of Section 2 of the Letter Agreement and
replacing it with the following:
"the lower of (x) $2.375 per share of Common Stock and (y) the
Conversion Price as reset at the Reset Date (as such terms are defined
in Section 1.3-A of the Investment Agreement by and between Pioneer
Ventures Associates Limited Partnership ("Pioneer") and the Company
dated November 16, 1998) (the "Exercise Price"). This Option shall be
exercisable at any time until and including September 30, 2000 (the
"Expiration Date")";
inserting the following words after the first sentence of Section 4(a):
If by May 16, 1999 Pioneer has exercised certain outstanding warrants
to purchase an aggregate of 500,000 shares of Common Stock, at an
exercise price of $1.00 per share, and the certain other outstanding
warrants to purchase an aggregate of 539,000 shares of Common Stock,
at an exercise price of $2.50 per share (together, the "Warrants"),
then Pioneer shall have the right to participate in this Option by
having the right to purchase 50% of any Option Shares, at the same
exercise price per share, as Holder shall purchase upon exercise from
time to time of this Option ("Purchase Option"). If Holder exercises
all or any portion of this Option prior to May 16, 1999, Pioneer shall
have the right to participate in this Option through its Purchase
Option (even though Pioneer has not then exercised the Warrants),
provided that Pioneer shall thereafter forfeit its right to
participate in any future exercises of this Option if Pioneer shall
not have exercised the Warrants by May 16, 1999.";
deleting clause (i) of Section 8(d) of the Option and renumbering clauses (ii)
and (iii) of Section 8(d) as clauses (i) and (ii), respectively; and
inserting the following words in the first sentence of Section 8(d) immediately
preceding the closing of the first parenthesis:
"or (iii) to Pioneer pursuant to the Investment Agreement by and
between Pioneer and the Company dated November 16, 1998,";
Securities Purchase Agreement. As of the Effective Date, the Securities Purchase
Agreement shall automatically, and without further action by the parties hereto,
be amended by:
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<PAGE>
renumbering clauses (ii) and (iii) of Section 5.2(a) as (iii) and (iv),
respectively, and inserting the following sentence after clause (i) of Section
5.2(a):
"(ii) the convertible preferred stock (the "Preferred Stock"), the
warrants (the "Investment Agreement Warrants") issued to Pioneer
Ventures Associates Limited Partnership ("Pioneer") and Ventures
Management Partners LLC pursuant to the Investment Agreement by and
between Pioneer and the Company dated November 16, 1998 (the
"Investment Agreement"), or the warrants (together with the Investment
Agreement Warrants, the "Pioneer Warrants") issued to Mountain Ranch
Partners, Inc., a Colorado corporation, to purchase 500,000 shares of
Company Common Stock, which expire on December 31, 1998, or shares
issued upon the exercise of the Pioneer Warrants or the conversion of
the Preferred Stock";
deleting the last two sentences of Section 5.2(a);
renumbering clauses (ii) and (iii) of Section 5.2(b) as clauses (iii) and (iv),
respectively, and inserting the following sentence after clause (i) of Section
5.2(b):
"(ii) the Preferred Stock or the Pioneer Warrants issued to Pioneer
pursuant to the Investment Agreement, or shares issued upon the
exercise of the Pioneer Warrants or the conversion of the Preferred
Stock";
deleting the last two sentences of Sections 5.2(b);
inserting the following words into the first sentence of Section 5.2(b) after
the words "Securities Act":
"or (v) the issuance of Company Common Stock, or securities
exchangeable for or convertible into Company Common Stock, at or above
90% of the Current Market Price, as defined in the Option, provided
that such an issuance is approved by a majority of the Company's
entire Board of Directors, after due notice of the terms and
conditions of such issuance, or (vi) the issuance of Company Common
Stock, or securities exchangeable for or convertible into Company
Common Stock, at a price below 90% of the Current Market Price,
provided that such issuance is approved by at least 75% of the
Company's entire Board of Directors."; and
adding a new Section 5.2(c) with the following text:
"So long as Pioneer, its partners or affiliates owns any Preferred
Stock (and, if applicable, Company Common Stock acquired pursuant to
the conversion of the Preferred Stock), this Section 5.2(c) shall
apply instead of Section 5.2(a), and Purchaser shall be entitled, as
of right, (i) to purchase or subscribe for any
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<PAGE>
capital stock or equity or debt securities or any options, warrants,
rights to purchase any such securities or rights of the Company
proposed to be issued by the Company (collectively referred to as "New
Securities") and (ii) provide any debt financing proposed to be
obtained by the Company. Pioneer and Purchaser shall share the rights
of first refusal under this Section 5.2(c) on a pari passu basis, with
each of Pioneer and Purchaser having the right to purchase fifty
percent (50%) of the New Securities to be offered and sold or to
provide fifty percent (50%) of the debt financing to be provided under
this Section 5.2(c). The rights of first refusal set forth hereinabove
shall not be applicable to (i) securities issued to employees,
consultants or directors of the Company pursuant to any stock option
plan or stock purchase or stock bonus arrangement approved by the
Board of Directors; provided, however, such plan, purchase or
arrangement shall not exceed that number of shares of Company Common
Stock equal to (x) the number of options outstanding as of November
16, 1998, plus (y) up to 250,000 additional options, (ii) securities
offered to the public pursuant to a registration statement filed
pursuant to the Securities Act, and (iii) securities issued pursuant
to an acquisition of another corporation by the Company by merger,
purchase of all or substantially all of the assets or other
reorganization whereby the Company is the surviving corporation, in
the case of a merger or consolidation, and the then existing
shareholders of the Company own not less than fifty-one percent (51%)
of the voting stock of the Company on a fully diluted basis following
such merger or consolidation, or in the case of a share exchange, the
Company owns not less than fifty-one percent (51%) of the voting stock
of such acquired corporation, (iv) securities issued upon the
conversion of the Convertible Debenture or the exercise of the Warrant
issued to Purchaser, (v) any shares of Common Stock issued pursuant to
the exercise of options, warrants or other securities outstanding on
November 16, 1998, (vi) any shares of Common Stock or warrants,
options, rights or securities convertible into or exchangeable for
capital stock of the Company in connection with any stock split, stock
dividend or similar event affecting the Company Common Stock and (vii)
the Preferred Stock, the Pioneer Warrants and the Common Stock to be
issued pursuant to conversion of the Preferred Stock or the exercise
of the Pioneer Warrants under the Investment Agreement. In the event
the Company proposes to issue New Securities or to obtain any
financing, it shall give Pioneer and Purchaser written notice of its
intention, describing the type of New Securities or debt to be
incurred, the price and general terms upon which the Company proposes
to issue the same. In exercising their rights, Pioneer and Purchaser
shall be given thirty (30) days from the receipt of such
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<PAGE>
notice to agree to purchase or subscribe for such New Securities or
make or arrange such loan, in whole or in part, at the same price
and/or on the same terms as proposed. Pioneer and Purchaser shall have
the right of over-allotment such that, in the event the other fails to
exercise such right to purchase all of the New Securities or to make
or arrange such loan, the other may purchase the New Securities not so
purchased, or make or arrange the other's portion of such loan. The
Company shall provide notice to Pioneer or Purchaser, as the case may
be, of the availability of such over-allotment, and Pioneer or
Purchaser, as the case may be, shall be required to exercise its
over-allotment rights, in whole or in part within fifteen (15)
business days from the date the non-participating party fails to
exercise its rights hereunder. Pioneer and Purchaser shall be required
to commit in writing, at the time they exercise their rights under
this Section 5.2(c), the maximum amount of over-allotment of New
Securities they agree to purchase or the amount of loan(s) they intend
to make or arrange, if any become available.";
inserting the following words in the second to last sentence of Section 5.5(a)
after "Closing,":
"and at least nine months after the Company's Form 10 has become
effective under the Securities Exchange Act of 1934,".
deleting the words "per year." from the last sentence of Sections 5.5(a); and
deleting the words "six (6) months" from the first sentence of Section
5.5(d)(ii) and replacing it with the following:
"two (2) years";
Debentures. As of the Effective Date, the Debentures shall automatically, and
without further action by the parties hereto, be amended by:
adding the following in the first paragraph of each Debenture after the words
"three and one-half (3.5%) percent per annum in excess of the prime rate as
published in The Wall Street Journal from time to time during the term hereof":
"subject to adjustment as set forth in Section 3(a) of this Note";
deleting "$2.85" in the first sentence of Section 3(a) and replacing it with the
following:
"the lower of (x) $2.375 per share of Common Stock and (y) the
Conversion Price as reset at the Reset Date (as such terms are defined
in Section 1.3-A of the Investment Agreement by and between Pioneer
Ventures Associates Limited Partnership ("Pioneer") and the Company
dated November 16, 1998 (the "Investment Agreement")).";
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<PAGE>
inserting the following words at the end of Section 3(a):
"Solely for purposes of determining the Conversion Amount under this
Section 3(a), interest accrued after the Effective Date (as defined
below) shall be calculated at a rate equal to 13% per annum. As used
herein, "Effective Date" shall mean November 16, 1998."
deleting clause (i) of Section 4(d) and renumbering clauses (ii) and (iii) of
Section 4(d) as clauses (i) and (ii), respectively;
inserting the following words in the first sentence of Section 4(d) immediately
preceding the closing of the first parenthesis:
"or (iii) to Pioneer pursuant to the Investment Agreement,";
eliminating Sections 6(d), 6(l) and 7(f) and substituting in the Debentures the
words "Intentionally Omitted" for such sections;
adding the following to the end of Section 6(c):
"provided that no prior consent of Holder shall be required for any
cash dividend on the Pioneer Preferred Stock (as defined below) if it
is declared by a majority of the entire Board of Directors. As used
herein, "Pioneer Preferred Stock" shall mean the preferred stock
issued to Pioneer pursuant to the Investment Agreement.";
adding the following to the end of Sections 6(m) and 6(n):
"provided that no prior consent of Holder shall be required for any
action approved by a majority of the entire Board of Directors.";
adding the following to the end of Section 6(e):
"provided that no prior consent of Holder shall be required with
respect to any action referred to in the preceding clause (iii) that
is approved by at least 75% of the entire Board of Directors.
Notwithstanding anything to the contrary contained herein, the Company
shall be permitted to sell its WebPASSPORT technology and related
assets if approved by a majority of the entire Board of Directors,
provided that the terms and conditions of such sale are acceptable to
Holder.";
deleting clause 3 of Section 6(g) and replacing it with the following:
"annual compensation increases above 10% per person that are approved
by a majority of the entire Board of Directors.";
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<PAGE>
adding the following to the end of Section 6(h):
"provided that no prior consent of Holder shall be required for any
action approved by 75% of the entire Board of Directors."; and
adding the following after Section 6(o):
"(p) The following covenant shall be applicable, in addition to any
other covenant herein that covers the same or related matters. So long
as an aggregate of at least five percent (5%) of the outstanding Notes
(as defined below) (included in such 5% calculation for the
denominator shall be any Notes which have then been converted into
Common Stock) is held by Holder, the Company shall not without the
affirmative vote or consent of Holder (i) authorize or issue any
additional equity securities of the Company or of any subsidiaries
other than those issuable (x) upon the conversion, exchange or
exercise of securities or rights outstanding on the Closing Date (as
defined in the Investment Agreement) and (y) pursuant to grants of
options previously granted and outstanding on such Closing Date under
the Company's Stock Option Plan, however such consent shall not be
unreasonably withheld, (ii) approve any merger, consolidation,
compulsory share exchange or sale of assets to which the Company is a
party, however such consent shall not be unreasonably withheld, (iii)
repurchase or redeem any equity securities or pay dividends or other
distributions on any equity securities, except as provided pursuant to
the terms of the Pioneer Preferred Stock, (iv) liquidate, dissolve,
recapitalize or reorganize the Company, (v) guarantee indebtedness of
other persons, directly or indirectly, except with respect to any
wholly owned subsidiaries, (vi) incur any indebtedness for borrowed
money, or guarantee indebtedness of other persons, directly or
indirectly except with respect to any wholly-owned subsidiaries, (vii)
effect any fundamental changes in the nature of the Company's
business, including but not limited to acquiring or investing in
another business entity, however, such consent shall not be
unreasonably withheld, and (viii) approve the sale or transfer of any
material intangible or intellectual property, other than the issuance
of licenses or sales of equipment in the ordinary course of business,
however, such approval shall not be unreasonably withheld. As used
herein, "Notes" shall mean this Note and the other note issued
pursuant to the Securities Purchase Agreement."
Any succession plans following the Closing Date (as defined in the Investment
Agreement) following any termination of the employment by Mark Graff shall be
approved by Holder.
inserting the following words after Section 7(f):
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<PAGE>
"(g) The Voting Agreement dated November 16, 1998 by and among the
Company, Holder, Pioneer and Mark Graff shall not have been complied
with in connection with an election for directors and either of the
Holder's two nominees shall not have been elected to the Board of
Directors in such election.
(h) The Company's cash and cash equivalents, minus bona fide accounts
payable over thirty (30) days in arrears, shall be less than $100,000
at the end of any month.
(i) Notwithstanding anything to the contrary in Section 6(p)(iii)
hereof, if Pioneer shall exercise its option under Section 6.10 of the
Investment Agreement and Holder does not approve the redemption or
repurchase of the Pioneer Preferred Stock pursuant to Section 6(c)
hereof."
Securities Agreement. As of the Effective Date, the Security Agreement shall be
automatically, and without further action by the parties hereto, amended by
deleting Section 2 and replacing it with the following:
"2. The collateral shall be all assets of the Corporation (other than
leased software and equipment) whether now owned or hereafter acquired
and all proceeds therefrom (including, but not limited to, any
machinery, equipment (other than leased equipment), furniture,
fixtures, inventory, work-in-progress, cash, accounts receivable,
contracts, leases (other than equipment and software leases),
software, source and operating codes, designs, marketing and other
plans, intellectual property, trade names and trade marks
(collectively, the "Collateral")."
Warrant. As of the Effective Date, the Warrant, dated December 4, 1997, issued
by the Company to Holder, shall automatically, and without further action by the
parties hereto, be amended by:
changing the reference in the first paragraph from "forty percent (40%)" to
"thirty percent (30%)"; and
inserting the following words immediately preceding clause (ii) of the first
paragraph:
", other than the shares and other securities which are then and
potentially issuable to Pioneer Ventures Associates Limited
Partnership upon conversion of the convertible preferred stock or upon
exercise of the warrants issued to Pioneer pursuant to the Investment
Agreement by and between Pioneer and the Company dated November 16,
1998".
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<PAGE>
PREFERRED STOCK ISSUANCE;
WAIVER OF EVENTS OF DEFAULT
Simultaneous with the Effective Date, Holder grants permission to the
Company to issue preferred stock to Pioneer (including preferred stock issued as
dividends thereon) and warrants, and any securities to be issued pursuant to the
preferred stock or warrants issued to Pioneer pursuant to the Investment
Agreement and Holder waives all Events of Default, which may have arisen before
the Effective Date. Nothing herein shall be deemed to be a waiver of Holder's
rights to request registration of its securities, or to piggyback its securities
on another registration, as set forth in the Securities Purchase Agreement.
WAIVER OF A CERTAIN LETTER AGREEMENT.
Simultaneous with the Effective Date, Holder waives any benefits under a
certain side letter, dated December 4, 1997, with Mark Graff relating to the
sale of shares by Mr. Graff to Holder.
AMENDMENT
Upon the Effective Date, this Agreement shall constitute the amendment to
each of the agreements referred to in paragraph 1 above, which amendments shall
thereupon become effective; and such agreements, as amended, shall remain in
full force and effect.
FURTHER ASSURANCES
At any time or from time to time after the execution of this Agreement,
each party hereto agrees to take such actions and to execute and deliver such
documents as shall be reasonably necessary to effectuate the purposes of this
Agreement.
WAIVER AND AMENDMENT
Nothing contained herein shall constitute a waiver of any Events of Default
arising after the Effective Date. No amendment or modification of any provision
of this Agreement shall be effective unless contained in a written agreement
signed by the parties hereto. No waiver of any provision of this Agreement shall
be effective unless it is set forth in a written instrument signed by the party
waiving its rights hereunder. The failure or delay by either party in exercising
any right, power or remedy under this Agreement shall not operate as a waiver of
any such right, power or remedy.
ASSIGNMENT
No party may assign any of its rights or delegate any of its obligations
under this Agreement to any third party without the express written consent of
the other party, and such consent shall not be unreasonably withheld.
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<PAGE>
GOVERNING LAW
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
entirely within the State.
SEVERABILITY
If any provision or provisions of this Agreement shall be held to be
illegal, invalid or unenforceable, the validity, legality and enforceability of
the remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
NOTICES
Any notice or payment required or permitted to be made by or given by any
party hereto shall be sufficiently made or given on the date sent by such party
to the other parties by mail, facsimile, commercial overnight courier, personal
delivery, or a similar reliable delivery method, addressed as set forth below or
to such other address as any other party shall designate by written notice given
to the party giving the notice or making the payment in accordance with this
Agreement.
In the case of the Company:
American Interactive Media, Inc.
611 Broadway
Suite 308
New York, New York 10012
Attention: James Stokes Hatch, Secretary
Telecopy Number: (212) 358-8380
with a copy to:
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178
Attention: Jeffrey N. Ostrager, Esq.
Telecopy Number: (212) 697-1559
In the case of Holder:
Hollinger Digital, Inc.
270 Lafayette Street, Suite 600
New York, New York 10012
Attention: Philip Kunsberg
Telecopy Number: (212) 334-5957
with a copy to:
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<PAGE>
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: Judith R. Thoyer, Esq.
Telecopy Number: (212) 757-3990
Any notice given by the Company to Holder hereunder or under any of the
agreements referred to herein shall also be given to Pioneer at:
Pioneer Ventures Associates Limited Partnership
651 Day Hill Road
P.O. Box 40
Windsor, Connecticut 06095
Attention: Robert A. Lerman, Managing Director
with a copy to:
Kaplan Gottbetter & Levenson
630 Third Avenue, 5th Floor
New York, New York 10017
Attention: Martin Enright, Esq.
Telecopy Number: (212) 983-9210
HEADINGS
The headings used in this Agreement are inserted for convenience of
reference only and shall not be a part of, or affect the meaning or
interpretation of, this Agreement.
ENTIRE AGREEMENT
This Agreement contains the entire and exclusive agreement between the
parties relating to the subject matter hereof and shall not be modified except
in writing, signed by the parties hereto. This Agreement supersedes all prior
agreements, oral or written, and all other communications between the parties
relating to the subject matter of this Agreement.
COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be an original with respect to the party executing the counterpart and all
of which together shall constitute one and the same agreement.
THIRD PARTY BENEFICIARY
Pioneer may rely upon (a) the consent and waiver provisions herein, (b) the
notice provision contained in Section 10 hereof, (c) the provisions of Section
1(d)(iii) hereof and (d) the provisions of Section 1(e)(vi) hereof.
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<PAGE>
IN WITNESS WHEREOF, the Company and Holder have caused this Agreement to be
executed and delivered as of the date first set forth above by their duly
authorized representatives.
AMERICAN INTERACTIVE MEDIA, INC.
By: /s/ Mark Graff
---------------------------------------
Name:
Title:
HOLLINGER DIGITAL INC.
By: /s/ Philip Kunsberg
---------------------------------------
Name: Philip Kunsberg
Title: Executive V.P., General Counsel
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HOLLINGER PLEDGE AND SECURITY AGREEMENT
December 4, 1997
PLEDGE AND SECURITY AGREEMENT between AMERICAN INTERACTIVE MEDIA, INC., a
Nevada corporation having an address at 611 Broadway, New York, New York 10012
(the "Corporation"), and HOLLINGER DIGITAL, INC., a Delaware corporation having
an address at 270 Lafayette Street, New York, New York 10012 (the "Secured
Party").
WHEREAS, the Corporation has issued and sold to the Secured Party the
Floating Rate Convertible Secured Debenture Note dated as of the date hereof
(the "Note");
WHEREAS, it is the intention of the parties hereto that the granting of the
security interest pursuant to this Pledge and Security Agreement will secure all
of the obligations of the Corporation under the Note (such obligations being
referred to herein as the "Secured Obligations").
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
and covenants herein contained, and intending to be legally bound hereby, the
parties hereto HEREBY AGREE AS FOLLOWS:
1. Subject to Section 9 below, the Corporation hereby grants to the Secured
Party a first priority security interest in the Collateral (as defined in
paragraph 2 below) to secure the Secured Obligations.
2. The collateral shall be all assets of the Corporation whether now owned
or hereafter acquired and all proceeds therefrom (including, but not limited to,
any machinery, equipment, furniture, fixtures, inventory, work-in-process, cash,
accounts receivable, contracts,
<PAGE>
leases, software, source and operating codes, designs, marketing and other
plans, intellectual property, trade names and trade marks (collectively, the
"Collateral")).
3. The occurrence of any one or more of the following events shall
constitute an event of default ("Default") by the Corporation under this
Security Agreement if not cured within fifteen (15) days after written notice
thereof from the Secured Party: (a) an Event of Default under the Note; (b) in
the event of substantial loss, theft or destruction of, or substantial damage
to, the Collateral not adequately covered by insurance, or the making or filing
of any lien, levy, or execution on, or seizure, attachment or garnishment of, a
substantial portion of the Collateral not discharged, bonded, paid or removed
within sixty (60) days; (c) if the Corporation shall be liquidated, dissolved,
or shall fail to maintain its corporate existence in good standing; (d) if there
shall be filed by or against the Corporation any petition for any relief under
the bankruptcy laws of the United States now or hereafter in effect or under any
insolvency, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction now or hereafter in effect (in the case of any filing against
the Corporation, which is not discharged, vacated or dismissed within sixty (60)
days); or (e) if the usual business of the Corporation shall be terminated or
suspended for more than sixty (60) days.
4. Upon the occurrence of any Event of Default under the Note and the
expiration of all applicable cure periods or of any Default hereunder not cured
by the Corporation or its affiliates within fifteen (15) days after written
notice thereof from the Secured Party, the Secured Party shall have all rights
and remedies of a secured party under the laws of the State of New York,
including the Uniform Commercial Code of the State of New York (the "UCC").
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<PAGE>
5. It is expressly agreed by all parties hereto that the Secured
Obligations of the Corporation under, and with respect to, the Note shall not be
subject to any set-offs, defenses or counterclaims which the Corporation or its
affiliates may have against the Secured Party under, or arising out of, the Note
or any other document required to be executed by the Securities Purchase
Agreement referred to in the Note.
6. The Corporation shall deliver UCC-1 financing statements evidencing the
Secured Party's security interest hereunder. Upon payment in full of the Secured
Obligations by the Corporation or conversion in full of the Note, the Secured
Party shall forthwith deliver to the Corporation UCC-3 termination statements,
terminating the Secured Party's security interest hereunder and the security
interest granted by this Security Agreement shall become null and void and of no
further force and effect.
7. Any notices or demands to be effective under this Security Agreement
shall be given pursuant to the notice provisions of the Securities Purchase
Agreement.
8. The proceeds of the sale of any of the Collateral by the Secured Party
pursuant to the terms hereof after a Default shall be applied as follows:
FIRST: To the payment of the costs and expenses of such sale,
including the out-of-pocket expenses of the Secured Party and the
reasonable fees and out-of-pocket expenses of counsel employed by the
Secured Party in connection therewith;
SECOND: To the payment of all amounts then owing to the Secured Party
under the Secured Obligations;
THIRD: The balance (if any) of the proceeds shall be paid to the
Corporation or its successors or assigns.
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<PAGE>
9. Notwithstanding any other provision of this Security Agreement, with
respect to additional property acquired after the Closing Date, the Corporation
or any of its affiliates may grant purchase money security interests therein to
finance the purchase thereof and may also permit the filing of liens to evidence
such property which is leased by the Corporation or any of its affiliates.
10. Any Collateral which may be obtained by the Secured Party pursuant to
this Security Agreement or otherwise, or the right to so obtain Collateral, may
be pledged by the Secured Party or an affiliate to the lenders of any such
affiliate or may be assigned to any affiliate of the Secured Party.
11. (a) All terms used herein shall have the meanings as defined in the
UCC, unless the context otherwise requires.
(b) No provision hereof shall be modified, altered or limited except by a
written instrument expressly referring to this Security Agreement and to such
provision, and executed by the party to be charged.
(c) The execution and delivery of this Security Agreement has been
authorized by the Board of Directors and shareholders of the Corporation.
(d) This Security Agreement shall be binding upon and inure to the benefit
of the successors or assigns of the Secured Party and the Corporation.
(e) In the event of any conflict between the responsibilities of the
parties under this Security Agreement and the Securities Purchase Agreement, the
provisions of the Securities Purchase Agreement shall govern, and nothing in
this Security Agreement is intended to or shall modify or reduce any
representation, warranty, covenant, or indemnification by the Secured Party in
the Securities Purchase Agreement.
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<PAGE>
(f) This Security Agreement shall be governed by the laws of the State of
New York applicable to contracts made and performed entirely within the State of
New York without regard to conflict of laws rules applied in the State of New
York.
(g) This Agreement may be executed in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
IN WITNESS WHEREOF, the undersigned have executed or caused this Security
Agreement to be executed on the date first set forth above.
AMERICAN INTERACTIVE MEDIA, INC.
By ______________________________________
Name:
Title:
HOLLINGER DIGITAL, INC.
By ______________________________________
Name:
Title:
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CERTIFICATE OF DESIGNATION OF
SERIES A CONVERTIBLE PREFERRED STOCK OF
AMERICAN INTERACTIVE MEDIA, INC.
The undersigned, Mark Graff and James Stokes Hatch, hereby certify that:
They are the duly elected and acting Chairman and CEO, and Secretary,
respectively, of American Interactive Media, Inc., a Delaware corporation (the
"Company").
The Certificate of Incorporation of the Company authorizes 100,000 shares
of preferred stock, par value $1.00 per share, of which the following have been
authorized and are issued and outstanding: none.
The following is a true and correct copy of resolutions duly adopted by the
Board of Directors of the Company (the "Board of Directors") by unanimous
written consent dated as of November 12, 1998, which constituted all requisite
action on the part of the Company for adoption of such resolutions.
RESOLUTIONS
WHEREAS, the Board of Directors is authorized to provide for the issuance
of the shares of preferred stock in series, and by filing a certificate pursuant
to the applicable law of the State of Delaware, to establish from time to time
the number of shares to be included in each such series, and to fix the
designations, preferences and relative, participating, optional or other special
rights of the shares of each such series, and the qualifications or restrictions
thereof;
WHEREAS, the Board of Directors desires, pursuant to its authority as
aforesaid, to designate a new series of preferred stock, set the number of
shares constituting such series and fix the rights, preferences, privileges and
restrictions of such series;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
designates a new series of preferred stock and the number of shares constituting
such series and fixes the rights, preferences, privileges and restrictions
relating to such series as follows:
Section 1. Designation, Amount and Par Value. The series of Preferred Stock
shall be designated as the Series A Convertible Preferred Stock (the "Preferred
Stock"), and the number of shares so designated shall be 15,000. The par value
of each share of Preferred Stock shall be $1.00. Each share of Preferred Stock
shall have a stated value of $315.00 per share (the "Stated Value"). All terms
defined in the Investment Agreement, dated November 13, 1998,
<PAGE>
between the Company and the Purchaser therein (the "Purchase Agreement") and not
otherwise defined herein shall have for purposes hereof the meanings provided
for therein.
Section 2. Dividends.
a. Holders of outstanding shares of Preferred Stock shall be entitled to
receive, out of funds legally available therefor, and the Company shall pay,
cumulative cash dividends at the rate per share (as a percentage of the Stated
Value per share) equal to 8% per annum (or 13% per annum in the case of dividend
paid in shares of Preferred Stock under Section 2(c) hereof) (subject to reset
as provided below in this Section 2(a) and to increase pursuant to Section 2(d)
hereof), in cash or (as provided for herein) shares of Preferred Stock, payable
quarterly in arrears on the last day of March, June, September and December of
each year commencing December 31, 1998 (each, a "Dividend Payment Date"). Any
arrears in payment of dividends with respect to any share of Preferred Stock
shall be payable on the Conversion Date (as defined in Section 5(b)) applicable
to such share or earlier if so determined by the Company at the default rates
set forth in Section 2(e) hereof. Dividends on shares of the Preferred Stock
shall accrue daily commencing on the Issue Date of such shares, shall be
calculated based on the actual number of days in such quarterly period in a 360
day year and shall be deemed to accrue on such date whether or not earned or
declared and whether or not there are profits, surplus or other funds of the
Company legally available for the payment of dividends. The party that holds the
Preferred Stock on an applicable record date for any dividend payment will be
entitled to receive such dividend payment and any other accrued and unpaid
dividends which accrued prior to such Dividend Payment Date, without regard to
any sale or disposition of such Preferred Stock subsequent to the applicable
record date but prior to the applicable Dividend Payment Date. A transfer of the
right to receive payments hereunder shall be transferable only through an
appropriate entry in the register (the "Register") to be maintained by the
Company through the Transfer Agent, in which shall be entered the names and
addresses of the registered holder of shares of Preferred Stock and all
transfers of such shares. References to the Holder or "Holders" shall mean the
Person listed in the Register as the registered holder of such shares. The
ownership of such shares shall be proved by the Register, absent manifest error.
Except as otherwise provided herein, if at any time the Company pays less than
the total amount of dividends then accrued on account of the Preferred Stock,
such payment shall be distributed ratably among the holders of Preferred Stock
based upon the number of shares held by each Holder. Dividends due hereunder on
a Dividend Payment Date shall on the first Dividend Payment Date, and with
respect to any subsequent Dividend Payment Date may, if so determined by a
majority of the Company's entire Board of Directors , be paid in shares of
Preferred Stock calculated based upon the Stated Value per share. Other than
payment of dividends in shares of Preferred Stock all other amounts due
hereunder at any time shall be paid in immediately available funds. The
Conversion Price shall be subject to reset as follows. In the event that the
average closing bid price per share of the Company's Common Stock on the NASD
OTC Bulletin Board, the Nasdaq SmallCap Market or such other market or exchange
on which the Common shall then be traded for the twenty (20) trading days
immediately preceding February 29, 2000 is below $2.375 (the AReset Average
Price"), the Conversion Price shall be reset to a price per share of Common
Stock equal to seventy-five percent (75%) of the Reset Average Price. Once reset
in accordance with the provisions of this Section 2(a), the Conversion Price
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<PAGE>
shall remain at the reset Conversion Price, subject to adjustment in accordance
with Section 5(d), below.
b. Notwithstanding anything to the contrary contained herein, the Company
may not, without the prior written consent of each Holder, in each instance,
issue shares of Preferred Stock in payment of dividends (and must deliver
immediately available funds in respect thereof) on the Preferred Stock if:
i. the number of shares of Preferred Stock at the time authorized,
unissued and unreserved for all purposes, or held as treasury
stock, is insufficient to issue such dividends to be paid in
shares of Preferred Stock; or
ii. if ten Business Days shall have elapsed from the date an Event of
Default (as defined in Section 6) shall have been declared
hereunder as having occurred and the Company shall not have cured
such Event of Default.
c. If the Company elects to issue shares of Preferred Stock in satisfaction
of the Company's obligation to pay dividends on any previously outstanding
shares of Preferred Stock such dividends shall be paid at an annual rate of
thirteen percent (13%) per share (calculated as a percentage of the Stated Value
per share) and not the eight percent (8%) dividend rate applicable to cash
dividends.
d. So long as any shares of Preferred Stock shall remain outstanding,
neither the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any Junior Securities (as defined in
Section 7), nor shall the Company directly or indirectly pay or declare any
dividend or make any distribution (other than a dividend or distribution
described in Section 5) upon, nor shall any distribution be made in respect of,
any Junior Securities, nor shall any monies be set aside for or applied to the
purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities, unless in each case all dividends on the Preferred Stock for all
past dividend periods shall have been paid.
e. Notwithstanding anything to the contrary contained herein, upon the
occurrence of an Event of Default and for so long as such Event of Default is
continuing, the dividend rate otherwise applicable specified in Section 2(a)
shall be increased to 13% per annum, paid in cash (or, in the case of Shares of
Preferred Stock issued in satisfaction of dividends, 18%) or, if less, the
maximum rate permitted by applicable law until such time as the applicable Event
of Default is cured. The provisions of this Section are not exclusive and shall
in no way limit the Company's obligations under the Investment Agreement, or
limit the Company's liability for damages to any holder occasioned by such Event
of Default.
Section 3. Voting Rights. In addition to any voting rights provided by law,
the holders of Preferred Stock shall have voting rights entitling them to one
vote for each share of Common Stock into which shares of Preferred Stock held by
them are then convertible. The holders of Preferred Stock shall vote with the
holders of Common Stock as one class on all matters submitted to the holders of
Common Stock for a vote. However, so long as any shares of Preferred Stock are
outstanding, the Company shall not, without the affirmative vote of the
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<PAGE>
holders of a majority in interest of the shares of the Preferred Stock then
outstanding, (i) alter or change adversely the powers, preferences or rights
given to the Preferred Stock or (ii) authorize or create any class of stock
ranking as to dividends or distribution of assets upon a Liquidation senior to,
prior to, or pari passu with, the Preferred Stock.
Section 4. Liquidation. Upon any liquidation, dissolution or winding-up of
the Company, whether voluntary or involuntary (a "Liquidation"), the holders of
shares of Preferred Stock shall be entitled to receive out of the assets of the
Company, whether such assets are capital or surplus, for each share of Preferred
Stock an amount equal to one thousand dollars ($1,000) per share of Preferred
Stock, plus an amount equal to accrued but unpaid dividends per share, whether
declared or not, before any distribution or payment shall be made to the holders
of any Junior Securities, and if the assets of the Company shall be insufficient
to pay such amounts in full, then the entire assets of the Company to be
distributed shall be distributed among the holders of Preferred Stock ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full. A sale, conveyance or disposition
of all or substantially all of the assets of the Company or the effectuation by
the Company of a transaction or series of related transactions in which more
than 33 1/3% of the voting power of the Company is disposed of, or a
consolidation or merger of the Company with or into any other company or
companies or a reclassification of the Common Stock shall not be treated as a
Liquidation, but instead shall be subject to the provisions of Section 5. The
Company shall mail written notice of any such Liquidation, not less than 60 days
prior to the payment date stated therein, to each record holder of Preferred
Stock.
Section 5. Conversion.
a. Each share of Preferred Stock shall be convertible into shares of
Common Stock at the Conversion Price, at the option of the holder in
whole or in part at any time and from time to time after the Issue
Date of such share of Preferred Stock. The holder of the Preferred
Stock shall effect conversions by surrendering the certificate or
certificates representing the shares of Preferred Stock to be
converted to the Company, together with the form of conversion notice
attached hereto as Exhibit A (the "Holder Conversion Notice"). Each
Holder Conversion Notice shall specify the number of shares of
Preferred Stock to be converted and the date on which such conversion
is to be effected, which date may not be prior to the date the holder
of Preferred Stock delivers such Notice by facsimile (the "Holder
Conversion Date"). If no Holder Conversion Date is specified in a
Holder Conversion Notice, the Holder Conversion Date shall be the date
that the Holder Conversion Notice is deemed delivered pursuant to
Section 5(j). Each Holder Conversion Notice, once given, shall be
irrevocable. If a holder is converting less than all shares of
Preferred Stock represented by the certificate or certificates
tendered by such holder with the Holder Conversion Notice, or if a
conversion hereunder cannot be effected in full for any reason, the
Company shall promptly deliver to such holder (in the manner and
within the time set forth in Section 5(c)) a certificate for such
number of shares of Preferred Stock as have not been converted.
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<PAGE>
b. On the tenth anniversary of the Issue Date (the "Company Conversion
Date") for each share of Preferred Stock that has not previously been
converted, such share of Preferred Stock shall be automatically
convertible into shares of Common Stock at the then applicable
Conversion Price; provided, however, that no shares of Preferred Stock
shall be converted (i) unless the Company shall have duly reserved for
issuance to the holder a sufficient number of shares of Common Stock
to issue upon such conversion; or (ii) if an Event of Default shall
have occurred hereunder and is continuing. In connection with such
conversion, the Company shall deliver to the holders of such shares of
Preferred Stock a written notice in the form attached hereto as
Exhibit B (the "Company Conversion Notice"). The Company Conversion
Notice shall specify the number of shares of Preferred Stock that will
be subject to automatic conversion on the Company Conversion Date. The
Company shall deliver or cause to be delivered the Company Conversion
Notice at least five (5) Trading Days before the Company Conversion
Date. The holders of the Preferred Stock shall surrender the
certificates representing such shares at the office of the Company or
the Transfer Agent not later than Five (5) Trading Days after the
Company Conversion Date. Each of a Holder Conversion Notice and a
Company Conversion Notice is sometimes referred to herein as a
"Conversion Notice," and each of a "Holder Conversion Date" and a
"Company Conversion Date" is sometimes referred to herein as a
"Conversion Date."
c. Not later than five (5) Trading Days after the Conversion Date, the
Company will, or will cause the Transfer Agent to deliver to the
holder of Preferred Stock (i) a certificate or certificates
representing the number of shares of Common Stock being acquired upon
the conversion of shares of Preferred Stock, including certificates
representing the number of shares of Common Stock as equals the
accrued but unpaid dividends thereon divided by the average Per Share
Market Value, and (ii) one or more certificates representing the
number of shares of Preferred Stock not converted. If, at the time of
any conversion of Preferred Stock, there shall be an effective
Registration Statement applicable to the shares of Common Stock
available for such conversion, any certificates representing shares of
Common Stock to be delivered upon such conversion hereunder shall be
free of restrictive legends and trading restrictions on the stock
transfer books of the Company. The Company shall not be obligated to
issue certificates evidencing the shares of Common Stock issuable upon
conversion of any shares of Preferred Stock and the counting of
Trading Days for purposes of any consequences under this Section for a
failure to deliver such certificates under this Section shall not
begin until certificates representing the shares of Preferred Stock to
be converted are either delivered for conversion to the Transfer Agent
for the Common Stock, or until the holder notifies the Company that
such certificates representing the shares of Preferred Stock have been
lost, stolen or destroyed and (if requested by the Company or the
Transfer Agent) provides a bond and other supporting documentation
reasonably satisfactory to the Company and the Transfer Agent (or
other adequate security reasonably acceptable to the Company and the
Transfer Agent) to indemnify the Company from any loss incurred by it
in
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<PAGE>
connection therewith, provided that, if the Company or the Transfer
Agent receives the original certificates representing the shares of
Preferred Stock being converted on or prior to the time specified for
the delivery of such shares of Common Stock or on or prior to the time
at which liquidated damages begin to accrue, the date of the Holder
Conversion Notice shall be deemed to be the date of delivery of such
original certificates representing the shares of Preferred Stock. The
Company shall, upon request of the holder, use its best efforts to
deliver any certificate or certificates required to be delivered by
the Company under this Section 5(c) electronically through the
Depository Trust Corporation or another established clearing
corporation performing similar functions. If such certificate or
certificates are not delivered by the date required under this Section
5(c), the holder shall be entitled by written notice to the Company
and the Transfer Agent at any time on or before its receipt of such
certificate or certificates, to rescind such conversion, in which
event the Company shall immediately instruct the Transfer Agent to
return the certificates representing the shares of Preferred Stock
subject to such conversion that were tendered for conversion.
d.
i. If the Company, at any time while any shares of Preferred Stock
are outstanding, (a) shall pay a stock dividend or otherwise make
any distributions on shares of its Junior Securities payable in
shares of its capital stock (whether payable in shares of its
Common Stock or of capital stock of any class), (b) subdivide
outstanding shares of Common Stock into a larger number of
shares, or (c) combine outstanding shares of Common Stock into a
smaller number of shares, the Conversion Price shall be
multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock of the Company outstanding
before such event and of which the denominator shall be the
number of shares of Common Stock outstanding after such event.
Any adjustment made pursuant to this Section 5(d)(i) shall become
effective immediately upon the record date for the determination
of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date
in the case of a subdivision or combination.
ii. If the Company, at any time while any shares of Preferred Stock
are outstanding, shall issue shares of Common Stock or securities
convertible into Common Stock at a conversion price, or rights or
warrants exercisable for shares of Common Stock at an exercise
price, per share less than the Per Share Market Value of Common
Stock at the record date mentioned below, the Conversion Price
shall be multiplied by a fraction, of which the denominator shall
be the number of shares of Common Stock (excluding treasury
shares, if any, but including warrants or options that would be
included for purposes of determining earnings per share in
accordance with generally accepted accounting principles)
outstanding on the date of issuance of such rights or warrants
plus the number of additional shares of Common Stock offered for
subscription or purchase, and of which the
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<PAGE>
numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any, but including warrants or
options that would be included for purposes of determining
earnings per share in accordance with generally accepted
accounting principles) outstanding on the date of issuance of
such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered
would purchase at such Per Share Market Value. Such adjustment
shall be made whenever such rights or warrants are issued, and
shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or
warrants. However, upon the expiration of any right or warrant to
purchase Common Stock the issuance of which resulted in an
adjustment in the Conversion Price designated pursuant to this
Section 5(d)(ii), if any such right or warrant shall expire and
shall not have been exercised, the Conversion Price shall
immediately upon such expiration be recomputed and effective
immediately upon such expiration be increased to the price which
it would have been (but reflecting any other adjustments in the
Conversion Price made pursuant to the provisions of this Section
5 after the issuance of such rights or warrants) had the
adjustment of the Conversion Price made upon the issuance of such
rights or warrants been made on the basis of offering for
subscription or purchase only that number of shares of Common
Stock actually purchased upon the exercise of such rights or
warrants actually exercised.
iii. If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and
not to holders of Preferred Stock) evidences of its indebtedness
or assets or rights or warrants to subscribe for or purchase any
security (excluding those referred to in Section 5(d)(ii) above),
then in each such case the Conversion Price at which each share
of Preferred Stock shall thereafter be convertible shall be
determined by multiplying the Conversion Price in effect
immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction
of which the denominator shall be the Per Share Market Value of
Common Stock, and of which the numerator shall be such Per Share
Market Value of the Common Stock on such record date less the
then fair market value at such record date of the portion of such
assets or evidences of indebtedness so distributed applicable to
one outstanding share of Common Stock as determined by the Board
of Directors in good faith; provided, however that in the event
of a distribution exceeding ten percent (10%) of the assets of
the Company, such fair market value shall be determined by a
nationally recognized or major regional investment banking firm
or firm of independent certified public accountants of recognized
standing (which may be the firm that regularly examines the
financial statements of the Company) (an "Appraiser") selected in
good faith by the holders of a majority in interest of the shares
of Preferred Stock then outstanding; and provided, further, that
the Company, after receipt of the determination by
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<PAGE>
such Appraiser shall have the right to select an additional
Appraiser, in which case the fair market value shall be equal to
the average of the determinations by each such Appraiser. In
either case the adjustments shall be described in a statement
provided to the holders of Preferred Stock of the portion of
assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made
and shall become effective immediately after the record date
mentioned above.
iv. All calculations under this Section 5 shall be made to the
nearest one-cent ($.01)or the nearest 1/100th of a share, as the
case may be.
v. Whenever the Conversion Price is adjusted pursuant to Section
5(d)(i), (ii), (iii) or (iv), the Company shall, or shall
instruct the Transfer Agent to, promptly mail to the holders of
Preferred Stock a notice setting forth the Conversion Price after
such adjustment and setting forth a brief statement of the facts
requiring such adjustment.
vi. In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another
person pursuant to which the Company will not be the surviving
entity, the sale or transfer of all or substantially all of the
assets of the Company or any compulsory share exchange pursuant
to which the Common Stock is converted into other securities,
cash or property, the holders of the Preferred Stock then
outstanding shall have the right thereafter to convert such
shares into the shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of
Common Stock following such reclassification, consolidation,
merger, sale, transfer or share exchange, and the holders of the
Preferred Stock shall be entitled upon such event to receive such
amount of securities, cash or property as would be payable to the
holders of the shares of the Common Stock of the Company into
which such shares of Preferred Stock could have been converted
immediately prior to such reclassification, consolidation,
merger, sale, transfer or share exchange. The terms of any such
consolidation, merger, sale, transfer or share exchange shall
include such terms so as to continue to give to the holder of
Preferred Stock the right to receive the securities, cash or
property set forth in this Section 5(d)(vi) upon any conversion
following such consolidation, merger, sale, transfer or share
exchange. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or
share exchanges.
vii If:
(1) the Company shall declare a dividend (or any other
distribution) on its Common Stock (other than a
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<PAGE>
subdivision of the outstanding shares of Common Stock) or
shall authorize a repurchase or redemption or otherwise
enter into any other transaction (including a stock split,
recapitalization or other transaction) which would cause a
decrease in the number of its shares of Common Stock issued
and outstanding (other than transactions that similarly
decrease the number of shares of Common Stock into which
shares of Preferred Stock are convertible); or
(2) the Company shall declare a special nonrecurring cash
dividend on its then outstanding Common Stock; or
(3) the Company shall authorize the granting to all holders of
the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any
rights; or
(4) the approval of any stockholders of the Company shall be
required in connection with any reclassification of the
Common Stock of the Company (other than a subdivision or
combination of the outstanding shares of Common Stock), any
consolidation or merger to which the Company is a party, any
sale or transfer of all or substantially all of the assets
of the Company, or any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or
property; or
(5) the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding-up of the affairs of the
Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Preferred Stock, and shall cause to be mailed to
the holders of Preferred Stock at their last respective addresses as they shall
appear upon the Register, at least 30 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such dividend, distribution,
repurchase, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distribution, repurchase, redemption, rights or warrants are to
be determined, or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, share exchange, dissolution, liquidation or winding-up
is expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding-up; provided, however, that the failure to
mail such notice or any defect therein or in the mailing thereof shall not
affect the validity of the corporate action required to be specified in such
notice.
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e. If at any time conditions shall arise by reason of action taken by the
Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might
materially and adversely affect the rights of the holders of Preferred
Stock (different than or distinguished from the effect generally on
rights of holders of any class of the Company's capital stock) or if
at any time any such conditions are expected to arise by reason of any
action contemplated by the Company, the Company shall, at least 30
calendar days prior to the effective date of such action, mail a
written notice to each holder of Preferred Stock briefly describing
the action contemplated and the material adverse effects of such
action on the rights of such holders and an Appraiser selected by the
holders of majority in interest of the Preferred Stock shall give its
opinion as to the adjustment, if any (not inconsistent with the
standards established in this Section 5), of the Conversion Price
(including, if necessary, any adjustment as to the securities into
which shares of Preferred Stock may thereafter be convertible) and any
distribution which is or would be required to preserve without
diluting the rights of the holders of shares of Preferred Stock;
provided, however that the Company, after receipt of the determination
by such Appraiser, shall have the right to select an additional
Appraiser, in which case the adjustment shall be equal to the average
of the adjustments recommended by each such Appraiser. The Board of
Directors shall make the adjustment recommended forthwith upon the
receipt of such opinion or opinions or the taking of any such action
contemplated, as the case may be; provided, however, that no such
adjustment of the Conversion Price shall be made which in the opinion
of the Appraiser(s) giving the aforesaid opinion or opinions would
result in an increase of the Conversion Price to more than the
Conversion Price then in effect.
f. The Company (i) represents and warrants that as of the Issue Date (as
defined in Section 7), it has duly reserved solely for issuance upon
conversion of Preferred Stock, as herein provided, out of its
authorized and unissued Common Stock free from preemptive rights or
any other actual or contingent purchase rights of persons other than
holder of Preferred Stock, the number of shares of Common Stock as
would be issuable upon conversion of all of the shares of the
Preferred Stock that are authorized for issuance hereunder as if all
such shares were issued on, and such conversion had occurred on, the
Issue Date and (ii) covenants that it will at all times reserve and
keep available out of its authorized and unissued Common Stock solely
for the purpose of issuance upon conversion of Preferred Stock as
herein provided, free from preemptive rights or any other actual or
contingent purchase rights of persons other than the holders of
Preferred Stock, the number of shares of Common Stock as shall be
issuable (taking into account the resent provisions of Section 2(a)
and the adjustments and restrictions of Section 5(d) hereof) upon the
conversion of the aggregate of all outstanding shares of Preferred
Stock that are authorized for issuance hereunder. The Company
covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully
paid and nonassessable.
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g. Upon a conversion hereunder the Company shall not be required to issue
stock certificates representing fractions of shares of Common Stock,
but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Conversion Price. If the
Company elects not to, or is unable to, make such a cash payment, the
holder of Preferred Stock shall be entitled to receive, in lieu of the
final fraction of a share, one whole share of Common Stock.
h. The issuance of certificates for (i) shares of Common Stock on
conversion of Preferred Stock or (ii) shares of Preferred Stock paid
as dividends, shall be made without charge to the holders thereof for
any documentary stamp or similar taxes that may be payable in respect
of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issuance and delivery of any
such certificate upon conversion in a name other than that of the
holder of such shares of Preferred Stock so converted and the Company
shall not be required to issue or deliver such certificates unless or
until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established
to the satisfaction of the Company that such tax has been paid.
i. Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares
of preferred stock.
j. Any and all notices or other communications or deliveries to be
provided by the holder hereunder, including, without limitation, any
Conversion Notice, shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service
or sent by certified or registered mail, postage prepaid, addressed to
the attention of the Chief Operating Officer of the Company at the
facsimile telephone number or address of the principal place of
business of the Company and if applicable to the Transfer Agent. Any
and all notices or other communications or deliveries to be provided
by the Company hereunder shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid,
addressed to the holder at the facsimile telephone number or address
of the holder appearing on the books of the Company, or if no such
facsimile telephone number or address appears, at the principal place
of business of the holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the
earliest of (i) the date of transmission, if delivered via facsimile
at the facsimile telephone number specified in the Purchase Agreement
prior to 4:30 p.m. (Eastern Time) on a Trading Day, (ii) the Trading
Day after the date of transmission, if delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later
than 4:30 p.m. (Eastern Time) on any date and earlier than 11:59 p.m.
(Eastern Time) on such date, (iii) the Trading Day following the date
of mailing, if sent by nationally recognized overnight
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courier service, or (iv) upon actual receipt by the party to whom such
notice is required to be given.
Section 6. Redemption.
(a) The Company shall have the right, subject to each Holder's right to
convert all or any portion of its shares of Preferred Stock in accordance with
Section 5 hereof on or prior to the Redemption Date to redeem any or all of the
shares of Preferred Stock on any Quarterly Dividend Payment Date (for purposes
of this Section 6 such date shall be the ARedemption Date"), provided written
demand as set forth below is given. The redemption price for each share of
Preferred Stock to be redeemed shall be paid by the Company in cash in an amount
equal to the higher of (i) the product of (x) the Stated Value for such share of
Preferred Stock divided by the average closing bid price of a share of the
Company's Common Stock for the five (5) trading days immediately preceding the
Redemption Date, multiplied by (y) seven (7); and (ii) the product of (x) the
Stated Value for such Share of Preferred Stock divided by the Conversion Price,
multiplied by by (y) a number which shall be five (5) in the first year
following the Closing Date, six (6), in the second year following the Closing
Date, seven (7) in the third year following the Closing Date, eight (8) in the
fourth year following the Closing Date, nine (9) in the fifth year following the
Closing Date and ten (10) thereafter; (all subject to appropriate adjustment in
the event of any stock dividend, stock split, combination or other similar
recapitalization affecting such shares) (the ARedemption Price").
(b) Thirty (30) days prior to the Redemption Date, the Company shall
provide each holder of Preferred Stock with a written demand (ARedemption
Notice") (addressed to the holder at its address as it appears on the stock
transfer books of the Company) to redeem shares of Preferred Stock as provided
above, which notice shall specify the estimated Redemption Price and the number
of shares to be redeemed. All Redemption Notices hereunder shall be sent by
certified mail, returned receipt requested, and shall be deemed to have been
provided when received.
(c) On or prior to the Redemption Date, each holder of Preferred Stock
shall surrender his or its certificate or certificates representing the shares
to be redeemed, in the manner and at the place designated in the Redemption
Notice and if the Holder elects to convert any or all of the Shares of Preferred
Stock, a Holder Conversion Notice in conformance with Section 5 hereof. If less
than all shares represented by such certificate or certificates are redeemed,
the Company shall issue a new certificate for the unredeemed shares. From and
after the Redemption Date, unless there shall be a default in payment of the
Redemption Price, all rights of each holder with respect to shares of Preferred
Stock redeemed on the Redemption Date shall cease (except the right to receive
the Redemption Price and interest at the rate of 13% in the event payment is not
made within 20 days after the Redemption Date), and such shares shall not be
deemed to be outstanding for any purpose whatsoever.
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Section. Definitions. For the purposes hereof, the following terms shall
have the following meanings:
"Business Day" means any day of the year on which commercial banks are not
required or authorized to be closed in New York City.
"Common Stock" means shares now or hereafter authorized of the class of
Common Stock, $.001 par value, of the Company, stock of any other class into
which such shares may hereafter have been reclassified or changed and any other
equity securities of the Company hereafter designated as Common Stock.
"Conversion Amount" means, with respect to any share of Preferred Stock
surrendered for conversion hereunder, the Stated Value of such share of
Preferred Stock plus accrued but unpaid dividends thereon through and including
the applicable Conversion Date.
"Conversion Price" means $2.375 per share of Common Stock, subject to reset
or adjustment according to the provisions of the Investment Agreement or this
Certificate of Designation.
"Event of Default," wherever used herein, means any one of the following
events (whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):
a. any default by the Company to pay when due and payable dividends on any
shares of Preferred Stock, either on a Dividend Payment Date or Conversion Date,
or any other amounts hereunder, by acceleration or otherwise, or, within five
(5) Business Days following the delivery of notice to the Company, any fees or
any other amounts payable (and not otherwise referred to in this clause (a)) by
the Company under the Investment Agreement;
b. the Company shall fail to timely observe or perform any other covenant,
agreement or warranty contained in, or otherwise commit any breach of, this
Certificate of Designation or the Investment Agreement and such failure or
breach shall not have been remedied within five (5) Business Days after the date
on which such failure or breach shall have occurred or such other cure period as
may specifically be provided herein or in such other agreements with respect to
any particular covenant, agreement or warranty;
c. the Company or any of its subsidiaries shall commence a voluntary case
under the United States Bankruptcy Code as now or hereafter in effect or any
successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced
against the Company under the Bankruptcy Code and the petition is not
controverted within 30 days, or is not dismissed within 60 days, after
commencement of such involuntary case; or a "custodian" (as defined in the
Bankruptcy Code) is appointed for, or takes charge of, all or any substantial
part of the property of the Company or the Company commences any other
proceeding under any reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company or
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there is commenced against the Company any such proceeding which remains
undismissed for a period of 60 days; or the Company is adjudicated insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or the Company suffers any appointment of any custodian
or the like for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or the Company makes a general
assignment for the benefit of creditors; or the Company shall call a meeting of
its creditors with a view to arranging a composition or adjustment of its debts;
or the Company shall by any act or failure to act indicate its consent to,
approval of or acquiescence in any of the foregoing; or any corporate or other
action is taken by the Company for the purpose of effecting any of the
foregoing;
d. the Company shall fail to pay any amount of principal or interest on any
mortgage, credit agreement or other facility, indenture or other instrument
under which there may be issued, or by which there may be secured or evidenced,
any indebtedness of the Company in an amount exceeding fifty thousand dollars
($50,000) (collectively, "Indebtedness"), whether such Indebtedness now exists
or shall hereafter be created, when and as the same shall become due and
payable, or the Company shall fail to observe or perform any term, covenant or
agreement contained in any agreement or instrument evidencing or governing any
of such Indebtedness if the cure period for such term, covenant or agreement
contained in such agreement or instrument has run and the holder or holders of
such Indebtedness or a trustee on their behalf shall have the right to cause
such Indebtedness to become due prior to its stated maturity;
e. the Common Stock shall not be registered under Section 12, 13 or 15 of
the Securities Exchange Act of 1934, as amended, within one hundred and eighty
(180) days after the Closing Date (or if earlier, on or prior to the date on
which the registration statement relating to the shares of Common Stock into
which shares of Preferred Stock are convertible, as contemplated by the
Investment Agreement, is declared effective by the Commission);
f. the trading in the Common Stock shall have been suspended by the
Commission, the NASD OTC Bulletin Board or, once the Common Stock is listed on
the Nasdaq National Market or the Nasdaq SmallCap Market, by Nasdaq or any other
federal or state regulatory authority having jurisdiction over the Common Stock
(except for any suspension of trading of limited duration solely to permit
dissemination of material information regarding the Company and except if, at
the time there is any suspension on the Nasdaq Market, the Common Stock is then
listed and approved for trading on either the New York Stock Exchange, the
American Stock Exchange, the Nasdaq SmallCap Market, or the Nasdaq National
Market within two (2) Trading Days thereof);
g. once listed on any Nasdaq market, the Company shall have its Common
Stock delisted from the Nasdaq Market for at least ten (10) consecutive Trading
Days and is unable to obtain a listing on either the New York Stock Exchange,
the American Stock Exchange, the Nasdaq SmallCap Market or the Nasdaq National
Market within such ten (10) Trading Days; or
h. the entry of any judgments against the Company aggregating more than
$10,000.
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"Junior Securities" means the Common Stock and all other classes of equity
securities of the Company, other than the Series A Convertible Preferred Stock.
"Issue Date" shall mean, with respect to any share of Preferred Stock, the
date of the issuance of such share of Preferred Stock regardless of the number
of transfers of such share of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such share of Preferred Stock.
"Per Share Market Value" means the lesser of (i) $2.375 or (ii) the average
closing bid price per share of Common Stock for the five (5) trading days
immediately preceding a Conversion Date. For purposes of determining the closing
bid price on any day, reference shall be to the closing bid price for a share of
Common Stock on such date on the NASD OTC Bulletin Board, the Nasdaq SmallCap
Stock Market or such other securities exchange or market as reported on
Bloomberg, L.P. (or similar organization or agency succeeding to its functions
of reporting prices).
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Trading Day" means (a) a day on which the Common Stock is traded on the
NASD OTC Bulletin Board, The Nasdaq National Market or Nasdaq SmallCap Stock
Market or principal national securities exchange or market on which the Common
Stock has been listed or quoted, or (b) if the Common Stock is not listed or
quoted on The Nasdaq National Market or Nasdaq SmallCap Market or any principal
national securities exchange or market, a day on which the Common Stock is
traded in the over-the-counter market, as reported by Bloomberg, L.P., the
National Quotation Bureau Incorporated or any similar organization or agency
succeeding its functions of reporting prices.
RESOLVED FURTHER, that the Chairman and Secretary of the Company be, and
they hereby are, authorized and directed to prepare, execute, verify and file
with the
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Secretary of State of Delaware, A Certificate of Designation in accordance
with these resolutions and as required by law.
IN WITNESS WHEREOF, American Interactive Media, Inc. has caused its
corporate seal to be hereunto affixed and this certificate to be signed by Mark
Graff, its Chairman and CEO, and attested by James Stokes Hatch, its secretary,
this 16th Day of November, 1998.
AMERICAN INTERACTIVE MEDIA, INC.
By: /s/ Mark Graff
-------------------------------
Name: Mark Graff
Title: Chairman and CEO
Attest
By: /s/ James Stokes Hatch
-------------------------------
Name: James Stokes Hatch
Title: Secretary
16
VOTING TRUST AND STOCKHOLDERS' AGREEMENT
AGREEMENT, made as of this 1st day of January, 1997 by and among WEBFEAT
INC., a Delaware corporation (the "Corporation"), MARK GRAFF ("Graff" or "Voting
Trustee") and the other stockholders of the Corporation listed on the signature
page hereof (the "Stockholders").
W I T N E S S E T H :
WHEREAS, the Stockholders own, of record and beneficially, 275 shares of
common stock, $.01 par value (the "Shares"), of the Corporation; and
WHEREAS, the Stockholders deem it necessary and advisable and in their best
interests to deposit the Shares with the Voting Trustee on the terms and
conditions hereinafter set forth in order, inter alia, to assure the continuity
and stability of policy and management of the Corporation.
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants and agreements hereinafter contained, it is hereby agreed as
follows:
1. Term. The term of this Agreement shall commence on the date hereof and
continue for a period of three years thereafter.
2. Transfer of Shares to Voting Trustee. Each of the Stockholders,
simultaneously with the execution and delivery of this Agreement, has delivered
or caused to be delivered to the Voting Trustee a stock certificate representing
such Stockholder's Shares (receipt of which is hereby acknowledged by the Voting
Trustee). The parties shall immediately take such actions as are necessary or
appropriate to effect the transfer of the Shares to the Voting Trustee on the
books of the Corporation, including the immediate filing of a copy of this
Agreement at the registered office of the Corporation in the State of Delaware.
The Voting Trustee shall hold in trust the Shares, as stockholder of record,
subject to the terms and conditions of this Agreement.
3. Issuance of Voting Trust Certificate. Promptly after the execution
hereof, the Voting Trustee shall issue to each of the Stockholders, in exchange
for the Shares delivered or caused to be delivered by such Stockholder
hereunder, a voting trust certificate substantially in the form annexed as
Exhibit A hereto (a "Voting Trust Certificate").
4. Transfer of a Voting Trust Certificate. Subject to the terms of this
Agreement, a Voting Trust Certificate shall be transferable only on the books of
the Voting Trustee and upon proper endorsement and surrender thereof. Until a
Voting Trust Certificate is transferred on the books of the Voting Trustee, the
Voting Trustee may, for all purposes whatsoever, treat the registered holder of
such Voting Trust Certificate as its owner. Subject to the terms of this
Agreement, all or part of the interest in a Voting Trust Certificate may be
transferred by a registered holder thereof; provided, however, that any
transferee (including one by operation of law) must first agree to be bound by
the terms of this Agreement. The term "Stockholders," as used herein, shall be
deemed to include any such transferee.
<PAGE>
5. Receipt of Additional Stock Certificates. In the event that the Voting
Trustee shall receive any stock certificates of the Corporation or any other
corporation issued by way of a dividend, split-up, recapitalization, exchange,
reorganization, merger, consolidation, or any other change or adjustment
involving the Shares held by him pursuant to this Agreement, the Voting Trustee
shall hold such additional or changed stock certificates subject to the terms of
this Agreement and shall issue additional or substitute Voting Trust
Certificates therefor. In the event that any Stockholder receives any stock
certificates of the Corporation or any other corporation by reason of any such
change or adjustment involving the Shares, such Stockholder agrees to deliver
such certificates to the Voting Trustee. The term "Shares," as used herein,
shall include, in addition to the Shares originally deposited into the Voting
Trust, all shares of stock of the Corporation or any other corporation deposited
in the Voting Trust pursuant to this Paragraph 5 and the term "Corporation," as
used herein, shall include any successor to the Corporation resulting from the
events described in this Paragraph 5.
6. Authority of Voting Trustee to Vote the Shares. The Voting Trustee shall
have full power and authority, and is hereby fully and exclusively empowered and
authorized, to vote in person or by proxy the Shares deposited hereunder and
transferred to the Voting Trustee at meetings of stockholders of the Corporation
or to execute written consents in lieu of any such meetings. Such power to vote
and execute consents shall be irrevocable for the term of this Agreement and
shall extend to the election of directors, to the waiver of notice of meetings,
and to any and all other matters and questions which may be properly brought
before any stockholders' meeting.
7. Dividends and Distributions. The Voting Trustee shall collect all
dividends and distributions on account of the Shares and shall promptly
distribute the same to the holder(s) of Voting Trust Certificate(s), except as
otherwise provided by Paragraph 5 hereof.
8. No Compensation; Expenses. The Voting Trustee shall serve without
compensation. The Voting Trustee shall have the right to incur and pay such
reasonable expenses and charges and to employ such professional counsel as he
may deem necessary and proper in the performance of his duties hereunder. Any
such charges or expenses incurred may be charged pro rata to the holder(s) of
Voting Trust Certificate(s) who shall then promptly pay such amounts to the
Voting Trustee.
9. Indemnification of Voting Trustee. The Voting Trustee shall not be
liable by reason of any matter arising out of or in relation to this Agreement,
except for such loss or damage as any Voting Trust Certificate holder may suffer
by reason of the Voting Trustee's willful misconduct or gross negligence, and,
without limiting the foregoing, the Voting Trustee shall not be liable for any
action taken, or omitted to be taken, by him in reliance upon and in conformity
with the advice of legal counsel. The Voting Trustee shall be indemnified and
held harmless by each Voting Trust Certificate holder from and against any and
all liabilities, costs, claims, damages and expenses (including, without
limitation, reasonable attorneys' fees and disbursements) arising out of the
Voting Trustee's actions or failures to act hereunder or his status as Voting
Trustee, except such arising from Voting Trustee's willful misconduct or gross
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<PAGE>
negligence. The Voting Trustee shall not be required to post a bond or other
security for the faithful performance of his duties as such.
10. No Disqualification. Nothing herein contained shall disqualify the
Voting Trustee from voting for himself to serve or from serving the Corporation
or any subsidiaries or affiliates as an officer or director or in any other
capacity and from voting for himself to receive and receiving compensation for
such services.
11. Successor Trustee. If the Voting Trustee shall resign, die, or become
physically or mentally unable to serve as a Voting Trustee, then Frederick E.
Smithline, if he is then living and willing to serve as such, shall succeed him
as the Voting Trustee hereunder.
12. Delivery of Stock Certificates Upon Termination. Upon the termination
of this Agreement, the Voting Trustee shall deliver a stock certificate to the
holder of each Voting Trust Certificate for the number and type of shares
represented thereby upon surrender of the Voting Trust Certificate.
13. General Limitation on Sales. Except as expressly provided for in this
Agreement and except for any sale or other transfer to Graff, each Stockholder
hereby agrees that he shall not at any time during the term of this Agreement
sell, or in any other way directly or indirectly transfer, assign, distribute,
devise, encumber or otherwise dispose of, either voluntarily or involuntarily
and whether or not for consideration, any Shares, Voting Trust Certificate or
interest in either thereof (hereinafter collectively referred to as a "Sale of
Shares"). This Agreement shall not restrict in any way the right of Graff to
engage in any Sale of Shares.
14. Right of First Refusal.
a. In the event any Stockholder receives a bona fide offer from a
third party (hereinafter called the "Paragraph 14 Offeror") to purchase
from such Stockholder any Shares, including by way of purchase of the
related Voting Trust Certificate or interest therein (hereinafter called a
"Paragraph 14 Offer"), such stockholder (the "Selling Stockholder") shall
not effectuate such Sale of Shares unless he shall first have complied with
the terms of this Paragraph 14. The Selling Stockholder shall promptly
forward to Graff a notice setting forth all material terms and provisions
of the Paragraph 14 Offer (a "Paragraph 14 Offer Notice"). The Paragraph 14
Offer Notice shall constitute an irrevocable offer to sell to Graff all or
any part of the Shares or interest therein proposed to be sold (the
"Offered Shares") on terms identical to those described in the Paragraph 14
Offer Notice (the "Offered Terms"). Graff shall have a period of 30 days
after his receipt of the Paragraph 14 Offer Notice to exercise the
aforesaid option by delivery, on or prior to such 30th day, of a notice to
the Selling Stockholder setting forth the number of Offered Shares which he
elects to purchase (a "Notice of Acceptance"). All purchases provided for
in this subsection shall be made not later than 30 days after the date as
of which Graff shall have given the Notice of Acceptance, at a closing at
the principal place of business of the Corporation, or at such other place
and on such other date as the parties to the purchase shall agree. Each
Stockholder hereby warrants that any Shares sold by him pursuant to the
terms of this Paragraph 14a shall be free of any claims, liens, security
interests or other such encumbrances, that he shall
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<PAGE>
then be the sole and exclusive owner of such shares and that he shall then
have all right, power and authority to effectuate such sale. Any shares
which the Stockholder shall have been entitled, but shall have declined, to
sell to the Paragraph 14 Offeror may not be sold until they are again
offered to Graff under this Paragraph 14.
b. In the event that Graff does not give a Notice of Acceptance within
the aforesaid 30 day period, the Stockholder may consummate the Sale of
Shares described in the Paragraph 14 Notice upon the Offered Terms;
provided, however, that such Sale of Shares shall be subject to all of the
terms of this Agreement and any new Stockholder shall, prior to becoming a
Stockholder, execute and deliver to the Corporation and Graff an
appropriate agreement, prepared by Graff and the Corporation, to be bound
by the terms and provisions of this Agreement to the extent and in the same
manner as the Stockholder (including, without limitation, with respect to
this Paragraph 14), and each Stockholder prior to any Sale of Shares by it
to any other person or entity pursuant to this Paragraph 14 shall ensure
that such an agreement has been executed and delivered to the Corporation.
15. Third-Party Offer.
a. In the event that Graff shall receive a bona fide offer (a
"Paragraph 15 Offer") from one or more third parties (a "Paragraph 15
Offeror") to purchase or otherwise acquire all of his Shares of the
Corporation, Graff shall have the right to cause each Stockholder to sell
or otherwise transfer to such third party or parties all Shares owned by
such Stockholder on the terms and conditions set forth in the Stockholders
Third Party Notice (defined below). Upon receipt of the Paragraph 15 Offer,
Graff shall have the right to deliver a notice to the Corporation and each
Stockholder which shall: (i) describe the material terms and provisions of
the Paragraph 15 Offer, and (ii) identify the Paragraph 15 Offeror (the
"Stockholders Third Party Notice").
b. The closing with respect to the sale by Graff and the Stockholders,
of all their Shares to the Paragraph 15 Offeror hereunder (the "Paragraph
15 Sale"), shall occur no later than 45 days after the date on which the
Stockholders Third Party Notice is given. The closing date may be extended
beyond the 45 days at the discretion of Graff. The closing shall be held at
the principal place of business of the Corporation, or at such other place
to be determined by Graff and the Paragraph 15 Offeror. The Stockholders
agree that they shall take any and all reasonable action necessary and/or
appropriate to cause the consummation of the Paragraph 15 Sale.
c. Each Stockholder hereby warrants and shall warrant to the Paragraph
15 Offeror with respect to such sale that any and all Shares sold by him to
the Paragraph 15 Offeror hereunder shall be free of any claims, liens,
security interests or other such encumbrances, that he shall then be the
sole and exclusive owner of such shares and that he shall then have all
right, power and authority to effectuate such sale.
16. Confidentiality. Each of the Stockholders agrees that he will not
willfully, either during the term of this Agreement or subsequent thereto,
commit any act, or in any way
4
<PAGE>
assist others to commit any act, for the purpose of injuring the Corporation,
and, without limiting the generality of the foregoing, he will not, except in
connection with the benefit of, or his duties to, the Corporation (a) divulge or
make available to others any confidential information or know-how, trade secrets
or inventions, or documents, files, customer lists, surveys or other papers or
things concerning the business or financial affairs of the Corporation or of any
affiliate of the Corporation ("Confidential Information"), or (b) remove any
such Confidential Information from the premises of the Corporation or any
affiliate.
17. Notices. All notices, advice and communications to be given or
otherwise made to any party to this Agreement shall be contained in a written
instrument delivered in person (which shall include express couriers, such as
Federal Express) or duly sent by first class registered or certified mail,
postage prepaid, addressed to such party at the address set forth below or at
such other address as may hereafter be designated in writing by the addressee to
all other parties hereto:
If to the Corporation:
Webfeat Inc.
611 Broadway
Suite 418
New York, New York 10012
Attention: President
If to Graff:
Mark Graff
2 Perry Lane
Nyack, New York 10960
If to the Stockholders:
At their respective addresses set forth on the signature pages
attached hereto.
All notices, advice and communications sent as aforesaid shall be deemed to have
been received on the date of such delivery.
18. Modification. The provisions of this Agreement may be amended at any
time and from time to time, with and only with an agreement or consent in
writing signed by the parties hereto.
19. Captions. The captions herein are inserted for convenience only and
shall not define, limit, extend or describe the scope of this Agreement or
affect the construction hereof.
5
<PAGE>
20. Nouns and Pronouns. Whenever the context may require, any pronouns used
herein shall include the corresponding masculine, feminine or neuter forms, and
the singular form of names and pronouns shall include the plural and vice versa.
21. Severability; Governing Law. If any provision of this Agreement shall
be determined to be illegal and unenforceable by any court of law, the remaining
provisions shall be severable and enforceable in accordance with their terms.
This Agreement shall be governed by, and construed in accordance with, the laws
of the State of Delaware.
22. Benefits of Agreement. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective successors and assigns, legal
representatives and heirs; provided, however, that the rights of the
Stockholders provided herein shall be transferable only in connection with a
Sale of Shares and any purported transfer of rights or Sale of Shares in
violation hereof shall be null and void ab initio. The death, disability or
incompetency of the Stockholders during the term of this Agreement shall in no
way affect the validity or enforceability of this Agreement or a Voting Trust
Certificate issued pursuant hereto.
23. Merger Provision. This Agreement constitutes the entire agreement among
the parties pertaining to the subject matter hereof and supersedes all prior and
contemporaneous agreements and understandings of the parties in connection
therewith.
24. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which,
taken together, shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Voting Trust
Agreement as of the day and year first above written.
WEBFEAT INC.
By: ______________________________
Mark Graff
President
VOTING TRUSTEE:
______________________________
Mark Graff
RESIDENCE: STOCKHOLDERS:
1618 N. Fairfax Avenue ______________________________
Los Angeles, CA 90046 William J. Zaccheo
33 Greenwich Avenue, #9F ______________________________
New York, NY 10014 Richard Scott Feifer
56 Nestro Road ______________________________
West Orange, NJ 07052 Robert M. Gyure
85 North 13th Street ______________________________
Bloomfield, NJ 07003 Robert P. Perna
80 East End Ave., #12A ______________________________
New York, NY 10012 Jerilyn Kessel
1555 East 19th Street ______________________________
Brooklyn, NY 11230 David A. Daniels
3 Sycamore Lane ______________________________
White Plains, NY 10605 Frederick E. Smithline
7
VOTING AND SHAREHOLDERS AGREEMENT dated as of November 16, 1998 by and
between Pioneer Ventures Associates Limited Partnership, having an office at 651
Day Hill Road, Windsor, Connecticut 06095 (the "Pioneer Partnership"), AND
certain Shareholders of American Interactive Media, Inc. (the "Company"), who
are parties hereto (collectively hereinafter referred to as the "Principal
Shareholders").
WHEREAS, the Principal Shareholders have "beneficial ownership," as that
term is defined under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") of an aggregate of 3,995,000 shares of common stock, $.001 par
value per share ("Common Shares") of American Interactive Media, Inc. (the
"Company") as more specifically set forth in Exhibit A attached hereto;
WHEREAS, pursuant to a certain Investment Agreement dated the date hereof
(the "Investment Agreement"), the Pioneer Partnership is investing in the
Company through the purchase of Preferred Stock and Warrants and may make
additional investments in the Company through the exercise of the Warrants in
the future; and
WHEREAS, the execution of this Agreement by the parties hereto is a
condition precedent to the consummation of the transactions provided for in the
Investment Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties hereto agree as follows:
ARTICLE I.
1.1 Voting by Principal Shareholders; Agreement to Vote.
Each of the Principal Shareholders agrees that, so long as the Pioneer
Partnership, its Partners or affiliates shall own any Preferred Stock, Warrants
or Common Stock obtained either through conversion of the Preferred Stock or
exercise of the Warrants, each of the Principal Shareholders shall vote all of
their Common Shares, whether now owned or hereafter acquired, for the election
as a director(s) of the Company of the designee(s) of the Pioneer Partnership in
accordance with paragraph 1.10 of the Investment Agreement at any meeting of the
Company's shareholders at which such designee shall be nominated as a director.
Without limiting the generality of the foregoing, the Principal Shareholders
agree to execute and deliver any and all documents, agreements and instruments,
including, without limitation, proxies, as the Pioneer Partnership shall
reasonably request so that at least one (1) designee of the Pioneer Partnership
shall be a director of the Company at all times while any Preferred Stock or
such Common Stock is held by the Pioneer Partnership.
1.2 Special Meeting Upon Default.
In the event of a default under, or a breach of, this Agreement which (in the
reasonable judgment of the Pioneer Partnership) materially adversely affects the
Pioneer Partnership, or the Investment Agreement, or the Certificate of
Designation of Preferred Stock under which the Pioneer Partnership or its
assigns are a holder of Preferred Stock, the Principal Shareholders agree to
call and the Company agrees to pay the expenses associated with a special
meeting of
<PAGE>
the Shareholders at the sole expense of the Company, and the Principal
Shareholders each agree that they shall vote in favor of that number of and
those nominees to the Board of Directors designated by the Pioneer Partnership
such that the nominees of the Pioneer Partnership shall be equal to the number
of directors of the Company who are designees of Hollinger Digital, Inc.
("Hollinger") and such that the number of directors of the Pioneer Partnership
and Hollinger, taken in the aggregate, shall constitute a majority of the
directors of the Company, after any such defaults, for so long as the Pioneer
Partnership, its partners or affiliates own Preferred Stock, Warrants or Common
Stock obtained through the conversion of Preferred Stock or the exercise of
Warrants. The Principal Shareholders hereby agree to take no action to
contravene, limit or otherwise terminate the Pioneer Partnership and Hollinger
board election mechanism. The Principal Shareholders agree to vote in favor of
such Pioneer Partnership and Hollinger nominees for so long as the Pioneer
Partnership, its partners or affiliates own Preferred Stock, Warrants or Common
Stock obtained through the conversion of Preferred Stock or the exercise of
Warrants.
1.3 Preservation of Bylaws.
The provisions of Sections 1(a) and 1(b) above are in consonance with the
amendments to the Bylaws of the Company as set forth in the minutes of a special
meeting (Unanimous Written Consent) of the Board of Directors of the Company,
attached hereto as Exhibit B, and incorporated herein by this reference (the
"Resolutions"). If the directors or the shareholders of the Company further
amend such Bylaws at any time during which the Pioneer Partnership shall own any
Preferred Stock, Warrants or Common Stock obtained upon conversion of Preferred
Stock or exercise of Warrants, notice shall be given to the Pioneer Partnership,
and upon the written demand therefor by the Pioneer Partnership, the Principal
Shareholders shall promptly call a special meeting of the Shareholders and the
Company hereby agrees to pay all expenses in connection with such meeting, at
the sole expense of the Company, and the Principal Shareholders each agree that
they shall vote all of their Common Shares, whether now owned or hereafter
acquired, for the Bylaws to be restored to or retained, as the case may be, to
the form as set forth in the Resolutions, in accordance with the By-laws.
ARTICLE II. Transfers
2.1 Transfer of Common Shares to Affiliates.
During the term of this Agreement, neither the Principal Shareholders nor any
other person who shall become a party to or bound by this Agreement shall
transfer any Common Shares, whether now or hereafter acquired, other than (i) to
any person who agrees to be bound by and be subject to the terms and conditions
of this Agreement with the same force and effect as if such person were named as
a party to this Agreement or as a Principal Shareholder hereunder, provided that
the Pioneer Partnership consents to such transfer, such consent not to be
unreasonably withheld, and (ii) beginning November 16, 1999, pursuant to any
sale of securities pursuant to a distribution to the public, whether pursuant to
a registered public offering, a Rule 144 sale or otherwise, provided that the
Pioneer Partnership consents to such sale, such consent not to be unreasonably
withheld.
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<PAGE>
2.2 Legend on Stock Certificates.
The Principal Shareholder shall submit to the Transfer Agent for the Common
Stock the certificates evidencing the Common Stock now owned by the Principal
Shareholders (the "Restricted Shares") and the Company shall cause the Transfer
Agent to imprint upon such certificates (or replacement certificates) a
restrictive legend as follows:
The shares of stock represented by this certificate are subject to all of the
terms of a certain Voting and Shareholders Agreement dated November 16, 1998, a
copy of which is on file at the offices of the issuer of this certificate. The
shares are subject to certain voting, co-sale and transfer restrictions. Any
actions taken in contravention to that agreement shall be null and void.
The terms of such endorsement and restrictions are hereby expressly consented to
and accepted.
ARTICLE III. Co-Sale Provisions
3.1 Third-Party Offer and Notice.
Any voluntary or involuntary transfer of the Common Shares by any Principal
Shareholder will be subject to a participation right of co-sale by the Pioneer
Partnership or its assigns on a pro rata fully diluted basis. If any one or more
of the Principal Shareholders obtain from a third party ("Third Party
Purchaser") an offer to purchase any amount of his or her Shares, and the
Principal Shareholder(s) wish to accept such offer, the Principal Shareholder(s)
shall submit a written notice (the "Co-Sale Notice") to the Pioneer Partnership
disclosing the amount of Common Shares proposed to be sold, the offered purchase
price, the proposed closing date, and the total number of Common Shares owned by
the Principal Shareholder(s).
3.2 Co-Sale Right of Participation.
Upon receipt of a Co-Sale Notice from any Principal Shareholder, the Pioneer
Partnership or its assigns may elect to participate in such transaction and
shall have the right to offer its securities, at the same price and on the same
terms, on a fully diluted pro rata basis with the proposed selling
shareholder(s) as set forth in the offer made by the Third Party Purchaser. Each
participating selling party shall in turn be entitled to receive at the
applicable closing the net proceeds of the sale allocable to the securities sold
on behalf of each selling shareholder, after deduction of such selling
shareholder's proportionate share of the reasonable expenses of the sale. These
co-sale provisions will not apply to any sale of securities pursuant to a
distribution to the public, whether pursuant to a registered public offering, a
Rule 144 sale or otherwise. If less than all of a shareholder's securities are
being sold pursuant to this Article III, the securities to be sold shall be
determined on a pro rata fully diluted basis.
3.3 Notice of Intent to Participate in Co-Sale.
If the Pioneer Partnership wishes to participate in any sale under this Article
III, then the Pioneer Partnership shall notify the selling Principal
Shareholder(s) in writing of such intention as soon as practicable after such
Pioneer Partnership's receipt of the Co-Sale Notice made pursuant to Section
3.1, and in any event within fifteen (15) business days after the date of such
Co-Sale Notice has been delivered. Such notification shall be delivered in
person or by facsimile to the Principal Shareholder(s) at the Company's offices.
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<PAGE>
3.4 Exception to this Article III.
This Article III shall not apply to transfers made pursuant to Section 14 of
that certain Voting Trust and Stockholders' Agreement dated January 1, 1997
among Mark Graff ("Graff") and certain shareholders.
ARTICLE IV. Remedies
4.1 Violation of Agreement.
Consent to Injunctive Relief. Each of the Principal Shareholders recognizes and
agrees that any violation of any of his or her obligations set forth in this
Agreement would cause irreparable damage which could not be compensated by
monetary damages. Such violation shall constitute an Event of Default under the
Investment Agreement. Accordingly, in the event of any breach of a Principal
Shareholder's obligations under this Agreement, such Principal Shareholder
consents to the entry of injunctive relief, including the remedy of specific
performance, by a court of competent jurisdiction restraining any such violation
or threatened violation, and/or granting full voting authority to the Pioneer
Partnership for purposes of this Agreement, in addition to any other remedies
available at law or in equity. The Principal Shareholders agree to pay the
reasonable costs of the Pioneer Partnership, including reasonable attorneys
fees, incurred in enforcing the provisions of this Article IV.
ARTICLE V. Miscellaneous
5.1 Representations.
Graff represents and warrants that, at the date hereof, he is the sole record
and beneficial owner of the securities of the Company set forth opposite his
name on Exhibit A to this Agreement and voting trustee with full power to bind
the other shareholders to the provisions of Article I hereof for the shares for
which he is named as voting trustee on such Exhibit A. Each of the Principal
Shareholders represents that he/she is not the beneficial owner of any Common
Shares or any warrants, options, rights to acquire or securities convertible
into Common Shares NOT disclosed herein through any affiliate or otherwise.
5.2 Term.
This Agreement shall terminate on the earlier to occur of (i) ten (10) years
from the Closing Date or (ii) the date upon which the Pioneer Partnership, its
partners and affiliates no longer own five percent (5%) of the Preferred Stock
(including for purposes of such calculation all shares of Common Stock received
upon conversion of the Preferred Stock).
5.3 Further Assurances.
From and after the date of this Agreement, the parties hereto shall from time to
time, at the request of any other party and without further consideration, do,
execute and deliver, or cause to be done, executed and delivered, all such
further acts, things and instruments as may be reasonably requested or required
more effectively to evidence and give effect to the transactions provided for in
this Agreement.
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<PAGE>
5.4 Notices.
All notices, requests, demands and other communications required or permitted
under this Agreement shall be in writing and shall be deemed to have been duly
given if personally delivered or if mailed by first class registered or
certified mail return receipt requested, or by first class mail or overnight
courier if received, addressed to the parties at their respective addresses set
forth on the first page of this Agreement, or to such other person or address as
may be designated by like notice hereunder.
5.5 Modifications.
This Agreement may not be modified or discharged orally, but only in writing
duly executed by the party to be charged.
5.6 Successors and Assigns.
All the covenants, stipulations, promises and agreements in this Agreement shall
bind the parties' respective heirs, successors and assigns, whether so expressed
or not.
5.7 Headings.
The headings of the various sections of this Agreement are for convenience of
reference only and shall in no way modify any of the terms or provisions of this
Agreement.
5.8 Governing Law.
This Agreement shall be governed by and construed in accordance with the laws of
the State of Delaware applicable to instruments made and to be performed
entirely within such State.
5.9 Counterparts.
This Agreement may be executed in two or more counterparts, each of which shall
be deemed an original but all of which together shall constitute one and the
same document.
5.10 Gender.
All pronouns used herein are inserted for convenience only and shall be applied
in the masculine, feminine, or third person as appropriate for each party
signing hereto.
5.11 Use of Term "Pioneer Partnership". Notwithstanding any provision of this
Agreement to the contrary, included in the definition and meaning of the
"Pioneer Partnership" shall be any one or more parallel limited partnerships
which have been or shall be organized by Ventures Management Partners LLC as the
general partner to invest in parallel with Pioneer Ventures Associates Limited
Partnership on the same economic terms and pro rata based upon their aggregate
subscriptions. The limited partners of Pioneer Ventures Associates Limited
Partnership and the parallel partnerships shall be referred to herein as the
"limited partners".
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<PAGE>
5.12 Capitalized terms use in this Agreement but not otherwise defined herein
shall have the meanings given to them in the Investment Agreement.
[ SIGNATURE PAGE TO FOLLOW ]
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date and year first above written.
By the Pioneer Partnership:
PIONEER VENTURES ASSOCIATES LIMITED PARTNERSHIP
By:
------------------------------------
Pioneer Ventures Corp.,
Managing Member
of the General Partner
Ventures Management Partners LLC
By: /s/ Robert A. Lerman
------------------------------------
Robert A. Lerman, President
the Principal Shareholders:
/s/ Mark Graff
- ---------------------------------------
Mark Graff, individually
Mark Graff, as Trustee for the Shareholders
listed on Exhibit A hereto
/s/ James Stokes Hatch
- ---------------------------------------
James Stokes Hatch
Consented to, and the obligation set forth in Article I to pay for such special
meetings of the Shareholders is hereby agreed to:
AMERICAN INTERACTIVE MEDIA, INC.
By: /s/ Mark Graff
------------------------------------
Mark Graff
President
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SHAREHOLDERS AGREEMENT
This shareholders agreement (the "Agreement") is made and entered into as
of November 16, 1998, by and among Hollinger Digital Inc., a Delaware
corporation ("Hollinger"), Pioneer Ventures Associates Limited Partnership, a
Connecticut limited partnership ("Pioneer"), and Mark Graff ("Graff") (together,
the "Shareholders").
WHEREAS, the Shareholders deem it in their best interests and in the best
interests of American Interactive Media, Inc., a Delaware corporation (the
"Company") to provide consistent and uniform management of the Company and
desire to enter into this Agreement in order to effectuate that purpose.
NOW THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, the Shareholders, for good and valuable consideration, and
intending to be legally bound, hereby agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
The Shareholders, severally and not jointly, represent and warrant each as
to itself as follows:
(a) The Shareholder is authorized to execute and deliver this
Agreement. This Agreement has been duly executed and delivered by the
Shareholder and constitutes the legal, valid and binding obligation of the
Shareholder, enforceable against the Shareholder in accordance with its
terms, except to the extent that such enforcement is limited by bankruptcy,
insolvency, reorganization or other laws relating to or affecting the
enforcement of creditors' rights generally or by general principles of
equity.
(b) The execution, delivery and performance by the Shareholder of this
Agreement, and the consum.. mation by the Shareholder of the transactions
contemplated hereby and thereby: (i) do not and will not violate or
conflict with any provision of law or regulation, or any writ, order,
judgment or decree of any court or governmental or regulatory authority
specifically naming the Shareholder; and (ii) do not and will not, with or
without the passage of time or the giving of notice, result in the breach
of, or constitute a default, cause the acceleration of performance, permit
the unilateral modification or termination of, or require any consent
under, or result in the creation of any lien, charge or encumbrance upon
any property or assets of the Shareholder pursuant to, any material
instrument or agreement to which the Shareholder is a party or by which the
Shareholder or any of its respective properties may be bound or affected.
<PAGE>
2. COMPOSITION OF THE BOARD
(a) The Board of Directors of the Company shall consist of at least
five directors, of which four directors shall include (i) Mark Graff, as
long as he serves as President of the Company or an executive officer of
the Company or any subsidiary, (ii) at least two designees of Hollinger, as
long as Hollinger owns Shares (as defined herein) or debentures of the
Company convertible into such Shares and (iii) one designee of Pioneer, as
long as Pioneer owns Shares (as defined herein).
(b) Each Shareholder shall appear in person or by proxy at any annual
or special meeting of shareholders (or in lieu of any such meeting, shall
give the Shareholder's written consent with respect to such Shareholder's
Common Stock and all other securities of the Company of any kind or class
having power to vote for the election of directors ("Shares")) for the
purposes of obtaining a quorum and shall vote the Shares owned by such
Shareholder, or over which such Shareholder has voting power, either in
person or by proxy, at any annual or special meeting of shareholders of the
Company called for the purpose of voting on the election or removal of
directors or by consensual action of shareholders with respect to the
election or removal of directors, in favor of the election of the directors
nominated in accordance with Section 2(a) and shall take all other actions
necessary to give effect to the provisions of this Agreement, and to ensure
that the By-laws of the Company do not, at any time hereafter, conflict in
any respect with the provisions of this Agreement.
(c) No Shareholder shall hereafter grant any proxy or enter into or
agree to be bound by any voting trust with respect to its Shares nor shall
any Shareholder enter into any stockholder agreements or arrangements of
any kind with any person with respect to its Shares inconsistent with the
provisions of this Agreement, provided that this provision shall in no way
limit the ability of a Shareholder to sell or dispose of its Shares.
3. TERMINATION
This Agreement shall, unless otherwise agreed to by each of the
Shareholders, terminate on the date which is five years from the date hereof,
whereupon the foregoing provisions of this Agreement shall cease to have any
force or effect.
4. FURTHER ASSURANCES
At any time or from time to time after the execution of this Agreement,
each party hereto agrees to take such actions and to execute and deliver such
documents as shall be reasonably necessary to effectuate the purposes of this
Agreement.
5. WAIVER AND AMENDMENT
No amendment or modification of any provision of this Agreement shall be
effective unless contained in a written agreement signed by each of the parties
hereto. No waiver of any provision of this Agreement shall be effective unless
it is set forth in a written instrument signed by the party waiving its rights
hereunder. The failure or delay by any party in exercising
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<PAGE>
any right, power or remedy under this Agreement shall not operate as a waiver of
any such right, power or remedy.
6. ASSIGNMENT
No party may assign or sublicense any of its rights or delegate any of its
obligations under this Agreement to any third party without the express written
consent of the other parties, and such consent shall not be unreasonably
withheld.
7. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware applicable to contracts made and to be performed
entirely within the State.
8. SEVERABILITY
If any provision or provisions of this Agreement shall be held to be
illegal, invalid or unenforceable, the validity, legality and enforceability of
the remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
9. NOTICES
Any notice or payment required or permitted to be made by or given by any
party hereto shall be sufficiently made or given on the date sent by such party
to the other parties by mail, facsimile, commercial overnight courier, personal
delivery, or a similar reliable delivery method, addressed as set forth below or
to such other address as any other party shall designate by written notice given
to the party giving the notice or making the payment in accordance with this
Agreement.
In the case of the Company:
American Interactive Media, Inc.
611 Broadway
Suite 308
New York, New York 10012
Attention: James Stokes Hatch, Secretary
Telecopy Number: (212) 358-8380
with a copy to:
Curtis, Mallet-Prevost, Colt & Mosle
101 Park Avenue
New York, New York 10178
Attention: Jeffrey N. Ostrager, Esq.
Telecopy Number: (212) 697-1559
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<PAGE>
In the case of Hollinger:
Hollinger Digital, Inc.
270 Lafayette Street, Suite 600
New York, New York 10012
Attention: Philip Kunsberg
Telecopy Number: (212) 334-5957
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: Judith R. Thoyer, Esq.
Telecopy Number: (212) 757-3990
In the case of Pioneer:
Pioneer Ventures Associates Limited Partnership
651 Day Hill Road
P.O. Box 40
Windsor, Connecticut 06095
Attention: Robert A. Lerman, Managing Director
with a copy to:
Kaplan Gottbetter & Levenson
630 Third Avenue, 5th Floor
New York, New York 10017
Attention: Martin Enright, Esq.
Telecopy Number: (212) 983-9210
In the case of Graff:
Mark Graff
c/o American Interactive Media, Inc.
611 Broadway, Suite 308
New York, New York 10012
Telecopy Number: (212) 358-8380
10. HEADINGS
The headings used in this Agreement are inserted for convenience of
reference only and shall not be a part of, or affect the meaning or
interpretation of, this Agreement.
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<PAGE>
11. INJUNCTIVE RELIEF
It is possible that remedies that exist at law may be inadequate and,
therefore, the parties hereto shall be entitled to equitable relief including,
without limitation, injunctive relief, specific performance or other equitable
remedies in addition to all other remedies provided hereunder or available to
the parties hereto at law or in equity.
12. ENTIRE AGREEMENT
This Agreement contains the entire and exclusive agreement between the
parties relating to the subject matter hereof and shall not be modified except
in writing, signed by the parties hereto. This Agreement supersedes all prior
agreements, oral or written, and all other communications between the parties
relating to the subject matter of this Agreement.
13. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be an original with respect to the party executing the counterpart and all
of which together shall constitute one and the same agreement.
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<PAGE>
IN WITNESS WHEREOF, Pioneer, Hollinger and Graff have caused this Agreement
to be executed and delivered as of the date first set forth above by their duly
authorized representatives.
PIONEER VENTURES ASSOCIATES LIMITED PARTNERSHIP
By: /s/ Robert Lerman
------------------------------------
Name:
Title:
HOLLINGER DIGITAL INC.
By: /s/ Philip Kunsberg
------------------------------------
Name:
Title:
MARK GRAFF
/s/ Mark Graff
---------------------------------------
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EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of October 10,
1997, by and between American Interactive Media, Inc. (hereinafter the
"Company"), a Nevada corporation, and Peter B. Yunich (hereinafter "Employee").
WHEREAS, the Company desires to employ Employee as its Chief Executive
Officer, and Employee desires to be employed by the Company from and after the
date hereof upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
1. EMPLOYMENT:
a. The Company shall employ Employee and Employee accepts employment
by the Company and shall render services as its Chief Executive Officer,
with specific duties, not inconsistent with the office of Chief Executive
Officer, as determined by the Company's Board of Directors.
b. It is expressly understood that the Company's Board of Directors
shall, as soon as practicable after the execution of this Agreement, elect
Employee as a member of the Company's Board of Directors and as Chairman of
the Board of Directors.
c. Employee shall have final approval of any public or internal
notices concerning his employment, election as a director, termination as
an employee or withdrawal as a director.
d. The parties acknowledge that Employee has other business interests
in which Employee's ownership interest exceeds One Percent (1%) and that
Employee shall, not inconsistent with his duties hereunder, devote time and
attention to such other business
<PAGE>
interests in addition to and contemporaneously with the performance of
Employee's duties hereunder. Employer shall reasonably accommodate
Employee's other business interests with respect to domestic and foreign
travel requirements associated with the performance of Employee's duties
under this Agreement.
2. TERM:
a. The term of this Agreement, and the term of Employee's employment
hereunder, shall be for five (5) years, shall commence as of January 2,
1997 and shall end on January 2, 2002, if not terminated by Employee or the
Company on or prior to any such anniversary. Notwithstanding the foregoing,
however, and subject to the terms and conditions set forth elsewhere in
this Agreement, the Company may terminate Employee's employment hereunder
at any time, with or without cause. Notwithstanding any other provision of
this Agreement, Employee's duties under an Employment Agreement dated
January 2, 1997 (the "January 2 Agreement"), a copy of which is attached
hereto and deemed a part hereof, shall serve to satisfy the parties'
obligations to one another through October 9, 1997, after which, the
parties' obligations are governed solely by the terms of this Agreement,
notwithstanding any provision (contrary or otherwise) in the January 2
Agreement. It is specifically understood that Employee's service under the
January 2 Agreement shall be considered the initial part of the five (5)
year term described herein.
b. Employee shall have the right to terminate his employment hereunder
for cause upon written notice to the Company referring to this subparagraph
2(b) and describing the condition relied upon by him in invoking the
provisions hereof if, without Employee's written consent: (i) the Company
fails to pay any salary or other compensation or benefit required to be
paid to Employee hereunder when due and for an additional period of
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<PAGE>
fifteen (15) days after demand therefor by Employee; (ii) there occurs any
substantial change in the titles, authorities, powers, functions or duties
attached to Employee's positions unless the Company, within thirty (30)
days after Employee's giving of notice hereunder, takes full and effective
action to eliminate the condition cited by Employee in his notice of
termination as the reason for his giving of such notice; (iii) there is
consummated a merger or consolidation of the Company with any other
corporation or corporations in which the Company is not the surviving
corporation; or (iv) the stockholders of the Company approve a plan of
complete liquidation or dissolution of the Company or there is consummated
an agreement for the sale or disposition of all or substantially all of the
Company's assets.
3. COMPENSATION:
a. During the term of his employment hereunder, the Company shall pay
Employee a Fifty Thousand Dollar ($50,000.00) sign-on bonus, prior receipt
of which is hereby acknowledged, plus a base salary as follows: (i) at the
rate of Two Hundred Fifty Thousand Dollars ($250,000.00) per year for the
year 1997, which sum shall be paid from an escrow fund established by the
Company with its customary bank in advance of the execution of this
Agreement; and (ii) at the rate of Three Hundred Thousand Dollars
($300,000.00) during the year 1998. The Employee's base salary for the
third through fifth years of this five-year agreement shall be determined
by good faith negotiation between the Employee and the Company, but in no
event shall be less than Three Hundred Thousand Dollars ($300,000.00).
Employee's base salary shall be paid in equal, bi-monthly installments
commencing with the first pay period immediately following the Effective
Date, or at such other intervals upon which Employee and the Company shall
mutually agree, and to the extent allowed by applicable law,
-3-
<PAGE>
shall not when provided be reduced by federal, state, or local payroll
withholding taxes. Employer and Employee may agree at any time to increase
Employee's base salary.
b. In addition to any other compensation or incentive payable to
Employee hereunder, the Company shall grant Employee Options under the
Company's existing Incentive Stock Option Plan (the "Plan") to purchase One
Million Five Hundred Thousand (1,500,000) shares of Common Stock at a price
of One Dollar ($1.00), effective as of the Effective Date, subject to the
terms of the Plan and the Option Certificate attached as Exhibit "A"
hereto.
c. The Company represents and warrants that all shares and options for
shares of the Company's common stock granted under this Agreement shall be
registered with the Securities and Exchange Commission on Form S-8 or other
appropriate form, or shall be so registered as such shares vest hereunder,
to the extent such shares are subject to reporting. The Company shall cause
the Plan to be amended to authorize such additional shares as are necessary
to meet its obligation under this Agreement, and shall register such shares
with the Securities and Exchange Commission on Form S-8 or other
appropriate form to the extent such shares are subject to reporting. If the
shares described in this paragraph 3(e) are not registered with the
Securities and Exchange Commission on Form S-8 or other appropriate form on
or before December 31, 1997, then Employee may, at his sole option, (i)
choose to terminate for cause as if termination occurred described in
paragraph 2(b) herein but without regard to any precondition or advance
notice contained herein, and shall benefit from the provisions of
subparagraph 5(a) herein, or (ii) choose not to terminate for cause and
receive a lump sum cash payment from the Company of One Hundred Thousand
Dollars ($100,000.00) from the Company in quarterly payments of Twenty Five
Thousand Dollars ($25,000.00) in 1998, which
-4-
<PAGE>
sum shall not when provided be reduced by federal, state or local payroll
taxes to the extent allowed by applicable law.
d. The parties understand and agree that, in the course of and
incident to his employment by the Company, Employee will perform executive
services for the Company's majority-owned subsidiary corporations. The
Company shall have the right, in its sole discretion, to allocate the
financial burden of Employee's salary hereunder among its subsidiary
corporations, and any salary received by Employee from any majority-owned
subsidiary of the Company shall reduce the amount payable directly by the
Company; provided, however, that nothing herein is intended to relieve or
shall relieve the Company from its responsibility to pay the full amount of
Employee's salary to the extent not already paid by a subsidiary of the
Company.
4. OTHER BENEFITS:
a. The Company shall reimburse Employee for ordinary and reasonable
business expenses incurred by him in the performance of services pursuant
to this Agreement. In addition, the Company shall provide Employee with a
Company-owned or leased luxury automobile appropriate to his position for
his use, and shall provide for (or reimburse for, at Employee's option)
operating expenses with respect to such vehicle, including (without
limitation) gasoline, oil, insurance, general maintenance, tires, batteries
and repairs.
b. During the term of his employment and during any restricted period
during which he is entitled to receive payments pursuant to subparagraph
5(c) below, Employee shall be entitled to participate in any medical,
health, disability and accident or other hospitalization or insurance plan
established by the Company for its employees, on a basis equivalent to a
full-time employee.
-5-
<PAGE>
c. Employee shall receive a bonus of $10,000.00 for every
$1,000,000.00 in capital raised by the Company up to a total of
$15,000,000.00 in raised capital. After the first $15,000,000.00 in raised
capital, Employee shall receive a bonus of $5,000.00 for each $1,000,000.00
in raised capital up to the next $15,000,000.00 in raised capital (for a
total cap of $30,000,000.00 in raised capital). Employee shall also have
the right to participate in any bonus compensation plan or other
prerequisites that may be established from time to time appropriate to his
position.
d. During each full year of the term of his Employment, Employee shall
be entitled to three (3) weeks paid vacation time which shall not be
cumulative from year to year.
e. If Employee is made a party or threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (collectively, a "Proceeding"),
by reason of the fact that he was a director or officer of the Company, or
was acting on behalf of or is or was serving at the request of the Company
as a director, officer, partner, employee or agent of another corporation,
partnership, joint venture or other enterprise or entity, the Company shall
indemnify Employee against all expenses, liability and loss actually and
reasonably incurred or suffered by him in connection with such Proceeding,
whether or not the indemnified liability arises or arose from any
Proceeding by or in the right of the Company, to the extent that such
indemnification is not prohibited by law as it presently exists or may
hereafter be amended. Upon Employee's request, the Company shall pay
expenses reasonably incurred by Employee in defending a Proceeding as they
are incurred, in advance of the final disposition of such Proceeding;
provided, however, as a condition to his right to receive such advances,
Employee shall agree to reimburse to the
-6-
<PAGE>
Company the amounts so advanced if and to the extent that a court of
competent jurisdiction shall determine that, because of his actions related
to the claim upon which such Proceedings were based, indemnification of
Employee from liability for such claim or expenses incurred in connection
with the defense of such claim was not allowed under applicable laws. The
Company's obligations under this paragraph 4(e) shall continue in respect
to any act or omission by Employee when done on behalf of or at the request
of the Company, even if a Proceeding is commenced after termination of
Employee's obligations under this Agreement, and even if such Proceeding is
frivolous, fraudulent or commenced in bad faith.
f. During the term of this Agreement or any extension of this
Agreement, and for any acts or omissions arising from the performance of
Employee's obligations under this Agreement, the Company shall maintain
Directors' and Officers' liability insurance reasonably acceptable in form
and content to Employee, with a minimum limit of Three Million Dollars
($3,000,000.00), which shall inure to the benefit of Employee. The Company
shall cause such insurance to be in force within thirty (30) days of the
execution of this Agreement.
5. COMPENSATION UPON TERMINATION: If Employee's employment is terminated at
any time during the term of this Agreement, the following provisions shall
apply:
a. If Employee's employment is terminated for any reason whatsoever,
except for (i) termination by the Company with cause, as defined in
subparagraph 5(d) below, or (ii) by Employee without cause pursuant to
subparagraph 2(c) above, then, in such event, the Company shall pay
Employee, at the time of such termination, an amount equal to the
difference of (i) two years' base salary at the amount in effect at the
time of such termination, as
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<PAGE>
provided in subparagraph 3(a) herein; plus all pay, benefits, bonuses,
options and perquisites described in paragraphs 3(c) through 3(d) herein,
and (ii) any renuneration received by the Employee in the first year after
such termination through gainful employment obtained after making a
reasonable effort to obtain employment, which payment shall be made in lieu
of any other severance or post-employment benefits except as otherwise
expressly provided for in this Agreement. Employee also shall have the
option to continued use of the automobile as described in paragraph 4(a)
herein, without regard to subsequent employment, for the full term of this
Agreement and any agreed-upon extended term, even if Employee's employment
is terminated as described in this paragraph 5(a), and shall be entitled to
the benefits of subparagraphs 4(b), 4(c), 4(f), 4(g) and 5(b) herein.
b. If Employee's employment is terminated by his death, his estate or
a beneficiary designated by him on notice to the Company shall receive (i)
the remainder of his base salary through the last month of the year of his
death, plus (ii) one year's base salary at the rate in effect in the year
of his death, which payments shall not be reduced by life insurance
proceeds, if any, paid to beneficiaries designated by Employee under any
life insurance policy owned by the Company.
c. If Employee voluntarily terminates his employment with the Company
without cause, the Company at its election, by notice to Employee given not
later than ten (10) days after such termination and referring specifically
to this subparagraph (c), shall have the right to require for one (1) year
from the date of termination (the "restricted period") that Employee not
directly or indirectly engage in any competitive activity, as defined
below, and, if the Company so elects, Employee agrees not to engage in any
competitive activity, provided, however, that (i) the Company provides
Employee with all pay, benefits, bonuses, options and
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perquisites described in subparagraphs 3(a) through 3(d) herein
("Compensation"); (ii) such Compensation shall not be provided when such
Compensation would otherwise be due, but rather shall be accelerated and
provided to Employee within ten (10) days of Employee's termination and
shall include Two Hundred Percent (200%) of all cash compensation which
otherwise would be provided under paragraph 3(a) of the Agreement for the
year following the year in which Employee's termination occurs, except if
Employee's termination occurs in the fourth year of this Agreement, in
which case such compensation shall include Two Hundred Fifteen Percent
(215%) of all cash compensation which otherwise would be provided under
paragraph 3(a) of this Agreement; and (iii) the Company honors and timely
performs its obligations to Employee under subparagraphs 4(a) through 4(c)
and 4(e), 4(f), 5(a) and 5(b) herein. Any failure by the Company to provide
the compensation accelerated as required hereunder, or to honor and timely
perform its obligations to Employee under subparagraphs 4(a) through 4(c)
and 4(e), 4(f), 5(a) and 5(b) above, and shall constitute a full and
irrevocable waiver of the Company's rights under this subparagraph 5(c).
d. For the purposes of subparagraph 5(a) above, "cause" for
termination of Employee's employment shall exist only in the event of
Employee's gross negligence or intentional malfeasance in the performance
of his duties as an officer of the Company and/or its subsidiaries which
results in or creates a substantial risk of serious financial injury to the
Company.
e. For purposes of subparagraph 5(c) above, the term "competitive
activity" shall mean, directly or indirectly, acting alone or in
conjunction with others: (i) engaging as a director, officer, employee,
partner, shareholder, or any other capacity, in any business related,
indirectly or directly, to the manufacture or sale of internet access
hardware,
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access software or access services; (ii) requesting any customers of any
business then being conducted by Company to curtail or cancel their
business with the Company; (iii) disclosing to any person, firm or
corporation any trade, technical or technological secrets, any details or
organization or business affairs, any names of past or present customers of
Company or any other information relating to the business of Company; (iv)
soliciting, canvassing or accepting any business or transaction for any
other person, firm or corporation or business similar to any business of
Company; (v) inducing, or attempting to influence, any employee of Company
to terminate employment with Company or to enter into any employment or
other business relationship with any other person (including Employee),
firm or corporation; (vi) acting in any manner which he shall have reason
to believe is contrary to the best interests of Company; provided, however,
that nothing in this paragraph 5(e) shall be deemed by the Company to
prevent or restrict Employee from fully performing all obligations to which
he is bound (by contract or otherwise) at the time of the execution of this
Agreement, including (without limitation) participation on boards of
directors, performance of covenants of restriction, or obligation to report
business activities.
6. OWNERSHIP OF DOCUMENTS/PROPRIETARY PROPERTY:
a. All books, tapes, records, documents, programs, customer lists,
supplier lists or any other confidential information of the Company,
regardless of whether developed, compiled or made by Employee, made
available to Employee or used by Employee during the term of this Agreement
are and shall remain the property of the Company and shall be delivered to
the Company by Employee at the end of the term hereof.
b. Employee shall promptly disclose, grant and assign ownership to the
Company for its sole use and benefit any and all articles, inventions,
improvements,
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discoveries, copyrights, information, ideas and suggestions (whether
patentable or not) (collectively, "Proprietary Property") (i) which he may
develop, acquire, conceive or reduce to practice while Employee is carrying
out the duties of this Agreement and which relate to the business, products
or services of the Company, including the design and/or development of
internet access software programs and codes, and/or (ii) which result,
directly or indirectly, in whole or in part, from use of the time,
facilities, materials or information of the Company; in each case together
with all patent applications, copyrights and reissues thereof that may at
any time be granted for or upon any such Proprietary Property. Employee
understands and agrees that the Company is and shall be the sole owner of
any and all property rights in any Proprietary Property.
c. Employee agrees to execute such further assignments as necessary to
the Company or to its nominees, successors, or assigns of all of his right,
title and interest in and to any and all such Proprietary Property and in
and to any and all copyrights and patent applications therefor, and in and
to all copyrights and patents that may be granted therefor throughout the
world. Employee also agrees, during and subsequent to his employment with
the Company, to render to the Company at its expense all such assistance as
the Company may require in order to fully carry out the intent of this
Agreement.
d. Employee shall keep and maintain adequate and current written
records of all such Inventions in the form of notes, sketches, drawings, or
reports relating thereto, which records shall be made available to, and
remain the property of, the Company at all times.
e. Employee represents, warrants and agrees that as of the date of
this Agreement, he has not developed, conceived or reduced to practice any
Proprietary Property
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other than those for which a copyright registration or patent application
have been previously filed or which are listed in Exhibit "B" attached
hereto.
f. Except as expressly set forth herein, no severance or similar
compensation shall be payable to Employee upon the termination of his
employment.
7. ADDITIONAL OBLIGATIONS OF THE COMPANY UPON TERMINATION: Upon the
termination of Employee's employment for any reason or cause other than
termination by the Company with cause, or termination by Employee without cause,
options to purchase common stock of the Company owned by Employee shall be
convertible into common stock of the Company by Employee, at his election, upon
notice to the Company making specific reference to this Section 7. Any such
conversion shall be effective upon the giving of such notice by Employee. The
numbers of shares into which such options shall be converted shall equal the
number of options to be converted multiplied by a fraction, the numerator of
which is the difference between the market price of the common stock (determined
in accordance with Section 3(c) above) on the date of conversion minus the
exercise price of the options, and the denominator of which shall equal the
market price of the Company's common stock on such date.
8. ASSIGNMENT: This Agreement is personal in its nature and neither of the
parties hereto shall, without the consent of the other, assign or transfer this
Agreement or any rights or obligations hereunder, except that: (i) the Company
may assign or transfer this Agreement to a successor organization in the event
of merger, consolidation, or transfer of sale of all or substantially all of the
assets of the Company, in which case the term Company shall mean such successor,
provided that in the case of any such assignment or transfer, the obligations of
this Agreement are assumed by such successor or are binding upon and inure to
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the benefit of such successor as a matter of law; and (ii) in the event of
Employee's death, the term "Employee" shall include his heirs, executors and
administrators.
9. NOTICES: All notices hereunder shall be in writing and shall be deemed
to have been given at the time when mailed in any general or branch United
States Post Office enclosed in a certified post-paid envelope, addressed to the
respective parties stated below, or to such changed address as such party may
fix by notice as aforesaid:
To the Company: Attn: Board of Directors
611 Broadway, Suite 308
New York, New York 10012
To Employee: Peter B. Yunich
7 Highview Avenue
Basking Ridge, New Jersey 07920
10. RESOLUTION OF DISPUTES:
a. Any controversy or claim arising out of or relating to this
Agreement or the breach thereof, including without limitation a claim for
declaratory relief or relief which is equitable in nature, shall be settled
by arbitration in the State of New Jersey, by an arbitrator selected by
Employee and the Company. If the Company and Employee cannot agree on the
appointment of an arbitrator within ten (10) days after a request for
arbitration, then such arbitration shall be conducted by a panel of three
arbitrators selected in accordance with procedures established and
implemented by the American Arbitration Association. The arbitration shall
be conducted in accordance with the rules of the American Arbitration
Association, except as otherwise provided in this paragraph 10. Except as
otherwise provided herein, all costs of the arbitrator shall be borne by
the Company. Judgment upon any award rendered by the arbitrator may be
entered in any court having jurisdiction over the parties. Any award of the
arbitrator may include interest at a rate or rates considered just under
the circumstances by the arbitrator, but shall not include any award of
punitive damages.
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<PAGE>
b. Employee shall be entitled to recover from the Company reasonable
attorney's fees and costs and other expenses incurred by him in connection
with any arbitration hereunder. Subject to the limitations of subparagraph
10(c) below, payment of such fees and expenses shall be made by the Company
as they are incurred by Employee. If, however, the arbitrator(s) should
later determine that, under the circumstances, it was unjust for the
Company to have made any of these payments of attorney's fees and costs and
expenses to Employee, the arbitrator(s) may require Employee to repay any
such payments in accordance with such terms and conditions as the
arbitrator(s) shall direct.
c. Notwithstanding anything to the contrary in subparagraph 10(b)
above, the amount which the Company shall be required to advance to
Employee or which Employee shall be entitled to recover from the Company on
account of attorney's fees, costs and expenses incurred by him in any
arbitration hereunder shall be limited to the amount incurred by the
Company on account of its own attorney's fees, costs and expenses, as and
when such fees, costs and expenses are incurred by the Company, unless the
arbitrator(s) shall determine that, under the circumstances, it is unjust
to so limit the Company's advances and reimbursements to Employee.
d. Employee recognizes that immediate and irreparable damage will
result to Company if Employee breaches any of the terms and conditions of
Sections 5(e) (if applicable) or 6 hereof. Therefore, notwithstanding any
other term of this Agreement, Employee and Company agree that any claim for
injunctive relief (including preliminary injunctive relief) based upon an
alleged violation of such Sections may be brought in the courts of the
State of New Jersey (including the United States District Court for the
District of New Jersey) and Employee consents to the jurisdiction of such
courts.
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11. MISCELLANEOUS:
a. At any time, and from time to time, after the signing of this
Agreement, each party will execute such additional instruments and take
such action as may be reasonably requested by the other party to carry out
the intent and purposes of this Agreement.
b. This Agreement shall be governed, construed and enforced in
accordance with the substantive laws of the State of New Jersey,
notwithstanding any conflicts-of-law doctrines or laws of any jurisdiction
to the contrary.
c. This Agreement shall be binding upon, and shall inure to the
benefit of, the parties and their heirs, personal representatives,
successors and assigns.
d. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. e. This Agreement
shall not be interpreted in favor of or against either party on account of
such party having drafted this Agreement.
f. Neither the failure nor any delay on the part of either party to
exercise any right, remedy, power or privilege under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of
any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power or
privilege with respect to any other occurrence.
g. The provisions of this Agreement are independent of and separable
from each other, and no provision shall be affected or rendered invalid or
unenforceable by
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<PAGE>
virtue of the fact that for any reason any other or others of them may be
invalid or unenforceable in whole or in part. Without limiting the
foregoing, it is specifically agreed with regard to each of the covenants
in this Agreement set forth in paragraphs 8 and 9 that they are severable
and if any of them are held invalid or unenforceable by reason of length of
time, area covered or actively covered, or any combination thereof, or for
any other reason, and such covenant shall be adjusted or reduced to the
extent necessary to cure any invalidity and to protect the interest of the
Company to the fullest extent of the law.
h. This Agreement contains the entire understanding among the parties
hereto with respect to the subject matter hereof, and supersedes all prior
and contemporaneous agreements and understandings, inducements or
conditions, express or implied, oral or written, except as herein
contained. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms
hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
IN WITNESS WHEREOF, Employee has signed his name and the Company, by the
signatures of its duly authorized officers, has executed this Agreement as of
the date and year mentioned at the top of page one.
____________________________________
American Interactive Media, Inc.
(CORPORATE SEAL)
By: _______________________________
Attest: ____________________________
Secretary
WITNESS:
________________________________ ____________________________________
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SEPARATION AGREEMENT
This Separation Agreement (the "Agreement") shall be effective as of August
28, 1998 by and between Peter B. Yunich ("Yunich") and American Interactive
Media, Inc., a Delaware corporation ("AIM" or the "Company").
RECITALS
A. Yunich is currently Chairman of the Board of Directors of AIM (the
"Board") and is employed as AIM's Chief Executive Officer.
B. The parties mutually desire to provide for an orderly resignation from
the Board by Yunich and termination of Yunich's employment, all on terms
satisfactory to both Yunich and AIM, as further set forth in this Agreement.
AGREEMENTS
In consideration of the acts, payments, covenants and mutual agreements
contained herein, AIM and Yunich agree as follows:
1. Resignation from Board and Termination of Employment. Effective as of
the close of business on August 28, 1998 ("Termination Date"), Yunich hereby
resigns his position on AIM's Board of Directors and his position as Chief
Executive Officer of the Company. Yunich also hereby resigns from all other
positions he holds on behalf of AIM, its subsidiaries and affiliates and
acknowledges that AIM has no obligation to recall or reemploy Yunich in the
future. Yunich agrees to sign at AIM's request all appropriate mutually
agreeable documentation prepared by AIM to document these resignations.
2. Compensation and Benefits Upon Termination. AIM will pay the following:
a. Severance Payments. Yunich shall continue to receive his current base
salary for a period of six (6) months from the date hereof in accordance with
AIM's standard payroll practices. Such payments shall be subject to reduction to
the extent of any remuneration received by Yunich during such period through
gainful employment obtained after making a reasonable effort to obtain
employment. In addition, and without any reduction due to gainful employment,
AIM shall also pay Yunich two (2) additional payments of Twenty-Five Thousand
Dollars ($25,000) for an aggregate payment of Fifty Thousand Dollars ($50,000),
payable in two (2) equal installments on September 30, 1998 and December 31,
1998. AIM shall continue to pay for and provide Yunich with health insurance
benefits in accordance with the terms and provisions of such plans and
arrangements in effect on the Termination Date for a period of twelve (12)
months from Termination Date. AIM also shall convert to the extent possible the
individual non-Company portion of Yunich's key-man life insurance policy to an
individual policy and shall pay the premiums thereon for a period of twelve (12)
months provided that AIM shall not be obligated to pay for premiums in excess of
the current rate.
The Board previously granted Yunich options to purchase shares of AIM
Common Stock under AIM's 1995 Incentive Stock Option Plan (the "Option Plan").
Yunich and AIM agree that the number of Yunich's options are hereby reduced to
options to purchase Five Hundred
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Thousand (500,000) shares of AIM Common Stock, which are vested as of the date
hereof, at an exercise price of one dollar ($1.00) per share (subject to
adjustment as provided in the Option Plan). The balance of Yunich's options are
hereby irrevocably terminated and shall have no further force or effect.
Yunich's continuing options shall be subject to the terms and provisions of the
Option Plan and the related Option Certificate, provided that the options shall
not expire as a result of Yunich's resignation or the termination of his
employment, but shall continue to be exercisable until their normal expiration
date of January 2, 2002 unless otherwise sooner terminated in accordance with
the terms and provisions of the Option Plan. Yunich shall return to AIM the
original Option Certificate and AIM shall issue a New Option Certificate setting
forth the option terms set forth herein. The Company shall provide Yunich with
piggyback registration rights with respect to the option shares on terms
comparable with those offered by the Company generally to its investors.
AIM shall reimburse Yunich in accordance with the Company's normal
practices any travel, hotel and other expenses or disbursements reasonably
incurred or paid by Yunich in connection with services performed by Yunich prior
to Termination Date. AIM also shall reimburse Yunich his reasonable
out-of-pocket expenses for his personal attendance at the August 28, 1998
meeting of the Board.
Yunich shall return to the Company all property of the Company in his
possession, provided that Yunich may retain his laptop computer. Yunich shall
return to the Company his company-leased automobile no later than September 8,
1998 by returning said automobile to the leasing dealership.
The payments and benefits outlined in this Paragraph 2(a) shall constitute
full satisfaction of all of AIM's obligations to pay severance benefits to
Yunich under any and all other written or oral agreements between Yunich and AIM
including but not limited to, the Employment Agreement dated as of October 10,
1997 (the "Employment Agreement"). There shall be no other payments to Yunich
except as stated in this Paragraph 2(a).
b. Receipt of Documentation. Yunich acknowledges that he has previously
received from AIM copies of pertinent portions of AIM's Option Plan and AIM's
benefit plans relating to health care. Yunich understands and agrees to be bound
by the written terms and conditions of these various plans, policies or
programs, unless expressly provided for otherwise under this Agreement, and
agrees that AIM has reserved the right and option, in its sole discretion, to
change, interpret, modify or terminate these and all other plans, policies or
programs at any time without Yunich's consent so long as such action does not
conflict with or reduce Yunich's rights under this Agreement. AIM shall furnish
Yunich with a copy of its Directors and Officers liability insurance policy.
c. No Other Benefits. Yunich will not be entitled to receive any other
compensation, bonus or benefits provided by, through or on behalf of AIM, its
affiliates or subsidiaries, other than benefits provided for herein. Yunich will
be responsible for all taxes imposed upon him as a result of the benefits
provided in this Agreement.
3. Confidentiality/Non-Disparagement. The terms of this Agreement are
confidential. Neither Yunich nor AIM will at any time disclose to any third
party the terms of
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<PAGE>
this Agreement, except as authorized by this Agreement or as required by law,
including any disclosure obligations of the Company under the securities laws or
stock exchange or Nasdaq requirements as advised by counsel to the Company. AIM
may also make such disclosure to its professional advisors and potential sources
of financing (and their professional advisors) and other third parties (and
their professional advisors) conducting appropriate due diligence of the
Company; any disclosure by any such party shall be deemed a disclosure by AIM.
Yunich may also make such disclosure to his spouse, tax advisor and/or lawyer,
all of whom shall be instructed to keep the information disclosed to them
confidential; any disclosure by any such party shall be deemed a disclosure by
Yunich.
AIM and Yunich shall not disparage each other in their communications in
response to all inquiries from the press, public media or any other third
parties regarding this Agreement or Yunich's employment termination. If AIM
makes such a statement disparaging Yunich, then Yunich may invoke the procedures
outlined in Paragraph 18 of this Agreement. If Yunich makes such a statement
which disparages AIM, then AIM may invoke the procedures outlined in Paragraph
18 of this Agreement. Subject to the foregoing provisions, AIM shall issue a
press release, announcing the resignation of Yunich. Such press release shall be
mutually satisfactory to AIM and Yunich, provided that Yunich shall not
unreasonably withhold his approval of the release, which Yunich acknowledges
shall be issued no later than the close of business on August 31, 1998 or such
later time as AIM deems appropriate.
4. Trade Secrets, Confidentiality and Proprietary Information. Yunich
acknowledges and agrees that as a former officer and director of AIM he has
knowledge of confidential and proprietary information including, but not limited
to strategic plans or data, financial statements, information concerning the
business, operations or financial condition of AIM, and its subsidiaries and
affiliates, marketing data, customer research and data, information concerning
sources of supply, pricing information and data and trade secrets. Such
information shall be referred to hereinafter as "Proprietary Information."
Yunich further acknowledges that AIM has expended significant amounts of time,
effort and resources in the procurement of its Proprietary Information, that AIM
has taken all reasonable steps in protecting the secrecy of its Proprietary
Information, that said Proprietary Information is of critical importance to AIM
and that a violation of this Section 4 would seriously and irreparably impair
and damage AIM's business. Further to the above, Yunich agrees to keep all
Proprietary Information confidential.
Yunich agrees to promptly return to AIM all AIM Proprietary Information,
including but not limited to all inventions, discoveries, improvements, computer
programs, designs, documentation, notes, plans, drawings and copies thereof.
Yunich and AIM agree that this section regarding Trade Secrets,
Confidentiality and Proprietary Information shall survive any termination of
this Agreement.
5. Non-Solicitation/Non-Competition. Yunich acknowledges and agrees that as
an officer and director of AIM he has acquired substantial knowledge and
information regarding the business and operations of AIM and that AIM's work
force constitutes an important and vital aspect of its business.
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<PAGE>
Yunich agrees, therefore, that he shall not solicit others employed by AIM,
or any of its subsidiaries or affiliates, to become employed by, or to consult
in any capacity, any firm, company or other business enterprise anywhere in the
world for a period of one (1) year from the Termination Date. Yunich further
represents that he has at no time prior to this Agreement solicited any employee
to leave AIM. Nothing in this Agreement will prevent Yunich from providing
favorable recommendations or favorable references on behalf of persons who
previously worked with Yunich.
Yunich and AIM also agree, that upon a breach or violation or threatened
breach or violation of any confidentiality, trade secrets, or non-solicitation
agreement by Yunich contained herein, or of any provision of Sections 3, 4, or 5
of this Agreement, AIM, in addition to all other remedies which might be
available to it including rescission of the Agreement and repayment of the
consideration paid to Yunich for the covenants or promises breached, shall be
entitled as a matter of right to equitable relief in any court of competent
jurisdiction, including the right to obtain injunctive relief or specific
performance. Yunich and AIM agree that the remedies at law for any such breach
or violation are not fully adequate and that the injuries to AIM as a result of
the continuation of any breach or violation are incapable of full calculation in
monetary terms and therefore constitute irreparable harm. This Section 5 shall
survive any termination of this Agreement.
Yunich agrees that, for a period of eight (8) months from the Termination
Date he will not, whether acting individually or as an officer, director,
employee, agent, stockholder or consultant of any person, firm, corporation,
business or other entity, engage in a business anywhere in the world in which
AIM presently conducts business that competes, directly or indirectly, in any
material respect with the business conducted as of the date hereof by AIM and
its affiliates; provided, however, that Yunich may own publicly-traded stock of
any such person, firm, corporation, business or other entity constituting not
more than 1% of the outstanding shares of such class of stock so long as his
involvement with any such entity is limited to the ownership of such stock.
Notwithstanding the foregoing or any other provision of this Agreement, Yunich
may solicit, sell and market goods, products and services, not competitive with
those of AIM, on the Internet or through any other electronic, broadcast, wire
or print medium. Also notwithstanding the foregoing, Yunich shall not be
required to divest himself of any currently-held investment even in the event of
a public offering of stock in any business in which Yunich currently has an
interest.
The parties agree that the duration and area for which the covenant not to
compete set forth in this Agreement is to be effective is reasonable. In the
event that any court or arbitral panel determines that the time period or
geographical areas (or both of them) provided for in this Agreement are
unreasonable and that such coverage is to an extent unenforceable, such covenant
shall be deemed to be one of a series of severable covenants, one for each and
every state of the United States of America and for any other territory or
country in which this covenant is intended to be effective.
Nothing in this Agreement shall be construed to limit or negate the common
law of torts or trade secrets where such common law provides AIM with broader
protection than the protection provided by this Agreement.
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6. Indemnification. If Yunich is made a party or threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (collectively, a
"Proceeding"), by reason of the fact that he was a director or officer of AIM,
or was acting on behalf of or was serving at the request of AIM as a director,
officer, partner, employee or agent of another corporation, partnership, joint
venture or other enterprise or entity, AIM shall indemnify Yunich against all
expenses, liability and loss actually and reasonably incurred or suffered by him
in connection with such Proceeding, whether or not the indemnified liability
arises or arose from any Proceeding by or in the right of AIM, to the extent
that such indemnification is not prohibited by law as it presently exists or may
hereafter be amended. Upon Yunich's request, AIM shall pay expenses reasonably
incurred by Yunich in defending a Proceeding as they are incurred, in advance of
the final disposition of such Proceeding; provided, however, as a condition to
his right to receive such advances, Yunich shall agree to reimburse AIM the
amounts so advanced if and to the extent that a court of competent jurisdiction
shall determine that, because of his actions related to the claim upon which
such Proceedings were based, indemnification of Yunich from liability for such
claim or expenses incurred in connection with the defense of such claim was not
allowed under applicable laws. AIM's obligations under this Section 6 shall
apply even if such Proceeding is frivolous, fraudulent, or commenced in bad
faith.
7. Governing Law. The validity, interpretation, effect, and enforcement of
this Agreement shall be governed by the laws of the State of New York without
regard to its choice of law principles.
8. Entire Agreement. This Agreement sets forth the entire Agreement and
understanding between Yunich and AIM, and supersedes any other negotiations,
written agreements, understandings, oral agreements, representations or past or
future practices, whether written or oral, by AIM, including but not limited to,
the Employment Agreement. Parol evidence will be inadmissible to show agreement
by and between the parties to any term or condition contrary to or in addition
to the terms and conditions contained in this Agreement.
Each AIM plan or policy referred to herein directly or by implication
(except the Option Plan) is incorporated herein only insofar as it does not
contradict this Agreement. If any inconsistencies exist between this Agreement
and any such plan or policy, this Agreement shall control. If any
inconsistencies exist between this Agreement and the Option Plan, with the
exception of the terms and conditions of Paragraph 2 above, the Option Plan
shall control.
9. Right to Advice of Counsel. Yunich represents that this Agreement has
been reviewed by his lawyer and acknowledges that AIM has encouraged him to
consult with his lawyer so that he is fully aware of his rights and obligations
under this Agreement. Yunich acknowledges that he has done so.
10. Modification. This Agreement may not be amended, modified, changed or
discharged in any respect except as agreed in writing and signed by Yunich and
an authorized officer of American Interactive Media, Inc.
11. Severability and Interpretation. In the event that any provision or any
portion of this Agreement is held invalid or unenforceable by a court of
competent jurisdiction, such
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provision or portion thereof shall be considered separate and apart from the
remainder of this Agreement and the other provisions shall remain fully valid
and enforceable, provided that, if Paragraph 1, 3, 4, 5, 16, or 18 is held to be
invalid or unenforceable in response to a motion, argument or other act by
Yunich, then AIM, at its sole discretion, may rescind the Agreement and recover
all consideration paid to Yunich under the Agreement.
12. Notices. All notices required by this Agreement shall by given in
writing either by personal delivery or by first class mail, return receipt
requested. Notices shall be addressed as follows:
To AIM: 611 Broadway
Suite 308
New York, NY 10012
To Yunich: Peter B. Yunich
7 Highview Avenue
Basking Ridge, NJ 07920
13. Miscellaneous. The rights and obligations of AIM under this Agreement
shall inure to the benefit of and shall be binding upon the present and future
subsidiaries of AIM, any and all subsidiaries of a subsidiary, all affiliated
corporations, and successors and assigns of AIM. No assignment of this Agreement
by AIM will relieve AIM of its obligations. Yunich shall not assign any of his
rights and/or obligations under this Agreement and any such attempted assignment
will be void. This Agreement shall be binding upon and inure to the benefit of
Yunich's heirs, executors, administrators, or other legal representatives and
their legal assigns.
No provision of this Agreement shall be interpreted or construed against
any party because that party or its legal representative drafted such provision.
For all purposes of this Agreement, unless the context otherwise requires or as
otherwise expressly provided, (a) all defined terms shall include both the
singular and plural forms thereof; (b) all references to words such as "herein",
"hereof" and the like shall refer to this Agreement as a whole and not to any
particular paragraph within this Agreement; (c) the term "include" means
"include without limitation"; and (d) the term "or" is intended to include the
term "and/or".
14. Damage Limitation. At Termination Date, Yunich shall not be entitled to
recover any compensation, benefits or damages except as specifically described
in this Agreement. This damage waiver provides that no damages (including
without limitation, special, consequential, general, liquidated or punitive
damages or attorneys fees or costs) shall be sought or due from AIM.
15. Waiver. A waiver by either party of any of the terms or conditions of
this Agreement in any instance shall not be deemed or construed to be a waiver
of such term or condition for the future, or of any subsequent breach thereof.
All remedies, rights, undertakings, obligations, and agreements contained in
this Agreement shall be cumulative and none of them
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<PAGE>
shall be in limitation of any other remedy, right, undertaking, obligation or
agreement of either party.
16. Release.
a. Yunich hereby completely releases and forever discharges AIM, its Board
of Directors, officers, directors, agents, employees, attorneys, insurers,
subsidiaries and affiliates ("AIM Parties") from, and covenants not to sue any
AIM Party with respect to, all claims, rights, demands, actions, obligations,
debts, sums of money, damages (including but not limited to general, special,
punitive, liquidated and compensatory damages) and causes of action of every
kind, nature and character, known and unknown, in law or equity, connected with
Yunich's employment relationship with the AIM Parties, or any other act or
omission of any AIM Party which may have occurred prior to the date this
Agreement is signed. Yunich further agrees that by his acceptance and
negotiation of the payments and benefits provided for in Paragraph 2 of this
Agreement, he thereby completely releases and forever discharges the AIM Parties
from, and covenants not to sue any AIM Party with respect to, all claims,
rights, demands, actions, obligations, debts, sums of money, damages (including
but not limited to general, special, punitive, liquidated and compensatory
damages) and causes of action of every kind, nature and character, known and
unknown, in law or equity, connected with Yunich's employment relationship with
the AIM Parties, or the termination of such relationship, or any other act or
omission of any AIM Party which may have occurred prior to Termination Date and
further releases the AIM Parties from any further obligations whatsoever under
the Employment Agreement. This release and discharge includes, but is not
limited to, all "wrongful discharge" claims; all claims relating to any
contracts of employment, express or implied; any covenant of good faith and fair
dealing, express or implied; any tort of any nature; any federal, state, or
municipal statute or ordinance; any claims under Title VII of the Civil Rights
Act of 1964, 42 U.S.C. Section 1981, and any other laws and regulations relating
to employment discrimination and any and all claims for attorney's fees and
costs.
b. Yunich represents and warrants to AIM that he has not sold, assigned nor
otherwise transferred to any other person or entity any claim which he has, had
or may have against AIM Parties. AIM Parties may plead the foregoing release as
a complete defense and bar to any claim brought in contravention hereof. In that
event, or in the event of any breach of the representation contained in this
paragraph, Yunich will indemnify, defend and hold harmless such released party
from and against all costs and expenses arising therefrom, including without
limitation reasonable attorneys fees and expenses.
c. AIM hereby completely releases and forever discharges Yunich, his agents
and attorneys from, and covenant not to sue Yunich, his agents and attorneys
with respect to, all claims, rights, demands, actions, obligations, debts, sums
of money, damages (including but not limited to, general, special, punitive,
liquidated and compensatory damages) and causes of action of every kind, nature
and character, known and unknown, in law or in equity, ("claims") arising from
his employment relationship with AIM, or any other act or omission of Yunich,
his agents and attorneys, which may have occurred prior to the date this
Agreement is signed, to the extent permitted by law and public policy, except
for any claims arising from any intentional acts of misconduct, or any other act
taken in bad faith or without a reasonable belief that it was in the best
interests of the AIM Parties.
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<PAGE>
17. Cooperation. Yunich agrees that he will make himself available at
reasonable times and intervals to participate in the conduct of and preparation
for any pending or future litigation to which AIM is a party and in which his
experience or knowledge may be relevant. Yunich shall be reimbursed for his
reasonable travel and out-of-pocket expenses incurred by virtue of his
cooperation as described in this Paragraph. In no respect shall this provision
be deemed to pertain to or affect the nature or substance of Yunich testimony at
deposition or trial or in any other truthful testimony at deposition or trial or
in any other circumstances.
18. Remedies in Event of Future Dispute.
a. Except as provided in subparagraph (b) below, in the event of any future
dispute, controversy or claim between the parties arising from or relating to
this Agreement, its breach, any matter addressed by this Agreement, and/or
Yunich's employment with AIM through Termination Date, the parties will first
attempt to resolve the dispute through confidential mediation to be conducted in
New York by a mutually agreed-upon mediator. If the parties' dispute is not
resolved through mediation, it will be resolved through binding confidential
arbitration to be conducted by the American Arbitration Association in New York,
pursuant to its New York Employment Dispute Resolution Rules, and judgment upon
the award rendered by the Arbitrator(s) may be entered by any court having
jurisdiction of the matter. The prevailing party in such arbitration shall be
entitled to recover from the losing party, not only the amount of any judgment
awarded in its favor, but also any and all costs and expenses, incurred in
arbitrating the dispute or in preparing for such arbitration.
b. In the event that a dispute arises concerning compliance with this
Agreement, either party will be entitled to obtain from a court with
jurisdiction over the parties preliminary and permanent injunctive relief to
enjoin or restrict the other party from such breach or to enjoin or restrict a
third party from inducing any such breach, and other appropriate relief,
including money damages. In seeking any such relief, however, the moving party
will retain the right to have any remaining portion of the controversy resolved
by binding confidential arbitration in accordance with subparagraph (a) above.
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<PAGE>
By signing the below, the parties agree to the terms hereof, and agree that
this document sets forth their entire agreement.
AMERICAN INTERACTIVE MEDIA, INC.
By /s/ Mark Graff
--------------------------
President
Date: August 28, 1998
I have read, understand, and agree
to the foregoing:
By /s/ Peter B. Yunich
--------------------------
Peter B. Yunich
Date: August 28, 1998
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EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of October 10,
1997, by and between American Interactive Media, Inc. (hereinafter the
"Company"), a Nevada corporation, and Mark Graff (hereinafter "Employee").
WHEREAS, the Company desires to employ Employee as its President, and
Employee desires to be employed by the Company from and after the date hereof
upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
1. EMPLOYMENT:
a. The Company shall employ Employee and Employee accepts employment
by the Company and shall render services as its President, with specific
duties, not inconsistent with the office of President, as determined by the
Company's Board of Directors.
b. It is expressly understood that the Company's Board of Directors
shall, as soon as practicable after the execution of this Agreement, elect
Employee as a member of the Company's Board of Directors.
c. Employee shall have final approval of any public or internal
notices concerning his employment, election as a director, termination as
an employee or withdrawal as a director.
2. TERM:
a. The term of this Agreement, and the term of Employee's employment
hereunder, shall commence as of September 30, 1997 (the "Effective Date")
and shall end on January 2, 2002, if not terminated by Employee or the
Company on or prior to any
<PAGE>
such anniversary. Notwithstanding the foregoing, however, and subject to
the terms and conditions set forth elsewhere in this Agreement, the Company
may terminate Employee's employment hereunder at any time, with or without
cause.
b. Employee shall have the right to terminate his employment hereunder
for cause upon written notice to the Company referring to this subparagraph
2(b) and describing the condition relied upon by him in invoking the
provisions hereof if, without Employee's written consent: (i) the Company
fails to pay any salary or other compensation or benefit required to be
paid to Employee hereunder when due and for an additional period of fifteen
(15) days after demand therefor by Employee; (ii) there is consummated a
merger or consolidation of the Company with any other corporation or
corporations in which the Company is not the surviving corporation; or
(iii) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is consummated an
agreement for the sale or disposition of all or substantially all of the
Company's assets.
3. COMPENSATION:
a. During the term of his employment hereunder, the Company shall pay
Employee a base salary as follows: (i) at the rate of Two Hundred Fifty
Thousand ($250,000.00) Dollars per year pro rated for the year 1997; and
(ii) at the rate of Three Hundred Thousand ($300,000.00) Dollars during the
year 1998. The Employee's base salary for the years 1999, 2000 and 2001
shall be determined by good faith negotiation between the Employee and the
Company, but in no event shall be less than Three Hundred Thousand
($300,000.00) Dollars. Employee's base salary shall be paid in equal,
bi-monthly installments commencing with the first pay period immediately
following the Effective Date, or at such other intervals upon which
Employee and the Company shall mutually agree, and to the extent allowed by
applicable law,
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<PAGE>
shall not when provided be reduced by federal, state, or local payroll
withholding taxes. Employer and Employee may agree at any time to increase
Employee's base salary.
b. The parties understand and agree that, in the course of and
incident to his employment by the Company, Employee will perform executive
services for the Company's majority-owned subsidiary corporations. The
Company shall have the right, in its sole discretion, to allocate the
financial burden of Employee's salary hereunder among its subsidiary
corporations, and any salary received by Employee from any majority-owned
subsidiary of the Company shall reduce the amount payable directly by the
Company; provided, however, that nothing herein is intended to relieve or
shall relieve the Company from its responsibility to pay the full amount of
Employee's salary to the extent not already paid by a subsidiary of the
Company.
4. OTHER BENEFITS:
a. The Company shall reimburse Employee for ordinary and reasonable
business expenses incurred by him in the performance of services pursuant
to this Agreement. In addition, the Company shall reimburse Employee for a
leased automobile for his use, and shall reimburse Employee for operating
expenses with respect to such vehicle, including (without limitation)
gasoline, oil, insurance, general maintenance, tires, batteries and
repairs.
b. During the term of his employment and during any restricted period
during which he is entitled to receive payments pursuant to subparagraph
5(c) below, Employee shall be entitled to participate in any medical,
health, disability and accident or other hospitalization or insurance plan
established by the Company for its employees, on a basis equivalent to a
full-time employee.
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<PAGE>
c. Employee shall have the right to participate in any bonus
compensation plan or other prerequisites that may be established from time
to time appropriate to his position.
d. During each full year of the term of his Employment, Employee shall
be entitled to three (3) weeks' paid vacation time which shall not be
cumulative from year to year.
e. If Employee is made a party or threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (collectively, a "Proceeding"),
by reason of the fact that he was a director or officer of the Company, or
was acting on behalf of or is or was serving at the request of the Company
as a director, officer, partner, employee or agent of another corporation,
partnership, joint venture or other enterprise or entity, the Company shall
indemnify Employee against all expenses, liability and loss actually and
reasonably incurred or suffered by him in connection with such Proceeding,
whether or not the indemnified liability arises or arose from any
Proceeding by or in the right of the Company, to the extent that such
indemnification is not prohibited by law as it presently exists or may
hereafter be amended. Upon Employee's request, the Company shall pay
expenses reasonably incurred by Employee in defending a Proceeding as they
are incurred, in advance of the final disposition of such Proceeding;
provided, however, as a condition to his right to receive such advances,
Employee shall agree to reimburse to the Company the amounts so advanced if
and to the extent that a court of competent jurisdiction shall determine
that, because of his actions related to the claim upon which such
Proceedings were based, indemnification of Employee from liability for such
claim or expenses incurred in connection with the defense of such claim was
not allowed under applicable laws. The
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<PAGE>
Company's obligations under this paragraph 4(f) shall continue in respect
to any act or omission by Employee when done on behalf of or at the request
of the Company, even if a Proceeding is commenced after termination of
Employee's obligations under this Agreement, and even if such Proceeding is
frivolous, fraudulent or commenced in bad faith.
f. During the term of this Agreement or any extension of this
Agreement, and for any acts or omissions arising from the performance of
Employee's obligations under this Agreement, the Company shall maintain
Directors' and Officers' liability insurance reasonably acceptable in form
and content to Employee, with a minimum limit of Three Million
($3,000,000.00) Dollars, which shall inure to the benefit of Employee. The
Company shall cause such insurance to be in force within thirty (30) days
of the execution of this Agreement.
5. COMPENSATION UPON TERMINATION: If Employee's employment is terminated at
any time during the term of this Agreement, the following provisions shall
apply:
a. If Employee's employment is terminated for any reason whatsoever,
except for (i) termination by the Company with cause, as defined in
subparagraph 5(d) below, or (ii) by Employee without cause pursuant to
subparagraph 2(c) above, then, in such event, the Company shall pay
Employee, at the time of such termination, an amount equal to the
difference of (i) two years' base salary at the amount in effect at the
time of such termination, as provided in subparagraph 3(a) herein, and (ii)
any remuneration received by the Employee in the first year after such
termination through gainful employment obtained after making a reasonable
effort to obtain employment, which payment shall be made in lieu of any
other severance or post-employment benefits except as otherwise expressly
provided for in this Agreement.
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<PAGE>
Employee also shall have the option to continued use of the automobile as
described in paragraph 4(a) herein, without regard to subsequent
employment, for the full term of this Agreement and any agreed-upon
extended term, even if Employee's employment is terminated as described in
this paragraph 5(a), and shall be entitled to the benefits of subparagraphs
4(b), 4(c), 4(f), 4(g) and 5(b) herein.
b. If Employee's employment is terminated by his death, his estate or
a beneficiary designated by him on notice to the Company shall receive (i)
the remainder of his base salary through the last month of the year of his
death, plus (ii) one year's base salary at the rate in effect in the year
of his death, which payments shall not be reduced by life insurance
proceeds, if any, paid to beneficiaries designated by Employee under any
life insurance policy owned by the Company.
c. If Employee voluntarily terminates his employment with the Company
without cause, the Company at its election, by notice to Employee given not
later than ten (10) days after such termination and referring specifically
to this subparagraph (c), shall have the right to require for one (1) year
from the date of termination (the "restricted period") that Employee not
directly or indirectly engage in any competitive activity, as defined
below, and, if the Company so elects, Employee agrees not to engage in any
competitive activity, provided, however, that (i) the Company provides
Employee with all pay, benefits, bonuses, options and perquisites described
in subparagraph 3(a) herein ("Compensation"); (ii) such Compensation shall
not be provided when such Compensation would otherwise be due, but rather
shall be accelerated and provided to Employee within ten (10) days of
Employee's termination and shall include One Hundred (100%) Percent of all
cash compensation which otherwise would be provided under paragraph 3 (a)
of the Agreement for the year following the year in which
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<PAGE>
Employee's termination occurs. The Company shall honor and timely perform
its obligations to Employee under subparagraphs 4 (a) through 4 (c) and 4
(e), 4 (f), 5(a) and 5 (b) herein. Any failure by the Company to provide
the compensation accelerated as required hereunder, or to honor and timely
perform its obligations to Employee under subparagraphs 4(a) through 4 (c)
and 4 (e), 4 (f), 5 (a) and 5 (b) above, and shall constitute a full and
irrevocable waiver of the Company's rights under this subparagraph 5 (c).
d. For the purposes of subparagraph 5(a) above, "cause" for
termination of Employee's employment shall exist only in the event of
Employee's gross negligence or intentional malfeasance in the performance
of his duties as an officer of the Company and/or its subsidiaries which
results in or creates a substantial risk of serious financial injury to the
Company.
e. For purposes of subparagraph 5 (c) above, the term "competitive
activity" shall mean directly or indirectly, acting alone or in conjunction
with others: (i) engaging as a director, officer, employee, partner,
shareholder or any other capacity, in any business related, indirectly or
directly, to the manufacture or sale of internet access hardware, access
software or access services; (ii) requesting any customers of any business
then being conducted by Company to curtail or cancel their business with
the Company; (iii) disclosing to any person, firm or corporation any trade,
technical or technological secrets, any details or organization or business
affairs, any names of past or present customers of Company or any other
information relating to the business of Company; (iv) soliciting,
canvassing or accepting any business or transaction for any other person,
firm or corporation or business similar to any business of Company; (v)
inducing, or attempting to influence, any employee of Company to terminate
employment with Company or to enter into any employment or other business
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<PAGE>
relationship with any other person (including Employee), firm or
corporation; (vi) acting in any manner which he shall have reason to
believe is contrary to the best interests of Company; provided, however,
that nothing in this paragraph 5(e) shall be deemed by the Company to
prevent or restrict Employee from fully performing all obligations to which
he is bound (by contract or otherwise) at the time of the execution of this
Agreement, including (without limitation) participation on boards of
directors, performance of covenants of restriction, or obligation to report
business activities.
6. OWNERSHIP OF DOCUMENTS/PROPRIETARY PROPERTY.
a. All books, tapes, records, documents, programs, customer lists,
supplier lists or any other confidential information of the Company,
regardless of whether developed, compiled or made by Employee, made
available to Employee or used by Employee during the term of this Agreement
are and shall remain the property of the Company and shall be delivered to
the Company by Employee at the end of the term hereof.
b. Employee shall promptly disclose, grant and assign ownership to the
Company for its sole use and benefit any and all articles, inventions,
improvements, discoveries, copyrights, information, ideas and suggestions
(whether patentable or not) (collectively, "Proprietary Property") (i)
which he may develop, acquire, conceive or reduce to practice while
Employee is carrying out the duties of this Agreement and which relate to
the business, products or services of the Company, including the design
and/or development of internet access software programs and codes, and/or
(ii) which result directly or indirectly, in whole or in part, from use of
the time, facilities, materials or information of the Company; in each case
together with all patent applications, copyrights and reissues thereof that
may at any time be granted for or upon any such Proprietary Property.
Employee understands and agrees
-8-
<PAGE>
that the Company is and shall be the sole owner of any and all property
rights in any Proprietary Property.
c. Employee agrees to execute such further assignments as necessary to
the Company or to its nominees, successors, or assigns of all of his right,
title and interest in and to any and all such Proprietary Property and in
and to any and all copyrights and patent applications therefor, and in and
to all copyrights and patents that may be granted therefor throughout the
world. Employee also agrees, during and subsequent to his employment with
the Company, to render to the Company at its expense all such assistance as
the Company may require in order to fully carry out the intent of this
Agreement.
d. Employee shall keep and maintain adequate and current written
records of all such Inventions in the form of notes, sketches, drawings, or
reports relating thereto, which records shall be made available to, and
remain the property of, the Company at all times.
e. Employee represents, warrants and agrees that as of the date of
this Agreement, he has not developed, conceived or reduced to practice any
Proprietary Property other than those for which a copyright registration or
patent application have been previously filed or which are listed in
Exhibit "B" attached hereto.
f. Except as expressly set forth herein, no severance or similar
compensation shall be payable to Employee upon the termination of his
employment.
7. ADDITIONAL OBLIGATIONS OF THE COMPANY UPON TERMINATION: Upon the
termination of Employee's employment for any reason or cause other than
termination by the Company with cause, or termination by Employee without cause,
options to purchase common stock of the Company owned by Employee shall be
convertible into common stock of the Company by Employee, at his election, upon
notice to the Company
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<PAGE>
making specific reference to this Section 7. Any such conversion shall be
effective upon the giving of such notice by Employee. The numbers of shares into
which such options shall be converted shall equal the number of options to be
converted multiplied by a fraction, the numerator of which is the difference
between the market price of the common stock (determined in accordance with
Section 3(c) above) on the date of conversion minus the exercise price of the
options, and the denominator of which shall equal the market price of the
Company's common stock on such date.
8. ASSIGNMENT: This Agreement is personal in its nature and neither of the
parties hereto shall, without the consent of the other, assign or transfer this
Agreement or any rights or obligations hereunder, except that: (i) the Company
may assign or transfer this Agreement to a successor organization in the event
of merger, consolidation, or transfer of sale of all or substantially all of the
assets of the Company, in which case the term Company shall mean such successor,
provided that in the case of any such assignment or transfer, the obligations of
this Agreement are assumed by such successor or are binding upon and inure to
the benefit of such successor as a matter of law; and (ii) in the event of
Employee's death, the term "Employee" shall include his heirs, executors and
administrators.
9. NOTICES: All notices hereunder shall be in writing and shall be deemed
to have been given at the time when mailed in any general or branch United
States Post Office enclosed in a certified post-paid envelope, addressed to the
respective parties stated below, or to such changed address as such party may
fix by notice as aforesaid:
To the Company: Attn.: Board of Directors
611 Broadway, Suite 308
New York, New York 10012
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<PAGE>
To Employee: Mr. Mark Graff
2 Perry Lane
Upper Nyack, New York 10960
10. RESOLUTION OF DISPUTES:
a. Any controversy or claim arising out of or relating to this
Agreement or the breach thereof, including, without limitation, a claim for
declaratory relief or relief which is equitable in nature, shall be settled
by arbitration in the State of New York, by an arbitrator selected by
Employee and the Company. If the Company and Employee cannot agree on the
appointment of an arbitrator within ten (10) days after a request for
arbitration, then such arbitration shall be conducted by a panel of three
arbitrators selected in accordance with procedures established and
implemented by the American Arbitration Association. The arbitration shall
be conducted in accordance with the rules of the American Arbitration
Association, except as otherwise provided in this paragraph 10. Except as
otherwise provided herein, all costs of the arbitrator shall be borne by
the Company. Judgment upon any award rendered by the arbitrator may be
entered in any court having jurisdiction over the parties. Any award of the
arbitrator may include interest at a rate or rates considered just under
the circumstances by the arbitrator, but shall not include any award of
punitive damages.
b. Employee shall be entitled to recover from the Company reasonable
attorney's fees and costs and other expenses incurred by him in connection
with any arbitration hereunder. Subject to the limitations of subparagraph
10(c) below, payment of such fees and expenses shall be made by the Company
as they are incurred by Employee. If, however, the arbitrator(s) should
later determine that, under the circumstances, it was unjust for the
Company to have made any of these payment of attorney's fees and costs and
expenses to
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<PAGE>
Employee, the arbitrator(s) may require Employee to repay any such payments
in accordance with such terms and conditions as the arbitrator(s) shall
direct.
c. Notwithstanding anything to the contrary in subparagraph 10(b)
above, the amount which the Company shall be required to advance to
Employee or which Employee shall be entitled to recover from the Company on
account of attorney's fees, costs and expenses incurred by him in any
arbitration hereunder shall be limited to the amount incurred by the
Company on account of its own attorney's fees, costs and expenses, as and
when such fees, costs and expenses are incurred by the Company, unless the
arbitrator(s) shall determine that, under the circumstances, it is unjust
to so limit the Company's advances and reimbursements to Employee.
d. Employee recognizes that immediate and irreparable damage will
result to Company if Employee breaches any of the terms and conditions of
Section 5(e) (if applicable) or 6 hereof. Therefore, notwithstanding any
other term of this Agreement, Employee and Company agree that any claim for
injunctive relief (including preliminary injunctive relief) based upon an
alleged violation of such Sections may be brought in the courts of the
State of New York (including the United States District Court for the
Southern District of New York) and Employee consents to the jurisdiction of
such courts.
11. MISCELLANEOUS:
a. At any time, and from time to time, after the signing of this
Agreement, each party will execute such additional instruments and take
such action as may be reasonably requested by the other party to carry out
the intent and purposes of this Agreement.
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<PAGE>
b. This Agreement shall be governed, construed and enforced in
accordance with the substantive laws of the State of New York,
notwithstanding any conflicts-of-law doctrines or laws of any jurisdiction
to the contrary.
c. This Agreement shall be binding upon, and shall inure to the
benefit of, the parties and their heirs, personal representatives,
successors and assigns.
d. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
e. This Agreement shall not be interpreted in favor of or against
either party on account of such party having drafted this Agreement.
f. Neither the failure nor any delay on the part of either party to
exercise any right, remedy, power or privilege under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise of
any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power or
privilege with respect to any other occurrence.
g. The provisions of this Agreement are independent of and separable
from each other, and no provision shall be affected or rendered invalid or
unenforceable by virtue of the fact that for any reason any other or others
of them may be invalid or unenforceable in whole or in part. Without
limiting the foregoing, it is specifically agreed with regard to each of
the covenants in this Agreement set forth in paragraphs 8 and 9 that they
are severable and if any of them are held invalid or unenforceable by
reason of length of time, area covered or
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<PAGE>
actively covered, or any combination thereof, or for any other reason, and
such covenant shall be adjusted or reduced to the extent necessary to cure
any invalidity and to protect the interest of the Company to the fullest
extent of the law.
h. This Agreement contains the entire understanding among the parties
hereto with respect to the subject matter hereof, and supersedes all prior
and contemporaneous agreements and understandings, inducements or
conditions, express or implied, oral or written, except as herein
contained. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms
hereof. This Agreement may not be modified or amended other than by an
agreement in writing.
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<PAGE>
IN WITNESS WHEREOF, Employee has signed his name and the Company, by the
signatures of its duly authorized officers, has executed this Agreement as of
the date and year mentioned at the top of page one.
____________________________________
American Interactive Media, Inc.
(CORPORATE SEAL)
By: _______________________________
Attest: ____________________________
Secretary
WITNESS:
________________________________ ____________________________________
Mark Graff
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American Interactive Media, Inc.
1999 STOCK INCENTIVE PLAN
I. PURPOSES AND SCOPE OF PLAN.
American Interactive Media, Inc. (the "Company") desires to afford certain
salaried officers and other salaried employees of the Company and its
subsidiaries, directors of the Company, and certain outside consultants and
advisors an opportunity to acquire a proprietary interest in the Company through
the granting to such persons (i) in the cases of eligible employees, incentive
stock options ("Incentive Options") which are intended to qualify under Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"); and (ii)
options which are not intended to so qualify ("NQSOs").
The 1999 Stock Incentive Plan (the "Plan") has been established by the
Company to (i) attract and retain persons eligible to participate in the Plan,
(ii) motivate participants, by means of appropriate incentives, to achieve
long-range goals, (iii) provide incentive compensation opportunities that are
competitive with those of other similar companies, and (iv) align the interests
of participants with those of the Company's stockholders through equity-based
compensation; and thereby promote the long-term interests of the Company and its
subsidiaries, including the enhancement of long-term stockholder return.
II. AMOUNT OF STOCK SUBJECT TO THE PLAN
The total number of shares of common stock of the Company reserved and
available for distribution pursuant to options granted hereunder shall not
exceed, in the aggregate, 7,500,000 shares of the authorized common stock,
$0.001 par value, per share, of the Company (the "Shares"), subject to
adjustment as described below.
Shares which may be acquired under the Plan may be either authorized but
unissued Shares or Shares of issued stock held in the Company's treasury, or
both, at the discretion of the Company. Whenever any outstanding option or
portion thereof expires, is canceled, is forfeited or is otherwise terminated
for any reason without having been exercised in respect of the entire option,
the Shares allocable to the expired, canceled, forfeited or otherwise terminated
portion of the option may again be the subject of options granted hereunder.
In the event of any stock dividend, stock split, combination or exchange of
Shares, recapitalization or other change in the capital structure of the
Company, corporate separation or division (including, but not limited to,
split-up, spin-off or distribution to Company stockholders other than a normal
cash dividend), sale by the Company of all or a substantial portion of its
assets, rights offering, merger, consolidation, reorganization or partial or
complete liquidation, or any other corporate transaction or event having an
effect similar to any of the foregoing, the aggregate number of Shares reserved
for issuance under the Plan, the number and option price of Shares subject to
outstanding options, and any other characteristics or terms of the options as
the
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Committee (as hereinafter defined) shall deem necessary or appropriate to
reflect equitably the effects of such changes to the holders of options, shall
be appropriately substituted for new shares or adjusted, as determined by the
Committee in its discretion. Notwithstanding the foregoing, (i) each such
adjustment with respect to an Incentive Option shall comply with the rules of
Section 424(a) of the Code, and (ii) in no event shall any adjustment be made
which would render any Incentive Option granted hereunder other than an
incentive stock option for purposes of Section 422 of the Code without the
consent of the grantee.
III. ADMINISTRATION
The Compensation Committee (the "Committee"), or the Board of Directors of
the Company (the "Board of Directors") if there is no Committee, will have sole
and exclusive authority to administer the Plan. The Committee shall consist of
no fewer than two (2) members of the Board of Directors. A majority of the
members of the Committee shall constitute a quorum, and the act of a majority of
the members of the Committee shall be the act of the Committee. Any member of
the Committee may be removed at any time, either with or without cause, by
resolution adopted by a majority of the Board of Directors, and any vacancy on
the Committee may at any time be filled by resolution adopted by a majority of
the Board of Directors.
Subject to the express provisions of the Plan, the Board of Directors or
the Committee, as the case may be, shall have authority, in its discretion, to
(i) select recipients of options; (ii) determine the number and type of options
to be granted; (iii) determine the terms and conditions, not inconsistent with
the terms hereof, of any options granted; (iv) adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; (v) interpret the terms and provisions of the
Plan and any option granted and any agreements relating thereto; and (vi)
otherwise supervise the administration of the Plan.
The determination of the Board of Directors or the Committee, as the case
may be, on matters referred to in this Article III shall be conclusive.
The Board of Directors or the Committee, as the case may be, may employ
such legal counsel, consultants and agents as it may deem desirable for the
administration of the Plan and may rely upon any opinion received from any such
counsel or consultant and any computation received from any such consultant or
agent. Expenses incurred by the Board of Directors or the Committee in the
engagement of such counsel, consultant or agent shall be paid by the Company. No
member or former member of the Committee or of the Board of Directors shall be
liable for any action or determination made in good faith with respect to the
Plan or any option or award granted hereunder.
The Company shall indemnify each member of the Board of Directors or the
Committee, as the case may be, for all costs and expenses and, to the extent
permitted by applicable law, any liability incurred in connection with defending
against, responding to, negotiation for the settlement of, or otherwise dealing
with any claim, cause of action or dispute of any kind arising in connection
with any actions in administering the Plan or in authorizing or denying
authorization to any transaction hereunder.
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<PAGE>
IV. LIMITATION ON GRANTS
No employee shall be granted stock options covering, in the aggregate, more
than 500,000 Shares in any fiscal year of the Company (subject to adjustment as
provided in II. above).
V. STOCK OPTIONS
1. General. Any options granted under the Plan shall be in such form as the
Board of Directors or the Committee, as the case may be, may from time to time
approve and the provisions of the option grants need not be the same with
respect to each optionee. Options granted under the Plan may be either Incentive
Options or NQSOs. The Committee may grant to any optionee Incentive Options,
NQSOs or both types of options. Notwithstanding the foregoing, Incentive Options
may not be granted unless this Plan is approved by the Company's stockholders.
Options granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions not
inconsistent with the terms of the Plan, as the Board of Directors or the
Committee, as the case may be, deems appropriate. Each option grant shall be
evidenced by an agreement executed on behalf of the Company by an officer
designated by the Board of Directors or the Committee, as the case may be, and
accepted by the optionee. Such agreement shall describe the options and state
that such options are subject to all the terms and provisions of the Plan and
shall contain such other terms and provisions, consistent with the Plan, as the
Board of Directors or the Committee, as the case may be, may approve.
2. Exercise Price and Payment. The price per Share under any option granted
hereunder shall be such amount as the Board of Directors or the Committee, as
the case may be, shall determine, provided, however, that in the case of
Incentive Options, such price shall not be less than one hundred percent (100%)
of the "Fair Market Value" of the Shares subject to such option, as determined
below, at the date the option is granted (110% in the case of an Incentive
Option granted to any person who, at the time the option is granted, owns stock
of the Company or any subsidiary or parent of the Company possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company or of any subsidiary or parent of the Company (a "10%
Shareholder")).
For purposes of determining the "Fair Market Value" of the Shares as of any
date, the following rules shall apply:
(i) If the principal market for the Shares is a national securities
exchange or the Nasdaq stock market, then the "Fair Market Value" as of
that date shall be the average of the lowest and highest reported sale
prices of the Shares on that date on the principal exchange or the Nasdaq
stock market on which the Shares are then listed or admitted to trading;
(ii) If the principal market for the Shares is not a national
securities exchange and the Shares are not quoted on the Nasdaq stock
market, then the "Fair
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Market Value" as of that date shall be the average between the highest bid
and lowest asked prices for the Shares on such day as reported on the
NASDAQ OTC Bulletin Board Service or by the National Quotation Bureau,
Incorporated or a comparable service; and
(iii) If the date is not a trading day, and as a result, paragraphs
(i) and (ii) next above are inapplicable, the "Fair Market Value" of the
Shares shall be determined as of the last preceding trading day. If
paragraphs (i) and (ii) next above are otherwise inapplicable, then the
"Fair Market Value" of the Shares shall be determined in good faith by the
Board of Directors or the Committee, as the case may be.
For purposes of this Plan, the determination by the Board of Directors or
the Committee, as the case may be, of the "Fair Market Value" of a Share shall
be conclusive.
3. Term of Options and Limitations on the Right of Exercise. The term of
each option will be for such period as the Board of Directors or the Committee,
as the case may be, shall determine, provided that, except as otherwise provided
herein, in no event may any option granted hereunder be exercisable more than
ten (10) years from the date of grant of such option (five years in the case of
an Incentive Option granted to a 10% Shareholder). Each option shall become
exercisable in such installments and at such times as may be designated by the
Board of Directors or the Committee, as the case may be, and set forth in the
agreement related to the grant of options. To the extent not exercised,
installments shall accumulate and be exercisable, in whole or in part, at any
time after becoming exercisable, but not later than the date the option expires.
The Board of Directors or the Committee, as the case may be, shall have the
right to limit, restrict or prohibit, in whole or in part, from time to time,
conditionally or unconditionally, rights to exercise any option granted
hereunder.
To the extent that an option is not exercised within the period of
exercisability specified therein, it shall expire as to the then unexercised
part.
4. Exercise of Options. Options granted under the Plan shall be exercised
by the optionee as to all or part of the Shares covered thereby by the giving of
written notice of the exercise thereof to the Secretary of the Company at the
principal business office of the Company, specifying the number of Shares to be
purchased, accompanied by payment therefor made to the Company for the full
purchase price of such Shares. The date of actual receipt by the Company of such
notice shall be deemed the date of exercise of the option with respect to the
Shares being purchased.
Upon the exercise of an option granted hereunder, the Company shall cause
the purchased Shares to be issued only when it shall have received the full
purchase price for the Shares in cash; provided, however, that in lieu of cash,
the holder of an option may, to the extent permitted by applicable law and
otherwise in accordance with such rules as the Board of Directors or the
Committee may prescribe, exercise an option in whole or in part, by delivering
to the Company unrestricted Shares (in proper form for transfer and accompanied
by all requisite stock transfer tax stamps or cash in lieu thereof) owned by
such holder having a fair market
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<PAGE>
value equal to the cash exercise price applicable to that portion of the option
being exercised. The fair market value of the Shares so delivered shall be
determined as of the date immediately preceding the date on which the option is
exercised, or as may be required in order to comply with or to conform to the
requirements of any applicable laws or regulations. For purposes of this
paragraph, the provisions of Paragraph 2 hereof relating to the "Fair Market
Value" of Shares shall apply in all respects.
Notwithstanding the foregoing, the Company, in its sole discretion, may
establish cashless exercise procedures whereby an option holder, subject to the
requirements of Rule 16b-3, Regulation T, federal income tax laws, and other
federal, state and local tax and securities laws, can exercise an option or a
portion thereof without making a direct payment of the option price to the
Company, including a program whereby option shares would be sold on behalf of
and at the request of an option holder by a designated broker and the exercise
price would be satisfied out of the sale proceeds and delivered to the Company.
If the Company so elects to establish a cashless exercise program, the Company
shall determine, in its sole discretion, and from time to time, such
administrative procedures and policies as it deems appropriate and such
procedures and policies shall be binding on any option holder wishing to utilize
the cashless exercise program.
5. Nontransferability of Options. An option granted hereunder shall not be
transferable, whether by operation of law or otherwise, other than by will or
the laws of descent and distribution, and any option granted hereunder shall be
exercisable, during the lifetime of the holder, only by such holder.
The option of any person to acquire Shares and all his rights thereunder
shall terminate immediately if the holder: (a) attempts to or does sell, assign,
transfer, pledge, hypothecate or otherwise dispose of the option or any rights
thereunder to any other person except as permitted above; or (b) becomes
insolvent or bankrupt or becomes involved in any manner so that the option or
any rights thereunder becomes subject to being taken from him to satisfy his
debts or liabilities.
6. Termination of Options. Any option previously granted unless otherwise
specified by the Board of Directors or the Committee, as the case may be, shall,
to the extent not theretofore exercised, terminate and become null and void,
upon the earliest to occur of:
(a) the expiration of the option term;
(b) in the case of options granted to employees, one year after the
termination of the option holder's employment relationship with the Company
if such relationship is terminated as a result of death, retirement or
disability (provided that the option shall only be exercisable during such
period to the extent the option was exercisable at the time of death,
retirement or disability, as the case may be);
(c) in the case of options granted to employees, ninety (90) days
after the termination of the option holder's employment relationship with
the Company if such relationship is terminated other than as a result of
death, retirement or disability (provided
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that the option shall only be exercisable during such period to the extent
the option was exercisable at the time of termination of employment); or
(d) in the case of options granted to employees, immediately upon the
termination of the option holder's employment relationship with the Company
if such relationship is terminated "for cause", as determined in good faith
by the Committee or the Board of Directors, as the case may be.
In no event shall any person be entitled to exercise any option after the
expiration of the period of exercisability of such option as specified therein.
If an option granted hereunder shall be exercised by the legal
representative of a deceased option holder or former option holder or by a
person who acquired an option granted hereunder by bequest or inheritance or by
reason of the death of any option holder or former option holder, written notice
of such exercise shall be accompanied by a certified copy of letters
testamentary or equivalent proof of the right of such legal representative or
other person to exercise such option.
A termination of employment shall not be deemed to occur by reason of (i)
the transfer of an employee from employment by the Company to employment by a
subsidiary of the Company or (ii) the transfer of an employee from employment by
a subsidiary of the Company to employment by the Company or by another
subsidiary of the Company.
7. Maximum Allotment of Incentive Options. If the aggregate "Fair Market
Value" of Shares with respect to which Incentive Options are exercisable for the
first time by an employee during any calendar year (under all stock option plans
of the Company and any parent or any subsidiary of the Company) exceeds
$100,000, any options which otherwise qualify as Incentive Options, to the
extent of the excess, will be treated as NQSOs.
VI. CHANGE OF CONTROL
Notwithstanding anything to the contrary contained herein, upon a Change of
Control (as defined below) of the Company, all options shall immediately vest
and become exercisable in full during the remaining term thereof.
A Change of Control shall be deemed to have taken place upon the occurrence
of any of the following events:
(i) any Person (which shall mean and include any individual,
corporation, partnership, group, association or other "person", as such
term is used in Sections 13 and 14 of the Securities Exchange Act of 1934,
as amended) is, becomes, or has the right to become the beneficial owner,
directly or indirectly, of securities of the Company representing 20% or
more of the Shares then outstanding, whether or not such Person continues
to be the beneficial owner of securities representing 20% or more of the
outstanding Shares, provided that a Change of Control shall not be deemed
to have taken place upon any Existing Holder or any affiliate of such
Existing Holder having, maintaining or increasing its beneficial ownership
as of the
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<PAGE>
effective date of this Plan (for purposes hereof, Existing Holder shall
mean any of Pioneer Ventures Associates Limited Partnership, Hollinger
Digital Inc., and Mark Graff); or
(ii) as the result of, or in connection with, any tender or exchange
offer, merger or other business combination, sale of assets or contested
election, any announcement of an intention to make any of the foregoing
transactions, or any combination of the foregoing transactions (a
"Transaction"), those persons who were directors of the Company before the
Transaction and were otherwise unaffiliated with any other party to the
Transaction shall cease to constitute a majority of the Board of Directors
of the Company or any successor to the Company (a "Change in the Board");
or
(iii) the stockholders of the Company approve any merger,
consolidation, reorganization, liquidation, dissolution, or sale of all or
substantially all of the Company's assets in which neither the Company nor
a successor resulting from a change in domicile or form of organization
will survive as an independent, publicly owned corporation.
Notwithstanding anything herein to the contrary, no Change of Control (only
with respect to the particular option holder referred to therein in the case of
(i)(A) and (ii) below) shall be deemed to have occurred by virtue of any event
which results in any of the following:
(i) the acquisition, directly or indirectly, of 20% or more of the
outstanding Shares by (A) the option holder or a person including the
option holder, (B) the Company, (C) a subsidiary of the Company, or (D) any
employee benefit plan of the Company or of a subsidiary, or any entity
holding securities of the Company recognized, appointed, or established by
the Company or by a subsidiary for or pursuant to the terms of such plan;
or
(ii) a Change in the Board resulting from any Transaction in which the
option holder or a Person including the option holder participates directly
or indirectly with any party to the Transaction other than the Company.
VII. EFFECT OF RECAPITALIZATION OF REORGANIZATION
If any dividend payable in common stock of the Company is paid on the
common stock of the Company, or if the shares of common stock are split or
reclassified, or if the Company should be reorganized or consolidated or merged
with or into another corporation, or if all or substantially all the assets of
the Company are transferred to any other corporation in a reorganization, the
option holder shall be entitled upon exercise of the option holder's option to
receive the same number and kind of shares of stock to the nearest whole number
as the option holder would have been entitled to receive upon the happening of
such stock dividend, stock split, reclassification, reorganization,
consolidation or transfer as if the option holder had been immediately prior to
such event the holder of such shares.
VIII. PURCHASE FOR INVESTMENT
Except as hereafter provided, the Company may require the recipient of
Shares pursuant to an option granted hereunder, upon receipt thereof, to execute
and deliver to the Company a
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<PAGE>
written statement, in form satisfactory to the Company, in which such holder
represents and warrants that such holder is purchasing or acquiring the Shares
acquired thereunder for such holder's own account, for investment only and not
with a view to the resale or distribution thereof, and agrees that any
subsequent offer for sale or sale or distribution of any of such Shares shall be
made only pursuant to either (a) a Registration Statement on an appropriate form
under the Securities Act of 1993, as amended (the "Act"), which Registration
Statement has become effective and is current with regard to the Shares being
offered or sold, or (b) a specific exemption from the registration requirements
of the Act, but in claiming such exemption the holder shall, prior to any offer
for sale or sale of such Shares, obtain a prior favorable written opinion, in
form and substance satisfactory to the Company, from counsel for or approved by
the Company, as to the applicability of such exemption thereto. The foregoing
restriction shall not apply to (i) issuances by the Company so long as the
Shares being issued are registered under the Act and a prospectus in respect
thereof is current or (ii) reofferings of Shares by affiliates of the Company
(as defined in Rule 405 or any successor rule or regulation promulgated under
the Act) if the Shares being reoffered are registered under the Act and a
prospectus in respect thereof is current.
IX. ISSUANCE OF CERTIFICATES; LEGENDS; PAYMENT OF EXPENSES
The Company may endorse such legend or legends upon the certificates for
Shares issued pursuant to a grant hereunder and may issue such "stop transfer"
instructions to its transfer agent in respect of such Shares as, in its
discretion, it determines to be necessary or appropriate to (i) prevent a
violation of, or to perfect an exemption from, the registration requirements of
the Act, (ii) implement the provisions of the Plan and any agreement between the
Company and the optionee with respect to such Shares, or (iii) permit the
Company to determine the occurrence of a disqualifying disposition, as described
in Section 421(b) of the Code, of Shares transferred upon exercise of an
Incentive Option granted under the Plan.
The Company shall pay all issue or transfer taxes with respect to the
issuance or transfer of Shares upon exercise of an option, as well as all fees
and expenses necessarily incurred by the Company in connection with such
issuance or transfer, except fees and expenses which may be necessitated by the
filing or amending of a Registration Statement under the Act, which fees and
expenses shall be borne by the recipient of the Shares unless such Registration
Statement has been filed by the Company for its own corporate purposes (and the
Company so states) in which event the recipient of the Shares shall bear only
such fees and expenses as are attributable solely to the inclusion of the Shares
he or she receives in the Registration Statement, provided that the Company
shall have no obligation to include any Shares in any Registration Statement.
All Shares issued as provided herein shall be fully paid and non-assessable
to the extent permitted by law.
X. WITHHOLDING TAXES
The Company may require an option holder exercising an NQSO or disposing of
Shares acquired pursuant to the exercise of an Incentive Option in a
disqualifying disposition (within the meaning of Section 421(b) of the Code) to
reimburse the Company for any taxes required by any
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government to be withheld or otherwise deducted and paid by the Company in
respect of the issuance or disposition of Shares. In lieu thereof, the Company
shall have the right to withhold the amount of such taxes from any other sums
due or to become due from the Company to the option holder upon such terms and
conditions as the Board of Directors or the Committee, as the case may be, shall
prescribe. An option holder exercising an NQSO may elect to have a specified
percentage of shares withheld by the Company in order to satisfy tax
obligations. Any such election shall be made pursuant to a written notice signed
by the employee.
If an optionee makes a disposition, within the meaning of Section 424(c) of
the Code and regulations promulgated thereunder, of any Share or Shares issued
to such optionee pursuant to the exercise of an Incentive Option within the
two-year period commencing on the day after the date of the grant or within the
one-year period commencing on the day after the date of transfer of such Share
or Shares to the optionee pursuant to such exercise, the optionee shall, within
ten (10) days of such disposition, notify the Company thereof, by delivery of
written notice to the Company at its principal executive office.
XI. LISTING OF SHARES AND RELATED MATTERS
If at any time the Board of Directors or the Committee, as the case may be,
shall determine in its discretion that the listing, registration or
qualification of the Shares covered by the Plan upon any national securities
exchange or under any state or federal law or the consent or approval of any
governmental regulatory body, is necessary or desirable as a condition of, or in
connection with, the sale or purchase of Shares under the Plan, no Shares shall
be issued unless and until such listing, registration, qualification, consent or
approval shall have been effected or obtained, or otherwise provided for, free
of any conditions not acceptable to the Board of Directors or the Committee, as
the case may be.
XII. AMENDMENT OF THE PLAN
The Board of Directors or the Committee, as the case may be, may, from time
to time, amend the Plan, provided that no amendment shall be made, without the
approval of the stockholders of the Company, that will increase the total number
of Shares which may be issued under the Plan (other than an increase resulting
from an adjustment provided for in Article II). The Board of Directors or the
Committee, as the case may be, shall be authorized to amend the Plan and the
awards granted hereunder to permit the Incentive Options granted hereunder to
qualify as incentive stock options within the meaning of Section 422 of the
Code. The rights and obligations under any option or award granted before
amendment of the Plan or any unexercised portion of such option shall not be
adversely affected by amendment of the Plan or the option without the consent of
the holder of the option.
XIII. TERMINATION OR SUSPENSION OF THE PLAN
The Board of Directors or the Committee, as the case may be, may at any
time suspend or terminate the Plan. The Plan, unless sooner terminated by action
of the Board of Directors or the Committee, as the case may be, shall terminate
at the close of business on February 25, 2009. An option may not be granted
while the Plan is suspended or after it is terminated. Rights and
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<PAGE>
obligations under any option granted while the Plan is in effect shall not be
altered or impaired by suspension or termination of the Plan, except upon the
consent of the person to whom the option or award was granted. The power of the
Board of Directors or the Committee, as the case may be, to construe and
administer any options granted prior to the termination or suspension of the
Plan under Article III nevertheless shall continue after such termination or
during such suspension.
XIV. GOVERNING LAW
The Plan, and such options as may be granted thereunder and all related
matters shall be governed by, and construed and enforced in accordance with, the
laws of the State of Delaware.
XV. PARTIAL INVALIDITY
The invalidity or illegality of any provision herein shall not be deemed to
affect the validity of any other provision.
XVI. EFFECTIVE DATE
The Plan shall become effective upon the adoption by the Board of
Directors.
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PIONEER VENTURES ASSOCIATES LIMITED PARTNERSHIP
Investment Agreement
by and between
Pioneer Ventures Associates Limited Partnership
and
American Interactive Media, Inc.
November 16, 1998
<PAGE>
INVESTMENT AGREEMENT
INVESTMENT AGREEMENT dated November 16, 1998 ("Agreement") by and between
Pioneer Ventures Associates Limited Partnership, a Connecticut limited
partnership with offices at 651 Day Hill Road, Windsor, Connecticut 06095 (the
"Pioneer Partnership"), AND American Interactive Media, Inc., a Delaware
corporation with offices at 611 Broadway, Suite 308, New York, New York, 10012
(the "Company").
WHEREAS, the Company delivers proprietary, aggregated and licensed digital
content and other internet-based services and the Company's webPASSPORT Network
provides internet access and customized interactive services delivered to
television.
WHEREAS, the Company desires to obtain funds to finance its operations,
expand its marketing activities, and for working capital purposes.
WHEREAS, the Pioneer Partnership desires to provide funds to the Company
for such purposes on the terms and subject to the conditions set forth below.
NOW THEREFORE, in consideration of the investment to be made, mutual
benefits to be derived hereby and the representations, warranties, covenants and
agreements herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Pioneer Partnership agree as follows:
SALE AND TRANSFER OF STOCK
1. Series A Senior Convertible Preferred Stock.
(a) Upon the terms and subject to the conditions hereinafter set forth, at
the Closing (as hereinafter defined and set forth), the Company shall
issue, sell, transfer and deliver to the Pioneer Partnership an
aggregate of ten thousand (*10,000*) shares of the Company's Series A
Senior Convertible Preferred Stock, $1.00 par value per share (the
"Preferred Stock") at the Purchase Price set forth in Section 1.2
hereof; the Preferred Stock shall have the terms and be issued subject
to the conditions as set forth herein and in the Series A Certificate
of Designation to be filed and recorded with the Secretary of State of
the State of Delaware upon the occurrence of the Closing as set forth
below.
(b-1) At the closing ("Closing") on November 16, 1998 or such other date no
later than December 31, 1998 as the Company and the Pioneer
Partnership may agree (the "Closing Date"), the Company shall issue,
sell, transfer and deliver to the Pioneer Partnership ten thousand
(*10,000*) shares of Preferred Stock upon payment of the Purchase
Price therefor and satisfaction of the conditions contemplated herein.
(b-2) At the Closing, the Company shall issue one million (1,000,000)
warrants, each to purchase one (1) share of Common Stock, as defined
inss.1.3 hereof, at an exercise price of one hundred ten (110%)
percent of the Market Price per share as (defined in Section 1.3-B
hereof), subject to adjustment as stated therein (the "Warrants").
<PAGE>
The Warrants shall be immediately transferable; the Warrants shall be
exercisable during the sixty (60) month period commencing on the
Closing Date. The Pioneer Partnership shall receive five hundred
thousand (500,000) of these warrants and Ventures Management Partners
LLC the remaining five hundred thousand (500,000) warrants.
(c) At the Closing, the Company shall reserve (i) one million three
hundred and twenty-six thousand three hundred and sixteen (1,326,316)
shares of Common Stock issuable upon conversion of all of the
Preferred Stock, and (ii) one million (1,000,000) shares of Common
Stock issuable upon exercise of all of the Warrants.
(d) Upon sale and issuance to the Pioneer Partnership each share of
Preferred Stock, each Warrant and each share of Common Stock
underlying such Warrants shall be free and clear of all manner of
liens, pledges, encumbrances, charges and claims thereon.
(e) Certificates evidencing the Preferred Stock and Warrants shall be
delivered by the Company to the Pioneer Partnership at the Closing.
Such certificates shall also be accompanied by evidence satisfactory
to the Pioneer Partnership of the Company's payment of any applicable
transfer taxes. The Preferred Stock, the Warrants and the shares of
Common Stock issuable upon conversion of Preferred Stock or exercise
of the Warrants shall be "restricted securities" as that term is
defined in Rule 144 promulgated by the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"). Certificates evidencing the Preferred
Stock shall be in the form annexed hereto as Exhibit 1.1, and the
certificates evidencing the Warrants shall be in the form of Exhibit
1.1(b).
1.2 Purchase Price, and Payment.
The Purchase Price for the Preferred Stock shall be three hundred and
fifteen dollars ($315.00) per share (such amount per share being sometimes
referred to herein as the "Stated Value"), equal to an aggregate investment of
three million one hundred and fifty thousand ($3,150,000) dollars. Upon the
occurrence and consummation of the Closing, and in consideration therefor, the
Pioneer Partnership shall pay the Company at that Closing, by bank or certified
check or wire transfer, in immediately available funds (as determined by the
Pioneer Partnership) or such other method of payment selected by the Pioneer
Partnership, the sum of three million one hundred and fifty thousand
($3,150,000.00) dollars as full consideration for its subscription therefor.
1.3-A Preferred Convertible into Common.
Each share of Preferred Stock shall be convertible at the option of the
holder at any time and from time-to-time into such number of shares of the
Company's common stock, $ .001 par value (the "Common Stock"), as shall be equal
to the aggregate Stated Value of Preferred Stock
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to be converted (plus accumulated dividends, if so elected by the Holder)
divided by $2.375 (the "Conversion Price"). If the average closing bid price of
the Company's common stock on the NASD OTC Bulletin Board, the Nasdaq SmallCap
Market, the Nasdaq National Market or such other trading market or exchange upon
which the Common Stock shall the be traded for the twenty trading days ending
February 29, 2000 (the "Reset Date") ( "Price") is below the Conversion Price of
$2.375 per share then the Conversion Price shall be reset to a price per share
of Common Stock equal to seventy-five (75%) percent of the Average Price. The
Pioneer Partnership shall not engage in any "short" sales of Common Stock during
the twenty (20) trading days immediately preceding the Reset Date. The
Conversion Price and number of shares of Common Stock issuable upon conversion
of the Preferred Stock will also be subject to adjustment in certain
circumstances upon any recapitalizations, including but not limited to stock
splits, readjustments or reclassifications, to protect against dilution, as set
forth in more detail in Section 1.7 hereof.
1.3-B Warrants Exercisable into Common.
The Warrants shall be exercisable, in whole or in part, at the option of
the holder at any time and from time-to-time. Each Warrant shall be convertible
into one share of Common Stock upon the payment of the exercise price per share.
The exercise price of the Warrant shall be one hundred ten (110%) percent of the
average closing bid price of the Common Stock on the NASD OTC Bulletin Board,
the Nasdaq SmallCap Market, the Nasdaq National Market or such other trading
market or exchange upon which the Common Stock shall the be traded for the five
(5) trading days immediately preceding the Closing (the "Market Price"). The
exercise price and number of shares of Common Stock issuable upon exercise of
the Warrants will be subject to reset or adjustment in certain circumstances
including but not limited to stock splits, recapitalizations, readjustments or
reclassifications, to protect against dilution, as set forth in more detail in
Section 1.7 hereof.
1.4 Cumulative Dividend.
Holders of the Preferred Stock shall be entitled to an eight (8%) percent
cumulative annual cash dividend ($25.20 per share of Preferred Stock) calculated
on the basis of a 360-day year consisting of twelve 30-day months, and shall be
payable quarterly ($6.30 per share of Preferred Stock) in arrears on each March
31, June 30, September 30, and December 31 out of the assets of the Company
legally available therefor. Dividends shall accrue daily commencing on the Issue
Date whether or not earned or declared and whether or not there are profits,
surplus or other funds of the Company legally available for the payment of
dividends. The Preferred Stock dividend shall be paid before any dividend shall
be set apart or paid on the Common Stock for such quarter or for any other class
of capital stock. If less than the full preferential dividend is paid (whether
as a partial payment or if no dividend is paid) to the holders of the Preferred
Stock in any quarter, the unpaid amount shall accumulate and be added to the
preferential dividends due in the immediately subsequent quarter, in which case
such unpaid amounts shall be paid first and the newly accrued dividends of the
then current quarter, to the extent are unpaid, shall accumulate until paid. No
dividends shall be paid to the holders of the Common Stock or any other security
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of the Company if any dividends are unpaid on the Preferred Stock. No dividend
shall be paid to the holders of any class of capital stock of the Company unless
and until all dividends accrued and unpaid on the Preferred Stock are paid in
full. The Company may, upon approval by a majority of its entire Board of
Directors, elect to pay dividends upon the Series A Preferred Stock, by the
issuance of additional shares of Series A Preferred Stock which shall have terms
and conditions identical to other shares of Series A Preferred Stock. If the
Company elects to pay any dividend by the issuance of Series A Preferred Stock
in lieu of a cash dividend, the amount of such dividend shall be thirteen (13%)
percent ($40.95 per share of Preferred Stock per annum; or $10.2375 per share
per quarter) based on the Stated Value thereof. Nothing in the immediately
preceding sentence to the contrary notwithstanding, all dividends from the
period from the Closing Date until December 31, 1998 shall be paid solely in
shares of Preferred Stock at such increased dividend rate. The failure to pay
any dividend when due shall be an Event of Default under the Certificate of
Designation of the Preferred Stock and shall result in additional dividend
payments at the default rates as set forth therein.
1.5 Liquidation.
In the event of the voluntary or involuntary liquidation, bankruptcy,
receivership, dissolution or winding up of the Company, holders of shares of the
Preferred Stock shall be entitled to receive a liquidation preference equal to
one thousand dollars ($1,000) per share and, subject to the adjustments as
provided in this section, an amount equal to any accrued and unpaid dividends to
the payment date (the "Liquidation Preference"), before any payment or
distribution is made to the holders of Common Stock or any other securities of
the Company. Neither a consolidation or merger of the Company with another
corporation nor a sale or transfer of all or part of the Company's assets for
cash, securities or other property will be considered a liquidation, dissolution
or winding up of the Company, provided that all accrued but unpaid dividends on
the Preferred Stock (including any interest due thereon) are paid upon the
occurrence of such event.
1.6 Reservation of Shares; Shares to be Fully Paid; Seniority.
As of the date hereof, the Company has reserved, free from preemptive
rights, out of its authorized but unissued shares of Common Stock, or out of
shares of Common Stock held in its treasury, such number of shares of its Common
Stock as would be issuable upon conversion of all shares of Preferred Stock and
the exercise of all Warrants. (a) The Company covenants that all shares of
Common Stock which may be issued upon conversion of the Preferred Stock and the
exercise of all Warrants will upon issue be fully paid and nonassessable, and
free of all preemptive rights, liens and encumbrances. (b) Except as
specifically set forth in Exhibit 1.6(b) hereto, the Preferred Stock shall be
senior to all other classes of stock and/or securities issued or to be issued by
the Company.
1.7 Anti-Dilution Rights; Right of First Refusal.
The Pioneer Partnership, so long as it, its partners or affiliates owns any
Preferred Stock, (and, if applicable, the Common Stock acquired pursuant to the
conversion of the Preferred Stock) shall be entitled, as of right, (i) to
purchase or subscribe for any capital stock or equity or debt
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securities or any options, warrants, rights to purchase any such securities or
rights of the Company proposed to be issued by the Company (collectively
referred to as "New Securities") and (ii) provide any debt financing proposed to
be obtained by the Company. The Company acknowledges that the Pioneer
Partnership and Hollinger Digital, Inc. ("Hollinger") have agreed pursuant to an
agreement of even date herewith, that the Pioneer Partnership and Hollinger
shall share the rights of first refusal under this Section 1.7 on a pari passu
basis, with each of the Pioneer Partnership and Hollinger having the right to
purchase fifty percent (50%) of the New Securities to be offered and sold or to
provide fifty percent (50%) of the debt financing to be provided under this
Section 1.7. The rights of first refusal set forth hereinabove shall not be
applicable to (i) securities issued to employees, consultants or directors of
the Company pursuant to any stock option plan or stock purchase or stock bonus
arrangement approved by the Board of Directors; provided, however, such plan,
purchase or arrangement shall not exceed the maximum amount as provided in
Section 6.5, (ii) securities offered to the public pursuant to a registration
statement filed pursuant to the Securities Act, and (iii) securities issued
pursuant to an acquisition of another corporation by the Company by merger,
purchase of all or substantially all of the assets or other reorganization
whereby the Company is the surviving corporation, in the case of a merger or
consolidation, and the then existing shareholders of the Company own not less
than fifty-one percent (51%) of the voting stock of the Company on a fully
diluted basis following such merger or consolidation, or in the case of a share
exchange, the Company owns not less than fifty-one (51%) percent of the voting
stock of such acquired corporation, (iv) securities issued upon the conversion
of any of the Debentures or the exercise of the Warrant issued to Hollinger in
that certain Securities Purchase Agreement dated December 3, 1997 between the
Company and Hollinger (the "Hollinger Securities Purchase Agreement") and
modified by an agreement dated the date hereof between Hollinger and the
Company, (v) any shares of Common Stock issued pursuant to the exercise of
options, warrants or other securities outstanding on the Closing Date, (vi) any
shares of Common Stock or warrants, options, rights or securities convertible
into or exchangeable for capital stock of the Company in connection with any
stock split, stock dividend or similar event affecting the Company Common Stock
and (vii) the Preferred Stock, the Warrants and the Common Stock to be issued
pursuant to conversion of the Preferred Stock or the exercise of the Warrants
under the Investment Agreement.
The rights of the Pioneer Partnership under this Section 1.7 may, in the
discretion of the Pioneer Partnership, be assigned pro rata to any transfees of
the Preferred Stock.
(a) Notice and Exercise of Rights. In the event the Company proposes to
issue New Securities or to obtain any financing, it shall give ( and holders of
any Common Stock received upon conversion of the Preferred Stock) and Hollinger
written notice of its intention, describing the type of New Securities to be
issued or debt to be incurred, the price and general terms upon which the
Company proposes to issue the same. In exercising their rights, . shall be given
thirty (30) days from the receipt of such notice to agree to purchase or
subscribe for such New Securities or make or arrange such loan, in whole or in
part, at the same price and/or on the same terms as proposed.
(b) Over-Allotment. The Pioneer Partnership and Hollinger shall have the
right of over-allotment such that, in the event the other fails to exercise such
right to purchase all of the
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New Securities or to make or arrange such loan, the other may purchase the New
Securities not so purchased, or make or arrange the other's portion of such
loan. The Company shall provide notice to the Pioneer Partnership or Hollinger,
as the case may be, of the availability of such over-allotment, and the Pioneer
Partnership, or Hollinger, as the case may be, shall be required to exercise its
over-allotment rights, in whole or in part within fifteen (15) business days
from the date the non-participating party fails to exercise its rights
hereunder. The Pioneer Partnership and Hollinger shall be required to commit in
writing, at the time they exercise their rights under this Section 1.7, the
maximum amount of over-allotment of New Securities they agree to purchase or the
amount of loans(s) they intend to make or arrange, if any become available.
(c) Nothing herein shall prevent the Pioneer Partnership, Hollinger or
their respective partners, shareholders or affiliates from purchasing additional
securities of the Company from the Company, in the open market or otherwise,
thereby increasing its or their ownership percentage.
1.8 Percentage of Fully Diluted Shares.
The shares of Preferred Stock to be delivered by the Company to the Pioneer
Partnership as set forth above shall, if converted, constitute four and
four-tenths percent (4.4%) percent of the fully diluted issued and outstanding
Common Stock of the Company as of the Closing Date. The term "fully diluted" as
used in this Agreement shall mean the number of shares of the Common Stock of
the Company to be outstanding assuming the exercise or conversion of all
warrants (including the Warrants to be issued with respect to this transaction),
options or other securities convertible into or exchangeable for the Common
Stock of the Company as of the Closing Date, including the Preferred Stock to be
issued on the Closing Date.
1.9 Voting Rights and Prohibitive Covenants.
The Preferred Stock shall have full voting rights and shall be voted
together with the Common Stock as one class, and the shares of Preferred Stock
shall entitle the holder thereof to the number of votes as if the Preferred
Stock had been converted into shares of Common Stock on the appropriate record
date. So long as an aggregate of at least five percent (5%) of the outstanding
Preferred Stock (included in such 5% calculation for the denominator shall be
any Preferred Stock which has then been converted into Common Stock) is held by
the Pioneer Partnership, the Company shall not without the affirmative vote or
consent of the holders of a majority of all outstanding shares of the Preferred
Stock voting separately as a class (i) amend, alter or repeal any provision of
the Certificate of Incorporation or the By-Laws of the Company so as to
adversely affect the relative rights, preferences, qualifications, limitations
or restrictions of the Preferred Stock, (ii) authorize or issue any additional
equity securities of the Company or of any subsidiaries other than those
issuable (x) upon the conversion, exchange or exercise of securities or rights
outstanding on the Closing Date and (y) pursuant to grants of options previously
granted and outstanding on the Closing Date under the Company's Stock Option
plan, however such consent shall not be unreasonably withheld, (iii) approve any
merger, consolidation, compulsory share exchange or sale of assets to which the
Company is a party, however such consent shall not be unreasonably withheld,
(iv) repurchase or redeem any equity securities or pay dividends or other
distributions on any equity securities, except as provided pursuant to the terms
of the Preferred Stock, (v) liquidate, dissolve, recapitalize or reorganize the
Company, (vi) incur
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any indebtedness for borrowed money, or guarantee indebtedness, of other
persons, directly or indirectly except with respect to any wholly owned
subsidiaries, (vii) effect any fundamental changes in the nature of the
Company's business, including but not limited to acquiring or investing in
another business entity, however such consent shall not be unreasonably
withheld, and (viii) approve the sale or transfer of any material intangible or
intellectual property, other than the issuance of licenses or sales of equipment
in the ordinary course of business, however, such approval shall not be
unreasonably withheld.
1.10 Voting Agreements Concerning Directors.
(a) Generally. As soon as practicable after the Closing, but in no event
more than thirty (30) days following the Closing Date, one (1) nominee of the
Pioneer Partnership, John F. Ferraro or another designee of the Pioneer
Partnership, shall be elected a director of the Company for a period from the
Closing Date until the next regularly scheduled annual meeting of the
shareholders of the Company (or longer if the applicable terms of directors are
set for longer periods). So long as the Pioneer Partnership shall own any
Preferred Stock or Common Stock, the Board of Directors of the Company shall
nominate and include in the list of candidates for directors recommended by the
Board of Directors, and use its best efforts to have elected by the shareholders
at least one nominee of the Pioneer Partnership. Should any Pioneer Partnership
nominee decline to be nominated or elected, another of the Pioneer Partnership's
designees shall have the right to receive notice of and to attend any and all
meetings of the board of directors of the Company, and the Company shall be
required to deliver notice to such designee as if such designee were a director.
In furtherance of the foregoing, Mark Graff, the other persons named in Exhibit
1.10(a) hereto , and any trusts, or other entities or affiliates related to them
(collectively "Principal Shareholders") holding the voting rights to their
shares, shall at the Closing execute and deliver to the Pioneer Partnership a
Voting and Shareholders Agreement in the form annexed hereto as Exhibit 1.10(a)
hereto.
(b) Additional Nominees of the Pioneer Partnership On Default. In the event
that (i) the Company shall default in the due and punctual payment of any
installment of the cumulative dividends on the Preferred Stock when and as the
same shall become due and payable, (ii) such default shall continue for 30 days
and (iii) provided the Pioneer Partnership and/or its limited partners shall be
the holder(s) of an aggregate of at least five (5%) percent of the outstanding
Series A Preferred Stock (included in such 5% calculation for the denominator
shall be any Preferred Stock which has then been converted into Common), in
addition to the other remedies available to the Pioneer Partnership, the Pioneer
Partnership shall have the right to nominate, and the Board of Directors of
Company shall use its best efforts to have promptly elected or appointed such
number of individuals nominated by the Pioneer Partnership as shall be equal to
the number of Directors who are designees of Hollinger Digital, Inc.
("Hollinger"); provided, however, that the aggregate number of Directors that
are designees of the Pioneer Partnership or Hollinger shall then constitute a
simple majority of the Company's Board of Directors. If this is not the case,
the Board of Directors shall appoint as Directors such additional number of
designees of the Pioneer Partnership and Hollinger as shall be necessary to
ensure that (i) Pioneer and Hollinger shall have an equal number of designees
duly appointed as Directors and (ii) the Pioneer and Hollinger designees on the
Board shall constitute a simple majority of the Board of
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Directors, for so long thereafter as the Pioneer Partnership shall own any
Preferred Stock or Common Stock acquired upon conversion of any Preferred Stock.
To facilitate the foregoing, the Company has, concurrently with the execution
hereof, amended its by-laws to provide for the terms of this ss.1.10(b). A copy
of the Company's By-laws, as amended to the Closing Date, is annexed hereto as
Exhibit 4.1(b). The Company hereby covenants it shall not change such amended
provision of its by-laws without the Pioneer Partnership's prior written
consent. Failure to obtain such prior written consent to any such change shall
constitute an additional Event of Default under the Preferred Stock.
1.11 Transfer Agent.
American Stock Transfer & Trust Co. has been engaged and charged as the
transfer agent for the Common Stock and with the duties of the transfer agent
and registrar of the Series A Preferred Stock (the "Transfer Agent").
1.12 Use of Proceeds.
(a) The net proceeds to be received by the Company, after deduction of all
applicable (and previously unpaid) expenses of the Closing will be approximately
$3,002,775, and the gross proceeds shall be used and applied substantially as
follows:
Use of Proceeds
Trade Payables $800,000
Capital Equipment 50,000
Marketing 100,000
Camera & Editing 45,000
Comedy Talent 150,000
IDT et al. 92,500
Facility Expenses 243,000
Insurance 78,025
Leased Equipment 43,500
Payroll & Payroll Taxes 990,000
Professional Fees Legal 120,000
Public Relations 60,000
Accounting 30,000
Travel 120,000
Production Costs Press Association 60,000
Other 20,750
Working Capital: -0-
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Costs of Closing: $147,225
Finder's Fees: -0-
Pioneer Partnership's
Attorneys fees: $50,000
Expenses 1,225
Company's Attorney's fees: $25,000
Company's Accounting Fees: $3,000
Pioneer Partnership's Non-
accountable expense allowance: $5,000
Investment Banking Fees: $63,000
Miscellaneous: -0-
TOTAL $3,150,000
The Company shall expend these funds for the purposes indicated. No portion
of the proceeds will be paid to the Principal Shareholders, officers, directors,
or their affiliates or associates. No portion of the proceeds of the Closing may
be paid to those persons, directly or indirectly, as consultant fees, advisor
fees, officer salaries or director fees or for the purchase of shares or other
payments of any kind, or to make loans. However, funds allocated generally to
working capital may be used for salaries and wages of the general employee
population, and for board approved salaries of its executive officers and board
approved consulting, directors' and advisors' fees either (i) at rates currently
in effect at the Closing Date or (ii) as are ratified at one or more board
meetings at which the Pioneer Partnership nominee is in attendance. Without the
approval of the Compensation Committee of the Company's board of directors
(which committee shall have at least one Pioneer Partnership designee as a
voting member), The Company and its officers and directors shall not authorize
or implement any material increases in compensation for salaries, wages or fees
as compared to those in effect on the Closing Date, as disclosed in Exhibit
4.28. Material increases for purposes of this section 1.12 shall mean an annual
increase of ten (10%) percent or greater. No portion of the proceeds of the
Closing will be used to pay cash finder's fees with respect to this investment,
except as permitted under ss.4.17 and ss.5.4, nor will the Company issue
securities in payment of finder's fees with respect to the investment to any
person including the Principal Stockholders, officers, directors, or their
affiliates or associates.
(b) No proceeds of the Investment by the Pioneer Partnership shall be paid
to any person or entity other than the Company or Ventures Management Partners
LLC. No proceed of the Investment by the Pioneer Partnership shall be paid,
directly or indirectly, to any of the Company's shareholders, officers,
directors, subsidiaries or affiliates, unless specifically allocated in this
ss.1.12.
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(c) Margin Requirements. The Company does not intend to, and will not, use
the proceeds of the offer and sale of the Preferred Stock hereunder, directly or
ultimately, (i) to purchase or carry Margin Stock (as such term is defined under
Regulation U of the Board of Governors of the Federal Reserve System, as in
effect from time to time) or to extend credit to others for the purpose of
purchasing or carrying Margin Stock or to refund indebtedness originally
incurred for such purpose, or (ii) for any purpose which entails a violation of,
or which is inconsistent with, the provisions of Regulations G, T, U or X of the
Board of Governors of the Federal Reserve System.
1.13 Redemption.
The Company shall have the right to redeem any or all of the shares of
Preferred Stock on any Quarterly Dividend Payment Date (for purposes of this
ss.1.16 such date shall be the "Redemption Date"), provided written demand as
set forth below is given. The redemption price for each share of Preferred Stock
to be redeemed shall be paid by the Company in cash in an amount equal to the
higher of (i) the product of (x) the Stated Value for such share of Preferred
Stock divided by the average closing bid price of a share of the Company's
Common Stock for the five (5) trading days immediately preceding the Redemption
Date, multiplied by (y) seven (7); and (ii) the product of (x) the quotation of
the Stated Value for such Shares of Preferred Stock divided by the Conversion
Price multiplied by (y) a number which shall be five (5) in the first year
following the Closing Date, six (6), in the second year following the Closing
Date, seven (7) in the third year following the Closing Date, eight (8) in the
fourth year following the Closing Date, nine (9) in the fifth year following the
Closing Date and ten (10) thereafter.
Thirty (30) days prior to the Redemption Date, the Company shall provide
each holder of Preferred Stock with a written demand ("Redemption Notice")
(addressed to the holder at its address as it appears on the stock transfer
books of the Company) to redeem shares of Preferred Stock as provided above,
which notice shall specify the estimated Redemption Price and the number of
shares to be redeemed. All Redemption Notices hereunder shall be sent by
certified mail, returned receipt requested, and shall be deemed to have been
provided when received.
On or prior to the Redemption Date, each holder of Preferred Stock shall
surrender his or its certificate or certificates representing the shares of
Preferred Stock to be redeemed, in the manner and at the place designated in the
Redemption Notice. If less than all shares represented by such certificate or
certificates are redeemed, the Company shall issue a new certificate for the
unredeemed shares. From and after the Redemption Date, unless there shall be a
default in payment of the Redemption Price, all rights of each holder with
respect to shares of Preferred Stock redeemed on the Redemption Date shall cease
(except the right to receive the Redemption Price and interest at the rate of
13% per annum, on the basis of a 360-day year for the actual number of days
elapsed from the Redemption Date to the date the Redemption Price is actually
paid in the event payment is not made within 20 days after the Redemption Date),
and such shares shall not be deemed to be outstanding for any purpose
whatsoever.
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Registration Rights
2.1 Demand Registration.
The Company agrees that, on two (2) occasions, it shall promptly upon the
written request of the Pioneer Partnership at the Company's sole cost and
expense file such registration statement pursuant to the Securities Act to
register the shares of Common Stock into which the Preferred Stock may be
converted and the Shares of Common Stock for which the Warrants may be exercised
(the "Registrable Securities") for continuous resale under Rule 415 promulgated
by the Commission under the Securities Act. The Company shall use its best
efforts to cause such registration statement to become and remain effective
(including the taking of such steps as are reasonably necessary to obtain the
removal of any stop order) on a timely basis. The Company shall also execute an
undertaking to file post-effective amendments, appropriate qualification filings
under applicable state securities (blue sky) laws and appropriate compliance
with applicable regulations issued under the Securities Act).
2.2 Piggyback Registration.
(a) So long as the Pioneer Partnership or its partners or affiliates are
the holders of Preferred Stock or Common Stock, if the Company shall register
any of its securities for sale pursuant to any appropriate Registration
Statement under the Securities Act, the Company shall be required to offer the
Holders the opportunity to register any or all the Registrable Securities,
without cost to the Holders thereof. In connection with these piggy-back
registration rights, the Company shall give all of the Holders notice by
certified mail at least thirty (30) business days prior to the filing of such
Registration Statement under the Act. The Holders shall then have twenty-five
(25) days to elect to include all or a portion of its Registrable Securities for
sale in the Registration Statement. (b) The registration requirement shall not
apply to a Registration Statement filed by the Company pursuant to Form S-8 or
S-4 or any successor form or forms with the sole and express purpose of
registering shares for employees or for stock incentive plans, or any other
inappropriate form. (c) If the registration of which the Company gives notice is
for a registered public offering involving an underwriting, the Company will so
advise the Holders. In such event, these registration rights shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their securities
through such underwriting shall enter into an underwriting agreement in
customary form with the underwriter selected by the Company. In the event that
the lead or managing underwriter in its good faith judgment determines that
material adverse market factors require a limitation on the number of shares to
be underwritten, the underwriter may limit the number of Registrable Securities.
In such event, the Company shall so advise all holders of securities requesting
registration, and the number of shares of securities that are entitled to be
included in the registration and underwriting shall be allocated pro rata among
all Holders and other participants, including the Company, in proportion, as
nearly as practicable, to the respective amounts of Registrable Securities and
other securities which they had requested to be included in such registration
statement at the time of filing the registration statement. If any Holder
disapproves of the terms of any such underwriting, he may elect to withdraw
therefrom by written notice to the Company and the underwriter,
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provided such notice is delivered within 60 days of full disclosure of such
terms to such Holder, without thereby affecting the right of such Holder to
participate in subsequent offerings hereunder.
2.3 Registration Covenants.
In the case of each registration effected by the Company pursuant to this
Article II, the Company will keep each Holder advised in writing as to the
initiation, progress, and declaration of effectiveness of each registration and
as to the completion thereof. At its expense, the Company will:
(a) Keep such registration effective for a minimum period of two (2) years
or until the Holder or Holders have completed the distribution described in the
registration statement relating thereto, whichever first occurs; provided,
however, that in the case of any registration of Registrable Securities on Form
S-3 which are intended to be offered on a continuous or delayed basis, such two
(2) years period shall be extended, if necessary, to keep the registration
statement effective until all such Registrable Securities are sold, provided
that Rule 415, or any successor rule under the Securities Act, permits an
offering on a continuous or delayed basis, and provided further that applicable
rules under the Securities Act governing the obligation to file a post-effective
amendment, permit, in lieu of filing a post-effective amendment which (1)
includes any prospectus required by Section 10(a)(3) of the Securities Act, or
(2) reflects facts or events representing a material or fundamental change in
the information set forth in the registration statement, the incorporation by
reference of information required to be included in (1) and (2) above to be
contained in periodic reports filed pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act') in the
registration statement;
(b) Furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request;
(c) Furnish the Pioneer Partnership with copies of all correspondence with
the Commission; and
(d) In connection with any underwritten offering, the Company and the
Holders will enter into any underwriting agreement reasonably necessary to
effect the offer and sale of Registrable Securities, provided such agreement
contains customary underwriting provisions.
2.4 Blue Sky Registration.
(a) The Company will use its best efforts to register or qualify the
Registrable Securities covered by any registration statement under the
Securities Act and under such securities or blue sky laws in such jurisdictions
within the United States as the Pioneer Partnership may reasonably request;
provided, however, that the Company reserves the right, in its sole discretion,
not to register or qualify such shares of Common Stock in any jurisdiction in
which such shares of Common Stock do not satisfy the requirements of such
jurisdiction. The Company covenants that notwithstanding the above, that it
shall use its best efforts, at a minimum, to register or qualify the Registrable
Securities in the States of Connecticut and New York. (b) The
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Company shall (i) advise the Pioneer Partnership promptly after obtaining
knowledge thereof, and, if requested by the Pioneer Partnership, confirm such
advice in writing, of the issuance by the Commission or any state securities
commission of any stop order suspending the qualification or exemption from
qualification of the Registrable Securities for offer or sale in any
jurisdiction, or the initiation of any proceeding for such purpose the
Commission or by any state securities commission or other regulatory authority,
(ii) use its best efforts to prevent the issuance of any stop order or order
suspending the qualification or exemption from qualification of the Registrable
Securities under any state securities or Blue Sky laws, and (iii) if at any time
the Commission or any state securities commission or other regulatory authority
shall issue an order suspending the qualification or exemption from
qualification of the Registrable Securities under any such laws, use its best
efforts to obtain the withdrawal or lifting of such order at the earliest
possible time.
2.5 Deregistration.
In the event the Pioneer Partnership has not sold all of the Registrable
Securities included in the registration statement prior to the second
anniversary of the effective date of such registration statement, the Pioneer
Partnership hereby agrees that the Company may deregister by post-effective
amendment any Registrable Securities of the Pioneer Partnership covered by the
registration statement but not sold on or prior to such date.
2.6 Post-Effective Amendments.
The Company agrees that it will notify the Pioneer Partnership of the
filing and effective date of each such post-effective amendment.
2.7 Right to Delay.
The Company shall have the one-time right, after it shall have received
written notice pursuant to ss.2.1, to elect not to file or to delay any such
proposed registration statement by not more than 60 days, or to withdraw the
same after the filing but prior to the effective date thereof; such withdrawal
shall renew the Demand Registration rights under ss.2.1. In addition, the
Company may delay the filing of any registration statement requested pursuant to
ss.2.1 hereof by not more than 60 days if the Company, prior to the time it
would otherwise have been required to file such registration statement,
determines in good faith that the filing of the registration statement would
require the disclosure of non-public material information that, in its judgment,
would be detrimental to the Company if so disclosed or would otherwise adversely
affect a financing, acquisition, disposition, merger or other material
transaction.
2.8 Selection of Underwriters.
If a Demand Registration pursuant to ss.2.1 hereof involves an underwritten
offering, either the Pioneer Partnership or the Company shall have the right to
select the investment banker or investment bankers and manager or managers that
will serve as the underwriter with respect to the underwritten offering;
provided, however that the party not selecting such underwriter shall have the
right to approve the underwriter and such approval shall not be unreasonably
withheld or delayed without a material reason stated in writing.
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2.9 Principal Shareholders.
For so long as the Pioneer Partnership, its partners or affiliates owns any
Preferred Stock, Warrants or any Common Stock received upon conversion of
Preferred Stock or exercise of Warrants, the Company will not file a
registration statement on behalf of any Principal Shareholder (as that term is
defined in the Voting and Shareholders Agreement between the Pioneer Partnership
and certain shareholders of the Company, dated as of the Closing Date) as
selling shareholders without the prior written approval of the Pioneer
Partnership.
2.10 Transferability of Registration Rights.
The registration rights described in ss.2.1 and ss.2.2 are freely
transferable by the holders of Registrable Securities to any person to whom such
holder transfers its Registrable Securities.
2.11 Indemnification by Company re Registration Rights.
The Company will indemnify each Holder, each of its officers, directors and
partners, and each person controlling such Holder, with respect to which
registration, qualification or compliance has been effected pursuant to this
Article II, and each underwriter, if any, and each person who controls any
underwriter against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
statement, notification or the like incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or any violation by the Company of the
Securities Act or any rule or regulation thereunder applicable to the Company
and relating to action or inaction required of the Company in connection with
any such registration, qualification or compliance, and will reimburse each such
Holder, each of its officers, directors and partners, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating and defending any such claim, loss, damage,
liability or action, provided that the Company will not be liable in any such
case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission based upon written
information furnished to the Company by such Holder or underwriter and stated to
be specifically for use therein.
2.12 Indemnification by Holder.
Each Holder will, if Registrable Securities or other securities held by him
are included in the securities as to which such registration, qualification, or
compliance is being effected, indemnify the Company, each of its directors and
officers and each underwriter, if any, of the Company's securities covered by
such a registration statement, each person who controls the Company or such
underwriter within the meaning of the Securities Act and the rules and
regulations thereunder, each other such Holder and each of their officers,
directors, and partners, and each person controlling such Holder, for a period
of one (1) year from the effective date of such registration statement, against
all claims, losses, damages and liabilities (or actions in respect
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thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company and such Holders, directors, officers, partners, persons, underwriters
or control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by such Holder and stated to be specifically for use
therein; provided, however, that the obligations of such Holders hereunder shall
be limited to an amount equal to the proceeds to each such Holder of securities
sold pursuant a registration statement required by this Article II.
2.13 Notice of Indemnity and Defense.
Each party entitled to indemnification under this Article II (the
"Indemnified Party") shall give notice to the party requiring to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
be unreasonably withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnified Party of its obligations under this Article II. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect to such claim or litigation. Each Indemnified Party
shall furnish such information regarding itself or the claim in question as an
Indemnifying Party may reasonably request in writing and as shall be reasonably
required in connection with the defense of such claim and litigation resulting
therefrom.
CO-SALE PROVISIONS
3.1 Third-Party Offer and Notice.
Any proposed sale of the capital stock of the Company by any Principal
Shareholder will be subject to a participation right of co-sale by the Pioneer
Partnership or its assigns on a pro rata fully diluted basis. If any one or more
of the Principal Shareholders obtains from a third party ("Third Party
Purchaser") an offer to purchase any amount of their shares of capital stock of
the Company, such Principal Shareholders shall submit a written notice (the
"Co-Sale Notice") to the Pioneer Partnership disclosing the amount of shares
proposed to be sold, the offered purchase price, the proposed closing date, and
the total number of Shares owned by the Principal Shareholders.
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3.2 Co-Sale Right of Participation.
Upon receipt of a Co-Sale Notice from any Principal Shareholder, the
Pioneer Partnership or its assigns may elect to participate in such transaction
and shall have the right to offer its securities, at the same price and on the
same terms as contained in the Co-Sale Notice. Each participating selling party
who elects to participate in such sale shall be entitled to sell his Pro Rata
Share (as herein defined) of the number of shares the Third Party Purchaser is
willing to purchase. "Pro Rata Share" as used in the preceding sentence means
the product of the number of shares owned by such selling shareholder and a
fraction, the numerator of which is the number of fully diluted shares held by
such selling shareholder participating in a subject sale, and the denominator of
which is the total number of fully diluted shares held by all shareholders
participating in a subject sale. Each participating selling party shall in turn
be entitled to receive at the applicable closing the net proceeds of the sale
allocable to the securities sold on behalf of such selling shareholder, after
deduction of such selling shareholder's proportionate share of the reasonable
expenses of the sale.
3.3 Excluded Sales.
These co-sale provisions will not apply to any sale of securities pursuant
to a distribution to the public, whether pursuant to a registered public
offering, Rule 144 under the Securities Act or otherwise.
3.4 Notice of Intent to Participate in Co-Sale.
If the Pioneer Partnership wishes to participate in any sale under this
Article III, then the Pioneer Partnership shall notify the selling Principal
Shareholders in writing of such intention within fifteen (15) business days
after the Pioneer Partnership's receipt of the Co-Sale Notice made pursuant to
Section 3.1. Such notification shall be delivered in person or by facsimile to
the Principal Shareholders at the Company's offices.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company makes the following representations and warranties to the
Pioneer Partnership each of which shall be deemed material, and the Pioneer
Partnership, in executing, delivering and consummating this Agreement, has
relied and will rely upon the correctness and completeness of each of such
representations and warranties:
4.1 Organization, Qualification and Corporate Power.
The Company (i) is a corporation duly organized and validly existing and in
good standing under the laws of the State of Delaware; (ii) is duly qualified to
transact business as a foreign corporation and in good standing in the state of
New York, being all states or foreign jurisdictions in which its activities
require qualification and the failure to be so qualified would have a material
adverse effect on the business and operations of the Company; and (iii) has all
corporate power necessary to engage in the business in which it is presently
engaged and to enter into and consummate the transactions contemplated by this
Agreement. Annexed hereto as Exhibit 4.1(a)
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and 4.1(b), respectively, are true, accurate and complete copies of the
Certificate of Incorporation and the By-Laws of the Company, each as amended to
date.
4.2-A Subsidiaries.
The Company has no subsidiaries, nor is it the subsidiary of any other
corporation or entity except for (a)WebFeat, Inc. and (b) American Direct Media,
Inc. (collectively "Subsidiaries"). The Subsidiaries are all wholly owned by the
Company. The Subsidiaries and affiliates are entities duly organized and validly
existing and in good standing under the laws of the State(s) of Delaware and New
Jersey, respectively, except that American Direct Media, Inc. is currently not
in good standing, and currently conduct no business and owns no assets. The
Company covenants to do all things necessary to ensure that American Direct
Media, Inc. (i) returns to good standing in the State of New Jersey or (ii) is
dissolved; as soon as practicable following the Closing.
The Subsidiaries are controlled by the Company, as such term is defined in
ss.20(a) of the Securities Act. For purposes of this section, the term
"Subsidiary" is defined to mean any corporation or other business entity, a
majority of whose outstanding voting stock or ownership interests entitled to
vote for the election of directors or such other governing body is, at the time,
owned by the Company and/or one or more other subsidiaries.
4.2-B Affiliates.
The Company has no affiliated entities, nor is it the affiliate of any
other corporation or entity except for (a) Webfeat, Inc. and (b) American Direct
Media, Inc. (collectively "Affiliates"). The Affiliates are wholly owned by the
Company and/or by the Principal Shareholders. Hollinger is deemed an "affiliate"
through its beneficial ownership of its Debentures, Common Stock, Option and
Warrant. The term "affiliate" is defined as that term is defined in the federal
securities laws and the regulations of the Commission pursuant to those laws,
and any entity in which the Company is (or the Principal Shareholders are) the
beneficial owners of five (5%) or more such affiliate.
4.2-C Joint Ventures.
Except as set forth in Exhibit 4.2-C, the Company is not a party to any
partnership, management, shareholder, joint venture, or similar agreements.
4.3 Authorization of Agreement.
The execution, delivery and performance by the Company of this Investment
Agreement and all other documents and instruments contemplated hereby have been
duly authorized by all requisite corporate action. A true, correct and valid
copy of the Company's Board of Director's resolution(s) authorizing the
transactions and securities to be issued hereunder, in the form annexed as
Exhibit 4.3 hereto, has been delivered to the Pioneer Partnership. Neither the
execution and delivery of this Agreement nor compliance by the Company with any
of the provisions hereof nor the consummation of the transactions contemplated
hereby, will:
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(a) violate or conflict with any provision of the Certificate of
Incorporation or By-laws of the Company or its Subsidiaries or Affiliates or any
contract to which the Company or any of its Subsidiaries or Affiliates is bound;
(b) violate or, alone or with notice or the passage of time or both, result
in the material breach or termination of, or otherwise give any contracting
party the right to terminate, or declare a material default under, the terms of
any material agreement or other document or undertaking, oral or written to
which the Company or any of its Subsidiaries or Affiliates is a party or by
which it or its or their properties or assets may be bound (except for such
violations, conflicts, breaches or defaults as to which required waivers or
consents by other parties have been, or will be obtained, prior to the Closing);
(c) result in the creation or imposition of any lien, security interest,
charge or encumbrance upon any of the properties or assets of the Company or any
of its Subsidiaries or Affiliates pursuant to the terms of any such agreement or
instrument;
(d) violate any judgment, order, injunction, decree or award against, or
binding upon the Company or any of its Subsidiaries or Affiliates or upon its or
their properties or assets; or
(e) violate any law or regulation of any jurisdiction relating to either
the Company any Subsidiary or Affiliate or any of their respective securities,
assets or properties.
4.4 Validity.
This Agreement has been duly executed and delivered by the Company and
constitutes the valid and legally binding obligation of the Company, enforceable
in accordance with its terms.
4.5 Government Approval.
Except for filing a Form D with the Commission (to the extent necessary)
and any applicable Blue Sky filings, including the State of Connecticut, and
filing the Certificate of Designation with the Secretary of State of the State
of Delaware, no registration or filing with, or consent or approval of, or other
action by, any federal, state or other governmental agency or instrumentality is
or will be necessary for the valid execution, delivery and performance of this
Investment Agreement or any other document or transaction contemplated hereby.
4.6 Capitalization.
The authorized capital stock of the Company consists of: (a) fifty million
(50,000,000) shares of Common Stock, $.001 par value, and (b) one hundred
thousand (100,000) shares of Preferred Stock, $1.00 par value, authorized for
issuance under the Company's certificate of incorporation, as amended.
Immediately prior to the Closing Date, the issued and outstanding securities of
the Company shall consist of: fifteen million seven hundred and thirty-one
thousand six hundred and thirteen (15,731,613) shares of Common Stock issued and
outstanding and no shares of Preferred Stock issued and outstanding. Except as
set forth in Exhibit 4.6, no shares of Common Stock are issuable pursuant to
existing agreements and there are no outstanding
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warrants, options or other securities convertible into or exchangeable for the
Common Stock of the Company, and no other shares of Common Stock are issued or
outstanding or committed for issuance except those committed for issuance upon
conversion of the Preferred Stock and exercise of the Warrants to be issued
hereunder.
4.7 Annual Report and the Financial Statements.
(a) The Company has heretofore furnished to the Pioneer Partnership copies
of (i) the Company's consolidated audited financial statements for its fiscal
year ended December 31, 1997 (hereinafter the "Audited Financial Statements"),
and (ii) the Company's consolidated unaudited interim financial statement for
the applicable periods being three and six months ended March 31, 1998 and June
30, 1998 (hereinafter collectively referred to as the "Interim Financial
Statements"); if the term "Audited Financial Statements" is used herein, then
the unaudited Interim Financial Statements are excluded from such reference.
However, reference to "Financial Statements" shall mean both the Audited
Financial Statements, and all of the Interim Financial Statements, collectively.
Such Financial Statements are true, correct and complete in all material
respects, and accurately set forth, in all material respects, the financial
condition of the Company and its Subsidiaries as of their respective dates, and
the results of operations for the fiscal periods involved, and were prepared in
conformity with generally accepted accounting principles and practices
consistently applied ("GAAP") and are annexed hereto as Exhibit 4.7-B. The
Financial Statements fairly present in all material respects the financial
condition and results of operations of the Company and its Subsidiaries at the
dates thereof and for the periods covered thereby. The Company has previously
provided the Pioneer Partnership with interim, unaudited financial interim
reports for the months of July, August and September, 1998 (the "Monthly
Reports"). Except as set forth in Exhibit 4.7 hereto, since June 30, 1998, the
Company and/or its Subsidiaries has incurred no material (defined as $10,000 or
more for purpose of this ss.4.7) obligation or liability, whether absolute,
accrued, contingent or otherwise, that is not set forth in the Monthly Reports,
or for the period since September 30, that is not a recurring monthly expense
consistent with levels set forth in the Monthly Reports.
(b) The Company and/or its Subsidiaries have good and marketable title to
all of its property and assets and such property and assets are not subject to
any mortgage, pledge, lien or other encumbrance except as disclosed in Exhibit
4.7-B annexed hereto and made a part hereof.
(c) The Company and/or its Subsidiaries had no obligations, liabilities or
commitments, contingent or otherwise, of a material nature which were not
provided for except as set forth in Exhibit 4.7-C and except those incurred in
the normal course of business since June 30, 1998.
(d) Since June 30, 1998, there has been no materially adverse change in the
nature of the business of the Company and/or its Subsidiaries nor in any of
their financial condition or property, other than changes in the usual or
ordinary course of business, and the Company has incurred no obligations or
liabilities nor made any commitments other than in the usual and ordinary course
of business or as disclosed in Exhibit 4.7 -D.
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(e) The Company and/or its Subsidiaries are not a party to any employment
contract with any officer, director, or stockholder, or to any lease, agreement
or other commitment not in the usual and ordinary course of business, nor to any
pension, insurance, profit-sharing or bonus plan, except as disclosed in Exhibit
4.7-E.
4.8 Patents, Trademarks, Etc.
All of the officers, directors, principals and employees of and consultants
to the Company have assigned and transferred all of their Intellectual Property
as defined below, to the Company, and are contractually bound to assign or
transfer all of their Patents to the Company whether now existing or hereafter
created or acquired, all in connection with their duties to the Company. The
Company and/or its Subsidiaries own or possess, without any adverse claims with
respect thereto, and without known conflict with the rights of others, except as
disclosed in Exhibit 4.8, the rights to the patents, trademarks, service marks,
trade names, copyrights and licenses listed in Exhibit 4.8 hereto and the same
constitute all of the patents, trademarks, service marks, service names,
copyrights, and licenses necessary, used or useful in the conduct of the
business of the Company (collectively the "Intellectual Property"). The Company
protects all technical, trade secret and confidential information developed by
and belonging to the Company and/or its Subsidiaries, which has not been
patented, by maintaining the secrecy relating thereto, and the Company and/or
its Subsidiaries will continue to seek to protect all such information,
technology and intellectual property by maintenance of secrecy related thereto.
4.9 Taxes.
Except as set forth in Exhibit 4.9 annexed hereto, the Company and each of
the Subsidiaries has filed all applicable federal, state, county and local tax
and franchise returns and reports required to be filed by it and has paid (or,
as to taxes not currently due and payable, has made adequate provision in
accordance with generally accepted accounting principles for the payment of) all
income and other taxes, assessments, franchise fees and other governmental
charges required by law (including, without limitation, withholding, social
security, payroll and similar taxes) and all interest and penalties, if any,
thereon and all federal, state, local and other taxes accruable since the filing
of such returns have been properly accrued. No adverse proceedings or other
actions are pending or have been taken for the assessment or collection of
additional taxes of any kind from the Company and/or its Subsidiaries for any
period, and to the Company's knowledge, no investigation by the Internal Revenue
Service or any taxing authority affecting the Company and/or its Subsidiaries is
now pending. All taxes that the Company and/or its Subsidiaries are required by
law to withhold or collect have been withheld or collected and have been paid
over to the proper governmental authorities or are properly held by the Company
for such payment.
4.10 Approvals.
No authorization or approval of, or filing with, or compliance with any
applicable order, judgment, decree, statute, rule or regulation of, any court or
governmental authority, or approval, consent, release or action of any third
party, is required in connection with the execution and delivery by the Company
of, or the performance or satisfaction of any agreement of the Company
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contained in or contemplated by, this Agreement, except for claiming an
exemption from ss.5 of the Securities Act of 1993 by filing a Form D or
otherwise, and by claiming an exemption from registration from applicable state
Blue Sky laws (including but not limited to the laws of Connecticut) and any
filings required thereunder.
4.11 Litigation.
Except as set forth on Exhibit 4.11 hereto, neither the Company nor any of
its Subsidiaries, or affiliates is a defendant, nor are they a plaintiff against
whom a counter-claim has been asserted in any actions, suits, claims,
arbitrations, administrative or other proceedings or governmental investigations
seeking $5,000 or more in damages, or any equitable relief, pending or, to the
best of the Company's knowledge, threatened against, relating to or affecting
the Company or any of the Subsidiaries, or their respective business, operations
or assets, whether or not fully covered by insurance, or which question or seek
to prevent consummation of the transactions provided for in this Agreement,
whether at law or in equity, or before or by any Federal, state, local, foreign
or other governmental department, agency or instrumentality, nor to the best of
its knowledge is there any basis therefor. Neither the Company nor any
Subsidiary is bound or adversely affected by or in default with respect to any
judgment, order, writ, injunction or decree of any court or of any governmental
department, agency or instrumentality.
4.12 Schedule of Documents.
The schedule of contracts including a summary in tabular form of all
material terms (including but not limited to the purpose of the contract,
economic terms, covenants, warranties, representations, restrictions) attached
hereto as Exhibit 4.12 lists any and all material (material for purposes of this
paragraph only shall mean $10,000) contracts or other material commitments or
obligations relating to the Company and its Subsidiaries, (a) to which a
Principal Shareholder and/or officer or director of the Company or any
Subsidiary is a party, (b) all leases of real and/or personal property, (c)
union collective bargaining, employment, management and consulting agreements to
which the Company or any Subsidiary is a party, (d) compensation plans, bonus
plans, deferred compensation arrangements, pension and retirement plans, profit
sharing plans, stock purchase and stock option plans, (e) loan agreements and
notes, (f) options to purchase property, (g) stockholder agreements, and (h) all
other material contracts or commitments to which the Company is a party
(collectively, the "Material Agreements"). Except as listed on Exhibit 4.12,,
neither the Company nor any of its Subsidiaries is a party to or bound by any
contract or commitment (or group of related contracts or commitments), other
than contracts, or agreements in the ordinary course of business; nor is the
Company nor any of its Subsidiaries bound by any charter, contractual or other
corporate restriction that materially and adversely affect or could affect its
business, financial condition or prospects, or which restricts its right or
ability to operate its business as conducted or proposed to be conducted or to
pay dividends on the Preferred Stock. On or prior to the date hereof, the
Company has delivered to the Pioneer Partnership or a representative thereof, a
true and correct copy of each of the documents listed in Exhibit 4.12.
All Material Agreements are in full force and effect, are the legal, valid
and binding obligations of the Company and the other parties thereto,
enforceable in accordance with their
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terms (except as such enforceability may be limited by bankruptcy and insolvency
laws or by general principles of equity, whether consolidated in a proceeding in
law or in equity).
4.13 No Defaults.
Neither the Company nor any Subsidiary is in violation of, breach of or
default under, and no event (including, without limitation, execution of and
consummation of the transactions provided for in this Agreement) has occurred
which with the passage of time or notice from or action by any party thereto or
otherwise could result in a violation of or default under, or give any other
person the right to terminate, as the case may be, any indenture, mortgage,
security, loan, lease or other material agreement to which the Company or any of
the Subsidiaries is a party or by which any of them is bound or result in the
creation, imposition or acceleration of any material lien of any nature in favor
of any other person, other than defaults that will be cured (within the terms of
the applicable agreements) with the application of proceeds set forth in Section
1.12 hereof.
4.14 Lack of Felonies.
Neither the Company nor its Subsidiaries nor any of their respective
principals, directors, or executive officers have ever been convicted of or pled
guilty at any time within the past (10) years to any felony under the laws of
the United States or any state thereof. No criminal arrests, proceedings or
actions are pending, nor have any been threatened in the last thirty-six (36)
months against any of such persons.
4.15 No Judgments.
There are no judgments, decrees, binding decisions outstanding against the
Company or any of its Subsidiaries which were issued in any legal proceeding of
any kind by any court, arbitrator, panel, or other governing or determining
authority.
4.16 Insurance.
The Company and its Subsidiaries are covered by policies of general
liability insurance with coverage of at least $2,000,000 with a deductible of
$1,000, and workers' compensation insurance and extended coverage on its
property. There does not exist, nor has there been, any lapse in the coverage
under such insurance policies. Such policies are carried by a reputable and
financially stable insurance company and are sufficient to cover risks as are
customarily insured against by similar businesses. The Company represents it has
adequate insurance to replace a substantial amount of its assets.
4.17 No Brokers.
All negotiations relative to this Agreement and the transactions
contemplated hereby have been carried on directly with the Pioneer Partnership
by the Company, without the intervention of any broker, finder, investment
banker (except Ventures Management Partners LLC or Pioneer Ventures Corp.), or
other third party. The Company has not engaged, consented to, or
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authorized any broker, finder, investment banker or other third party to act on
its or his behalf, directly or indirectly, as a broker or finder in connection
with the transactions contemplated by this Agreement.
4.18 Loans and Liens.
Attached hereto as Exhibit 4.18 is a complete and accurate list of all
secured and unsecured loans to which the Company or any of its Subsidiaries is a
party as a borrower, debtor, guarantor or as a party obligated thereunder and
all other financial obligations or judgments to which they are subject. Such
schedule sets forth in tabular form the identity of the borrower, lender, any
guarantors, the original principal amount, the principal amount due at a date
within 90 days hereof, the interest rate, the current standing of such
obligation, the next payment due date, the amount of principal and interest next
due, the maturity date, and a summary of any other material provisions not
requested herein.
4.19 Solvency.
The Company has not admitted in writing or otherwise an inability to pay
its debts generally as they become due (other than debts that are listed on the
Company's current schedule of accounts payable previously provided to the
Pioneer Partnership, and which will be paid with the application of proceeds set
forth in Section 1.12 hereof), filed or consented to the filing against it of a
petition in bankruptcy or a petition to take advantage of any insolvency act,
made an assignment for the benefit of creditors, consented to the appointment of
a receiver for itself or for the whole or any substantial part of its property,
or had ever a petition in bankruptcy filed against it, been adjudicated a
bankrupt, or filed a petition or answer seeking reorganization or arrangement
under the federal bankruptcy laws or any other laws or of the United States or
any other jurisdiction.
4.20 Registration Rights.
Except as provided for herein and as otherwise provided on Exhibit 4.20
annexed hereto, the Company is not a party to any agreement or commitment that
obligates the Company to register under the Securities Act, any of the Company's
presently outstanding securities or any of the Company's securities that may
hereafter be issued.
4.21 Compliance with Securities Laws.
The offer, grant, sale, and/or issuance of the Preferred Stock, the
Warrants and the Common Stock issuable upon conversion of the Preferred Stock or
the exercise of Warrants shall not be in violation of the Securities Act, the
Exchange Act, any state securities or "blue sky" laws, or the Company's
organization documents such as the certificate of incorporation or bylaws, when
offered, sold and/or issued in accordance with this Agreement. The Company has
not (i) distributed any offering materials in connection with the offering and
sale of the Preferred Stock and Warrants or (ii) solicited any offer to buy or
sell the Preferred Stock and Warrants by means of any form of general
solicitation or advertising.
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4.22 Transfer Restrictions.
There are no restrictions on the transfer of capital stock of the Company
imposed by its certificate of incorporation, bylaws, other organization
documents, any agreement to which the Company is a party (other than those
agreements expressly contemplated by, or disclosed in the Exhibits to, this
Agreement), any order of any court or any governmental agency to which the
Company is subject, or any statute other than those imposed by relevant state
and federal securities laws.
4.23 Related Party Transactions.
There are no agreements, understandings or proposed transactions between
the Company and any of its officers, directors or other "affiliates" (as defined
in Rule 405 promulgated under the Securities Act) which involve transactions
exceeding $5,000 in amount, except as outlined on Exhibit 4.23.
4.24 Miscellaneous.
Except as set forth in Exhibit 4.12, Exhibit 4.7-A or Exhibit 4.7-B or the
Audited Financial Statements or notes thereto, (a) the Company is not a party to
or bound by any distribution, sales agency, franchise or similar agreement or
understanding that relates to the sale or distribution of its products and
services, (b) the Company does not have a sole-source supplier of significant
goods and services (other than utilities) with respect to which practical
alternative sources are not available on comparable terms and conditions, (c)
there are neither pending, nor threatened, any labor negotiations involving or
affecting the Company, and no organizing activities involving union
representation exists in respect of any of its employees, (d) except in the
ordinary course of business, the Company is not bound by any warranties relating
to its products or services, such warranties include those for merchantability
and fitness for a particular purpose, and (e) there has been no assertion of any
breach of product or service warranties that could have a material (greater than
$10,000) adverse affect on the business, financial condition or prospects of the
Company and its Subsidiaries, considered in the aggregate. Neither the Company
nor any of its employees, consultants, officers or directors is prohibited from
engaging in any business activity that is currently carried on or contemplated
by the Company or any Subsidiary, by reason of any restrictive covenant or
agreement, including but not limited to, a covenant not-to-compete.
4.25 Additional Representations. The Company represents and warrants that:
(a) The Investment to be consummated by the Pioneer Partnership in the
Company is NOT opposed by its board of directors;
(b) The Company is NOT engaged as a business in real estate investments,
and is not a real estate operating company;
(c) The Company is NOT undergoing a bankruptcy liquidation;
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(d) The securities to be issued upon consummation of the Investment are
either exercisable for, or convertible into, equity securities at a
pre-determined exercise price or conversion ratio, except for the reset
provisions of this Agreement;
(e) The Company is NOT offering as an investment or otherwise any uncovered
options, or any transaction in which securities are sold short in an uncovered
transaction or which would be in violation of Section 16(c) of the Exchange Act,
provided, however, that nothing in this subsection (e) shall prevent the Pioneer
Partnership from acquiring options or warrants exercisable for, or other
securities convertible into, equity securities or assets at a pre-determined
exercise price or conversion ratio;
(f) The Company and its subsidiaries are NOT domiciled in any country that
is, at the time of the closing of the Investment and will ensure that, at the
time of the conversion or partial conversion of any of the securities, a
participant in an international boycott illegal under United States law or
opposed by the United States government;
(g) The Company is NOT an investment company registered or required to be
registered under the Investment Company Act of 1940, as amended;
(h) The Company conducts NO operations in Northern Ireland and will ensure
that at the time of the conversion or partial conversion of any of the shares of
Preferred Stock that it conducts NO operations in Northern Ireland unless the
Company complies with the McBride principles to the satisfaction of the Pioneer
Partnership. The McBride principles consist of, but are not limited to, the
following:
1) increasing the representation of individuals from under-represented
religious groups in the workforce, including managerial, supervisory,
administrative, clerical and technical jobs;
2) providing adequate security for the protection of minority employees
at the workplace and while traveling to and from work;
3) banning provocative religious or political emblems from the workplace;
4) publicly advertising all job openings and making special recruitment
efforts to attract applicants from under-represented religious groups;
5) layoff, recall and termination procedures which do not in practice
favor particular religious groupings;
6) abolishing job reservations; apprenticeship restrictions and
differential employment criteria, which discriminate on the basis of
religion or ethnic origin;
7) developing training programs that will prepare substantial numbers of
current minority employees for skilled jobs, including the expansion
of existing programs and the creation of new programs to train,
upgrade and improve the skills of minority employees;
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8) establishing procedures to assess, identify and actively recruit
minority employees with potential for further advancement; and
9) appointing a senior management staff member to oversee the company's
affirmative action efforts and the setting up of timetables to carry
out affirmative action principles.
For purposes of this ss.4.25, a corporation will be considered to be
"conducting operations in Northern Ireland" if it has facilities and employees
in Northern Ireland, either directly or through one or more subsidiaries;
(i) The Company is NOT and shall NOT be engaged in any form of business in
Iran which could be considered contrary to the foreign policy or national
interests of the United States; and
(j) The Company, if it is an entity organized outside of the United States,
covenants that it shall obtain, on or before closing, a written opinion of
counsel, which counsel and opinion letter shall be addressed to and be
acceptable to the Pioneer Partnership (in addition to that opinion required by
ss.7.6 or incorporated within such opinion), to the effect that as a result of
the investment in the Company by the Pioneer Partnership neither the limited
partners, the general partner nor the Pioneer Partnership will be liable, either
directly or indirectly, for any claim, obligation, or liability of the Company.
4.26 Use of Proceeds.
The Company represents it shall use and apply the proceeds from the Closing
only for such purposes as set forth in ss.1.12 hereof.
4.27 Industry Specific Regulations.
The Company and the Subsidiaries and their operations do not violate any
state or federal laws or regulations with respect to the U.S. Environmental
Protection Agency, OSHA, or the FCC, and or their state corollary agencies, or
any other laws or regulations to which the Company or its Subsidiaries are
subject. No notices of deficiency or notices of any kind which may inhibit the
operations of the Company or its Subsidiaries has been received from any
governmental agency including but not limited to the U.S. Environmental
Protection Agency, OSHA, or the U.S. Food and Drug Administration, or their
state corollary agencies, or any other governmental agency or authority.
4.28 Wages and Salary.
Appended hereto as Exhibit 4.28 is a listing of wages, salaries and fees of
all officers, directors and principal shareholders and all other parties whose
compensation from the Company and/or any Subsidiary exceeds $50,000 per year.
Other than as set forth in Exhibit 4.28 hereto, at no time since the date of the
fiscal year end of the Audited Financial Statements has the Company or its
officers or directors authorized or implemented any material increases in
compensation for
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salaries, wages or fees in excess of whichever is most recent. Material
increases for purposes of this section shall mean a ten (10%) percent or greater
increase.
4.29 Compliance with ERISA and other Benefit Plans.
Neither the Company nor any of its Subsidiaries has any employee benefit or
pension plans or arrangements that are covered by ERISA or is subject to the
minimum funding standards under Section 412 of the Internal Revenue Code of
1986, as amended. The Company's existing benefit plans (including profit
sharing, deferred compensation, stock option, employee stock purchase, bonus,
retirement, health or insurance plans), relating to the employees of the Company
are duly registered where required by, and are in good standing in all material
respects under, all applicable laws; all required employer and employee
contributions and premiums under such benefit plans to the date hereof have been
made; the respective fund or funds established under such benefit plans are
funded in accordance with applicable laws; and no past service funding
liabilities exist thereunder.
4.30 Environmental Matters.
The costs and liabilities associated with Environmental Laws (including the
cost of compliance therewith) will not have a Material Adverse Effect on the
business, condition (financial or otherwise), operations, performance,
properties or prospects of the Company or any Subsidiary. Each of the Company
and the Subsidiaries conducts its businesses in compliance in all material
respects with all applicable Environmental Laws currently in effect.
4.31 Hollinger.
The Company has obtained a waiver addressed to the Pioneer Partnership
which waives the anti-dilution provisions of Hollinger with respect to the
Partnership's Securities.
4.32 Peter Yunich Separation.
The Company has entered into a valid and binding separation agreement
between the Company and Peter Yunich which was previously provided to the
Pioneer Partnership, enforceable in accordance with its terms.
4.33 Wasserstein Perrella
A true, correct and complete copy of the Company's engagement letter with
Wasserstein, Perrella & Co. is annexed as Exhibit 4.33.
4.34 Confidentiality Agreements.
Except as set forth in Exhibit 4.34, all employees of the Company and its
Subsidiaries have executed and delivered to the Company a non-compete and
confidentiality agreement (the "Confidentiality Agreement") in the form
previously provided to the Pioneer Partnership and have assigned to the Company
all rights, title and interest in and to any inventions, copyrights, patents,
trademarks and similar intellectual property relating in any way to business of
the Company and
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its Subsidiaries. The Confidentiality Agreements constitute the legal, valid and
binding obligations of the respective employees who have executed and delivered
them are enforceable by the Company in accordance with the their terms. Neither
the Company nor any subsidiary has taken any action to waive any rights of the
Company under any Confidentiality Agreement or to publish any confidential
information of the Company in any way so as to render any Confidentiality
Agreement unenforceable. The Company covenants to obtain the signatures of the
remaining employees named in Exhibit 4.34 as soon as practicable, but in no
event more than thirty (30) days, following the Closing Date.
4.35 Officer and Director Questionnaires.
To the best knowledge of the Company, after due inquiry, the officer and
directors questionnaires delivered to the Pioneer Partnership in connection with
the transactions contemplated by this Agreement are true, accurate and complete
and contain no material misstatements of fact, nor do they fail to state any
fact required to make the facts stated therein not misleading.
4.36 MSU Agreement.
The Company has obtained all rights to any computer hardware, firmware and
software necessary or advisable for the development and commercialization of its
webPASSPORT product pursuant to the Company's license Agreement dated May 6,
1998 with MSU (UK) Limited and related parties, including all necessary or
advisable rights related to software developed by Pacific Softworks, Inc.
4.37 Complete Disclosure.
No representation, warranty or statement, written or oral, made by the
Company in this Agreement or in any schedule, exhibit, certificate or other
document furnished or to be furnished to the Pioneer Partnership, pursuant
hereto or otherwise, in connection with the transactions contemplated hereby,
has contained, contains or will contain at the Closing Date any untrue statement
of a material fact or has omitted, omits or will omit at the Closing Date a
material fact required to be stated therein or necessary to make the statements
contained therein not misleading.
REPRESENTATIONS AND WARRANTIES OF THE PIONEER PARTNERSHIP
The Pioneer Partnership represents and warrants as follows:
5.1 Organization.
The Pioneer Partnership is a limited partnership duly organized and validly
existing under the laws of the State of Connecticut.
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5.2 No Breach.
The execution and delivery of this Agreement by the Pioneer Partnership and
the consummation of the transactions contemplated hereby will not violate any
judgment, order, injunction, decree, or award against, or binding upon, the
Pioneer Partnership or upon its properties or assets.
5.3 Authority for and Binding Nature of Agreement.
This Agreement and the documents delivered pursuant hereto have been duly
executed and delivered by the Pioneer Partnership and are valid and binding upon
it in accordance with their respective terms.
5.4 Brokers.
All negotiations relative to this Agreement and the transactions
contemplated hereby have been carried on directly with the Company by the
Pioneer Partnership without the intervention of any broker, finder, investment
banker (except Ventures Management Partners LLC or Pioneer Ventures Corp.), or
other third party. The Pioneer Partnership has not engaged, consented to, or
authorized any broker, finder, investment banker (except Pioneer Ventures
Corp.), or other third party to act on its behalf, directly or indirectly, as a
broker or finder in connection with the transactions contemplated by this
Agreement.
5.5 Securities Laws Matters.
(a) The Pioneer Partnership recognizes and understands that the Preferred
Stock, the Warrants and the Common Stock into which the Preferred Stock is
convertible and for which the Warrants are exercisable (collectively, the
"Securities") will not on the Closing Date be registered under the Securities
Act, or under the securities laws of any state (the "Securities Laws").
(b) The Pioneer Partnership represents and warrants that (i) Pioneer
Partnership has business knowledge and experience, such experience being based
on actual participation therein, (ii) Pioneer Partnership is capable of
evaluating the merits and risks of an investment in the Securities and the
suitability of an investment therein, (iii) the securities to be acquired by the
Pioneer Partnership in connection with this Agreement will be acquired solely
for investment and not with a view toward resale or redistribution in violation
of the securities laws, and (iv) Pioneer Partnership is an "accredited investor"
within the meaning of Regulation D promulgated by the Commission pursuant to the
Securities Act.
(c) The Pioneer Partnership has consulted with Pioneer Partnership's own
counsel in regard to the Securities Laws and is aware (i) of the circumstances
under which the Pioneer Partnership is required to hold the Securities, (ii) of
the limitations on the transfer or disposition of the Securities, (iii) that the
Securities must be held indefinitely unless the transfer thereof is registered
under the Securities Laws or an exemption from registration is available, and
(iv) that no exemption from registration is likely to become available for at
least one year from the date of acquisition of the Securities. The Pioneer
Partnership has been advised by Pioneer Partnership's
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counsel as to the provisions of Rules 144 and 145 as promulgated by the
Commission under the Securities Act and has been advised of the applicable
limitations thereof. The Pioneer Partnership acknowledges that the Company is
relying upon the truth and accuracy of the representations and warranties in
this Section 5.5 by the Pioneer Partnership in consummating the transactions
contemplated by this Agreement without registering the Securities under the
Securities Laws.
(d) The Pioneer Partnership and the Company agree that the certificates
representing the securities to be acquired pursuant to this Agreement will be
imprinted with the following legend, the terms of which are specifically agreed
to:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR UNDER ANY APPLICABLE STATE SECURITIES LAWS AND ARE "RESTRICTED
SECURITIES" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. NEITHER
THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED FOR SALE, SOLD,
TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE SECURITIES LAWS OR
AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS WHICH, IN
THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO THE COUNSEL FOR THIS CORPORATION, IS
AVAILABLE.
The Pioneer Partnership understands and agrees that appropriate stop transfer
notations will be placed in the records of the Company and with its transfer
agent in respect of the Securities which are to be issued to the Pioneer
Partnership.
5.6 Additional Matters.
The Pioneer Partnership agrees that neither the Pioneer Partnership nor its
general partner shall sell any shares of the Common Stock or otherwise engage in
short-selling efforts during the 90 days prior to the Closing Date or the twenty
(20) trading days immediately preceding the Reset Date.
COVENANTS
The Company hereby warranties and covenants that:
6.1 Financial.
Since the date of its Audited Financial Statements, except as contemplated
or disclosed in Exhibit 6.1 hereto or elsewhere in this Agreement, the Company
has not (i) paid or declared any dividends on, or made any distributions in
respect of, or issued, purchased or redeemed, any of the outstanding shares of
its capital stock, or (ii) other than its reincorporation in the State of
Delaware, made or authorized any changes in its Certificate of Incorporation or
in any amendment
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thereto or in its bylaws, or (iii) other than the separation agreement with
Peter Yunich referred to in Section 4.32 above, made any commitments or
disbursements or incurred any obligations or liabilities of a substantial nature
and which are not in the usual and ordinary course of business, or (iv) other
than as set forth in Exhibit 4.7(b) mortgaged or pledged or subjected to any
lien, charge or other encumbrance any of its assets, tangible or intangible, or
(v) sold, leased, or transferred or contracted to sell, lease or transfer any
assets, tangible or intangible or entered into any other transactions, except in
the usual and ordinary course of business, or (vi) made any loan or advance to
any stockholder, officer or director of the Company or to any other person,
firm, or corporation, or (vii) other than disclosed in Exhibit 4.28, made any
material change in any existing employment agreement or materially increased the
compensation payable or made any arrangement for the payment of any bonus to any
officer, director, employee or agent, except for the agreement with Peter Yunich
referred to in Section 4.32 hereof.
6.2 Access.
For so long as either the Pioneer Partnership and/or its partners own five
(5%) percent or more of the Company's Common Stock directly or through the
possible conversion of its Preferred Stock or exercise of the Warrants all on a
fully diluted basis, the Company shall afford, at its sole cost and expense, to
the officers, attorneys, accountants and other authorized representatives of the
Pioneer Partnership and/or its assigns free and full access, during regular
business hours and upon reasonable notice, to the books, records, personnel,
accountants, attorneys, and properties of the Company so that the Pioneer
Partnership may have full opportunity to make such review, examination and
investigation as it may desire of its respective business and affairs. The
Company will cause its employees, accountants, and attorneys to cooperate fully
with said review, examination and investigation and to make full disclosure to
the Pioneer Partnership of all material facts affecting its financial condition
and business operation. Nothing herein shall limit the rights of the Pioneer
Partnership and/or its assigns which are available under or granted by
applicable statutes with respect to access, review, examination and
investigations. Interference with said rights or delay in accommodating such
rights by the Company shall be an Event of Default of the terms of the Preferred
Stock.
6.3 Books of Record and Account.
The Company shall maintain at all times proper books of record and account
in accordance with GAAP. For so long as either the Pioneer Partnership or its
partners own five (5%) percent or more of the Company's Common Stock directly or
through the possible conversion of its Preferred Stock or the exercise of
Warrants all on a fully diluted basis, the Company will provide the Pioneer
Partnership, within 45 days of the end of each fiscal quarter with copies of
quarterly unaudited, within 90 days of the end of each fiscal year, copies of
annual audited financial statements consisting of balance sheets, statements of
operations, statements of cash flows, statements of changes in stockholders'
equity, notes, and the accountants' or auditors' opinions thereto, all prepared
in accordance with GAAP. The annual financial statements shall be audited by an
accounting firm acceptable to the Pioneer Partnership. The Pioneer Partnership
acknowledges that KMPG Peat Marwick LLP is acceptable to Pioneer Partnership.
Interference
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with said rights or delay in accommodating such rights by the Company, or in
providing such reports, shall be an Event of Default of the terms of the
Preferred Stock.
6.4 Membership on Board.
The Company's By-laws provide for a five-person Board of Directors subject
to increase pursuant to the By-Laws. Promptly upon the Closing Date and for so
long as the Pioneer Partnership or its partners own any shares of Company's
Preferred Stock or Common Stock directly or through the possible conversion of
Preferred Stock all on a fully diluted basis, the Company's principal
stockholders shall cause one (1) designee from the Pioneer Partnership to be
nominated and elected to serve as a director of the Company. Except as provided
for in Section 1.10(b) in connection with an Event of Default or elsewhere in
this Agreement, additional membership on the Board shall require majority
approval of the remaining members of the Board of Directors or election at a
meeting of shareholders. Both a Compensation Committee and an Audit Committee of
the Board of Directors shall have been established prior to the Closing Date.
The Compensation Committee shall consist of a maximum of three directors: a
designee of the Pioneer Partnership, a designee of Hollinger and one other
independent person selected by the Board. The Audit Committee shall consist of a
maximum of three directors: a designee of the Pioneer Partnership, a designee of
Hollinger, and one other independent person selected by the Board. The
Compensation Committee shall be maintained to consider and recommend to the
Board of Directors matters concerning the compensation of executives, awards of
stock options, and other incentive compensation.
6.5 Stock Option Plan.
The Company may retain its current stock option, bonus or stock incentive
plan(s), or cancel such plan(s) and adopt a new stock incentive plan in order to
have the ability to incentives its key employees, future employees and others.
The aggregate stock incentive pool shall consist of that number of shares of the
Common Stock of the Company equal to (i) the number of options outstanding as of
the Closing Date, plus (ii) up to 250,000 additional options; provided, however,
that any options granted after the Closing Date shall require the approval of
the Compensation Committee. Except as set forth in Exhibit 6.5 annexed hereto,
no person beneficially owning more than ten percent (10%) of the Company's
fully-diluted capital stock, shall be eligible to participate in such plan.
6.6 Rule 144 Transfers.
(a) Rule 144 Compliance. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the shares to the public without registration, at all times after ninety
(90) days after any registration statement covering a public offering of
securities of the Company under the Securities Act shall have become effective,
or at all times after the Company has a class of Securities registered under the
Exchange Act, the Company agrees to use its best efforts to: (i) make and keep
public information available, as those terms are understood and defined in Rule
144 under the Securities Act; (ii) use its best efforts to file with the
Commission in a timely manner all reports and other documents required of the
Company under the Securities Act and the Exchange Act; (iii) furnish
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to each holder of Registrable Securities forthwith upon request, a written
statement by the Company as to the Company's compliance with the reporting
requirements of Rule 144 and of the Securities Act and the Exchange Act, a copy
of the most recent annual or quarterly report of the Company, and such other
reports and documents so filed by the Company as such holder may reasonably
request in availing itself of any rule or regulation of the Commission allowing
such holder to sell any Registrable Securities without registration; and (iv)
use the Company's best efforts to satisfy the requirements of all such rules and
regulations (including the requirements for current public information,
registration under the Exchange Act and timely reporting to the Commission) at
the earliest possible date after its first registered public offering. (b)
Supplemental Information. If at any time the Company is not subject to the
requirements of Section 13 or 15(d) of the Exchange Act, the Company will
promptly furnish at its expense, upon request, for the benefit of the Pioneer
Partnership or its partners, and prospective purchasers of the Preferred Stock,
the Warrants or the Common Stock issuable upon conversion of the Preferred Stock
or exercise of the Warrants, information satisfying the information requirements
of Rule 144 under the Securities Act. (c) Acceptable Counsel. The Company
acknowledges and agrees that counsel to the Pioneer Partnership, including, but
not limited to Kenneth B. Lerman, Esquire, shall be acceptable counsel to the
Company for purposes of issuing an opinion of counsel with respect to transfers
of securities to its affiliates, or with respect to transfers of securities
under Rule 144 or such successor regulation.
6.7 Undertaking to Register its Securities pursuant to the Exchange Act.
In the event the Company shall not have its Common Stock registered under
Section 12 of the Exchange Act , the Company undertakes to use its best efforts
to register the Common Stock under the Exchange Act no later than the date that
is six (6) months from the Closing Date. The Company shall (i) advise the
Pioneer Partnership promptly after obtaining knowledge thereof, and, if
requested by the Pioneer Partnership, confirm such advice in writing, of the
issuance by any state securities commission of any stop order suspending the
qualification or exemption from qualification of the Preferred Stock or the
Common Stock for offering or sale in any jurisdiction, or the initiation of any
proceeding for such purpose by any state securities commission or other
regulatory authority, or (ii) use its best efforts to prevent the issuance of
any stop order or order suspending the qualification or exemption from
qualification of the Preferred Stock or the Common Stock under any state
securities or Blue Sky laws, and (iii) if at any time any state securities
commission or other regulatory authority shall issue an order suspending the
qualification or exemption from qualification of the Preferred Stock under any
such laws, use its best efforts to obtain the withdrawal or lifting of such
order at the earliest possible time.
6.8 Undertaking to File Exchange Act Filings and to be Listed on NASDAQ.
Provided the Company has securities which are publicly traded, or has one
or more classes of securities registered under the Exchange Act or subject to an
undertaking to file periodic reports with the Commission: (a) The Company
undertakes to continue filing its proxy statement, its annual reports on Form
10-K and its quarterly reports on Form 10-Q, or on such other appropriate forms,
with the Commission for so long as the Pioneer Partnership or its partners hold
any Preferred Stock or Common Stock received upon the conversion of Preferred
Stock or
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exercise of Warrants; (b) Once the Company qualifies, the Company undertakes to
use its best efforts to obtain and maintain a listing on the Nasdaq SmallCap
Stock Market, the NASDAQ National Market System, the American Stock Exchange or
such other national stock exchange upon which the Common Stock shall be
qualified for so long as the Pioneer Partnership holds any Preferred Stock, or
Common Stock obtained through conversion of the Preferred Stock or exercise of
the Warrants. The Company shall take all reasonable action to maintain such
listing after it is so approved and listed; and (c) The Company agrees that any
and all future filings (e.g. Schedule 13D or 13G) required to be made by the
Pioneer Partnership or it nominees as directors shall be prepared by and filed
by the Company on such parties behalf with such parties' consent and
cooperation; the expense of such filings including the legal fees incurred
therewith shall be borne by the Company.
6.9 Dividend Restriction Waiver.
The Company (and its Subsidiaries if applicable) shall obtain prior to the
Closing a signed original waiver and estoppel certificate (addressed to each of
them and to the Pioneer Partnership) from each of its lenders, including
Hollinger, certifying and agreeing either that the issuance and delivery of the
Preferred Stock declaration and payment of dividends on the Preferred Stock, the
conversion of Preferred Stock into shares of Common Stock, the issuance and
delivery of the Common Stock and the full compliance of the Company with the
terms of this Agreement and the Certificate of Designation of the Preferred
Stock shall not constitute an event of default or require or enable the lender
to accelerate any indebtedness of the Company.
6.10 Rights if Trading in Common Stock is Suspended.
In the event that at any time within the period commencing when the first
Registration Statement is declared effective under the Securities Act by the
Commission and ending three years after the Closing Date, trading in the shares
of the Common Stock is suspended on the NASD OTC Bulletin Board, the Nasdaq
Small Cap Stock Market, the Nasdaq National Market or such other stock exchange
upon which the Common Stock shall then be listed for trading (other than as a
result of the suspension of trading in securities on such market generally or
temporary suspensions pending the release of material information), then, at the
Pioneer Partnership's option exercisable by written notice to the Company, the
Company shall redeem, as applicable, all of the Preferred Stock and converted
Common Stock owned by the Pioneer Partnership at an aggregate purchase price
equal to the Redemption Price set forth in the Certificate of Designation for
the Preferred Stock, plus interest at the rate of 15% per annum on such amount
accruing from the 7th day after such notice until the Redemption Price is paid
in full.
6.11 Public Dissemination of Information; Filings & Names.
Prior to the inclusion of any name associated with the Pioneer Partnership
in any notice, filing, press release, other public communication or
communication with any governmental entity, a draft shall be submitted to the
Pioneer Partnership for prior written approval and such draft shall have all
incidences of such affiliated names highlighted and clearly marked. The
associated names are: Pioneer Ventures Associates Limited Partnership, Pioneer
Ventures 1st Parallel Limited Partnership, any other Pioneer Ventures
partnership, which may hereafter be formed and becomes
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a record holder of the Company's securities, Ventures Management Partners LLC,
Pioneer Ventures Corp., Robert A. Lerman, John F. Ferraro, and James M. Coady.
Additional names affiliated with PVALP are: Allied Capital Management, LLC and
Geoffrey Rowntree, and any Pioneer Partnership nominee to the Company's board of
directors.
6.12 Lock-Up.
The Principal Shareholders shall agree to restrict all sales of their
securities of the Company for a period of not less than one year from the date
of the Closing. However, the Pioneer Partnership, in its sole discretion, may
waive such restriction for a particular transfer upon request, prior to such
transaction.
6.13 Notice of Material Adverse Events.
The Company undertakes to notify the Pioneer Partnership within twenty (20)
days of the occurrence of a material adverse event which has not been cured
within said 20 days. A material adverse event shall include but not be limited
to: litigation or other legal proceeding involving $10,000 or greater in claims
or subject matter, bankruptcy, receivership, insolvency, a change in
circumstances that, if the representations in Article IV hereof were required to
be made on such future date, such representation could no longer truthfully or
accurately be made.
6.14 Tax Return.
The Company shall, on or prior to December 31, 1998, file any tax returns
required to be filed for the current and prior periods.
6.15 No Breach.
The Company will (i) use its best efforts to assure that all of its
representations and warranties contained herein are true in all material
respects as of the Closing Date as if repeated at and as of such time, and that
no material breach or default shall occur with respect to any of its covenants,
representations or warranties contained herein that has not been cured by the
Closing Date; (ii) not voluntarily take any action or do anything which will
cause a breach of or default respecting such covenants, representations or
warranties; and (iii) promptly notify the Pioneer Partnership of any event or
fact which represents, or is likely to cause, such a breach or default.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
THE PIONEER PARTNERSHIP TO CLOSE
Conditions Precedent to the Obligations of the Pioneer Partnership to Close. In
addition to the conditions precedent set forth in ss.1.13, the obligation of the
Pioneer Partnership to enter into and complete the Closing is subject to the
fulfillment, prior to or on the Closing Date, of each of the following
conditions, any one or more of which may be waived by the Pioneer Partnership
(except when the fulfillment of such condition is a requirement of law), as well
as the satisfactory completion (in the sole opinion of the Pioneer Partnership)
of (i) an audit or review of the books, records and accounts of the Company, and
(ii) legal and other due diligence.
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7.1 Representations and Warranties.
All representations and warranties of the Company contained in this
Agreement and in any written statement, exhibit, certificate, schedule or other
document delivered pursuant hereto or in connection with the transactions
contemplated hereby shall be true and correct in all material respects as at the
Closing Date, as if made at the Closing and as of the Closing Date.
7.2 Covenants.
The Company shall have performed and complied in all material respects with
all covenants and agreements required by this Agreement to be performed or
complied with by it prior to or at the Closing.
7.3 No Actions.
No action, suit, proceeding or investigation shall have been instituted,
and be continuing before a court or before or by a governmental body or agency,
or shall have been threatened and be unresolved, to restrain or to prevent or to
obtain damages in respect of, the carrying out of the transactions contemplated
hereby, or which might materially affect the right of the Pioneer Partnership to
own the Company's Stock or to operate or control the assets, properties and
business of the Company after each Closing Date, or which might have a
materially adverse effect thereon.
7.4 Consents, Licenses and Permits.
The Company shall have obtained all consents, licenses and permits of third
parties necessary for the performance of its obligations under this Agreement,
and such other consents, if any, to prevent (i) agreements of the Company from
terminating, the termination of which, in the aggregate, would have a material
adverse effect on the business, financial condition or assets of the Company, or
(ii) any material indebtedness of the Company from becoming due or being subject
to becoming due with the passage of time or on notice as a result of the
performance of this Agreement, any other provision of this Agreement to the
contrary notwithstanding.
7.5 Certificate.
The Pioneer Partnership shall have received a certificate in form
satisfactory to its counsel, dated at Closing Date, signed by an authorized
representative of the Company, confirming the substance and effect of the
representations and warranties set forth in Article IV hereto, and as to the
satisfaction of the conditions contained in Article VII.
7.6 Legal Opinion.
(a) The Pioneer Partnership shall have received a written opinion of the
Company's Counsel, dated the Closing Date, in form and substance satisfactory to
the Pioneer Partnership and its counsel, confirming the substance and effect of
certain of the representations and warranties set forth in Articles II and IV
hereto, that this Agreement is the valid and binding obligation of the Company,
enforceable in accordance with its terms, and as to such other matters
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as the Pioneer Partnership may request. Such opinion shall be substantially in
the form of Exhibit 7.6 hereto.
(b) The Pioneer Partnership shall have received a written opinion of
counsel to the Principal Shareholders, dated each Closing Date, in form and
substance satisfactory to the Pioneer Partnership and its counsel, confirming
the substance and effect of the representations and warranties set forth in the
Voting and Shareholders Agreement, and any modification, supplements or
subsequent agreements thereto confirming that such agreement is the valid and
binding obligation of the Principal Shareholders, enforceable in accordance with
its terms, and as to such other matters as the Pioneer Partnership may request.
7.7 No Material Adverse Change.
There shall have been no materially adverse change at the Closing Date in
the business, assets, and properties, financial status or prospects of the
Company from June 30, 1998, except as disclosed in Exhibit 7.7 hereof.
7.8 Agreements with Principals.
The Company shall have received and presented to the Pioneer Partnership
agreements, in the form contained in Exhibit 7.8, from all officers, directors
and the Principal Shareholders of the Company containing the substantive
provisions of this Agreement with respect to co-sale rights, voting agreement as
to Board membership, lock-up, restricted stock, restricted transfer provisions
as well as customary and satisfactory non-competition and confidentiality
agreements between the Company and its officers and key employees. Reference is
hereby made to the Voting and Shareholder Agreement between the Pioneer
Partnership and the Principal Stockholders named therein. Exhibit 7.8 shall
provide that any amendment, renewal or extension to said agreements shall
require the written consent of the Pioneer Partnership. Further, any shares
which are acquired as a result of such agreements or are subject to a proxy or
voting agreement shall otherwise be subject to the substantive provisions of
this Agreement with respect to anti-dilution rights, voting agreement as to
Board membership, restricted stock and co-sale provisions.
7.9 Key Person Insurance.
The Company shall have applied for Key-Person term life insurance, from a
licensed and reputable insurance company in the minimum face amount of at least
$1,000,000 each, insuring the lives of the President and CEO, COO, Executive
Vice President and/or chairman for a minimum of three (3) years. The Company
shall be the designated beneficiary. Renewal of the policies after the first
three years shall be at the discretion of the Company's Board of Directors.
7.10 Intellectual Property.
All of the officers, directors, principals and the affiliates of the
Company shall have assigned and transferred all of the Intellectual Property to
the Company.
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7.11 Approval of Counsel.
All actions, proceedings, instruments and documents required to carry out
this Agreement, or incidental thereto, and all other related legal matters shall
have been approved as to form and substance by the Pioneer Partnership's
counsel, which approval shall not be unreasonably withheld or delayed.
7.12 No Suspensions of Trading in Common Stock.
The trading in the Common Stock shall not have been suspended by the
Commission or by the National Association of Securities Dealers, Inc. or any
federal or state regulatory authority having jurisdiction over the Common Stock.
7.13 Change of Control.
No Change of Control shall have occurred between the date hereof and the
previous Closing Date. "Change of Control" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity of in excess
of 50% of the voting securities of the Company, (ii) a replacement of more than
one-half of the members of the Company's board of directors which is not
approved by those individuals who are members of the board of directors on the
date hereof in one or a series of related transactions, (iii) the merger of the
Company with or into another entity, consolidation or sale of all or
substantially all of the assets of the Company in one or a series of related
transactions, or (iv) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth above in (i), (ii) or (iii).
7.14 Continued Employment.
Mark Graff shall continue to be serving in the full time capacity set forth
in Exhibit 4.28. Lawful termination shall not be precluded, provided notice is
given to the Pioneer Partnership and succession plans are approved by the
Pioneer Partnership.
7.15 Additional Documents.
The Company shall have delivered all such other certificates and documents
as the Pioneer Partnership or their counsel may have reasonably requested.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY TO CLOSE
Conditions Precedent to the Obligations of the Company to Close. The
obligation of the Company to enter into and complete each Closing is subject to
the fulfillment, prior to or on each Closing Date, of each of the following
conditions, any one or more of which may be waived by the Company (except when
the fulfillment of such condition is a requirement of law).
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8.1 Representations and Warranties.
All representations and warranties of the Pioneer Partnership contained in
this Agreement and in any written statement, exhibit, certificate, schedule or
other document delivered pursuant hereto or in connection with the transactions
contemplated hereby shall be true and correct in all material respects as at
each Closing Date, as if made at each Closing and as of each Closing Date.
8.2 Covenants.
The Pioneer Partnership shall have performed and complied in all material
respects with all covenants and agreements required by this Agreement to be
performed or complied with by it prior to or at the Closing.
8.3 No Actions.
No action, suit, proceeding, or investigation shall have been instituted,
and be continuing before a court or before a governmental body or agency, or
have been threatened and be unresolved, to restrain or prevent, or obtain
damages in respect of, the carrying out of the transactions contemplated hereby.
8.4 Additional Documents.
The Pioneer Partnership shall have delivered all such other certificates
and documents as the Company or its counsel may have reasonably requested.
8.5 Approval of Counsel.
All actions, proceedings, instruments and documents required to carry out
this Agreement or incidental thereto, and all other related legal matters, shall
have been approved as to form and substance by Company's counsel, which approval
shall not be unreasonably withheld or delayed.
CLOSING
9.1 Location.
The Closing provided for herein (the "Closing") shall occur at the offices
of the Pioneer Partnership, or at such place and upon such date as the Company
and the Pioneer Partnership may mutually agree.
9.2 Items to be Delivered by the Company.
At the Closing, the Company will deliver or cause to be delivered to the
Pioneer Partnership:
(a) duly executed Investment Agreement;
(b) duly executed Voting and Shareholders Agreement;
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(c) duly executed resolutions;
(d) duly executed and recorded Certificate of Designation;
(e) validly issued original certificates representing the Preferred Stock
in accordance with Article I hereof.
(f) validly issued original Warrants in accordance with Article I hereof.
(g) the certificates required by ss.7.5 hereof;
(h) the opinions of the Company's counsel and counsel to the Principal
Stockholders, as required by section 7.6 hereof;
(i) the agreements required by section 7.8 and 7.11 hereof;
(j) the insurance binder and paid receipt required by section 7.9 hereof;
(k) separate checks for $5,000 and $53,000 payable to Ventures Management
Partners LLC (the General Partner of the Pioneer Partnership) as
required by sections 11.1, 11.2, and 11.4 hereof; and a validly issued
warrant to purchase 500,000 shares of common stock issued to Ventures
Management Partners LLC;
(l) a check payable to Kenneth B. Lerman, Esquire for legal fees of the
Pioneer Partnership in the amount of $15,000 plus out-of-expenses and
a check payable to Kaplan Gottbetter & Levenson, LLP in the amount of
$25,000 plus actual out-of-pocket expenses as required by section 11.3
hereof;
(m) such other certified resolutions, exhibits, instruments, documents and
certificates as are required to be delivered by the Company pursuant
to the provisions of this Agreement and pursuant to the checklists
presented by the Pioneer Partnership or its counsel.
9.3 Items to be Delivered by the Pioneer Partnership.
At the Closing, the Pioneer Partnership will deliver or cause to be
delivered to the Company:
a check or checks in the aggregate amount of three million one hundred and
fifty thousand dollars ($3,150,000) dollars, as specified in Article I
hereof; and
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
10.1 Survival.
The parties hereto agree that their respective representations, warranties,
covenants and agreements contained in this Agreement shall survive the Closing
for a period of six (6) years.
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10.2 Indemnification.
The Company agrees to save, defend and indemnify the Pioneer Partnership
and its limited and general partners and their respective officers, directors,
managing members and the agents, as well as the attorneys, accountants, or other
representatives of such parties (jointly or severally "indemnified parties")
against, and hold them harmless from any and all liabilities, of every kind,
nature and description, fixed or contingent (including, without limitation,
reasonable counsel fees, expert witness fees, and expenses in connection with
any action, claim or proceeding relating to such liabilities) arising out of a
material breach (for purposes of this Section 10.2, "material breach" shall be
any breach with a potential liability in excess of $5,000 as estimated by the
Pioneer Partnership) of any of the representations and warranties contained
herein and/or any transaction or event commencing or occurring on or prior to
the Closing Date, which is not fully disclosed or provided for in this Agreement
or in the exhibits hereto.
10.3 Defense of Claims.
The Pioneer Partnership agrees to notify the Company promptly of any claim
asserted against them in which the Company may be liable under this Agreement,
which notification shall be accompanied by a written statement setting forth the
basis of such claim and the manner of calculation thereof. The Company shall
have the right to defend any such claim(s) at its own expense and with counsel
of its choice; provided that the Pioneer Partnership may participate in such
defense, if it so chooses, with its own counsel and at its expense. The Company
agrees that if any of the representations and warranties made by it in this
Agreement shall be finally determined not to have been true, correct or complete
when made, then the Company shall pay to the Pioneer Partnership at the time of
such final determination an amount sufficient to indemnify the Pioneer
Partnership and the other indemnified parties hereto to the full extent of its
losses and expenses sustained by reason thereof, including attorneys,
accountants, expert witnesses, and other professional fees and expenses.
10.4 Rights without Prejudice.
The rights of the Pioneer Partnership under this Article are without
prejudice to any other rights or remedies that it may have by reason of this
Agreement or as otherwise provided by law.
FEES
11.1 Investment Banking Fees.
At the Closing, the Company shall pay an investment banking fee of Sixty
Three Thousand($63,000) dollars to Ventures Management Partners LLC, the General
Partner of the Limited Partnership, concurrently with its execution and delivery
of this Agreement. Such General Partner hereby acknowledges receipt from the
Company of a check in the amount of $10,000 in payment of the commitment fee
which shall be credited against the Investment Banking fee set forth in this
Section 11.1.
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11.2 Expenses.
The Company shall promptly pay and reimburse the General Partner a
non-accountable expense allowance of $5,000 for its out-of-pocket expenses
incurred in connection with visits to the Company's facilities and other costs
and expenses in connection with its due diligence investigation of the Company.
11.3 Legal Fees.
The Company shall pay at the Closing the attorneys fees plus out-of-pocket
expenses of counsel for the Pioneer Partnership in connection with the
transactions contemplated hereby; such attorneys fees shall equal Fifty Thousand
($50,000) dollars, excluding out-of-pocket expenses which are to be billed at or
after the closing in addition to the legal fees. It is acknowledged that $10,000
has been paid prior to the Closing. In addition, the Company shall pay its own
counsel's fees and all of the expenses of the closing, including all search
fees, filing fees, governmental certification fees, third party investigation or
other due diligence fees for reports, filings or certifications requested by the
Pioneer Partnership to effect the closing.
TERMINATION AND WAIVER
12.1 Termination.
(a) Anything herein or elsewhere to the contrary notwithstanding, this
Agreement may be terminated and the transactions provided for herein abandoned
at any time prior to the Closing Date:
(b) by mutual consent of the Pioneer Partnership and the Company;
(c) by the Pioneer Partnership if any of the conditions set forth in
Article VII and Sections 1.12 and 1.13 hereof, in its sole opinion, shall not
have been fulfilled on or prior to closing, or shall become incapable of
fulfillment, and shall not have been waived;
(d) by the Company if any of the conditions set forth in Article VIII
hereof shall not have been fulfilled on or prior to Closing, or shall have
become incapable of fulfillment, and shall not have been waived;
(e) by any party if any material legal action or proceeding shall have been
instituted or threatened seeking to restrain, prohibit, invalidate or otherwise
affect the consummation of the transactions contemplated by this Agreement.
In the event that this Agreement is terminated as described above, this
Agreement shall be void and of no force and effect, without any liability or
obligation on the part of any of the parties hereto, except the provisions of
ss.11.3, ss.11.4, and ss.11.5 hereof
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12.2 Waiver.
Any condition to the performance of the Company or of the Pioneer
Partnership which legally may be waived on or prior to the Closing Date may be
waived at any time by the party entitled to the benefit thereof by action taken
or authorized by an instrument in writing executed by the relevant party or
parties. The failure of any party at any time or times to require performance of
any provision hereof shall in no manner affect the right of such party at a
later time to enforce the same. No waiver by any party of the breach of any
term, covenant, representation or warranty contained in this Agreement as a
condition to such party's obligations hereunder shall release or affect any
liability resulting from such breach, and no waiver of any nature, whether by
conduct or otherwise, in any one or more instances, shall be deemed to be or
construed as a further or continuing waiver of any such condition or of any
breach of any other term, covenant, representation or warranty of this
Agreement.
MISCELLANEOUS PROVISIONS
13.1 Expenses.
Except as set forth in Article XI, each of the parties hereto shall bear
its own expenses in connection herewith.
13.2 Modification, Termination or Waiver.
This Agreement may be amended, modified, superseded or terminated, and any
of the terms, covenants, representations, warranties or conditions hereof may be
waived, but only by a written instrument executed by the party waiving
compliance. The failure of any party at any time or times to require performance
of any provision hereof shall in no manner affect the right of such party at a
later time to enforce the same.
13.3 Notices.
Any notice or other communication required or which may be given hereunder
shall be in writing and either be delivered personally or be mailed, certified
or registered mail, postage prepaid, and shall be deemed given when so delivered
personally, or if mailed, five (5) days after the date of mailing, as follows:
If to the Pioneer Partnership, to: Copies to:
Pioneer Ventures Associates Kenneth B. Lerman, Esquire
Limited Partnership Kenneth B. Lerman, P.C.
651 Day Hill Road 651 Day Hill Road
P.O. Box 40 Windsor, Connecticut 06095-0040
Windsor, Connecticut 06095
Attention: Robert A. Lerman
Managing Director
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If to the Company, to: Copies to:
American Interactive Media, Inc. Jeffrey N. Ostrager, Esquire
611 Broadway Curtis Mallet-Prevost, Colt & Mosle
Suite 308 101 Park Avenue
New York, NY 10012 New York, NY 10178-0061
Attention: James Stokes Hatch, Chief Operating
Officer
Any notice given by the Company to Pioneer hereunder or under any of the
agreements referred to herein shall also be given to Hollinger at:
With a copy to:
Hollinger Digital, Inc. Paul, Weiss, Rifkind, Wharton & Garrison
270 Lafayette Street, Suite 600 1285 Avenue of the Americas
Attention: Philip Kunsberg New York, NY 10019-6064
Telecopy Number: (212) 334-5957 Attention: Judith R. Thoyer, Esq.
Telecopy Number: (212) 757-3990
The parties may change the persons and addresses to which the notices or other
communications are to be sent to it by giving written notice of any such change
in the manner provided herein for giving notice.
13.4 Binding Effect and Assignment.
This Agreement shall be binding upon and inure to the benefit of the
successors and assigns of the parties hereto. No assignment of any rights or
delegation of any obligations provided for herein may be made by any party
without the express written consent of the other party.
13.5 Entire Agreement.
This Agreement, including the Exhibits hereto and the agreements entered
into in connection herewith contains the entire Agreement between the parties
with respect to the subject matter hereof.
13.6 Calendar Days.
All references to "days" in this agreement with respect to the amount of
time allocated for notices, performance or other periods shall mean calendar
days, unless otherwise specified.
13.7 Exhibits.
All Exhibits annexed hereto and the documents and instruments referred to
herein or required to be delivered simultaneously herewith or at the Closing are
expressly made a part of
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this Agreement as fully as though completely set forth herein, and all
references to this Agreement herein or in any such Exhibits, documents or
instruments shall be deemed to refer to and include all such Exhibits, documents
and instruments. Any execution of this Agreement is subject to the receipt of
current and complete exhibits.
13.8 Governing Law.
This Agreement shall be governed by, and construed in accordance with the
laws of the State of New York.
13.9 Consent to Jurisdiction.
The parties here to consent to jurisdiction of the Courts of the States of
Connecticut and New York and to the U.S. District Court in the Southern District
of New York and the District of Connecticut.
13.10 Counterparts.
This Agreement may be executed in counterparts, each of which shall be
deemed to be an original, but which together shall constitute one and the same
instrument.
13.11 Section Headings.
The section headings contained in this Agreement are inserted for
convenience of reference only and shall not affect the meaning or interpretation
of this Agreement.
13.12 Gender.
Whenever the content of this Agreement permits, the masculine, neuter or
third person genders shall include the feminine, third person and neuter
genders, and reference to singular or plural shall be interchangeable with the
other.
13.13 Use of Term "Pioneer Partnership".
Notwithstanding any provision of this Agreement to the contrary, included
in the definition and meaning of the "Pioneer Partnership" shall be any one or
more parallel limited partnerships which have been or shall be organized by
Ventures Management Partners LLC as the general partner to invest in parallel
with Pioneer Ventures Associates Limited Partnership on the same economic terms
and pro rata based upon their aggregate subscriptions. The limited partners of
Pioneer Ventures Associates Limited Partnership and the parallel partnerships
shall be referred to herein as the "limited partners".
[ SIGNATURE PAGE FOLLOWS ]
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WITNESS the execution of this Agreement as of the date first above written.
Pioneer Ventures Associates Limited Partnership
By: Pioneer Ventures Corp.
Managing Member of the
Partnership's General Partner,
Ventures Management Partners LLC
By: /s/ Robert A. Lerman
--------------------------------------
Robert A. Lerman, President
Pioneer Ventures Corp.
American Interactive Media, Inc.
By: /s/ Mark Graff
--------------------------------------
Mark Graff
President and CEO
Attest:
By: /s/ James Stokes Hatch
--------------------------------------
James Stokes Hatch
Chief Operating Officer
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NEITHER THIS OPTION NOR THE SECURITIES REPRESENTED BY THIS OPTION HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE. THE SECURITIES
REPRESENTED BY THIS OPTION HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A
VIEW TO DISTRIBUTION, AND NEITHER SUCH SecuRITIES NOR ANY INTEREST OR
PARTICIPATION THEREIN MAY BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED,
ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR DISPOSED OF EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
THEREOF AND IN COMPLIANCE WITH THE REGISTRATION PROVISIONS OF APPLICABLE
STATE SECURITIES OR BLUE SKY LAWS.
AMERICAN INTERACTIVE MEDIA, INC.
COMMON STOCK PURCHASE OPTION
Dated: December 4, 1997
AMERICAN INTERACTIVE MEDIA, INC., a Nevada corporation (the "Company"),
hereby certifies that, for value received, Hollinger Digital, Inc., or its
designee or its registered assigns ("Holder"), is entitled, subject to the terms
set forth below, to purchase from the Company in a single transaction the number
of shares of Common Stock, par value $0.001 per share (the "Common Stock"), of
the Company (each such share, an "Option Share" and all such shares, the "Option
Shares") as shall immediately following the exercise be equal to that number of
shares equal to ten percent (10%) of the outstanding shares of Common Stock and
Preferred Stock (if any) of the Company plus all shares and other securities
which are then and potentially issuable pursuant to all then outstanding
options, warrants and other securities convertible into or exchangeable for
shares of Common Stock, at an exercise price per share equal to (i) for six
months from the date hereof, $3.00 per share of Common Stock or (ii) after six
months from the date hereof up to and including the Expiration Date, the greater
of (x) $3.00 per share and (y) the Current Market Price per share of the Common
Stock. This Option shall be exerciseable at any time until and including the
date that is one year after the date hereof (the "Expiration Date"). The
"Current Market Price" shall be deemed to be the average of the daily closing
prices for the 30 consecutive trading days immediately preceding the exercise
date. The closing price for each day shall be the last reported sales price
regular way or in case no such reported sale takes place on such day, the
closing bid price regular way, in either case on the principal national
securities exchange (including, for the purposes hereof, the NASDAQ National
Market System) on which the Common Stock is listed or admitted to trading or, if
the
<PAGE>
Common Stock is not listed or admitted to trading on any national securities
exchange, the highest reported bid price for the Common Stock as furnished by
the National Association of Securities Dealers Inc. through NASDAQ or a similar
organization if NASDAQ is no longer reporting such information or if the Common
Stock is not reported on NASDAQ, as quoted on the OTC Bulletin Board. The Option
Shares and the exercise price shall be adjusted from time to time as provided in
Section 8. This Option is subject to the following terms and conditions:
1. Payment for the Option; Payments in Kind
(a) Payment of Exercise Price. The Exercise Price shall be payable 75% in
cash and 25% as a Payment in Kind (the "PIK Purchase Price"). The PIK Purchase
Price shall be governed by this Section 1. Upon exercise of the Option, (i) a
certificate for the portion of the Option Shares paid for in cash shall be
delivered in accordance with Section 4(b) of this Option and (ii) the portion of
the Option Shares to be paid for with Payments in Kind shall be deposited into
escrow in accordance with Section 1(b) of the Option.
(b) Escrowed Shares. Upon exercise of this Option, in lieu of delivery to
Holder of the Portion of the Option Shares to be paid for by Holder with
Payments in Kind (together with any other securities that may be issued by
Company in addition to, or in substitution for, such shares of Common Stock, the
"Escrowed Shares") the Escrowed Shares shall be held in escrow by Curtis,
Mallet-Prevost, Colt & Mosle (the "Escrow Agent") pending payment for such
shares by Holder's payment of the PIK Purchase Price. The Escrowed Shares shall
be considered to be paid for by Holder proportionately as the Payments in Kind
are provided in payment of the PIK Purchase Price. Upon submission of each PIK
Statement (as hereinafter defined) by Holder and acceptance thereof (or failure
to timely object), the Escrow Agent shall release to Holder that proportion of
the Escrowed Shares which equals the Percent Completion, as set forth on the
submitted PIK Statement. Upon Holder's payment in full of the PIK Purchase
Price, the Escrowed Shares shall be fully paid and certificates representing all
remaining Escrowed Shares shall be delivered to Holder. If the PIK Purchase
Price is not paid in full within two years of the date of this Option, this
Option shall expire with respect to the unpaid shares.
(c) General. In satisfaction of the PIK Purchase Price portion of this
Option, Purchaser shall provide to the Company "Payments in Kind" which shall
consist of goods and/or services provided to the Company by the Holder which are
useful to the Company in connection with the commercialization and promotion of
the Company's product offerings, including advertising and promotion, and which
the Company might otherwise use in the normal pursuit of its business. The PIK
Purchase Price shall be paid within two years of the date of this Option.
(d) Valuation. Unless otherwise agreed by Holder and Company, Payments in
Kind will be valued for purposes of this Option as follows: (i) for goods and/or
services which Holder or its affiliates generally provide to customers on a
commercial basis, at per unit amounts consistent on an overall basis with the
price at which such goods and/or services are then being made available to
Holder's commercial customers for similar quantity and type goods or services,
and (ii) for goods and/or services other than as contemplated by subsection (i)
above (including Payments in Kind which consist of time expended by personnel of
or provided by Holder), at Holder's fully-burdened cost.
(e) Record Keeping. Not later than forty-five (45) days following the end
of each quarter corresponding to a calendar year commencing with the exercise
date, Holder shall provide to Company and the Escrow Agent a written statement
(a "PIK Statement") (i) identifying all Payments in
2
<PAGE>
Kind provided by Holder with respect to such quarter, (ii) the value of such
Payments in Kind as determined pursuant to this Section and (iii) the aggregate
amount of Payments in Kind provided by Holder on a cumulative basis and the
percentage which such aggregate payments represent of the overall PIK Purchase
Price (the "Percent Completion"). The Payments in Kind and related valuations
set forth in a PIK Statement shall be final and binding as to Company thirty
days after Company's receipt of such PIK Statement unless, prior to such date,
Company shall have provided to Holder a written notice of disagreement with
respect to any matter set forth on such PIK Statement. Any such notice of
disagreement shall specify the specific Payments in Kind and/or valuation
disputed and in reasonable detail the basis for Company's good faith
determination that the PIK Statement is incorrect. Following receipt by
Purchaser of any such notice of disagreement, Purchaser and Company shall use
good faith efforts to resolve the disputed items.
(f) Provisions Respecting Escrow Agent.
A. The Escrow Agent shall release all or any portion of the Escrowed
Shares only upon acceptance of the applicable PIK Statement (or failure to
timely object) by the Company.
B. 1. The duties and obligations of the Escrow Agent shall be
determined solely by the express provisions of this Option and the Escrow
Agent shall not be liable except for the performance of such duties and
obligations as are specifically set out in this Option. The Escrow Agent
shall not be bound in any way by any agreement or contract among any of the
parties (whether or not the Escrow Agent has knowledge thereof).
2. The Escrow Agent shall not be responsible in any manner whatsoever
for any failure or inability of Holder or the Company to honor any of the
provisions of this Option.
3. The Escrow Agent shall be fully protected in acting on and relying
upon any written advice, certificate, notice, direction, instruction,
request, or other paper or document which the Escrow Agent in good faith
believes to be genuine and to have been signed or presented by the proper
party or parties, and may assume that any person purporting to give such
advice, certificate, notice, direction, instruction or request or other
paper or document has been duly authorized to do so.
4. The Escrow Agent shall not be liable for any error of judgment, or
for any act done or step taken or omitted by it in good faith or for any
mistake in fact or law, or for anything which it may do or refrain from
doing in connection herewith, except its own gross negligence or willful
misconduct.
5. The Escrow Agent may seek the advice of legal counsel in the event
of any dispute or question as to the construction of any of the provisions
of this Option or its duties hereunder, and it shall incur no liability and
shall be fully protected in respect of any action taken, omitted or
suffered by it in good faith in accordance with the opinion of such
counsel.
C. The Company and Holder jointly and severally agree to and will indemnify
and save harmless the Escrow Agent against all costs, damages, attorneys' fees,
expenses and liabilities which it may incur or sustain in connection with this
Option or any court action arising thereunder. The indemnification obligations
contained herein shall survive the resignation and substitution of the Escrow
Agent and the termination of this Option.
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D. The Escrow Agent may resign at any time by giving 30 days' notice of
such resignation to the Company and Holder. Thereafter, the Escrow Agent shall
have no further obligation hereunder except to hold the Escrowed Shares as
Depositary. In such event, the Escrow Agent shall not take any action until the
Company and Holder have designated a successor Escrow Agent. Upon receipt of
such instructions, the Escrow Agent shall promptly deliver the Escrowed Shares
to such successor Escrow Agent and shall thereafter have no further obligations
hereunder.
2. Registration of Option. The Company shall register this Option, upon
records to be maintained by the Company for that purpose (the "Option
Register"), in the name of the record Holder hereof from time to time. The
Company may deem and treat the registered Holder of this Option as the absolute
owner hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, and the Company shall not be affected by
notice to the contrary at any time until and including the date that is one (1)
year after the dated date of this Option (the "Expiration Date").
3. Transfers and Exchanges.
This Option and the rights hereunder shall be transferable in whole or in
part, subject to the limitations of and in accordance with the procedures
hereinafter set forth in this Section 3. This Option and the Option Shares
received upon the exercise of this Option have not been registered under the
United States Securities Act of 1933, as amended (as then in effect or any
similar statute then in effect) (the "Securities Act"), or the securities laws
of any state applicable to such exercise, issuance or transfer. Any transfer is
restricted and may only be made provided the Company receives such assurances as
the Company may reasonably request that the exercise of this Option, the
transfer of this Option, or any part thereof, and the issuance of Option Shares
pursuant to such exercise, will not violate the Securities Act. Such assurances
may include (but need not be limited to) opinions of counsel, covenants by the
holder or transferee to observe the Securities Act and the securities laws of
any state applicable to such exercise, issuance or transfer and the placement of
a legend on such certificate or certificates restricting subsequent transfers or
sales. In order to transfer this Option, Holder shall give not less than ten
(10) days' written notice to the Company, specifying (i) the name of the
proposed transferee, (ii) the number of Option Shares to which the transfer
relates and (iii) the amount of consideration to be paid therefor. The Company
shall register the transfer of any portion of this Option in the Option
Register, upon surrender of this Option, with the Form of Assignment attached
hereto duly completed and signed, to the Company at the office specified in or
pursuant to Section 4(b). Upon any such registration or transfer, a new Option
to purchase Common Stock, in substantially the form of this Option (any such new
Option, a "New Option"), evidencing the portion of this Option so transferred
shall be issued to the transferee and a New Option evidencing the remaining
portion of this Option not so transferred, if any, shall be issued to the
transferring Holder. After any such transfer, payment of the Exercise Price may
only be made by cash unless the transferee is an affliate of Hollinger Digital,
Inc.
4. Duration and Exercise of Options.
(a) This Option shall be exercisable by the registered Holder on any
business day before 5:00 P.M., New York time, at any time on or after the date
hereof (subject to the provisions of the first paragraph of this Option) to and
including the Expiration Date. At 5:00 P.M., New York time on the Expiration
Date, this Option if not exercised prior thereto shall be and become void and of
no value.
(b) Subject to Sections 5 and 9, upon surrender of this Option, with the
Form of Election to Purchase attached hereto duly completed and signed, to the
Company at its office at 611
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Broadway, Suite 308, New York, New York 10012, Attention: Secretary, or at such
other address as the Company may specify in writing to the then registered
Holder, and upon payment of the cash portion of the Exercise Price multiplied by
the number of Option Shares that the Holder intends to purchase hereunder, in
lawful money of the United States of America, in cash or by certified or
official bank check or checks or by wire transfer in same-day funds, all as
specified by the Holder in the Form of Election to Purchase, the Company shall
promptly (but in no event later than 3 days thereafter) issue and cause to be
delivered to or upon the written order of the Holder and in such name or names
as the Holder may designate, a certificate for the portion of the Option Shares
paid for in cash. The portion of the Option Shares to be paid for with Payments
in Kind shall be deposited into escrow, in accordance with Section 1 hereof. Any
person so designated by the Holder to receive Option Shares shall be deemed to
have become holder of record of such Option Shares as of the Date of Exercise of
this Option. Notwithstanding the foregoing, the Company shall not be obligated
to deliver any such certificate or certificates upon exercise of this Option
until the Company shall have received such assurances as the Company may
reasonably request that the exercise of this Option and the issuance of Common
Stock pursuant to such exercise will not violate the Securities Act or the
securities laws of any state applicable to such exercise, issuance or transfer.
Such assurances may include (but need not be limited to) opinions of counsel,
covenants by the holder or transferee to observe the Securities Act and the
securities laws of any state applicable to such exercise, issuance or transfer
and the placement of a legend on such certificate or certificates restricting
subsequent transfers or sales.
A "Date of Exercise" means the date on which the Company shall have
received (i) this Option (or any New Option, as applicable), with the Form of
Election to Purchase attached hereto (or attached to such New Option)
appropriately completed and duly signed, and (ii) payment of the cash portion of
the Exercise Price for the number of Option Shares so indicated by the holder
hereof to be purchased.
(c) This Option must be exercised in its entirety in a single transaction.
5. Payment of Taxes. The Company will pay all documentary stamp taxes
attributable to the issuance of Option Shares upon the exercise of this Option;
provided, however, that the Company shall not be required to pay any tax which
may be payable in respect of any transfer involved in the registration of any
certificates for Option Shares in a name other than that of the Holder, and the
Company shall not be required to issue or deliver the certificates for Option
Shares unless or until the person or persons requesting the issuance thereof
shall have paid to the Company the amount of such tax or shall have established
to the satisfaction of the Company that such tax has been paid. The Holder shall
be responsible for all other tax liability that may arise as a result of holding
or transferring this Option or receiving Option Shares upon exercise hereof.
6. Replacement of Option. If this Option is mutilated, lost, stolen or
destroyed, the Company may in its discretion issue in exchange and substitution
for and upon cancellation hereof, or in lieu of and substitution for this
Option, a New Option, but only upon receipt of evidence reasonably satisfactory
to the Company of such loss, theft or destruction and indemnity, if requested,
satisfactory to it. Applicants for a New Option under such circumstances shall
also comply with such other reasonable regulations and pay such other reasonable
charges as the Company may prescribe.
7. Reservation of Option Shares. The Company covenants that all Option
Shares that shall be issuable and deliverable shall, upon issue, be duly and
validly authorized, issued and fully paid, and subject only to payment of the
PIK Purchase Price, nonassessable. The Company shall at all times reserve and
keep available out of its authorized and unissued Common Stock, solely for the
purpose of providing
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for the exercise of this Option such number of shares of Common Stock as shall,
from time to time, be sufficient for the exercise of this Option in full.
8. Certain Adjustments. The Exercise Price and number of Option Shares
issuable upon exercise of this Option are subject to adjustment from time to
time as set forth in this Section 8.
(a) In case the Company shall at any time after the date this Option is
first issued (i) declare a dividend on the outstanding Common Stock payable in
shares of its capital stock, (ii) subdivide the outstanding Common Stock, (iii)
combine the outstanding Common Stock into a smaller number of shares, or (iv)
issue any shares of its capital stock by reclassification of the Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), then, in each case,
the Exercise Price, and the number and kind of shares issuable upon exercise of
this Option, in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination, or reclassification, shall
be proportionately adjusted so that the Holder after such time shall be entitled
to receive the aggregate number and kind of shares which, if the Option had been
exercised immediately prior to such time, it would have owned upon such exercise
and been entitled to receive by virtue of such dividend, subdivision,
combination, or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur.
(b) In case the Company shall issue or fix a record date for the issuance
to all holders of Common Stock of rights, options, or warrants to subscribe for
or purchase Common Stock (or securities convertible into or exchangeable for
Common Stock) at a price per share (or having a conversion or exchange price per
share, if a security convertible into or exchangeable for Common Stock) less
than the Current Market Price per share of Common Stock on such record date,
then, in each case, the number of shares of Common Stock into which this Option
shall be exerciseable after such record date shall be determined by multiplying
the number of shares of Common Stock into which this Option was theretofore
exerciseable by a fraction, the numerator of which shall be the number of shares
of Common Stock outstanding on such record date plus the number of additional
shares of Common Stock to be offered for subscription or purchase (or into which
the convertible or exchangeable securities so to be offered are initially
convertible or exchangeable) and the denominator of which shall be the number of
shares of Common Stock outstanding on such record date plus the number of shares
of Common Stock which the aggregate offering price of the total number of shares
of Common Stock so to be offered (or the aggregate initial conversion or
exchange price of the convertible or exchangeable securities so to be offered)
would purchase at such Current Market Price. Such adjustment shall become
effective at the close of business on such record date; provided, however, that,
to the extent the shares of Common Stock (or securities convertible into or
exchangeable for shares of Common Stock) are not delivered, the number of shares
of Common Stock issuable upon exercise of this Option shall be readjusted after
the expiration of such rights, options, or warrants (but only with respect to
any portion of this Option exercised after such expiration), to the number of
shares which would have been issuable upon exercise of this Option had the
adjustments made upon the issuance of such rights, options, or warrants been
made upon the basis of delivery of only the number of shares of Common Stock (or
securities convertible into or exchangeable for shares of Common Stock) actually
issued. In case any subscription price may be paid in a consideration part or
all of which shall be in a form other than cash, the value of such consideration
shall be as determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error. Shares of Common
Stock owned by or held for the account of the Company or any majority-owned
subsidiary shall not be deemed outstanding for the purpose of any such
computation.
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<PAGE>
(c) In case the Company shall distribute to all holders of Common Stock
(including any such distribution made to the stockholders of the Company in
connection with a consolidation or merger in which the Company is the continuing
corporation) evidences of its indebtedness or assets (other than cash dividends
or distributions and dividends payable in shares of Common Stock), or rights,
options, or warrants to subscribe for or purchase Common Stock, or securities
convertible into or exchangeable for shares of Common Stock (excluding those
with respect to the issuance of which an adjustment is provided for pursuant to
Section 8(b) of this Option), then, in each case, the number of shares of Common
Stock into which this Option shall be exerciseable shall be determined by
multiplying the number of shares of Common Stock into which this Option was
exerciseable immediately prior to the record date for the determination of
stockholders entitled to receive such distribution by a fraction, the numerator
of which shall be the Current Market Price per share of Common Stock on such
record date, and the denominator of which shall be such Current Market Price per
share of Common Stock less the fair market value (as reasonably determined in
good faith by the board of directors of the Company) of the portion of the
evidences of indebtedness or assets so to be distributed, or of such rights,
options, or warrants or convertible or exchangeable securities, applicable to
one share. Such adjustment shall be made whenever any such distribution is made,
and shall become effective on the date of such distribution retroactive to the
record date for the determination of stockholders entitled to receive such
distribution.
(d) In case the Company shall issue shares of Common Stock or rights,
options, or warrants to subscribe for or purchase Common Stock, or securities
convertible into or exchangeable for Common Stock (excluding shares, rights,
options, warrants, or convertible or exchangeable securities issued or issuable
(i) in a private placement of shares or convertible securities of up to
$6,000,000 provided that the Company shall consult with Holder with respect to
such issuance or in private placements of shares or convertible securities over
the $6,000,000 amount if Holder has approved such transaction, (ii) in any of
the transactions with respect to which an adjustment is provided for pursuant to
Sections 8(a), (b) or (c) of this Option, or (iii) upon exercise of this Option
or exercise or conversion of the Floating Rate Convertible Secured Debentures,
the Warrant and all other options, warrants or securities outstanding on the
date hereof) at a price per share (determined, in the case of such rights,
options, warrants, or convertible or exchangeable securities, by dividing (x)
the total amount received or receivable by the Company in consideration of the
sale and issuance of such rights, options, warrants, or convertible or
exchangeable securities, plus the minimum aggregate consideration payable to the
Company upon exercise, conversion, or exchange thereof, by (y) the maximum
number of shares covered by such rights, options, warrants, or convertible or
exchangeable securities) lower than the Current Market Price per share of Common
Stock in effect immediately prior to such issuance, then the number of shares of
Common Stock into which this Option shall be exerciseable shall be determined by
multiplying the number of shares of Common Stock into which this Option was
exerciseable immediately prior to such issuance by a fraction, the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately after such issuance and the denominator of which shall be an amount
equal to the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such issuance, plus (B) the quotient obtained by dividing
the consideration received by the Company upon such issuance by such Current
Market Price. For the purposes of such adjustments, the maximum number of shares
which the holders of any such rights, options, warrants, or convertible or
exchangeable securities shall be entitled to initially subscribe for or purchase
or convert or exchange such securities into shall be deemed to be issued and
outstanding as of the date of such issuance, and the consideration received by
the Company therefor shall be deemed to be the consideration received by the
Company for such rights, options, warrants, or convertible or exchangeable
securities, plus the minimum aggregate consideration or premiums stated in such
rights, options, warrants, or convertible or exchangeable securities to be paid
for the shares covered thereby. No further
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<PAGE>
adjustment shall be made as a result of the actual issuance of shares of Common
Stock on exercise of such rights, options, or warrants or on conversion or
exchange of such convertible or exchangeable securities. On the expiration or
the termination of such rights, options, or warrants, or the termination of such
right to convert or exchange, the number of shares of Common Stock issuable upon
exercise of this Option shall be readjusted to such number of shares as would
have been issuable had the adjustments made upon the issuance of such rights,
options, warrants, or convertible or exchangeable securities been made upon the
basis of the delivery of only the number of shares of Common Stock actually
delivered upon the exercise of such rights, options, or warrants or upon the
conversion or exchange of any such securities; and on any change of the number
of shares of Common Stock deliverable upon the exercise of any such rights,
options, or warrants or conversion or exchange of such convertible or
exchangeable securities or any change in the consideration to be received by the
Company upon such exercise, conversion, or exchange, including, but not limited
to, a change resulting from the antidilution provisions thereof, the number of
shares of Common Stock issuable upon exercise of this Option, as then in effect,
shall forthwith be readjusted to such number of shares as would have been
issuable had an adjustment been made upon the issuance of such rights, options,
or warrants not exercised prior to such change, or securities not converted or
exchanged prior to such change, on the basis of such change. In case the Company
shall issue shares of Common Stock or any such rights, options, warrants, or
convertible or exchangeable securities for a consideration consisting, in whole
or in part, of property other than cash or its equivalent, then the "price per
share" and the "consideration received by the Company" for purposes of the first
sentence of this Section 8(d) shall be as determined in good faith by the board
of directors of the Company, whose determination shall be conclusive absent
manifest error. Shares of Common Stock owned by or held for the account of the
Company or any majority-owned subsidiary shall not be deemed outstanding for the
purpose of any such computation.
(e) For the purpose of any computation under this Section 8, the Current
Market Price per share of Common Stock on any date shall be deemed to be the
average of the daily closing prices for the 30 consecutive trading days
immediately preceding the date in question. The closing price for each day shall
be the last reported sales price regular way or, in case no such reported sale
takes place on such day, the closing bid price regular way, in either case on
the principal national securities exchange (including, for purposes hereof, the
NASDAQ National Market System) on which the Common Stock is listed or admitted
to trading or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the highest reported bid price for the Common
Stock as furnished by the National Association of Securities Dealers, Inc.
through NASDAQ or a similar organization if NASDAQ is no longer reporting such
information or if the Common Stock is not reported on NASDAQ, as quoted on the
OTC Bulletin Board. If on any such date the Common Stock is not listed or
admitted to trading on any national securities exchange and is not quoted by
NASDAQ or any similar organization, the fair value of a share of Common Stock on
such date, as reasonably determined in good faith by the board of directors of
the Company shall be used. The foregoing provisions shall also be applied to
determine the Current Market Price of any shares of capital stock of the Company
issued by the Company by reclassification of the Common Stock (including any
such reclassification in connection with a consolidation or merger in which the
Company is the surviving corporation).
(f) No adjustment in the number of shares of Common Stock for which this
Option is exerciseable shall be required unless such adjustment would require an
increase or decrease of at least 1/20th of a share in the number of shares of
Common Stock for which this Option is exerciseable; provided, however, that any
adjustments which by reason of this Section 8(f) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
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(g) Upon each adjustment to the number of shares of Common Stock issuable
upon exercise of this Option as a result of the calculations made in Sections
8(b), (c) and (d) hereof, the Exercise Price shall simultaneously be adjusted to
the price obtained by multiplying the Exercise Price in effect immediately prior
to such adjustment by a fraction, the numerator of which shall be the number of
shares of Common Stock for which this Option was exerciseable immediately prior
to such adjustment and the denominator of which shall be the number of shares of
Common Stock for which this Option is exerciseable immediately after such
adjustment.
(h) Whenever there shall be an adjustment as provided in this Section 8,
the Company shall promptly cause written notice thereof to be sent to the
Holder, which notice shall be accompanied by an officer's certificate setting
forth the number of Option Shares issuable upon the exercise of the Option and
the Exercise Price after such adjustment and setting forth a brief statement of
the facts requiring such adjustment and the computation thereof, which officer's
certificate shall be conclusive evidence of the correctness of any such
adjustment absent manifest error.
(i) The Company shall not be required to issue fractions of shares of
Common Stock or other capital stock of the Company upon the exercise of the
Option. If any fraction of a share would be issuable on any exercise of the
Option (or specified portions thereof), the Company shall purchase such fraction
for an amount in cash equal to the same fraction of the Current Market Price of
such share of Common Stock or other capital stock on the date of exercise of the
Option.
(j) For the purposes of this Section, the following clauses shall also be
applicable:
A. Record Date. In case the Company shall take a record of the holders
of its Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock or in convertible
securities, or (B) to subscribe for or purchase Common Stock or convertible
securities, then such record date shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
B. Treasury Shares. The number of shares of Common Stock outstanding
at any given time shall not include shares owned or held by or for the
account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock for the purposes of this
subsection (j).
(k) All calculations under this Section 8 shall be made to the nearest cent
or the nearest 1/100th of a share, as the case may be.
(l) If:
A. the Company shall declare a dividend (or any other distribution)
on its Common Stock; or
B. the Company shall declare a special nonrecurring cash dividend on
or a redemption of its Common Stock; or
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C. the Company shall authorize the granting to all holders of the
Common Stock rights or Options to subscribe for or purchase any
shares of capital stock of any class or of any rights; or
D. the approval of any stockholders of the Company shall be required
in connection with any reclassification of the Common Stock of
the Company, any consolidation or merger to which the Company is
a party, any sale or transfer of all or substantially all of the
assets of the Company, or any compulsory share exchange whereby
the Common Stock is converted into other securities, cash or
property; or
E. the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the
Company,
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Option Register, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, however, that the failure to mail such notice or any
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
(m) If at any time conditions shall arise by reason of action taken by the
Company which in the opinion of the Board of Directors are not adequately
covered by the other provisions hereof and which might materially and adversely
affect the rights of the Holders (different than or distinguished from the
effect generally on rights of holders of any class of the Company's capital
stock) or if at any time any such conditions are expected to arise by reason of
any action contemplated by the Company, the Company shall mail a written notice
briefly describing the action contemplated and the material adverse effects of
such action on the rights of the Holders at least 30 calendar days prior to the
effective date of such action, and the Board of Directors of the Company shall
determine in good faith the appropriate adjustments to the Exercise Price and
the number of Option Shares issuable upon exercise of this Option, which
determination shall be conclusive absent manifest error.
9. Fractional Shares. The Company shall not be required to issue fractional
Option Shares on the exercise of this Option. The number of full Option Shares
which shall be issuable upon the exercise of this Option shall be computed on
the basis of the aggregate number of Option Shares purchasable on exercise of
this Option so presented. If any fraction of a Option Share would, except for
the provisions of this Section 9 be issuable on the exercise of this Option, the
Company shall pay an amount in cash equal to the Exercise Price multiplied by
such fraction.
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10. Notices. Any and all notices or other communications or deliveries
hereunder shall be in writing and shall be delivered personally, by facsimile,
sent by a nationally recognized overnight courier service or sent by registered
or certified mail, postage prepaid, addressed as follows: (1) if to the Company,
to AMERICAN INTERACTIVE MEDIA, INC., 611 Broadway, Suite 308, New York, New York
10012 Attention: Secretary, or to facsimile number (212) 358-8380; or (ii) if to
the Holder, to the Holder at the address or facsimile number appearing on the
Option Register or such other address or facsimile number as the Holder may
provide to the Company in accordance with this Section 10. Any notice or other
communications or deliveries hereunder shall be deemed given and effective on
the earliest of (i) the date of transmission, if delivered via facsimile at the
facsimile number specified in this Section 10, (ii) four (4) days after deposit
in the United States mails, (iii) the date when posted, if sent by nationally
recognized overnight courier service or (iv) upon actual receipt by the party to
whom such notice is required to be given.
11. Option Agent.
(a) The Company shall serve as Option agent under this Option. Upon thirty
(30) days' notice to the Holder, the Company and the Holder may appoint a new
Option agent. Such new Option agent shall be a corporation doing business under
the laws of the United States or any state thereof, in good standing and having
a combined capital and surplus of not less than U.S. $50,000,000. The combined
capital and surplus of any such new Option agent shall be deemed to be the
combined capital and surplus as set forth in the most recent annual report of
its condition published by such Option agent prior to its appointment; provided
that such reports are published at least annually pursuant to law or to the
requirements of a federal or state supervising or examining authority. After
acceptance in writing of such appointment by the new Option agent, it shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named herein as the Option agent, without any further assurance,
conveyance, act or deed, but if for any reason it shall be necessary or
expedient to execute and deliver any further assurance, conveyance, act or deed
the same shall be done at the expense of the Company and shall be legally and
validly executed and delivered by the Company.
(b) Any corporation into which the Company or any new Option agent may be
merged or any corporation resulting from any consolidation to which the Company
or any new Option agent shall be a party or any corporation to which the Company
or any new Option agent transfers substantially all of its corporate trust or
shareholders services business shall be a successor Option agent under this
Option without any further act; provided that such corporation (i) would be
eligible for appointment as successor to the Option agent under the provisions
of this Section 11 or (ii) is a wholly-owned subsidiary of the Option agent. Any
such successor Option agent shall promptly cause notice of its succession as
Option agent to be mailed (by first class mail, postage prepaid) to the Holder
at the Holder's last address as shown on the register maintained by the Option
agent pursuant to this Option.
12. Registration Rights
The Holder and any holder of Option Shares issuable upon exercise of this
Option shall have registration rights with respect to Option Shares as provided
for in the Securities Purchase Agreement between the Company and Holder of even
date herewith.
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13. Miscellaneous.
(a) This Option shall be binding on and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. This Option may be
amended only in writing signed by the Company and the Holder.
(b) Subject to Section 13(a), above, nothing in this Option shall be
construed to give to any person or corporation other than the Company, the
Holder and any registered holder of Option Shares any legal or equitable right,
remedy or cause under this Option; this Option shall be for the sole and
exclusive benefit of the Company, the Holder and any other registered holder of
Option Shares.
(c) This Option shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York without regard to the
principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not constitute a part
of this Option and shall not be deemed to limit or affect any of the provisions
hereof.
(e) In case any one or more of the provisions of this Option shall be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Option shall not in any way be affected
or impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Option.
IN WITNESS WHEREOF, the Company has caused this Option to be duly executed
by its authorized officer as of the date first indicated above.
AMERICAN INTERACTIVE MEDIA, INC.
By: /s/ Mark Graff
---------------------------------
Name: Mark Graff
Title: President
accepted and agreed:
HOLLINGER DIGITAL, INC.
By: /s/ Philip Kunsberg
--------------------------------------
Name:
Title:
CURTIS, MALLET-PREVOST, COLT&MOSLE
/s/ Curtis, Mallet-Provost, Colt & Mosle
- -----------------------------------------
as Escrow Agent
12
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Option)
To American Interactive Media, Inc.:
In accordance with the Option enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of Common Stock ("Common Stock"), par value $0.001 per share, of American
Interactive Media, Inc. and encloses herewith $________ in cash (or encloses
herewith evidence of payment of such sum), which sum represents the cash portion
of the Exercise Price (as defined in the Option) for the number of shares of
Common Stock to which this Form of Election to Purchase relates, together with
any applicable taxes payable by the undersigned pursuant to the Option.
The undersigned requests that certificates for the shares of Common Stock
issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
<PAGE>
[To be completed and signed only upon transfer of Option]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within Option
to purchase ____________ shares of Common Stock of AMERICAN INTERACTIVE MEDIA,
INC., to which the within Option relates and appoints ________________ attorney
to transfer said right on the books of AMERICAN INTERACTIVE MEDIA, INC., with
full power of substitution in the premises.
Dated:
_______________, ____
_________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Option)
_________________________________
Address
In the presence of:
_____________________
NEITHER THIS WARRANT NOR THE SECURITIES REPRESENTED BY THIS WARRANT
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
`SECURITIES ACT'), OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE.
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION, AND NEITHER SUCH
SECURITIES NOR ANY INTEREST OR PARTICIPATION THEREIN MAY BE SOLD,
ASSIGNED PLEDGED, HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER
TRANSFERRED OR DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF AND IN
COMPLIANCE WITH THE REGISTRATION PROVISIONS OF APPLICABLE STATE
SECURITIES OR BLUE SKY LAWS.
AMERICAN INTERACTIVE MEDIA, INC.
WARRANT
Dated: December 4, 1997
AMERICAN INTERACTIVE MEDIA, INC., a Nevada corporation (the "Company"),
hereby certifies that, for value received, Hollinger Digital, Inc., or its
designee or its registered assigns ("Holder"), is entitled, subject to the terms
set forth below, to purchase from the Company in a single transaction up to that
number of shares of Common Stock, par value $0.001 per share (the "Common
Stock"), of the Company (each such share, a "Warrant Share" and all such shares,
the "Warrant Shares") as shall immediately following the exercise be equal to
that number of shares determined by subtracting from (i) that number of shares
equal to forty percent (40%) of the outstanding shares of Common Stock and
Preferred Stock (if any) of the Company plus all shares and other securities
which are then and potentially issuable pursuant to all then outstanding
options, warrants and other securities convertible into or exchangeable for
shares of Common Stock, (ii) all shares of Common Stock issued to Holder
pursuant to conversion of the Floating Rate Convertible Debentures of the
Company issued to the Holder pursuant to that certain Securities Purchase
Agreement between the Company and Holder of even date herewith and all shares
received by the Holder pursuant to its exercise of the Common Stock Purchase
Option of even date herewith and any and all shares otherwise acquired by Holder
pursuant to purchases in public or private transactions for up to 10% of the
fully-diluted amount of the Common Stock as permitted under that certain Voting
and Standstill Agreement of even date herewith at an exercise price per share
equal to the Current Market Price per share of Common Stock on the exercise
date. The "Current Market Price" shall be deemed to be the average of the daily
closing prices for the 30 consecutive trading days immediately
<PAGE>
preceding the exercise date. The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sale takes place
on such day, the closing bid price regular way, in either case on the principal
national securities exchange (including, for purposes hereof, the NASDAQ
National Market System) on which the Common Stock is listed or admitted to
trading or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the highest reported bid price for the Common
Stock as furnished by the National Association of Securities Dealers Inc.
through NASDAQ or a similar organization if NASDAQ is no longer reporting such
information or if the Common Stock is not reported on NASDAQ, as quoted on the
OTC Bulletin Board. The Warrant Shares and the exercise price shall be adjusted
from time to time as provided in Section 7 ("Exercise Price"). This Warrant may
be exercised at any time after the Holder shall have completed conversion of the
Floating Rate Convertible Debentures in full and shall have exercised the Common
Stock Purchase Option in full, until and including the date that is one (1) year
after the date the Floating Rate Convertible Debentures shall have been
converted in full (the "Expiration Date"). This Warrant is subject to the
following terms and conditions:
1. Registration of Warrant. The Company shall register this Warrant, upon
records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder hereof from time to time. The
Company may deem and treat the registered Holder of this Warrant as the absolute
owner hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, and the Company shall not be affected by
notice to the contrary.
2. Transfers and Exchanges.
(a) This Warrant and the rights hereunder shall be transferable in
whole or in part, subject to the limitations of and in accordance with the
procedures hereinafter set forth in this Section 2(a). This Warrant and the
Warrant Shares received upon the exercise of this Warrant have not been
registered under the United States Securities Act of 1933, as amended (as
then in effect or any similar statute then in effect) (the "Securities
Act"), or the securities laws of any state applicable to such exercise,
issuance or transfer. Any transfer is restricted and may only be made
provided the Company receives such assurances as the Company may reasonably
request that the exercise of this Warrant, the transfer of this Warrant, or
any part thereof, and the issuance of Warrant Shares pursuant to such
exercise, will not violate the Securities Act. Such assurances may include
(but need not be limited to) opinions of counsel, covenants by the holder
or transferee to observe the Securities Act and the securities laws of any
state applicable to such exercise, issuance or transfer and the placement
of a legend on such certificate or certificates restricting subsequent
transfers or sales. In order to transfer this Warrant, Holder shall give
not less than ten (10) days' written notice to the Company, specifying (i)
the name of the proposed transferee, (ii) the number of Warrant Shares to
which the transfer relates and (iii) the amount of consideration to be paid
therefor. The Company shall register the transfer of any portion of this
Warrant in the Warrant Register, upon surrender of this Warrant, with the
Form of Assignment attached hereto duly completed and signed, to the
Company at the office specified in or pursuant to Section 3(b). Upon any
such registration or transfer, a new warrant to purchase Common Stock, in
substantially the form of this Warrant (any such new warrant, a "New
Warrant"), evidencing the portion of this Warrant so transferred shall be
issued to the transferee and a New Warrant evidencing the remaining portion
of this Warrant not so transferred, if any, shall be issued to the
transferring Holder.
(b) This Warrant is exchangeable, upon the surrender hereof by the
Holder at the office of the Company specified in or pursuant to Section
3(b) for one or more New Warrants, evidencing in the aggregate the right to
purchase the number of Warrant Shares which may then be purchased
hereunder. Any such New Warrant will be dated the date of such exchange.
2
<PAGE>
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the registered Holder on any
business day before 5:00 P.M., New York time, at any time and from time to
time on or after the date hereof (subject to the provisions of the first
paragraph of this Warrant) to and including the Expiration Date. At 5:00
P.M., New York time on the Expiration Date, this Warrant if not exercised
prior thereto shall be and become void and of no value.
(b) Subject to Sections 2(b), 4 and 8, upon surrender of this Warrant,
with the Form of Election to Purchase attached hereto duly completed and
signed, to the Company at its office at 611 Broadway, Suite 308, New York,
New York 10012, Attention: Secretary, or at such other address as the
Company may specify in writing to the then registered Holder, and upon
payment of the Exercise Price multiplied by the number of Warrant Shares
that the Holder intends to purchase hereunder, in lawful money of the
United States of America, in cash or by certified or official bank check or
checks or by wire transfer in same-day funds, all as specified by the
Holder in the Form of Election to Purchase, the Company shall promptly (but
in no event later than 3 days thereafter) issue and cause to be delivered
to or upon the written order of the Holder and in such name or names as the
Holder may designate, a certificate for the Warrant Shares issuable upon
such exercise. Any person so designated by the Holder to receive Warrant
Shares shall be deemed to have become holder of record of such Warrant
Shares as of the Date of Exercise of this Warrant. Notwithstanding the
foregoing, the Company shall not be obligated to deliver any such
certificate or certificates upon exercise of this Warrant until the Company
shall have received such assurances as the Company may reasonably request
that the exercise of this Warrant and the issuance of Common Stock pursuant
to such exercise will not violate the Securities Act or the securities laws
of any state applicable to such exercise, issuance or transfer. Such
assurances may include (but need not be limited to) opinions of counsel,
covenants by the holder or transferee to observe the Securities Act and the
securities laws of any state applicable to such exercise, issuance or
transfer and the placement of a legend on such certificate or certificates
restricting subsequent transfers or sales.
A "Date of Exercise" means the date on which the Company shall have
received (i) this Warrant (or any New Warrant, as applicable), with the
Form of Election to Purchase attached hereto (or attached to such New
Warrant) appropriately completed and duly signed, and (ii) payment of the
Exercise Price for the number of Warrant Shares so indicated by the holder
hereof to be purchased.
(c) This Warrant must be exercised in its entirety in a single
transaction.
4. Payment of Taxes. The Company will pay all documentary stamp taxes
attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares in a name other than that of the Holder,
and the Company shall not be required to issue or deliver the certificates for
Warrant Shares unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid. The
Holder shall be responsible for all other tax liability that may arise as a
result of holding or transferring this Warrant or receiving Warrant Shares upon
exercise hereof.
5. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or
destroyed, the Company may in its discretion issue in exchange and substitution
for and upon cancellation hereof, or in lieu of and substitution for this
Warrant, a New Warrant, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and indemnity, if
requested, satisfactory to it.
3
<PAGE>
Applicants for a New Warrant under such circumstances shall also comply with
such other reasonable regulations and pay such other reasonable charges as the
Company may prescribe.
6. Reservation of Warrant Shares. The Company covenants that all Warrant
Shares that shall be issuable and deliverable shall, upon issue, be duly and
validly authorized, issued and fully paid and nonassessable. The Company shall
at all times reserve and keep available out of its authorized and unissued
Common Stock, solely for the purpose of providing for the exercise of this
Warrant, such number of shares of Common Stock as shall, from time to time, be
sufficient for the exercise of this Warrant.
7. Certain Adjustments. The Exercise Price and number of Warrant Shares
issuable upon exercise of this Warrant are subject to adjustment from time to
time as set forth in this Section 7.
(a) In case the Company shall at any time after the date this Warrant
is first issued (i) declare a dividend on the outstanding Common Stock
payable in shares of its capital stock, (ii) subdivide the outstanding
Common Stock, (iii) combine the outstanding Common Stock into a smaller
number of shares, or (iv) issue any shares of its capital stock by
reclassification of the Common Stock (including any such reclassification
in connection with a consolidation or merger in which the Company is the
continuing corporation), then, in each case, the Exercise Price, and the
number and kind of shares issuable upon exercise of this Warrant, in effect
at the time of the record date for such dividend or of the effective date
of such subdivision, combination, or reclassification, shall be
proportionately adjusted so that the Holder after such time shall be
entitled to receive the aggregate number and kind of shares which, if the
Warrant had been exercised immediately prior to such time, it would have
owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination, or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) In case the Company shall issue or fix a record date for the
issuance to all holders of Common Stock of rights, options, or warrants to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a conversion
or exchange price per share, if a security convertible into or exchangeable
for Common Stock) less than the Current Market Price per share of Common
Stock on such record date, then, in each case, the number of shares of
Common Stock into which this Warrant shall be exercisable after such record
date shall be determined by multiplying the number of shares of Common
Stock into which this Warrant was theretofore exercisable by a fraction,
the numerator of which shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional shares of
Common Stock to be offered for subscription or purchase (or into which the
convertible or exchangeable securities so to be offered are initially
convertible or exchangeable) and the denominator of which shall be the
number of shares of Common Stock outstanding on such record date plus the
number of shares of Common Stock which the aggregate offering price of the
total number of shares of Common Stock so to be offered (or the aggregate
initial conversion or exchange price of the convertible or exchangeable
securities so to be offered) would purchase at such Current Market Price.
Such adjustment shall become effective at the close of business on such
record date; provided, however, that, to the extent the shares of Common
Stock (or securities convertible into or exchangeable for shares of Common
Stock) are not delivered, the number of shares of Common Stock issuable
upon exercise of this Warrant shall be readjusted after the expiration of
such rights, options, or warrants (but only with respect to any portion of
this Warrant exercised after such expiration), to the number of shares
which would have been issuable upon exercise of this Warrant had the
adjustments made upon the issuance of such rights, options, or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into or exchangeable for shares of Common
Stock) actually issued. In case any subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the
value of such consideration shall be as
4
<PAGE>
determined in good faith by the board of directors of the Company, whose
determination shall be conclusive absent manifest error. Shares of Common
Stock owned by or held for the account of the Company or any majority-owned
subsidiary shall not be deemed outstanding for the purpose of any such
computation.
(c) In case the Company shall distribute to all holders of Common
Stock (including any such distribution made to the stockholders of the
Company in connection with a consolidation or merger in which the Company
is the continuing corporation) evidences of its indebtedness or assets
(other than cash dividends or distributions and dividends payable in shares
of Common Stock), or rights, options, or warrants to subscribe for or
purchase Common Stock, or securities convertible into or exchangeable for
shares of Common Stock (excluding those with respect to the issuance of
which an adjustment is provided for pursuant to Section 7(b) of this
Warrant), then, in each case, the number of shares of Common Stock into
which this Warrant shall be exercisable shall be determined by multiplying
the number of shares of Common Stock into which this Warrant was
exerciseable immediately prior to the record date for the determination of
stockholders entitled to receive such distribution by a fraction, the
numerator of which shall be the Current Market Price per share of Common
Stock on such record date, and the denominator of which shall be such
Current Market Price per share of Common Stock less the fair market value
(as reasonably determined in good faith by the board of directors of the
Company) of the portion of the evidences of indebtedness or assets so to be
distributed, or of such rights, options, or warrants or convertible or
exchangeable securities, applicable to one share. Such adjustment shall be
made whenever any such distribution is made, and shall become effective on
the date of such distribution retroactive to the record date for the
determination of stockholders entitled to receive such distribution.
(d) In case the Company shall issue shares of Common Stock or rights,
options, or warrants to subscribe for or purchase Common Stock, or
securities convertible into or exchangeable for Common Stock (excluding
shares, rights, options, warrants, or convertible or exchangeable
securities issued or issuable (i) in a private placement of shares or
convertible securities of up to $6,000,000 provided that the Company shall
consult with Holder with respect to such issuance or in private placements
of shares or convertible securities over the $6,000,000 amount if Holder
has approved such transaction, (ii) in any of the transactions with respect
to which an adjustment is provided for pursuant to Sections 7(a), (b) or
(c) of this Warrant, or (iii) upon exercise of this Warrant or exercise or
conversion of the Floating Rate Convertible Secured Debentures, the Common
Stock Purchase Option and all other options, warrants or securities
outstanding on the date hereof) at a price per share (determined, in the
case of such rights, options, warrants, or convertible or exchangeable
securities, by dividing (x) the total amount received or receivable by the
Company in consideration of the sale and issuance of such rights, options,
warrants, or convertible or exchangeable securities, plus the minimum
aggregate consideration payable to the Company upon exercise, conversion,
or exchange thereof, by (y) the maximum number of shares covered by such
rights, options, warrants, or convertible or exchangeable securities) lower
than the Current Market Price per share of Common Stock in effect
immediately prior to such issuance, then the number of shares of Common
Stock into which this Warrant shall be exercisable shall be determined by
multiplying the number of shares of Common Stock into which this Warrant
was exercisable immediately prior to such issuance by a fraction, the
numerator of which shall be the total number of shares of Common Stock
outstanding immediately after such issuance and the denominator of which
shall be an amount equal to the sum of (A) the number of shares of Common
Stock outstanding immediately prior to such issuance, plus (B) the quotient
obtained by dividing the consideration received by the Company upon such
issuance by such Current Market Price. For the purposes of such
adjustments, the maximum number of shares which the holders of any such
rights, options, warrants, or convertible or exchangeable securities shall
be entitled to initially subscribe for or purchase or convert or exchange
such securities into shall be deemed to be issued and outstanding as of the
date of such issuance, and the consideration received by the Company
therefor shall be deemed to be the consideration received by the Company
for such rights,
5
<PAGE>
options, warrants, or convertible or exchangeable securities, plus the
minimum aggregate consideration or premiums stated in such rights, options,
warrants, or convertible or exchangeable securities to be paid for the
shares covered thereby. No further adjustment shall be made as a result of
the actual issuance of shares of Common Stock on exercise of such rights,
options, or warrants or on conversion or exchange of such convertible or
exchangeable securities. On the expiration or the termination of such
rights, options, or warrants, or the termination of such right to convert
or exchange, the number of shares of Common Stock issuable upon exercise of
this Warrant shall be readjusted to such number of shares as would have
been issuable had the adjustments made upon the issuance of such rights,
options, warrants, or convertible or exchangeable securities been made upon
the basis of the delivery of only the number of shares of Common Stock
actually delivered upon the exercise of such rights, options, or warrants
or upon the conversion or exchange of any such securities; and on any
change of the number of shares of Common Stock deliverable upon the
exercise of any such rights, options, or warrants or conversion or exchange
of such convertible or exchangeable securities or any change in the
consideration to be received by the Company upon such exercise, conversion,
or exchange, including, but not limited to, a change resulting from the
antidilution provisions thereof, the number of shares of Common Stock
issuable upon exercise of this Warrant, as then in effect, shall forthwith
be readjusted to such number of shares as would have been issuable had an
adjustment been made upon the issuance of such rights, options, or warrants
not exercised prior to such change, or securities not converted or
exchanged prior to such change, on the basis of such change. In case the
Company shall issue shares of Common Stock or any such rights, options,
warrants, or convertible or exchangeable securities for a consideration
consisting, in whole or in part, of property other than cash or its
equivalent, then the "price per share" and the "consideration received by
the Company" for purposes of the first sentence of this Section 7(d) shall
be as determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error. Shares of
Common Stock owned by or held for the account of the Company or any
majority-owned subsidiary shall not be deemed outstanding for the purpose
of any such computation.
(e) For the purpose of any computation under this Section 7, the
Current Market Price per share of Common Stock on any date shall be deemed
to be the average of the daily closing prices for the 30 consecutive
trading days immediately preceding the date in question. The closing price
for each day shall be the last reported sales price regular way or, in case
no such reported sale takes place on such day, the closing bid price
regular way, in either case on the principal national securities exchange
(including, for purposes hereof, the NASDAQ National Market System) on
which the Common Stock is listed or admitted to trading or, if the Common
Stock is not listed or admitted to trading on any national securities
exchange, the highest reported bid price for the Common Stock as furnished
by the National Association of Securities Dealers, Inc. through NASDAQ or a
similar organization if NASDAQ is no longer reporting such information or
if the Common Stock is not reported on NASDAQ, as quoted on the OTC
Bulletin Board. If on any such date the Common Stock is not listed or
admitted to trading on any national securities exchange and is not quoted
by NASDAQ or any similar organization, the fair value of a share of Common
Stock on such date, as reasonably determined in good faith by the board of
directors of the Company shall be used. The foregoing provisions shall also
be applied to determine the Current Market Price of any shares of capital
stock of the Company issued by the Company by reclassification of the
Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the surviving corporation).
(f) No adjustment in the number of shares of Common Stock into which
this Warrant is convertible shall be required unless such adjustment would
require an increase or decrease of at least 1/20th of a share in the number
of shares of Common Stock into which this Warrant is exercisable; provided,
however, that any adjustments which by reason of this Section 7(f) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment.
6
<PAGE>
(g) Upon each adjustment to the number of shares of Common Stock
issuable upon exercise of this Warrant as a result of the calculations made
in Sections 7(b), (c) and (d) hereof, the Exercise Price shall
simultaneously be adjusted to the price obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by a
fraction, the numerator of which shall be the number of shares of Common
Stock into which this Warrant was exercisable immediately prior to such
adjustment and the denominator of which shall be the number of shares of
Common Stock into which this Warrant is convertible immediately after such
adjustment.
(h) Whenever there shall be an adjustment as provided in this Section
7, the Company shall promptly cause written notice thereof to be sent to
the Holder, which notice shall be accompanied by an officer's certificate
setting forth the number of Warrant Shares issuable upon the exercise of
the Warrant and the Exercise Price after such adjustment and setting forth
a brief statement of the facts requiring such adjustment and the
computation thereof, which officer's certificate shall be conclusive
evidence of the correctness of any such adjustment absent manifest error.
(i) The Company shall not be required to issue fractions of shares of
Common Stock or other capital stock of the Company upon the exercise of the
Warrant. If any fraction of a share would be issuable on any exercise of
the Warrant (or specified portions thereof), the Company shall purchase
such fraction for an amount in cash equal to the same fraction of the
Current Market Price of such share of Common Stock or other capital stock
on the date of exercise of the Warrant.
(j) For the purposes of this Section, the following clauses shall
also be applicable:
A. Record Date. In case the Company shall take a record of the
holders of its Common Stock for the purpose of entitling them (A) to
receive a dividend or other distribution payable in Common Stock or in
convertible securities, or (B) to subscribe for or purchase Common
Stock or convertible securities, then such record date shall be deemed
to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may
be.
B. Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held
by or for the account of the Company, and the disposition of any such
shares shall be considered an issue or sale of Common Stock for the
purposes of this subsection (j).
(k) All calculations under this Section 7 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.
(l) If:
A. the Company shall declare a dividend (or any other distribution)
on its Common Stock; or
B. the Company shall declare a special nonrecurring cash dividend on
or a redemption of its Common Stock; or
7
<PAGE>
C. the Company shall authorize the granting to all holders of the
Common Stock rights or warrants to subscribe for or purchase any
shares of capital stock of any class or of any rights; or
D. the approval of any stockholders of the Company shall be required
in connection with any reclassification of the Common Stock of
the Company, any consolidation or merger to which the Company is
a party, any sale or transfer of all or substantially all of the
assets of the Company, or any compulsory share exchange whereby
the Common Stock is converted into other securities, cash or
property; or
E. the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the
Company,
then the Company shall cause to be mailed to each Holder at their last
addresses as they shall appear upon the Warrant Register, at least 30
calendar days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken
for the purpose of such dividend, distribution, redemption, rights or
warrants, or if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y)
the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and
the date as of which it is expected that holders of Common Stock of record
shall be entitled to exchange their shares of Common Stock for securities,
cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution,
liquidation or winding up; provided, however, that the failure to mail such
notice or any defect therein or in the mailing thereof shall not affect the
validity of the corporate action required to be specified in such notice.
(m) If at any time conditions shall arise by reason of action taken by
the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might
materially and adversely affect the rights of the Holders (different than
or distinguished from the effect generally on rights of holders of any
class of the Company's capital stock) or if at any time any such conditions
are expected to arise by reason of any action contemplated by the Company,
the Company shall mail a written notice briefly describing the action
contemplated and the material adverse effects of such action on the rights
of the Holders at least 30 calendar days prior to the effective date of
such action, and the Board of Directors of the Company shall determine in
good faith the appropriate adjustments to the Exercise Price and the number
of Warrant Shares issuable upon exercise of this Warrant, which
determination shall be conclusive absent manifest error.
(n) Notwithstanding the provisions of the introductory paragraph to
this Warrant, the maximum number of shares for which this Warrant shall be
exerciseable on the exercise date shall equal that number of shares
determined by subtracting from (i) that number of shares equal to forty
percent (40%) of the then outstanding Common Stock of the Company following
such exercise, (ii) all shares of Common Stock issued to Holder pursuant to
conversion of the Floating Rate Convertible Debentures of the Company
issued to Holder pursuant to that certain Securities Purchase Agreement
between the Company and Holder of even date herewith and all shares
received by Holder pursuant to its exercise of the Common Stock Purchase
Option of even date herewith and any and all shares otherwise acquired by
Holder pursuant to purchases in public or private transactions for up to
10% of the fully-diluted amount of the Common Stock as permitted under that
certain Voting and Standstill Agreement of even date herewith (such amount
including the amount pursuant to this Warrant, the "40% Amount"). On
8
<PAGE>
the exercise date, all options and warrants and other securities
convertible into or exchangeable for Common Stock (without taking into
account any sales of Common Stock by Holder and without adjustment for any
subsequent issuances) as such Extra Securities are exercised for, converted
into or exchanged for Common Stock. This right granted to Holder shall
survive so long as any Extra Security is outstanding and not expired. The
exercise price for any additional shares purchased shall be the Current
Market Price on the original exercise date.
8. Fractional Shares. The Company shall not be required to issue fractional
Warrant Shares on the exercise of this Warrant. The number of full Warrant
Shares which shall be issuable upon the exercise of this Warrant shall be
computed on the basis of the aggregate number of Warrant Shares purchasable on
exercise of this Warrant so presented. If any fraction of a Warrant Share would,
except for the provisions of this Section 8, be issuable on the exercise of this
Warrant, the Company shall pay an amount in cash equal to the Exercise Price
multiplied by such fraction.
9. Notices. Any and all notices or other communications or deliveries
hereunder shall be in writing and shall be delivered personally, by facsimile,
sent by a nationally recognized overnight courier service or sent by registered
or certified mail, postage prepaid, addressed as follows: (1) if to the Company,
to AMERICAN INTERACTIVE MEDIA, INC., 611 Broadway, Suite 308, New York, New York
10012, Attention: Secretary, or to facsimile number (212) 358-8380; or (ii) if
to the Holder, to the Holder at the address or facsimile number appearing on the
Warrant Register or such other address or facsimile number as the Holder may
provide to the Company in accordance with this Section 9. Any notice or other
communications or deliveries hereunder shall be deemed given and effective on
the earliest of (i) the date of transmission, if delivered via facsimile at the
facsimile number specified in this Section 9, (ii) four (4) days after deposit
in the United States mails, (iii) the date when posted, if sent by nationally
recognized overnight courier service or (iv) upon actual receipt by the party to
whom such notice is required to be given.
10. Warrant Agent.
a. The Company shall serve as warrant agent under this Warrant. Upon thirty
(30) days' notice to the Holder, the Company and the Holder may appoint a new
warrant agent. Such new warrant agent shall be a corporation doing business
under the laws of the United States or any state thereof, in good standing and
having a combined capital and surplus of not less than U.S. $50,000,000. The
combined capital and surplus of any such new warrant agent shall be deemed to be
the combined capital and surplus as set forth in the most recent annual report
of its condition published by such warrant agent prior to its appointment;
provided that such reports are published at least annually pursuant to law or to
the requirements of a federal or state supervising or examining authority. After
acceptance in writing of such appointment by the new warrant agent, it shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named herein as the warrant agent, without any further
assurance, conveyance, act or deed, but if for any reason it shall be necessary
or expedient to execute and deliver any further assurance, conveyance, act or
deed the same shall be done at the expense of the Company and shall be legally
and validly executed and delivered by the Company.
b. Any corporation into which the Company or any new warrant agent may be
merged or any corporation resulting from any consolidation to which the Company
or any new warrant agent shall be a party or any corporation to which the
Company or any new warrant agent transfers substantially all of its corporate
trust or shareholders services business shall be a successor warrant agent under
this Warrant without any further act; provided that such corporation (i) would
be eligible for appointment as successor to the warrant agent under the
provisions of this Section 10 or (ii) is a wholly-
9
<PAGE>
owned subsidiary of the warrant agent. Any such successor warrant agent shall
promptly cause notice of its succession as warrant agent to be mailed (by first
class mail, postage prepaid) to the Holder at the Holder's last address as shown
on the register maintained by the warrant agent pursuant to this Warrant.
11. Registration Rights.
The Holder and any holder of Warrant Shares issuable upon exercise of this
Warrant shall have registration rights with respect to the Warrant Shares as
provided for in the Securities Purchase Agreement between the Company and Holder
dated of even date herewith
12. Miscellaneous.
a. This Warrant shall be binding on and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. This Warrant may
be amended only in writing signed by the Company and the Holder.
b. Subject to Section 12(a), above, nothing in this Warrant shall be
construed to give to any person or corporation other than the Company, the
Holder and any registered holder of Warrant Shares any legal or equitable right,
remedy or cause under this Warrant; this Warrant shall be for the sole and
exclusive benefit of the Company, the Holder and any other registered holder of
Warrant Shares.
c. This Warrant shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York without regard to the
principles of conflicts of law thereof.
d. The headings herein are for convenience only, do not constitute a part
of this Warrant and shall not be deemed to limit or affect any of the provisions
hereof.
e. In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Warrant shall not in any way be affected
or impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
by its authorized officer as of the date first indicated above.
AMERICAN INTERACTIVE MEDIA, INC.
By: /s/ Mark Graff
---------------------------------
Name: Mark Graff
Title: President
Accepted and agreed:
HOLLINGER DIGITAL, INC.
By: /s/ Philip Kunsberg
---------------------------
Name:
Title:
11
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To American Interactive Media, Inc.:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase _____________
shares of Common Stock ("Common Stock"), par value $0.001 per share, of American
Interactive Media, Inc. and encloses herewith $________ in cash (or encloses
herewith evidence of payment of such sum), which sum represents the Exercise
Price (as defined in the Warrant) for the number of shares of Common Stock to
which this Form of Election to Purchase relates, together with any applicable
taxes payable by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common Stock
issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
(Please print name and address)
________________________________________________________________________________
Dated: ______________, ____ Name of Holder:
(Print)
(By:)
(Title:)
<PAGE>
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of AMERICAN INTERACTIVE
MEDIA, INC., to which the within Warrant relates and appoints ________________
attorney to transfer said right on the books of AMERICAN INTERACTIVE MEDIA,
INC., with full power of substitution in the premises.
Dated:
_______________, ____
_________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant)
_________________________________
Address
In the presence of:
_____________________
THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE UNDERLYING 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 OR
BLUE SKY LAWS OF ANY STATE. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO DISTRIBUTION, AND NEITHER THESE SECURITIES NOR ANY
INTEREST OR PARTICIPATION THEREIN MAY BE SOLD, ASSIGNED OR IN ANY OTHER MANNER
TRANSFERRED OR DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM
THE REGISTRATION REQUIREMENTS THEREOF AND IN COMPLIANCE WITH APPLICABLE STATE
SECURITIES OR BLUE SKY LAWS.
AMERICAN INTERACTIVE MEDIA, INC.
WARRANT CERTIFICATE No. PV-1
Dated November 16, 1998
Warrants to Purchase Common Stock
AMERICAN INTERACTIVE MEDIA, INC., a Delaware corporation (the "Company"),
hereby certifies that, for value received, Pioneer Ventures Associates Limited
Partnership ("Holder"), or its registered assigns, is the registered owner of
five hundred thousand (500,000) Warrants (the "Warrants"), each of which will
entitle the Holder thereof to purchase one share, as adjusted from time to time
as provided in Section 7, of the Common Stock, par value $.001 per share, of the
Company (the "Common Stock", each such share being a "Warrant Share" and all
such shares being the "Warrant Shares") at the exercise price of Three Dollars
and Fifty-Two Cents ($3.52) per share (as adjusted from time to time as provided
in Section 3(e) or Section 7, the "Exercise Price") at any time on or after the
date hereof (the "Initial Exercise Date") until and including November 15, 2003
(the "Expiration Date"), all subject to the following terms and conditions.
This Warrant is being issued and delivered pursuant to that certain
Investment Agreement between the Company and the Pioneer Ventures Associates
Limited Partnership (the "Investment Agreement"). Capitalized terms used and not
otherwise defined herein shall have the meanings given such terms in the
Investment Agreement.
For purposes of calculating the Exercise Price, the following definitions
shall apply:
"Per Share Market Value" means on any particular date (a) the closing bid
price per share of the Common Stock on such date on the Nasdaq National Market
or other stock exchange on which the Common Stock is then listed, as reported on
Bloomberg, L.P. or if there is no such bid price on such date, then the last
closing bid price on such exchange on the date nearest preceding
<PAGE>
such date, as reported on Bloomberg, L.P., or (b) if the Common Stock is not
listed on the Nasdaq National Market or any stock exchange, the closing bid
price for a share of Common Stock on such date on the Nasdaq SmallCap Market or
the OTC Bulletin Board, as reported on Bloomberg, L.P. (or similar organization
or agency succeeding to its functions of reporting prices), or (c) if the Common
Stock is no longer reported on Bloomberg, L.P. (or similar organization or
agency succeeding to its functions of reporting prices), then the average of the
"Pink Sheet" bids on such date, or (d) if the Common Stock is no longer publicly
traded, the fair market value of a share of Common Stock as determined by an
Appraiser (as defined below) selected in good faith by the Holder; provided,
however, that the Company, after receipt of the determination by such Appraiser,
shall have the right to select an additional Appraiser, in which case, the fair
market value shall be equal to the average of the determinations by each such
Appraiser.
"Trading Day" means (a) a day on which the Common Stock is traded on the
Nasdaq National Market or Nasdaq SmallCap Market or principal national
securities exchange or market on which the Common Stock has been listed or
quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq
National Market or Nasdaq SmallCap Market or any principal national securities
exchange or market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices).
1. Registration of Warrants. The Company shall register each Warrant, upon
records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder of such Warrant from time to time.
The Company may deem and treat the registered Holder of each Warrant as the
absolute owner thereof for the purpose of any exercise thereof or any
distribution to the Holder thereof, and for all other purposes, and the Company
shall not be affected by the notice to the contrary.
2. Registration of Transfers and Exchanges.
a. The Company shall register, or instruct the Transfer Agent to
register, the transfer of any Warrants in the Warrant Register, upon
surrender of this Warrant Certificate, with the Form of Assignment attached
hereto duly completed and signed, to the Transfer Agent or the Company at
the office specified in or pursuant to Section 3(c). Upon any such
registration of transfer, a new Warrant Certificate, in substantially the
form of this Warrant Certificate ("New Warrants"), evidencing the Warrants
so transferred shall be issued to the transferee and a New Warrant
evidencing the remaining Warrants not so transferred, if any, shall be
issued to the then registered holder thereof.
b. This Warrant Certificate is exchangeable, upon the surrender hereof
by the holder hereof to the Transfer Agent or at the office of the Company
specified in or pursuant to Section 3(c), for New Warrants evidencing in
the aggregate the right to purchase the number of Warrant Shares which may
then be purchased hereunder, each of such New Warrants to be dated the date
of such exchange and to represent the right to purchase such number of
Warrant Shares as shall be designated by said holder hereof at the time of
such surrender.
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<PAGE>
3. Duration and Exercise of Warrants.
a. Warrants shall be exercisable by the registered holder thereof on
any business day before 5:00 P.M., Eastern time, at any time and from time
to time on or after the Initial Exercise Date to and including the
Expiration Date. At 5:00 P.M., Eastern time, on the Expiration Date, each
Warrant not exercised prior thereto shall be and become void and of no
value.
b. Subject to the limitations set forth in Section 3(c) and to the
other provisions of this Warrant Certificate, including adjustments to the
number of Warrant Shares issuable on the exercise of each Warrant and to
the Exercise Price pursuant to Section 3(e) and Section 7, the Holder of
this Warrant shall have the right to purchase from the Company (and the
Company shall be obligated to issue and sell to the Holder) at the Exercise
Price one fully paid Warrant Share which is non-assessable.
c. Subject to Sections 2(b), 4 and 8, upon surrender of this Warrant
Certificate, with the Form of Election to Purchase attached hereto duly
completed and signed, to the Company at its office at 611 Broadway, Suite
308, New York, NY 10012, Attention: James Stokes Hatch, Chief Operating
Officer, or at such other address as the Company may specify in writing to
the then registered Holder of the Warrants, and upon payment of the
Exercise Price multiplied by the number of Warrant Shares then issuable
upon exercise of the Warrants being exercised in lawful money of the United
States of America, all as specified by the Holder of this Warrant
Certificate in the Form of Election to Purchase, the Company shall promptly
issue and cause to be delivered to or upon the written order of the
registered Holder of such Warrants, and in such name or names as such
registered Holder may designate, a certificate for the Warrant Shares
issued upon such exercise of such Warrants, free of restrictive legends
other than legends that may be required in the opinion of the Company's
counsel in the event at such time there is not an effective Registration
Statement as contemplated by the Investment Agreement. Any person so
designated to be named therein shall be deemed to have become Holder of
record of such Warrant Shares as of the Date of Exercise of such Warrants.
The "Date of Exercise" of any Warrant means the date on which the
Transfer Agent or the Company shall have received (i) this Warrant
Certificate (or any New Warrant, as applicable) with the Form of Election
to Purchase attached hereto (or thereto) appropriately completed and duly
signed, and (ii) payment of the Exercise Price for such Warrant.
d. The Warrants evidenced by this Warrant Certificate shall be
exercisable, either as an entirety or, from time to time, for part of the
number of Warrants evidenced by this Warrant Certificate so long as at
least twenty-five hundred (2,500) Warrant Shares are exercised. If less
than all of the Warrants evidenced by this Warrant Certificate are
exercised at any time, the Company shall issue, at its expense, a New
Warrant for the remaining number of Warrants evidenced by this Warrant
Certificate.
e. The Exercise Price shall be subject to reset as follows. In the
event that the Per Share Market Value for the twenty (20) trading days
immediately preceding February 29,
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<PAGE>
2000 (the "Reset Average Price"), the Exercise Price shall be reset to a
price per share of Common Stock equal to seventy-five percent (75%) of the
Reset Average Price. Once reset in accordance with the provisions of this
Section 3(e), the Conversion Price shall remain at the reset Conversion
Price, subject to adjustment in accordance with Section 7, below
4. Payment of Taxes. The Company will pay all documentary stamp taxes
attributable to the issuance of Warrant Shares upon the exercise of the Warrants
represented by this Warrant Certificate; provided, however, that the Company
shall not be required to pay any tax or taxes which may be payable in respect of
any transfer involved in the registration of any certificates for Warrant Shares
in a name other than that of the Holder, and the Company shall not be required
to issue or deliver the certificates for Warrant Shares unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid. The Holder shall be responsible for all
other tax liability that may arise as a result of holding or transferring the
Warrants represented by this Warrant Certificate or receiving the Warrant Shares
under this Warrant Certificate.
5. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or
destroyed, the Company may in its discretion issue in exchange and substitution
for and upon cancellation hereof, or in lieu of and substitution for this
Warrant, a new Warrant of like tenor, but only upon receipt of evidence
reasonably satisfactory to the Company and the Transfer Agent of such loss,
theft or destruction and bond or other indemnity, if requested, satisfactory to
it. Applicants for a substitute Warrant certificate also shall comply with such
other reasonable regulations and pay such other reasonable charges as the
Company may prescribe.
6. Reservation of Warrant Shares. The Company will at all times reserve and
keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued Common Stock or its authorized and issued Common Stock
held in its treasury, for the purpose of enabling it to satisfy any obligation
to issue Warrant Shares upon exercise of the Warrants, a number of shares of
Common Stock equal to at least the maximum number of Warrant Shares (as adjusted
from time to time pursuant to Section 7 hereof) which may then be deliverable
upon the exercise of this Warrant and all other outstanding warrants issued and
sold pursuant to the Investment Agreement. The Company covenants that all
Warrant Shares that shall be so issuable and deliverable shall, upon issuance
thereof, be duly and validly authorized, issued and fully paid, and
nonassessable.
7. Adjustment to the Number of Warrant Shares Issuable. The number of
Warrant Shares issuable upon the exercise of this Warrant is subject to
adjustment from time to time as set forth in Section 3(e) and this Section 7.
Upon each such adjustment of the Exercise Price pursuant to Section 3(e) or this
Section 7, the Holder shall thereafter prior to the Expiration Date be entitled
to purchase, at the Exercise Price resulting from such adjustment, the number of
Warrant Shares obtained by multiplying the Exercise Price in effect immediately
prior to such adjustment by the number of Warrant Shares issuable upon exercise
of this Warrant immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment. In the event the
Company and the holders of the Warrants issued pursuant to the Investment
Agreement that are then outstanding disagree as to any adjustment to the
Exercise
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<PAGE>
Price hereunder, an Appraiser selected by the holders of a majority of the
Warrants issued pursuant to the Investment Agreement that are then outstanding
(the "Majority Holders") shall give its opinion as to the adjustment, if any
(not inconsistent with the standards established in this Section 7), of the
Exercise Price; provided, however that the Company, after receipt of the
determination by such Appraiser, shall have the right to promptly select an
additional Appraiser, in which case the adjustment shall be equal to the average
of the adjustments recommended by each such Appraiser. The Board of Directors
shall make the adjustment recommended forthwith upon the receipt of such opinion
or opinions; provided, however, that no such adjustment of the Exercise Price
shall be made which in the opinion of the Appraiser(s) giving the aforesaid
opinion or opinions would result in an increase of the Exercise Price to more
than the Exercise Price then in effect.
a. If the Company, at any time while this Warrant is outstanding, (i)
shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Junior Securities (as such term is defined
in the Convertible Debentures) payable in shares of its capital stock
(whether payable in shares of its Common Stock or of capital stock of any
class), (ii) subdivide outstanding shares of Common Stock into a larger
number of shares, (iii) combine outstanding shares of Common Stock into a
smaller number of shares, or (iv) issue by reclassification of shares of
Common Stock any shares of capital stock of the Company, the Exercise Price
shall be multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding before such event and of which
the denominator shall be the number of shares of Common Stock outstanding
after such event. Any adjustment made pursuant to this Section 7(a) shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision, combination or reclassification.
b. In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the
sale or transfer of all or substantially all of the assets of the Company
or any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property, then the Holder shall
have the right thereafter to exercise this Warrant only into the shares of
stock and other securities and property receivable upon or deemed to be
held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange, and the Holder
shall be entitled upon such event to receive such amount of securities or
property as the shares of the Common Stock into which this Warrant could
have been converted immediately prior to such reclassification,
consolidation, merger, sale, transfer or share exchange would have been
entitled. The terms of any such consolidation, merger, sale, transfer or
share exchange shall include such terms so as to continue to give to the
Holder the right to receive the securities or property set forth in this
Section 7(c) upon any exercise following such consolidation, merger, sale,
transfer or share exchange. This provision shall similarly apply to
successive reclassifications, consolidations, mergers, sales, transfers or
share exchanges.
c. For the purposes of this Section 7, the following clauses shall
also be applicable:
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<PAGE>
(i) Record Date. In case the Company shall take a record of the
holders of its Common Stock for the purpose of entitling
them (A) to receive a dividend or other distribution payable
in Common Stock or in convertible securities, or (B) to
subscribe for or purchase Common Stock or convertible
securities, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of
such dividend or the making of such other distribution or
the date of the granting of such right of subscription or
purchase, as the case may be.
(ii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned
or held by or for the account of the Company, and the
disposition of any such shares shall be considered an issue
or sale of Common Stock for the purposes of this subsection
(e).
(iii) Certain Issues Excepted. Anything herein to the contrary
notwithstanding, the Company shall not be required to make
any adjustment of any Exercise Price in case of the issuance
of the Preferred Stock, the Warrants, the Underlying Shares
and the Warrant Shares pursuant to the Investment Agreement,
or in the event that the Company shall grant options to
purchase the Company's Common Stock pursuant to a bona fide
employee stock option, stock purchase or non-employee
director plan duly adopted by its shareholders in accordance
with the Investment Agreement or for (i) securities issued
upon the exercise or conversion of any of the Debentures or
exercise of the Warrant issued to Hollinger Digital, Inc., a
Delaware corporation ("Hollinger") under that certain
Securities Investment Agreement dated December 3, 1997
between the Company and Hollinger (the "Hollinger Securities
Purchase Agreement") and modified by an agreement dated the
date hereof between the Company and Hollinger, (ii) any
shares of Common Stock issued pursuant to the exercise of
options, warrants or other securities, options, rights or
securities convertible into or exchangeable for capital
stock of the Company in connection with any stock split,
stock dividend or similar event affecting the Company Common
Stock.
d. If:
i. the Company shall declare a dividend (or any other
distribution) on its Common Stock (other than a
subdivision of the outstanding shares of Common Stock)
or shall authorize a repurchase or redemption or
otherwise enter into any other transaction (including
stock split,
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<PAGE>
recapitalization or other transaction) which would
cause a decrease in the number of its shares of Common
Stock issued and outstanding (other than transactions
that similarly decrease the number of shares of Common
Stock for which this Warrant is exercisable); or
ii. the Company shall declare a special nonrecurring cash
dividend on its then-outstanding Common Stock; or
iii. the Company shall authorize the granting to all holders
of the Common Stock rights or warrants to subscribe for
or purchase any shares of capital stock of any class or
of any rights, or
iv. the approval of any stockholders of the Company shall
be required in connection with any reclassification of
the Common Stock of the Company (other than a
subdivision or combination of the outstanding shares of
Common Stock), any consolidation or merger to which the
Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property, or
v. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding-up of
the affairs of the Company;
then the Company shall cause to be mailed to each Holder at their last
addresses as they shall appear upon the Warrant Register, at least thirty
(30) days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken
for the purpose of such dividend, distribution, repurchase, redemption,
rights or warrants, or if a record is not to be taken, the date as of which
the holders of Common Stock of record to be entitled to such dividend,
distributions, repurchase, redemption, rights or warrants are to be
determined, or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, share exchange, dissolution, liquidation or
winding-up is expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer, share exchange, dissolution, liquidation or winding-up; provided,
however, that the failure to mail such notice or any defect therein or in
the mailing thereof shall not affect the validity of the corporate action
required to be specified in such notice.
e. In any case in which this Section 7 shall require that an
adjustment be made effective as of the record date for a specified event,
the Company may elect to defer until
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<PAGE>
occurrence of such event (A) issuing to the Holder, if this Warrant is
exercised after such record date, the Warrant Shares and other capital
stock of the Company, if any, issuable upon such exercise over and above
the Warrant Shares and other capital stock of the Company, if any, issuable
upon such exercise on the basis of the Exercise Price prior to adjustment
and (B) paying to the Holder any amount in cash in lieu of a fractional
share pursuant to Section 8 hereof, provided, however, that the Company
shall deliver to the Holder a due bill or other appropriate instrument
evidencing the Holder's right to receive such additional Warrant Shares,
other capital stock and/or cash upon the occurrence of the event requiring
such adjustment.
f. Any determination that the Company or the Board of Directors must
make pursuant to this Section 7 shall be conclusive if made in good faith.
g. If at any time conditions shall arise by reason of action taken by
the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might
materially affect the rights of the Holders (different than or
distinguished from the effect generally on rights of holders of any class
of the Company's capital stock) or if at any time such conditions are
expected to arise by reason of any action contemplated by the Company, the
Company shall mail a written notice briefly describing the action
contemplated and the material adverse effects of such action on the rights
of the Holders at least 30 calendar days prior to the effective date of
such action, and an Appraiser selected by the Holders of majority in
interest of the Warrants shall give its opinion as to the adjustment, if
any (not inconsistent with the standards established in Section 7(e)), of
the Exercise Price (including, if necessary, any adjustment as to the
Warrant Shares to be purchased upon exercise of this Warrant) and any
distribution which is or would be required to be preserved without diluting
the rights of the Holders.
8. Fractional Shares. The Company shall not be required to issue fractional
Warrant Shares on the exercise of this Warrant. The number of full Warrant
Shares which shall be issuable upon the exercise of this Warrant shall be
computed on the basis of the aggregate number of Warrant Shares purchasable on
exercise of this Warrant so presented. If any fraction of a Warrant Share would,
except for the provisions of this Section 8, be issuable on the exercise of this
Warrant, the Company shall, at its option (a) pay an amount in cash equal to the
Exercise Price multiplied by such fraction or (b) shall round the number of
Warrant Shares issuable, up to the next whole number of such shares.
9. Warrant Agent.
a. The Company shall serve as warrant agent under this Warrant. Upon
thirty (30) days' notice to the holders of Warrants issued pursuant to the
Investment Agreement, the Company and the Majority Holders may appoint a
new warrant agent.
b. Any corporation into which the Company or any new warrant agent may
be merged or any corporation resulting from any consolidation to which the
Company or any new warrant agent shall be a party or any corporation to
which the Company or any new warrant agent transfers substantially all of
its corporate trust or shareholders services business shall be a successor
warrant agent under this Warrant without any further act. Any such
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successor warrant agent shall promptly cause notice of its succession as
warrant agent to be mailed (by first class mail, postage prepaid) to the
Holder at the Holder's last address as shown on the register maintained by
the warrant agent pursuant to this Warrant.
10. Notices. All notices or other communications hereunder shall be given,
and shall be deemed duly given and received if given, by facsimile and by mail,
postage prepaid: (1) if to the Company, addressed as follows: American
Interactive Media, Inc., 611 Broadway, Suite 308, New York, NY 10012, Attention:
Jmes Stokes Hatch, Chief Operating Officer, or to facsimile no. (212) 358-8380;
or (ii) if to the Holder, addressed to the Holder at the facsimile telephone
number and address of the Holder appearing on the Warrant Register or such other
address or facsimile number as the Holder may provide to the Company in
accordance with this Section 10. Any such notice shall be deemed given and
effective upon the earliest to occur of (i) receipt of such facsimile at the
facsimile telephone number specified in this Section 10, (ii) five (5) Business
Days after deposit in the United States mails or (iii) upon actual receipt by
the party to whom such notice is required to be given.
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11. Miscellaneous.
a. This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and assigns (provided that
the Company's obligation to a transferee of this Warrant arises only if
such transfer is made in accordance with the terms of the Investment
Agreement and the transferee agrees to be bound by the terms of the
Investment Agreement and the other Documents executed in connection
therewith).
b. Subject to Section 11(a) above, nothing in this Warrant shall be
construed to give to any person or corporation other than the Company, the
Holder and any registered holder of Warrant Shares any legal or equitable
right, remedy or cause under this Warrant; this Warrant shall be for the
sole and exclusive benefit of the Company, the Holder and any other
registered holder of Warrant Shares.
c. This Warrant shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York without regard
to the principles of conflicts of law thereof.
d. The headings herein are for convenience only, do not constitute a
part of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.
e. In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of
the remaining terms and provisions of this Warrant shall not in any way be
affected or impaired thereby and the parties will attempt in good faith to
agree upon a valid and enforceable provision which shall be a commercially
reasonable substitute therefor, and upon so agreeing, shall incorporate
such substitute provision in this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
by its authorized officer as of the date first indicated above.
AMERICAN INTERACTIVE MEDIA, INC.
By: ________________________________
Name:_______________________________
Title: _____________________________
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FORM OF ELECTION TO PURCHASE
(To Be Executed by the Holder if the Holder Desires to Exercise Warrants
Evidenced by the Foregoing Warrant Certificate)
To American Interactive Media, Inc.:
The undersigned hereby irrevocably elects to exercise __________________
Warrants evidenced by the foregoing Warrant Certificate for, and to purchase
thereunder, __________________ full shares of Common Stock issuable upon
exercise of said Warrants and delivery of $__________ in cash and any applicable
taxes payable by the undersigned pursuant to such Warrant Certificate.
The undersigned requests that certificates for such shares be issued in the
name of
PLEASE INSERT SOCIAL SECURITY OR TAX
IDENTIFICATION NUMBER
______________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
If said number of Warrants shall not be all the Warrants evidenced by the
foregoing Warrant Certificate, the undersigned requests that a new Warrant
Certificate evidencing the Warrants not so exercise be issued in the name of and
delivered to:
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
Dated: ______________, 19__ Name of Holder:
(Print) ______________________________
(By:) ________________________________
(Title:) _____________________________
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FORM OF ASSIGNMENT
FOR VALUE RECEIVED, ______________________ hereby sells, assigns, and
transfers to each assignee set forth below all of the rights of the undersigned
in and to the number of Warrants (as defined in and evidenced by the foregoing
Warrant Certificate) set opposite the name of such assignee below and in and to
the foregoing Warrant Certificate with respect to said Warrants and the shares
of Common Stock issuable upon exercise of said Warrants:
Name of Assignee Address Number of Warrants
If the total of said Warrants shall not be all the Warrants evidenced by
the foregoing Warrant Certificate, the undersigned requests that a new Warrant
Certificate evidencing the Warrants not so assigned be issued in the name of and
delivered to the undersigned.
Dated: ______________, 19__ Name of Holder:
(Print) ______________________________
(By:) ________________________________
(Title:) _____________________________
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THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE UNDERLYING 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 OR
BLUE SKY LAWS OF ANY STATE. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO DISTRIBUTION, AND NEITHER THESE SECURITIES NOR ANY
INTEREST OR PARTICIPATION THEREIN MAY BE SOLD, ASSIGNED OR IN ANY OTHER MANNER
TRANSFERRED OR DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM
THE REGISTRATION REQUIREMENTS THEREOF AND IN COMPLIANCE WITH APPLICABLE STATE
SECURITIES OR BLUE SKY LAWS.
AMERICAN INTERACTIVE MEDIA, INC.
WARRANT CERTIFICATE No. PV-2
Dated November 16, 1998
Warrants to Purchase Common Stock
AMERICAN INTERACTIVE MEDIA, INC., a Delaware corporation (the "Company"),
hereby certifies that, for value received, Ventures Management Partners LLC
("Holder"), or its registered assigns, is the registered owner of five hundred
thousand (500,000) Warrants (the "Warrants"), each of which will entitle the
Holder thereof to purchase one share, as adjusted from time to time as provided
in Section 7, of the Common Stock, par value $.001 per share, of the Company
(the "Common Stock", each such share being a "Warrant Share" and all such shares
being the "Warrant Shares") at the exercise price of Three Dollars and Fifty-Two
Cents ($3.52) per share (as adjusted from time to time as provided in Section
3(e) or Section 7, the "Exercise Price") at any time on or after the date hereof
(the "Initial Exercise Date") until and including November 15, 2003 (the
"Expiration Date"), all subject to the following terms and conditions.
This Warrant is being issued and delivered pursuant to that certain
Investment Agreement between the Company and the Pioneer Ventures Associates
Limited Partnership (the "Investment Agreement"). Capitalized terms used and not
otherwise defined herein shall have the meanings given such terms in the
Investment Agreement.
For purposes of calculating the Exercise Price, the following definitions
shall apply:
"Per Share Market Value" means on any particular date (a) the closing bid
price per share of the Common Stock on such date on the Nasdaq National Market
or other stock exchange on which the Common Stock is then listed, as reported on
Bloomberg, L.P. or if there is no such bid price on such date, then the last
closing bid price on such exchange on the date nearest preceding such date, as
reported on Bloomberg, L.P., or (b) if the Common Stock is not listed on the
<PAGE>
Nasdaq National Market or any stock exchange, the closing bid price for a share
of Common Stock on such date on the Nasdaq SmallCap Market or the OTC Bulletin
Board, as reported on Bloomberg, L.P. (or similar organization or agency
succeeding to its functions of reporting prices), or (c) if the Common Stock is
no longer reported on Bloomberg, L.P. (or similar organization or agency
succeeding to its functions of reporting prices), then the average of the "Pink
Sheet" bids on such date, or (d) if the Common Stock is no longer publicly
traded, the fair market value of a share of Common Stock as determined by an
Appraiser (as defined below) selected in good faith by the Holder; provided,
however, that the Company, after receipt of the determination by such Appraiser,
shall have the right to select an additional Appraiser, in which case, the fair
market value shall be equal to the average of the determinations by each such
Appraiser.
"Trading Day" means (a) a day on which the Common Stock is traded on the
Nasdaq National Market or Nasdaq SmallCap Market or principal national
securities exchange or market on which the Common Stock has been listed or
quoted, or (b) if the Common Stock is not listed or quoted on the Nasdaq
National Market or Nasdaq SmallCap Market or any principal national securities
exchange or market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices).
1. Registration of Warrants. The Company shall register each Warrant, upon
records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder of such Warrant from time to time.
The Company may deem and treat the registered Holder of each Warrant as the
absolute owner thereof for the purpose of any exercise thereof or any
distribution to the Holder thereof, and for all other purposes, and the Company
shall not be affected by the notice to the contrary.
2. Registration of Transfers and Exchanges.
a. The Company shall register, or instruct the Transfer Agent to
register, the transfer of any Warrants in the Warrant Register, upon
surrender of this Warrant Certificate, with the Form of Assignment attached
hereto duly completed and signed, to the Transfer Agent or the Company at
the office specified in or pursuant to Section 3(c). Upon any such
registration of transfer, a new Warrant Certificate, in substantially the
form of this Warrant Certificate ("New Warrants"), evidencing the Warrants
so transferred shall be issued to the transferee and a New Warrant
evidencing the remaining Warrants not so transferred, if any, shall be
issued to the then registered holder thereof.
b. This Warrant Certificate is exchangeable, upon the surrender hereof
by the holder hereof to the Transfer Agent or at the office of the Company
specified in or pursuant to Section 3(c), for New Warrants evidencing in
the aggregate the right to purchase the number of Warrant Shares which may
then be purchased hereunder, each of such New Warrants to be dated the date
of such exchange and to represent the right to purchase such number of
Warrant Shares as shall be designated by said holder hereof at the time of
such surrender.
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<PAGE>
3. Duration and Exercise of Warrants.
a. Warrants shall be exercisable by the registered holder thereof on
any business day before 5:00 P.M., Eastern time, at any time and from time
to time on or after the Initial Exercise Date to and including the
Expiration Date. At 5:00 P.M., Eastern time, on the Expiration Date, each
Warrant not exercised prior thereto shall be and become void and of no
value.
b. Subject to the limitations set forth in Section 3(c) and to the
other provisions of this Warrant Certificate, including adjustments to the
number of Warrant Shares issuable on the exercise of each Warrant and to
the Exercise Price pursuant to Section 3(e) and Section 7, the Holder of
this Warrant shall have the right to purchase from the Company (and the
Company shall be obligated to issue and sell to the Holder) at the Exercise
Price one fully paid Warrant Share which is non-assessable.
c. Subject to Sections 2(b), 4 and 8, upon surrender of this Warrant
Certificate, with the Form of Election to Purchase attached hereto duly
completed and signed, to the Company at its office at 611 Broadway, Suite
308, New York, NY 10012, Attention: James Stokes Hatch, Chief Operating
Officer, or at such other address as the Company may specify in writing to
the then registered Holder of the Warrants, and upon payment of the
Exercise Price multiplied by the number of Warrant Shares then issuable
upon exercise of the Warrants being exercised in lawful money of the United
States of America, all as specified by the Holder of this Warrant
Certificate in the Form of Election to Purchase, the Company shall promptly
issue and cause to be delivered to or upon the written order of the
registered Holder of such Warrants, and in such name or names as such
registered Holder may designate, a certificate for the Warrant Shares
issued upon such exercise of such Warrants, free of restrictive legends
other than legends that may be required in the opinion of the Company's
counsel in the event at such time there is not an effective Registration
Statement as contemplated by the Investment Agreement. Any person so
designated to be named therein shall be deemed to have become Holder of
record of such Warrant Shares as of the Date of Exercise of such Warrants.
The "Date of Exercise" of any Warrant means the date on which the
Transfer Agent or the Company shall have received (i) this Warrant
Certificate (or any New Warrant, as applicable) with the Form of Election
to Purchase attached hereto (or thereto) appropriately completed and duly
signed, and (ii) payment of the Exercise Price for such Warrant.
d. The Warrants evidenced by this Warrant Certificate shall be
exercisable, either as an entirety or, from time to time, for part of the
number of Warrants evidenced by this Warrant Certificate so long as at
least twenty-five hundred (2,500) Warrant Shares are exercised. If less
than all of the Warrants evidenced by this Warrant Certificate are
exercised at any time, the Company shall issue, at its expense, a New
Warrant for the remaining number of Warrants evidenced by this Warrant
Certificate.
e. The Exercise Price shall be subject to reset as follows. In the
event that the Per Share Market Value for the twenty (20) trading days
immediately preceding February 29, 2000 (the "Reset Average Price"), the
Exercise Price shall be reset to a price per share of Common Stock equal to
seventy-five percent (75%) of the Reset Average Price. Once reset in
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accordance with the provisions of this Section 3(e), the Conversion Price
shall remain at the reset Conversion Price, subject to adjustment in
accordance with Section 7, below
4. Payment of Taxes. The Company will pay all documentary stamp taxes
attributable to the issuance of Warrant Shares upon the exercise of the Warrants
represented by this Warrant Certificate; provided, however, that the Company
shall not be required to pay any tax or taxes which may be payable in respect of
any transfer involved in the registration of any certificates for Warrant Shares
in a name other than that of the Holder, and the Company shall not be required
to issue or deliver the certificates for Warrant Shares unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid. The Holder shall be responsible for all
other tax liability that may arise as a result of holding or transferring the
Warrants represented by this Warrant Certificate or receiving the Warrant Shares
under this Warrant Certificate.
5. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or
destroyed, the Company may in its discretion issue in exchange and substitution
for and upon cancellation hereof, or in lieu of and substitution for this
Warrant, a new Warrant of like tenor, but only upon receipt of evidence
reasonably satisfactory to the Company and the Transfer Agent of such loss,
theft or destruction and bond or other indemnity, if requested, satisfactory to
it. Applicants for a substitute Warrant certificate also shall comply with such
other reasonable regulations and pay such other reasonable charges as the
Company may prescribe.
6. Reservation of Warrant Shares. The Company will at all times reserve and
keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued Common Stock or its authorized and issued Common Stock
held in its treasury, for the purpose of enabling it to satisfy any obligation
to issue Warrant Shares upon exercise of the Warrants, a number of shares of
Common Stock equal to at least the maximum number of Warrant Shares (as adjusted
from time to time pursuant to Section 7 hereof) which may then be deliverable
upon the exercise of this Warrant and all other outstanding warrants issued and
sold pursuant to the Investment Agreement. The Company covenants that all
Warrant Shares that shall be so issuable and deliverable shall, upon issuance
thereof, be duly and validly authorized, issued and fully paid, and
nonassessable.
7. Adjustment to the Number of Warrant Shares Issuable. The number of
Warrant Shares issuable upon the exercise of this Warrant is subject to
adjustment from time to time as set forth in Section 3(e) and this Section 7.
Upon each such adjustment of the Exercise Price pursuant to Section 3(e) or this
Section 7, the Holder shall thereafter prior to the Expiration Date be entitled
to purchase, at the Exercise Price resulting from such adjustment, the number of
Warrant Shares obtained by multiplying the Exercise Price in effect immediately
prior to such adjustment by the number of Warrant Shares issuable upon exercise
of this Warrant immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment. In the event the
Company and the holders of the Warrants issued pursuant to the Investment
Agreement that are then outstanding disagree as to any adjustment to the
Exercise Price hereunder, an Appraiser selected by the holders of a majority of
the Warrants issued pursuant to the Investment Agreement that are then
outstanding (the "Majority Holders") shall
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<PAGE>
give its opinion as to the adjustment, if any (not inconsistent with the
standards established in this Section 7), of the Exercise Price; provided,
however that the Company, after receipt of the determination by such Appraiser,
shall have the right to promptly select an additional Appraiser, in which case
the adjustment shall be equal to the average of the adjustments recommended by
each such Appraiser. The Board of Directors shall make the adjustment
recommended forthwith upon the receipt of such opinion or opinions; provided,
however, that no such adjustment of the Exercise Price shall be made which in
the opinion of the Appraiser(s) giving the aforesaid opinion or opinions would
result in an increase of the Exercise Price to more than the Exercise Price then
in effect.
a. If the Company, at any time while this Warrant is outstanding, (i)
shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Junior Securities (as such term is defined
in the Convertible Debentures) payable in shares of its capital stock
(whether payable in shares of its Common Stock or of capital stock of any
class), (ii) subdivide outstanding shares of Common Stock into a larger
number of shares, (iii) combine outstanding shares of Common Stock into a
smaller number of shares, or (iv) issue by reclassification of shares of
Common Stock any shares of capital stock of the Company, the Exercise Price
shall be multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding before such event and of which
the denominator shall be the number of shares of Common Stock outstanding
after such event. Any adjustment made pursuant to this Section 7(a) shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision, combination or reclassification.
b. In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the
sale or transfer of all or substantially all of the assets of the Company
or any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property, then the Holder shall
have the right thereafter to exercise this Warrant only into the shares of
stock and other securities and property receivable upon or deemed to be
held by holders of Common Stock following such reclassification,
consolidation, merger, sale, transfer or share exchange, and the Holder
shall be entitled upon such event to receive such amount of securities or
property as the shares of the Common Stock into which this Warrant could
have been converted immediately prior to such reclassification,
consolidation, merger, sale, transfer or share exchange would have been
entitled. The terms of any such consolidation, merger, sale, transfer or
share exchange shall include such terms so as to continue to give to the
Holder the right to receive the securities or property set forth in this
Section 7(c) upon any exercise following such consolidation, merger, sale,
transfer or share exchange. This provision shall similarly apply to
successive reclassifications, consolidations, mergers, sales, transfers or
share exchanges.
c. For the purposes of this Section 7, the following clauses shall
also be applicable:
(i) Record Date. In case the Company shall take a record of the
holders of its Common Stock for the purpose of entitling
them (A)
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to receive a dividend or other distribution payable in
Common Stock or in convertible securities, or (B) to
subscribe for or purchase Common Stock or convertible
securities, then such record date shall be deemed to be the
date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of
such dividend or the making of such other distribution or
the date of the granting of such right of subscription or
purchase, as the case may be.
(ii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned
or held by or for the account of the Company, and the
disposition of any such shares shall be considered an issue
or sale of Common Stock for the purposes of this subsection
(e).
(iii) Certain Issues Excepted. Anything herein to the contrary
notwithstanding, the Company shall not be required to make
any adjustment of any Exercise Price in case of the issuance
of the Preferred Stock, the Warrants, the Underlying Shares
and the Warrant Shares pursuant to the Investment Agreement,
or in the event that the Company shall grant options to
purchase the Company's Common Stock pursuant to a bona fide
employee stock option, stock purchase or non-employee
director plan duly adopted by its shareholders in accordance
with the Investment Agreement or for (i) securities issued
upon the exercise or conversion of any of the Debentures or
exercise of the Warrant issued to Hollinger Digital, Inc., a
Delaware corporation ("Hollinger") under that certain
Securities Investment Agreement dated December 3, 1997
between the Company and Hollinger (the "Hollinger Securities
Purchase Agreement") and modified by an agreement dated the
date hereof between the Company and Hollinger, (ii) any
shares of Common Stock issued pursuant to the exercise of
options, warrants or other securities, options, rights or
securities convertible into or exchangeable for capital
stock of the Company in connection with any stock split,
stock dividend or similar event affecting the Company Common
Stock.
d. If:
i. the Company shall declare a dividend (or any other
distribution) on its Common Stock (other than a
subdivision of the outstanding shares of Common Stock)
or shall authorize a repurchase or redemption or
otherwise enter into any other transaction (including
stock split, recapitalization or other transaction)
which would cause a decrease in the number of its
shares of Common Stock
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issued and outstanding (other than transactions that
similarly decrease the number of shares of Common Stock
for which this Warrant is exercisable); or
ii. the Company shall declare a special nonrecurring cash
dividend on its then-outstanding Common Stock; or
iii. the Company shall authorize the granting to all holders
of the Common Stock rights or warrants to subscribe for
or purchase any shares of capital stock of any class or
of any rights, or
iv. the approval of any stockholders of the Company shall
be required in connection with any reclassification of
the Common Stock of the Company (other than a
subdivision or combination of the outstanding shares of
Common Stock), any consolidation or merger to which the
Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property, or
v. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding-up of
the affairs of the Company;
then the Company shall cause to be mailed to each Holder at their last
addresses as they shall appear upon the Warrant Register, at least thirty
(30) days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken
for the purpose of such dividend, distribution, repurchase, redemption,
rights or warrants, or if a record is not to be taken, the date as of which
the holders of Common Stock of record to be entitled to such dividend,
distributions, repurchase, redemption, rights or warrants are to be
determined, or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, share exchange, dissolution, liquidation or
winding-up is expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer, share exchange, dissolution, liquidation or winding-up; provided,
however, that the failure to mail such notice or any defect therein or in
the mailing thereof shall not affect the validity of the corporate action
required to be specified in such notice.
e. In any case in which this Section 7 shall require that an
adjustment be made effective as of the record date for a specified event,
the Company may elect to defer until occurrence of such event (A) issuing
to the Holder, if this Warrant is exercised after such record date, the
Warrant Shares and other capital stock of the Company, if any, issuable
upon such exercise over and above the Warrant Shares and other capital
stock of the Company, if any, issuable upon such
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exercise on the basis of the Exercise Price prior to adjustment and (B)
paying to the Holder any amount in cash in lieu of a fractional share
pursuant to Section 8 hereof, provided, however, that the Company shall
deliver to the Holder a due bill or other appropriate instrument evidencing
the Holder's right to receive such additional Warrant Shares, other capital
stock and/or cash upon the occurrence of the event requiring such
adjustment.
f. Any determination that the Company or the Board of Directors must
make pursuant to this Section 7 shall be conclusive if made in good faith.
g. If at any time conditions shall arise by reason of action taken by
the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might
materially affect the rights of the Holders (different than or
distinguished from the effect generally on rights of holders of any class
of the Company's capital stock) or if at any time such conditions are
expected to arise by reason of any action contemplated by the Company, the
Company shall mail a written notice briefly describing the action
contemplated and the material adverse effects of such action on the rights
of the Holders at least 30 calendar days prior to the effective date of
such action, and an Appraiser selected by the Holders of majority in
interest of the Warrants shall give its opinion as to the adjustment, if
any (not inconsistent with the standards established in Section 7(e)), of
the Exercise Price (including, if necessary, any adjustment as to the
Warrant Shares to be purchased upon exercise of this Warrant) and any
distribution which is or would be required to be preserved without diluting
the rights of the Holders.
8. Fractional Shares. The Company shall not be required to issue fractional
Warrant Shares on the exercise of this Warrant. The number of full Warrant
Shares which shall be issuable upon the exercise of this Warrant shall be
computed on the basis of the aggregate number of Warrant Shares purchasable on
exercise of this Warrant so presented. If any fraction of a Warrant Share would,
except for the provisions of this Section 8, be issuable on the exercise of this
Warrant, the Company shall, at its option (a) pay an amount in cash equal to the
Exercise Price multiplied by such fraction or (b) shall round the number of
Warrant Shares issuable, up to the next whole number of such shares.
9. Warrant Agent.
a. The Company shall serve as warrant agent under this Warrant. Upon
thirty (30) days' notice to the holders of Warrants issued pursuant to the
Investment Agreement, the Company and the Majority Holders may appoint a
new warrant agent.
b. Any corporation into which the Company or any new warrant agent may
be merged or any corporation resulting from any consolidation to which the
Company or any new warrant agent shall be a party or any corporation to
which the Company or any new warrant agent transfers substantially all of
its corporate trust or shareholders services business shall be a successor
warrant agent under this Warrant without any further act. Any such
successor warrant agent shall promptly cause notice of its succession as
warrant agent to be mailed (by first class
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mail, postage prepaid) to the Holder at the Holder's last address as shown
on the register maintained by the warrant agent pursuant to this Warrant.
10. Notices. All notices or other communications hereunder shall be given,
and shall be deemed duly given and received if given, by facsimile and by mail,
postage prepaid: (1) if to the Company, addressed as follows: American
Interactive Media, Inc., 611 Broadway, Suite 308, New York, NY 10012, Attention:
Jmes Stokes Hatch, Chief Operating Officer, or to facsimile no. (212) 358-8380;
or (ii) if to the Holder, addressed to the Holder at the facsimile telephone
number and address of the Holder appearing on the Warrant Register or such other
address or facsimile number as the Holder may provide to the Company in
accordance with this Section 10. Any such notice shall be deemed given and
effective upon the earliest to occur of (i) receipt of such facsimile at the
facsimile telephone number specified in this Section 10, (ii) five (5) Business
Days after deposit in the United States mails or (iii) upon actual receipt by
the party to whom such notice is required to be given.
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11. Miscellaneous.
a. This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and assigns (provided that
the Company's obligation to a transferee of this Warrant arises only if
such transfer is made in accordance with the terms of the Investment
Agreement and the transferee agrees to be bound by the terms of the
Investment Agreement and the other Documents executed in connection
therewith).
b. Subject to Section 11(a) above, nothing in this Warrant shall be
construed to give to any person or corporation other than the Company, the
Holder and any registered holder of Warrant Shares any legal or equitable
right, remedy or cause under this Warrant; this Warrant shall be for the
sole and exclusive benefit of the Company, the Holder and any other
registered holder of Warrant Shares.
c. This Warrant shall be governed by and construed and enforced in
accordance with the internal laws of the State of New York without regard
to the principles of conflicts of law thereof.
d. The headings herein are for convenience only, do not constitute a
part of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.
e. In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of
the remaining terms and provisions of this Warrant shall not in any way be
affected or impaired thereby and the parties will attempt in good faith to
agree upon a valid and enforceable provision which shall be a commercially
reasonable substitute therefor, and upon so agreeing, shall incorporate
such substitute provision in this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
by its authorized officer as of the date first indicated above.
AMERICAN INTERACTIVE MEDIA, INC.
By: ________________________________
Name: ______________________________
Title: ____________________________
-10-
<PAGE>
FORM OF ELECTION TO PURCHASE
(To Be Executed by the Holder if the Holder Desires to Exercise Warrants
Evidenced by the Foregoing Warrant Certificate)
To American Interactive Media, Inc.:
The undersigned hereby irrevocably elects to exercise __________________
Warrants evidenced by the foregoing Warrant Certificate for, and to purchase
thereunder, __________________ full shares of Common Stock issuable upon
exercise of said Warrants and delivery of $__________ in cash and any applicable
taxes payable by the undersigned pursuant to such Warrant Certificate.
The undersigned requests that certificates for such shares be issued in the
name of
PLEASE INSERT SOCIAL SECURITY OR TAX
IDENTIFICATION NUMBER
______________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
If said number of Warrants shall not be all the Warrants evidenced by the
foregoing Warrant Certificate, the undersigned requests that a new Warrant
Certificate evidencing the Warrants not so exercise be issued in the name of and
delivered to:
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
Dated: ______________, 19__ Name of Holder:
(Print) ______________________________
(By:) ________________________________
(Title:) _____________________________
-11-
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, _____________________ hereby sells, assigns, and
transfers to each assignee set forth below all of the rights of the undersigned
in and to the number of Warrants (as defined in and evidenced by the foregoing
Warrant Certificate) set opposite the name of such assignee below and in and to
the foregoing Warrant Certificate with respect to said Warrants and the shares
of Common Stock issuable upon exercise of said Warrants:
Name of Assignee Address Number of Warrants
If the total of said Warrants shall not be all the Warrants evidenced by
the foregoing Warrant Certificate, the undersigned requests that a new Warrant
Certificate evidencing the Warrants not so assigned be issued in the name of and
delivered to the undersigned.
Dated: ______________, 19__ Name of Holder:
(Print) ______________________________
(By:) ________________________________
(Title:) _____________________________
-12-
Exhibit 16.1
May 14, 1999
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously principal accountants for American Interactive Media, Inc.
and we reported on the consolidated balance sheet of American Interactive Media,
Inc. and subsidiaries as of December 31, 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for the year ended
December 31, 1996. On October 10, 1997, our appointment as principal accountants
was terminated. We have read American Interactive Media, Inc.'s statements
included under Item 14 of its Registration Statement on Form 10, dated May 14,
1999, and we agree with such statements, except that we are not in a position to
agree or disagree with American Interactive Media, Inc.'s statements that the
change was approved by the Board of Directors, and we are not in a position to
agree or disagree with American Interactive Media, Inc.'s. statement that KPMG
LLP was not engaged regarding the application of accounting principles to a
specified transaction or the type of audit opinion that might be rendered on
American Interactive Media, Inc.'s financial statements.
Very truly yours,
/s/ Schiffman Hughes Brown
Schiffman Hughes Brown
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AMERICAN
INTERACTIVE MEDIA, INC. FORM 10 FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,617,756
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,634,506
<PP&E> 1,767,659
<DEPRECIATION> 570,372
<TOTAL-ASSETS> 6,301,323
<CURRENT-LIABILITIES> 1,446,334
<BONDS> 8,312,093
0
10,163
<COMMON> 16,359
<OTHER-SE> (2,037,292)
<TOTAL-LIABILITY-AND-EQUITY> 6,301,323
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,531,706
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 497,797
<INCOME-PRETAX> (6,995,292)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 13,133,230
<EXTRAORDINARY> 15,749,817
<CHANGES> 0
<NET-INCOME> (35,878,339)
<EPS-PRIMARY> (2.55)
<EPS-DILUTED> (2.55)
</TABLE>
