Exhibit 4a
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WARRANT AGREEMENT
THIS WARRANT AND THE SHARES OF CLASS A COMMON STOCK ISSUABLE UPON EXERCISE
THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS THERE IS (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT RELATED THERETO, (ii) AN OPINION
OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER(S) FROM THE
APPROPRIATE GOVERNMENTAL AUTHORITY(IES), OR (iv) UNLESS PURSUANT TO AN EXEMPTION
THEREFROM UNDER RULE 144 (OR ANY SUCCESSOR PROVISION) OF THE ACT.
VIDEO UPDATE, INC.
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WARRANT TO PURCHASE [___________] SHARES
OF CLASS A COMMON STOCK
VIDEO UPDATE, INC., a Delaware corporation (the "Company"), hereby certifies
that, for value received, [USBL AND RAVICH] (the "Initial Holder"), or its
registered transferees, successors or assigns (collectively, together with the
Initial Holder, the "holder"), is the registered holder of warrants (the
"Warrants") to subscribe for and purchase [___________________________
(_________)] shares of the fully paid and nonassessable Class A Common Stock (as
adjusted pursuant to Section 4 hereof, the "Warrant Shares") of the Company, at
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a purchase price per share equal to $0.8719 (such price, as adjusted pursuant to
Section 4 hereof, the "Warrant Price"), subject to the provisions and upon the
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terms and conditions hereinafter set forth. As used herein, (a) the term
"Common Stock" shall mean the Company's presently authorized Class A Common
Stock, par value $.01 per share, and any stock into or for which such Class A
Common Stock may hereafter be converted or exchanged, and (b) the term "Date of
Grant" shall mean June __, 1999. The term "Warrant" as used herein shall be
deemed to include any warrant issued upon transfer or partial exercise of this
Warrant, unless the context clearly requires otherwise. This Warrant is being
issued pursuant to (i) that certain Seventh Amendment and Waiver (the
"Amendment") of even date herewith by and among the Company, the persons or
institutions named as Banks on Schedule I to such Amendment, and Paribas, as
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Agent, and (ii) that certain Engagement Letter, by and between the Company and
U.S. Bancorp Libra, a division of U.S. Bancorp Investments, Inc., a Minnesota
corporation ("USBL"). The holders are entitled to the benefits of the
Registration Rights Agreement (the "Registration Rights Agreement") of even date
herewith by and among the Company and the investors name therein (each an
"Investor"). This Warrant, together with other similar warrants
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issued to the other Investors as of the date hereof, are referred to herein as
the "Investor Warrants".
1. Term. The purchase right represented by this Warrant is exercisable,
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in whole or in part, at any time and from time to time from the Date of Grant
through and including the close of business on June 16, 2006 (the "Expiration
Date"); provided, however, that in the event that any portion of this Warrant is
unexercised as of the Expiration Date, the terms of Section 2(b) below shall
apply.
2. Exercise.
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a. Method of Exercise; Payment; Issuance of New Warrant. Subject to
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Section 1 hereof, the purchase right represented by this Warrant may be
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exercised by the holder hereof, in whole or in part and from time to time, by
the surrender of this Warrant (with the notice of exercise form attached hereto
as Exhibit A duly executed) at the principal office of the Company, and, except
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as otherwise provided for herein, by the payment to the Company of an amount
equal to the then applicable Warrant Price multiplied by the number of Warrant
Shares then being purchased (the "Warrant Shares Purchase Price"). The Warrant
Shares Purchase Price shall be payable (i) in cash, or (ii) by cancellation of
such amount of loans made pursuant to the Amendment in a principal amount plus
accrued interest thereon equal to the Warrant Shares Purchase Price. The person
or persons in whose name(s) any certificate(s) representing shares of Common
Stock shall be issuable upon exercise of this Warrant shall be deemed to have
become the holder(s) of record of, and shall be treated for all purposes as the
record holder(s) of, the shares represented thereby (and such shares shall be
deemed to have been issued) immediately prior to the close of business on the
date or dates upon which this Warrant is exercised if exercised prior to the
close of business on such date; otherwise, the date of record shall be the next
business day. In the event of any exercise of the rights represented by this
Warrant, certificates for the shares of Common Stock so purchased shall be
delivered to the holder hereof as soon as possible and in any event within
thirty (30) days after such exercise and, unless this Warrant has been fully
exercised (including without limitation, exercise pursuant to Section 2(b)
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below), a new Warrant representing the portion of the Warrant Shares, if any,
with respect to which this Warrant shall not then have been exercised shall also
be issued to the holder hereof as soon as possible and in any event within such
thirty (30)-day period.
Notwithstanding any other provision of this Warrant, this Warrant may
only be exercised, fully or partially, if (i) the total number of shares of
Common Stock held by USBL, aggregated with any shares of Common Stock held by
any affiliate of USBL, and after giving effect to the proposed exercise, shall
be less than 5.00% of the total shares of Common Stock outstanding immediately
after such conversion; or (ii) a change in federal law permits a registered bank
holding company and its affiliates to acquire in excess of 5.00% of the voting
shares of the Company. For purposes of calculating the total number of shares
of Common Stock held by USBL or its affiliates, shares of Common Stock
previously held by USBL or its affiliates shall be added to the sum of shares
currently held by USBL and its affiliates unless those shares were sold through
a widely dispersed public offering, sales in the public secondary market or
through a private placement in which no purchaser acquired, individually or in
concert
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with others, more than 2% of the shares of Common Stock then outstanding. No
Default Event (as defined below) shall be triggered as a result of the inability
of USBL to exercise any portion of this Warrant pursuant to this paragraph. Upon
an automatic exercise as contemplated in Section 2(b) below, if, as a result of
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this paragraph, the Warrant may not be exercised in full, then this Warrant
shall be deemed to be exercised partially in such maximum amount that would
comply with this paragraph.
b. Automatic Exercise. In the event that any portion of this Warrant
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remains unexercised as of the Expiration Date and the fair market value
(determined in accordance with Section 4(h) below) of one share of Common Stock
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as of the Expiration Date is greater than the applicable Warrant Price as of the
Expiration Date, then this Warrant shall be deemed to have been exercised
automatically immediately prior to the close of business on the Expiration Date
(or, in the event that the Expiration Date is not a business day, the
immediately preceding business day) (the "Automatic Exercise Date"), and the
person entitled to receive the shares of Common Stock issuable upon such
exercise shall be treated for all purposes as the holder of record of such
Warrant Shares as of the close of business on such Automatic Exercise Date.
This Warrant shall be deemed to be surrendered to the Company on the Automatic
Exercise Date by virtue of this Section 2(b) and without any action by the
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holder of this Warrant or any other person, and payment to the Company of the
then applicable Warrant Price multiplied by the number of Warrant Shares then
being purchased shall be deemed to be made as of the Automatic Exercise Date
pursuant to the conversion provisions of Section 2(c) below (without payment by
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the holder of any cash exercise price). As promptly as practicable on or after
the Automatic Exercise Date and in any event within thirty (30) days thereafter,
the Company at its expense shall issue and deliver to the person or persons
entitled to receive the same a certificate or certificates for the number of
Warrant Shares issuable upon such exercise.
c. Cashless Right to Convert Warrant into Common Stock; Net Issuance.
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(1) Right to Convert. In addition to and without limiting the
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rights of the holder hereof under the terms of this Warrant, the holder shall
have the right to convert this Warrant or any portion thereof (the "Conversion
Right") into shares of Common Stock as provided in this Section 2(c) at any time
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or from time to time during the term of this Warrant, including upon the
Automatic Exercise Date. Upon exercise of the Conversion Right with respect to
all or a specified portion of Warrant Shares subject to this Warrant (the
"Converted Warrant Shares"), the Company shall deliver to the holder (without
payment by the holder of any cash or other cash consideration) that number of
shares of fully paid and nonassessable Common Stock equal to the quotient
obtained by dividing (i) the value of this Warrant (or the specified portion
hereof) on the Conversion Date (as defined in Section 2(c)(2) hereof), which
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value shall be equal to (A) the aggregate fair market value of the Converted
Warrant Shares issuable upon exercise of this Warrant (or the specified portion
hereof) on the Conversion Date less (B) the aggregate Warrant Price of the
Converted Warrant Shares immediately prior to the exercise of the Conversion
Right by (ii) the fair market value of one (1) share of Common Stock on the
Conversion Date.
Expressed as a formula, such conversion shall be computed as follows:
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X = A - B
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Y
Where: X = the number of shares of Common Stock to be issued
to the holder
Y = the fair market value ("FMV") of one (1) share of
Common Stock
A = the aggregate FMV (i.e., FMV x Converted Warrant
Shares)
B = the aggregate Warrant Price (i.e., Converted
Warrant Shares x Warrant Price)
No fractional shares shall be issuable upon exercise of the Conversion
Right, and, if the number of shares to be issued determined in accordance with
the foregoing formula is other than a whole number, the Company shall pay to the
holder an amount in cash equal to the fair market value of the resulting
fractional share on the Conversion Date. For purposes of the Registration
Rights Agreement, shares issued pursuant to the Conversion Right shall be
treated as if they were issued upon the exercise of this Warrant.
(2) Method of Exercise. The Conversion Right may be exercised by
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the holder by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right and indicating the number of shares
subject to this Warrant which are being surrendered (referred to in Section
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2(c)(1) hereof as the Converted Warrant Shares) in exercise of the Conversion
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Right. Such conversion shall be effective upon receipt by the Company of this
Warrant together with the aforesaid written statement, or on such later date as
is specified therein (the "Conversion Date"). Certificates for the shares
issuable upon exercise of the Conversion Right and, if applicable, a new warrant
evidencing the balance of the shares remaining subject to this Warrant, shall be
issued as of the Conversion Date and shall be delivered to the holder within
thirty (30) days following the Conversion Date.
(3) Determination of Fair Market Value. For purposes of this
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Section 2(c), "fair market value" of a share of Common Stock shall have the
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meaning set forth in Section 4(h) below.
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3. Stock Fully Paid; Reservation of Shares. All Warrant Shares that
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may be issued upon the exercise of the rights represented by this Warrant will,
upon issuance pursuant to the terms and conditions herein, be fully paid and
nonassessable, and free from all taxes, liens, charges, and pre-emptive rights
with respect to the issue thereof. The Company shall pay all transfer taxes, if
any, attributable to the issuance of the Warrant Shares upon the exercise of
this Warrant. During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized, and
reserved for the purpose of the issue upon exercise of the purchase rights
evidenced by this Warrant, a sufficient number of shares of its Common Stock to
provide for the exercise of the rights represented by this Warrant.
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4. Adjustment of Warrant Price and Number of Shares. The number and
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kind of securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
a. Merger, Sale, Reclassification. In case of any (i)
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consolidation or merger of the Company with or into another entity (other than a
merger in which the Company is the continuing corporation (A) and which does not
result in any reclassification or change of the then outstanding shares of
Common Stock or issuance of any dividend or other distribution of cash,
securities or property to holders of the then outstanding shares of Common
Stock, or (B) resulting solely in a change in par value, or from par value to no
par value, or from no par value to par value, or in a stock split, subdivision
or combination which is the subject of another paragraph in this Section 4),
(ii) sale or other disposition of all or substantially all of the Company's
assets or distribution of property to stockholders (other than distributions
payable out of earnings or retained earnings), or (iii) reclassification, change
or conversion of securities of the class issuable upon exercise of this Warrant
(other than a change in par value, or from par value to no par value, or from no
par value to par value, or as a result of any stock split, subdivision or
combination which is the subject of another paragraph in this Section 4), then
the Company shall take all necessary actions (including but not limited to
executing and delivering to the holder of this Warrant an additional Warrant or
other instrument, in form and substance mutually agreeable to the Company and
the holder of this Warrant) to ensure that the holder of this Warrant shall
thereafter have the right to receive, at a total purchase price not to exceed
that payable upon the exercise of the unexercised portion of this Warrant, and
in lieu of the shares of Common Stock theretofore issuable upon exercise of this
Warrant, the kind and amount of shares of stock, other securities, money and
property receivable upon such consolidation, merger, sale or other disposition,
reclassification, change or conversion by a holder of the number of shares of
Common Stock then purchasable under this Warrant (which, in the case of such a
transaction in which holders of Common Stock were entitled to elect between
different forms of consideration, shall be deemed to be the form of
consideration received by a plurality of the electing holders of Common Stock).
Such new Warrant shall provide for adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
4. The provisions of this Section 4(a) shall similarly apply to successive
reclassifications, changes and conversions.
b. Subdivision or Combination of Shares. If the Company at any
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time while this Warrant remains outstanding and unexpired shall subdivide or
combine its outstanding shares of Common Stock, the Warrant Price shall be
proportionately decreased in the case of a subdivision or increased in the case
of a combination, effective at the close of business on the date the subdivision
or combination becomes effective.
c. Stock Dividends and Other Distributions. If the Company at
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any time while this Warrant is outstanding and unexpired shall (i) pay a
dividend with respect to Common Stock payable in Common Stock, or (ii) make any
other distribution with respect to Common Stock (except any distribution
specifically provided for in Section 4(a) or Section 4(b) hereof) of Common
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Stock, then the Warrant Price shall be adjusted, from and after the date of
determination of stockholders entitled to receive such dividend or distribution,
to that price
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determined by multiplying the Warrant Price in effect immediately prior to such
date of determination by a fraction (i) the numerator of which shall be the
total number of shares of Common Stock outstanding immediately prior to such
dividend or distribution, and (ii) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after such dividend or
distribution.
d. Rights Offerings. In case the Company shall, at any time after
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the Date of Grant, issue to holders of shares of the capital stock of the
Company (solely as a result of such holders' status as stockholders of the
Company) any rights, options or warrants entitling them to subscribe for or
purchase shares of Common Stock (or securities convertible or exchangeable into
Common Stock) at a price per share of Common Stock (or having a conversion or
exchange price per share of Common Stock if a security convertible or
exchangeable into Common Stock) less than the fair market value per share of
Common Stock on the record date for such issuance (or the date of issuance, if
there is no record date), the Warrant Price to be in effect on and after such
record date (or issuance date, as the case may be) shall be adjusted so that it
shall equal the price determined by multiplying the Warrant Price in effect
immediately prior to such record date (or issuance date, as the case may be) by
a fraction (i) the numerator of which shall be the number of Fully Diluted
Shares of Common Stock outstanding on such record date (or issuance date, as the
case may be) plus the number of shares of Common Stock which the aggregate
offering price of the total number of shares of such Common Stock so to be
offered (or the aggregate initial exchange or conversion price of the
exchangeable or convertible securities so to be offered) would purchase at such
fair market value on such record date (or issuance date, as the case may be) and
(ii) the denominator of which shall be the number of Fully Diluted Shares of
Common Stock outstanding on such record date (or issuance date, as the case may
be) plus the number of additional shares of Common Stock to be offered for
subscription or purchase (or into which the convertible securities to be offered
are initially exchangeable or convertible). For purposes of this Warrant,
"Fully Diluted Shares" shall mean the number of shares of Common Stock deemed to
be outstanding calculated pursuant to the treasury stock method as contemplated
by the Accounting Principles Board Opinion No. 15 (as referred to in Statement
of Financial Accounting Standards No. 128). In case such subscription price may
be paid in part or in whole in a form other than cash, the fair market value of
such consideration shall be determined by the Board of Directors of the Company
in good faith as set forth in a duly adopted board resolution certified by the
Company's Secretary or Assistant Secretary, provided, that in the event the
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Board of Directors is unable to make such a determination or holders of at least
fifty-one percent (51%) of the Warrant Shares issuable under outstanding
Investor Warrants disagree in writing with such determination, then the fair
market value of such consideration shall be determined in the same manner as a
Valuation Procedure under Section 4(h) below. Such adjustment shall be made
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successively whenever such an issuance occurs; and in the event that such
rights, options, warrants, or convertible or exchangeable securities are not so
issued or are canceled, expire or cease to be convertible or exchangeable before
they are exercised, converted, or exchanged (as the case may be), then the
Warrant Price shall again be adjusted to be the Warrant Price that would then be
in effect if such issuance had not occurred, but such subsequent adjustment
shall not affect the number of Warrant Shares issued upon any exercise of this
Warrant prior to the date such subsequent adjustment is made.
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e. Other Special Distributions. In case the Company shall fix a
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record date for the making of a distribution (other than dividends,
distributions or issuances referred to in Section 4(b), Section 4(c) or Section
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4(d) above, and other than cash dividends to the extent paid out of the
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consolidated net income of the Company, as determined in accordance with
generally accepted accounting principles consistently applied, after the date
hereof) to all holders of shares of Common Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the surviving corporation) of cash, evidences of indebtedness, assets
or subscription rights, options, warrants, or exchangeable or convertible
securities containing the right to subscribe for or purchase shares of any class
of equity securities of the Company, the Warrant Price to be in effect on and
after such record date shall be adjusted by multiplying the Warrant Price in
effect immediately prior to such record date by a fraction (i) the numerator of
which shall be the fair market value per share of Common Stock on such record
date (determined in accordance with Section 4(h) below), less the cash and/or
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the fair market value (as determined by the Board of Directors of the Company in
good faith as set forth in a duly adopted board resolution certified by the
Company's Secretary or Assistant Secretary) of the portion of the assets or
evidences of indebtedness so to be distributed or of such subscription rights,
options, warrants, or exchangeable or convertible securities applicable to one
(1) share of the Common Stock outstanding as of such record date, provided, that
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in the event the Board of Directors is unable to make such a determination or
holders of at least fifty-one percent (51%) of the Warrant Shares issuable under
outstanding Investor Warrants disagree in writing with such determination, then
the fair market value of such consideration shall be determined in the same
manner as a Valuation Procedure under Section 4(h) below, and (ii) the
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denominator of which shall be such fair market value per share of Common Stock
as determined in the manner set forth under Section 4(h) below. Such adjustment
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shall be made successively whenever such a record date is fixed; and in the
event that such distribution is not so made, the Warrant Price shall again be
adjusted to be the Warrant Price which would then be in effect if such record
date had not been fixed, but such subsequent adjustment shall not affect the
number of Warrant Shares issued upon any exercise of this Warrant prior to the
date such subsequent adjustment was made.
f. Other Issuances and Adjustments.
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(1) In case the Company or any subsidiary thereof shall, at any
time after the Date of Grant, issue shares of Common Stock, or rights, options,
warrants or convertible or exchangeable securities containing the right to
subscribe for or acquire shares of Common Stock (excluding (i) shares, rights,
options, warrants, or convertible or exchangeable securities outstanding on the
Date of Grant, or issued in any of the transactions described in Sections 4(b),
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4(c), 4(d) or 4(e) above, (ii) shares issued upon the exercise of such rights,
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options or warrants or upon conversion or exchange of such convertible or
exchangeable securities, and (iii) up to Three Million Nine Hundred Fourteen
Thousand Eight Hundred Thirty Six (3,914,836) (subject to adjustment for splits,
recapitalizations, or similar events) shares of Common Stock issued or issuable
to directors, officers, employees or consultants of the Company or any
subsidiary in connection with their service as directors, officers, employees or
consultants pursuant to any stock grant, stock option, warrant or other right
issued by the Company and approved by the Board of Directors of the Company
under a duly adopted stock
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option or incentive plan in existence on the date hereof), at a price per share
of Common Stock (determined in the case of such rights, options, warrants, or
convertible or exchangeable securities by dividing (x) the total amount received
and/or receivable by the Company in consideration of the sale and issuance of
such rights, options, warrants, or convertible or exchangeable securities, plus
the total minimum consideration payable to the Company upon exercise,
conversion, or exchange thereof by (y) the total maximum number of shares of
Common Stock covered by such rights, options, warrants, or convertible or
exchangeable securities) less than the higher of (A) the Warrant Price and (B)
the fair market value per share of Common Stock (determined in accordance with
Section 4(h) below and in the case of rights, options, warrants or convertible
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or exchangeable securities, determined at the time of issuance of such
securities rather than upon exercise thereof), in each case on the date the
Company fixes the offering price of such shares, rights, options, warrants, or
convertible or exchangeable securities, then the Warrant Price shall be adjusted
so that it shall equal the price determined by multiplying the Warrant Price in
effect immediately prior thereto by a fraction (i) the numerator of which shall
be the sum of (A) the number of Fully Diluted Shares outstanding immediately
prior to such sale and issuance plus (B) the number of shares of Common Stock
which the aggregate consideration received or receivable (determined as provided
herein) in connection with such sale or issuance would purchase at such higher
price, and (ii) the denominator of which shall be the total number of Fully
Diluted Shares outstanding immediately after such sale and issuance. Such
adjustment shall be made successively whenever such an issuance is made. In the
event that any of the rights, options, warrants or convertible or exchangeable
securities referred to in this paragraph (1) are not so issued or are canceled,
expire or cease to be convertible or exchangeable before they are exercised,
converted, or exchanged (as the case may be), then the Warrant Price shall again
be adjusted to be the Warrant Price that would then be in effect if the issuance
of such rights, options, warrants or securities had not occurred, but such
subsequent adjustment shall not affect the number of Warrant Shares issued upon
any exercise of this Warrant prior to the date such subsequent adjustment is
made. If the Warrant Price is adjusted pursuant to this subsection, no further
adjustment shall be made upon the exercise of such rights, options or warrants
or upon the conversion or exchange of such convertible or exchangeable
securities, or upon the conversion or exchange of convertible securities issued
upon the exercise of such rights, options or warrants.
(2) In case the Company or any subsidiary thereof shall, at any
time after the Date of Grant, make or agree to (i) any downward adjustment in
the exercise, exchange or conversion price of, (ii) any increase in the number
of shares of Common Stock issuable upon the exercise, conversion or exchange of,
or (iii) any change in the consideration payable for the exercise, conversion or
exchange of, any rights, options, warrants or convertible or exchangeable
securities containing the right to subscribe for or acquire shares of Common
Stock, other than such adjustment that is specifically contemplated and required
under the terms of any such instrument as of the Date of Grant, then the Warrant
Price shall be adjusted so that it shall equal the price determined by
multiplying the Warrant Price in effect immediately prior thereto by a fraction
the numerator of which shall be the sum of (A) the number of shares of Common
Stock outstanding immediately prior thereto, plus (B) the number of shares of
Common Stock to be issued upon such exercise, conversion or exchange immediately
prior thereto, multiplied by the aggregate amount of the fair market value of
the consideration to be
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received by the Company upon such exercise, conversion or exchange immediately
thereafter, and the denominator shall be the sum of (X) the number of shares of
Common Stock outstanding immediately thereafter, plus (Y) the number of shares
of Common Stock to be issued upon such exercise, conversion or exchange
immediately thereafter, multiplied by the aggregate amount of the fair market
value of the consideration to be received by the Company upon such exercise,
conversion or exchange immediately prior thereto. Such adjustment shall be made
successively whenever such an issuance is made.
(3) For the purposes of an adjustment under this Section 4(f),
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the maximum number of shares of Common Stock which the holder of any right,
option, warrant or convertible or exchangeable security shall be entitled to
subscribe for or purchase shall be deemed to be issued and outstanding;
furthermore, the consideration received by the Company therefor shall be deemed
to be equal to the price per share of Common Stock (determined in the case of
such rights, options, warrants, or convertible or exchangeable securities by
dividing (x) the total amount received and/or receivable by the Company in
consideration of the sale and issuance of such rights, options, warrants, or
convertible or exchangeable securities, plus the total minimum consideration
payable to the Company upon exercise, conversion, or exchange thereof by (y) the
total maximum number of shares of Common Stock covered by such rights, options,
warrants, or convertible or exchangeable securities) multiplied by the number of
shares deemed issued and outstanding in the previous sentence. In case the
Company shall issue shares of Common Stock, or issue or make an adjustment to
the exercise, exchange or conversion price of rights, options, warrants, or
convertible or exchangeable securities containing the right to subscribe for or
acquire shares of Common Stock for a consideration consisting, in whole or in
part, of consideration other than cash or its equivalent, then in determining
the price per share of Common Stock and the consideration received by the
Company, the Board of Directors of the Company shall determine, in good faith,
the fair market value of said property, and such determination shall be
described in a duly adopted board resolution certified by the Company's
Secretary or Assistant Secretary, provided, that in the event the Board of
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Directors is unable to make such a determination or holders of at least fifty-
one percent (51%) of the Warrant Shares issuable under outstanding Investor
Warrants disagree in writing with such determination, then the fair market value
of such consideration shall be determined in the same manner as a Valuation
Procedure under Section 4(h) below. In case the Company shall issue shares of
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Common Stock, or issue or make an adjustment to the exercise or conversion price
of rights, options, warrants, or convertible or exchangeable securities
containing the right to subscribe for or acquire shares of Common Stock,
together with one (1) or more other security as a part of a unit at a price per
unit, then in determining the price per share of Common Stock and the
consideration received or to be by the Company, the Board of Directors of the
Company shall determine, in good faith, which determination shall be described
in a duly adopted board resolution certified by the Company's Secretary or
Assistant Secretary, the fair market value of the rights, options, warrants, or
convertible or exchangeable securities then being sold as part of such unit,
provided, that in the event the Board of Directors is unable to make such a
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determination or holders of at least fifty-one percent (51%) of the Warrant
Shares issuable under outstanding Investor Warrants disagree in writing with
such determination, then the fair market value of such consideration shall be
determined in the same manner as a Valuation Procedure under Section 4(h) below.
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g. Adjustment of Number of Shares. Upon each adjustment in the
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Warrant Price, the number of Warrant Shares purchasable hereunder shall be
adjusted, to the nearest whole share, to the product obtained by multiplying the
number of Warrant Shares purchasable immediately prior to such adjustment in the
Warrant Price by a fraction, the numerator of which shall be the Warrant Price
immediately prior to such adjustment and the denominator of which shall be the
Warrant Price immediately thereafter.
h. Determination of Fair Market Value. For purposes of those
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provisions of this Warrant requiring a determination in accordance with this
Section 4(h), "fair market value" as of a particular date (the "Determination
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Date") shall mean (i) if the Common Stock is publicly traded at the time of
determination, the average of the closing prices on such day of the Common Stock
on all domestic securities exchanges on which the Common Stock is then listed,
or, if there have been no sales on any such exchange on such day, the average of
the highest bid and lowest asked prices on all such exchanges at the end of such
day or, if on any such day the Common Stock is not so listed, the average of the
representative bid and asked prices quoted on the NASDAQ system as of 4:00 P.M.,
New York time, on such day, or if on any day such security is not quoted on the
NASDAQ system, the average of the highest bid and lowest asked prices on such
day in the domestic over-the-counter market as reported by the National
Quotation Bureau, Incorporated, or any similar successor organization, in each
such case averaged over a period of 30 days consisting of the day as of which
"fair market value" is being determined and the twenty-nine consecutive business
days prior to such day (provided that, if fair market value is being determined
--------
as of the date of a firm commitment public offering of the Common Stock, fair
market value as of such date shall be the offering price for the Common Stock
subject to such public offering); or (ii) if the Common Stock is not publicly
traded at the time of determination, the Common Stock price per share determined
by dividing Market Value (as defined below) by the outstanding number of Fully-
Diluted Shares of Common Stock. "Market Value" means the highest price that
would be paid for the entire common equity of the Company on a going-concern
basis in an arm's-length transaction between a willing buyer and a willing
seller (neither acting under compulsion), using valuation techniques then
prevailing in the securities industry (but without giving effect to any discount
in respect of a minority interest) and determined in accordance with the
"Valuation Procedure" (as defined below) and assuming full disclosure and
understanding of all relevant information and a reasonable period of time for
effectuating such sale. For the purposes of determining the Market Value, (a)
the exercise price of options or warrants to acquire Common Stock which are
deemed to have been exercised for the purpose of determining the outstanding
number of Fully-Diluted Shares of Common Stock, shall be deemed to have been
received by the Company, (b)(i) the liquidation preference or indebtedness, as
the case may be, represented by securities which are deemed exercised for or
converted into Common Stock for the purpose of determining the outstanding
number of Fully-Diluted Shares of Common Stock and (ii) any contractual
limitation in respect of the shares of Common Stock relating to voting rights,
shall be deemed to have been eliminated or canceled and (c) full effect shall be
given to any discount that may arise as the result of the fact that the shares
of Common Stock are not publicly traded.
E-10
"Valuation Procedure" means, with respect to the determination of any
amount or value required to be determined in accordance with such procedure, a
determination (which shall be final and binding on the Company and the holders)
made (i) by agreement among the Company and the holders of at least 51% of the
Warrant Shares issuable under outstanding Investor Warrants (collectively, the
"Requesting Holders") within twenty (20) days following the event requiring such
determination or (ii) in the absence of such an agreement, by an Independent
Financial Expert selected in accordance with the further provisions of this
definition. If required, an Independent Financial Expert shall be selected
within five days following the expiration of the 20-day period referred to
above, either by agreement among the Company and the Requesting Holders or, in
the absence of such agreement, by lot from a list of four potential Independent
Financial Experts remaining after the Company nominates three, the Requesting
Holders nominate three, and each side eliminates one potential Independent
Financial Expert. The Independent Financial Expert shall be instructed by the
Company and the Requesting Holders to make its determination within 20 days of
its selection. The fees and expenses of an Independent Financial Expert
selected hereunder shall be paid by the Company.
"Independent Financial Expert" means a nationally-recognized
investment banking firm (a) that does not (and whose directors, officers,
employees and Affiliates do not) have a direct or indirect material financial
interest in the Company or any holder, (b) that has not been, and, at the time
it is called upon to serve as an Independent Financial Expert under this
Agreement, is not (and none of whose directors, officers, employees or
Affiliates is not), a promoter, director or officer of the Company or any
Holder, (c) that has not been retained during the preceding two years by the
Company or the holder for any purpose, and (d) that is otherwise qualified to
serve as an Independent Financial Advisor. Any such person or entity may
receive customary compensation and indemnification by the Company for opinions
or services it provides as an Independent Financial Expert.
5. Notice of Adjustments. Whenever the Warrant Price or the number
---------------------
of Warrant Shares purchasable hereunder shall be adjusted pursuant to Section 4
---------
hereof, the Company shall make a certificate signed by its chief financial
officer setting forth, in reasonable detail, the event requiring the adjustment,
the amount of the adjustment, the method by which such adjustment was
calculated, and the Warrant Price and the number of Warrant Shares purchasable
hereunder after giving effect to such adjustment, which shall be mailed (without
regard to Section 14 hereof, by first class mail, postage prepaid) to the holder
----------
of this Warrant.
6. Fractional Shares. No fractional shares of Common Stock will be
-----------------
issued in connection with any exercise hereunder, but in lieu of such fractional
shares the Company shall make a cash payment therefor based on the fair market
value (as determined in accordance with Section 4(h) above) of a share of Common
------------
Stock on the date of exercise.
7. Compliance with Securities Act; Disposition of Warrant or Warrant
-----------------------------------------------------------------
Shares.
------
a. Compliance with Securities Act. The holder of this Warrant,
------------------------------
by acceptance hereof, agrees that this Warrant and the shares of Common Stock to
be issued upon
E-11
exercise hereof, are being acquired for investment and that such holder will not
offer, sell or otherwise dispose of this Warrant, or any shares of Common Stock
to be issued upon exercise hereof except under circumstances which will not
result in a violation of the Securities Act of 1933, as amended (the "Act").
Upon exercise of this Warrant, unless the Warrant Shares to be received upon
such exercise are intended to be included in a registration statement under the
Act, the holder hereof shall confirm in writing, by executing the form attached
as Schedule 1 to Exhibit A hereto, that the shares of Common Stock so purchased
---------
are being acquired for investment and not with a view toward distribution or
resale in violation of the Act. All shares of Common Stock issued upon exercise
of this Warrant (unless registered under the Act) shall be stamped or imprinted
with a legend in substantially the following form:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO
SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR
THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER(S)
FROM THE APPROPRIATE GOVERNMENTAL AUTHORITY(IES), OR (iv) OTHERWISE
COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH
---------
THESE SECURITIES WERE ISSUED DIRECTLY OR INDIRECTLY."
In addition, in connection with the issuance of this Warrant, the
holder specifically represents to the Company by acceptance of this Warrant as
follows:
(1) The holder is aware of the Company's business affairs and
financial condition, and has acquired information about the Company sufficient
to reach an informed and knowledgeable decision to acquire this Warrant. The
holder is acquiring this Warrant for its own account for investment purposes
only and not with a view to, or for resale in connection with any "distribution"
thereof for purposes of the Act in violation of the Act. Each of the holders
acknowledges that such holder, or such holder's representatives, if any, has
been given access to information about the Company, through written material
provided in or attached to the Amendment, and through meetings with
representatives of the Company, and has had an opportunity to verify the
accuracy of such information, to ask questions of the Company's officers and
directors, and has received answers to such holder's satisfaction. Each of the
holders understands that the valuation and terms of the Warrant has been made
solely through and upon negotiations between the Company and the holders, and
not by an independent accountant, auditor, investment banker or third party.
Each of the holders represents that such holder has evaluated the fairness of
the terms and conditions of the Warrant to the extent he, she or it has deemed
necessary. In making a decision to purchase the Warrant, each of the holders has
relied solely on the information contained or referred to herein and upon
independent investigations made by such holder in his, her or its discretion. In
addition, none of the holders is purchasing any Warrant as a result or
subsequent to: (1) any advertisement, article, notice, or other publication
published in any newspaper, magazine, or similar broadcast media over the
internet,
E-12
television, or radio; or (2) any seminar or meeting whose attendees, including
the holders, were invited as a result of, subsequent to, or pursuant to, any
general solicitation.
(2) The holder understands that this Warrant and the Warrant
Shares have not been registered under the Act in reliance upon a specific
exemption therefrom, which exemption depends upon, among other things, the bona
fide nature of the holder's investment intent as expressed herein, and the
assumption that holder resides at the address corresponding to him, her, or it
on Schedule A to the Registration Rights Agreement.
----------
(3) The holder further understands that this Warrant and the
Warrant Shares must be held indefinitely unless subsequently registered under
the Act and any applicable state securities laws, or unless exemptions from
registration are otherwise available.
(4) The holder is aware of the provisions of Rule 144
promulgated under the Act, which, in substance, permit limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, if applicable, including, among other
things: the availability of certain public information about the Company, the
resale occurring not less than one (1) year after the party has purchased and
paid for the securities to be sold; the sale being made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934, as
amended) and the amount of securities being sold during any three-month period
not exceeding the specified limitations stated therein.
(5) The holder further understands that at the time it wishes to
sell this Warrant and the Warrant Shares there may be no public market upon
which to make such a sale, and that, even if such a public market then exists,
the Company may not be satisfying the current public information requirements of
Rule 144, and that, in such event, the holder may be precluded from selling this
Warrant and the Warrant Shares under Rule 144 even if the one (1)-year minimum
holding period had been satisfied.
b. Disposition of Warrant or Warrant Shares. This Warrant
----------------------------------------
and the Warrant Shares may be detached and sold or otherwise transferred, in
whole or in part, separately from the loans made pursuant to the Amendment,
except that the holder may not transfer the Warrant or the Warrant Shares in a
transaction not effected on any securities exchange to any entity that is known
at the time of such transfer to be a direct competitor of, or that controls or
is controlled by or is under common control with an entity known to be a direct
competitor of, the Company or any of its material subsidiaries. With respect to
any offer, sale or other disposition of this Warrant, or any Warrant Shares
acquired pursuant to the exercise of this Warrant prior to registration of such
Warrant or Warrant Shares, the holder hereof and each subsequent holder of this
Warrant agrees to deliver, prior to the registration of any such transfer, a
written opinion of such holder's counsel (which may be in-house counsel for such
holder), if reasonably requested by the Company, to the effect that such offer,
sale or other disposition may be effected without registration or qualification
(under the Act as then in effect or any federal or state law then in effect) of
this Warrant or such Warrant Shares and indicating whether or not
E-13
under the Act certificates for this Warrant or such Warrant Shares to be sold or
otherwise disposed of require any restrictive legend as to applicable
restrictions on transferability in order to ensure compliance with applicable
law. If a determination has been made pursuant to this Section 7(b) that the
------------
opinion of counsel for the holder is not reasonably satisfactory to the Company,
the Company shall so notify the holder promptly after such determination has
been made. The foregoing notwithstanding, this Warrant or such Warrant Shares
may, as to such federal laws, be offered, sold or otherwise disposed of in
accordance with Rule 144 under the Act, provided that the Company shall have
been furnished with such information as the Company may reasonably request to
provide a reasonable assurance that the provisions of Rule 144 have been
satisfied. Each certificate representing this Warrant or the Warrant Shares thus
transferred (except a transfer pursuant to Rule 144) shall bear a legend as to
the applicable restrictions on transferability in order to ensure compliance
with such laws, unless in the aforesaid opinion of counsel for the holder
satisfactory to the Company, such legend is not required in order to ensure
compliance with such laws. The Company may issue stop transfer instructions to
its transfer agent or, if acting as its own transfer agent, the Company may stop
transfer on its corporate books, in connection with such restrictions.
8. Rights as Stockholders; Information. No holder of this
-----------------------------------
Warrant, as such, shall be entitled to vote or receive dividends or be deemed
the holder of Common Stock or any other securities of the Company which may at
any time be issuable on the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the holder of this Warrant, as
such, any of the rights of a stockholder of the Company or any right to vote for
the election of the directors or upon any matter submitted to stockholders at
any meeting thereof, or to receive notice of meetings, or to receive dividends
or subscription rights or otherwise, until this Warrant shall have been
exercised and the Warrant Shares purchasable upon the exercise hereof shall have
become deliverable, as provided herein. The foregoing notwithstanding, the
Company will transmit to the holder of this Warrant such information, documents
and reports as are generally distributed to the holders of any class or series
of the securities of the Company concurrently with the distribution thereof to
the stockholders.
9. Representations and Warranties. The Company represents and
------------------------------
warrants to the holder of this Warrant, except as otherwise disclosed in the
Amendment or any schedule or exhibit thereto, as follows:
a. This Warrant has been duly authorized and executed by
the Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and the rules of law or
principles at equity governing specific performance, injunctive relief and other
equitable remedies;
b. The Warrant Shares have been duly authorized and
reserved for issuance by the Company and, when issued in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable and are not
subject to any preemptive right of any stockholder of the Company;
E-14
c. The rights, preferences, privileges and restrictions
granted to or imposed upon the Common Stock and the holders thereof are as set
forth in the certificate of incorporation of the Company, as amended to the Date
of Grant (as so amended, the "Charter"), a true and complete copy of which has
been delivered to the original holder of this Warrant;
d. The execution and delivery of this Warrant are not, and
the issuance of the Warrant Shares upon exercise of this Warrant in accordance
with the terms hereof will not be, inconsistent with the Charter or by-laws of
the Company, do not and will not contravene, in any material respect, any
governmental rule or regulation, judgment or order applicable to the Company, do
not and will not conflict with or contravene any provision of, or constitute a
default under, any indenture, mortgage, contract or other instrument of which
the Company is a party or by which it is bound or require the consent or
approval of, the giving of notice to, the registration or filing with or the
taking of any action in respect of or by, any Federal, state or local government
authority or agency or other person, except for the filing of notices pursuant
to federal and state securities laws, which filings will be effected by the time
required thereby, and are not and will not, with the exception of the Amendment
and the Registration Rights Agreement, be subject to any voting trust agreement
or other contract, agreement, arrangement, commitment or understanding to which
the Company is a party, including such agreement, arrangement, commitment or
understanding restricting or otherwise relating to the voting or disposition
thereof;
e. There are no actions, suits, audits, investigations or
proceedings pending or, to the knowledge of the Company, threatened against the
Company in any court or before any governmental commission, board or authority
which, if adversely determined, will have a material adverse effect on the
ability of the Company to perform its obligations under this Warrant;
f. As of the Date of Grant, the authorized capital stock
of the Company (of all classes and series, including Common Stock and preferred
stock), the par value thereof, and the issued and outstanding amounts thereof,
are as set forth on Schedule 9(f) hereof. The issuance and sale of all such
-------------
interests was in compliance with all applicable federal and state securities
laws, and all issued and outstanding shares of capital stock of the Company are
duly authorized, validly issued, fully paid, and non-assessable. Other than the
Warrants, and other than as specified on Schedule 9(f) hereof, as of the Date of
-------------
Grant there are no preemptive rights or any outstanding subscriptions, options,
warrants, rights, convertible securities, calls or other agreements,
arrangements or commitments (including, without limitation, registration rights
agreements) relating to the issued or unissued shares of the Company's capital
stock or other securities, including any right of conversion or exchange under
any outstanding security or other instrument. Other than the Registration Rights
Agreement, the Warrants and any shares of Common Stock issued upon exercise of
the Warrants are not and will not be subject to any voting trust agreement or
other contract, agreement, arrangement, commitment or understanding to which the
Company is a party, including any such agreement, arrangement, commitment or
understanding restricting or otherwise relating to the voting or disposition
thereof. There are not any outstanding bonds, debentures, notes or other
indebtedness of the Company having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any
E-15
matters on which stockholders of the Company may vote. Except as set forth on
Schedule 9(f), as of the Date of Grant, there are not any securities, options,
-------------
warrants, calls, rights, convertible or exchangeable securities or commitments,
agreements, arrangements or undertakings of any kind to which the Company or any
of its subsidiaries is a party or by which any of them is bound obligating the
Company or any of its subsidiaries to issue, deliver or sell or create, or cause
to be issued, delivered or sold or created, additional shares of capital stock
or other voting securities or stock equivalents of the Company or any of its
subsidiaries or obligating the Company or any of its subsidiaries to issue,
grant, extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or understanding. As of the Date of Grant,
other than as specified on Schedule 9(f) hereof, the Company is not subject to
-------------
any obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock or any security convertible into or
exchangeable for any of its capital stock.
10. Additional Rights of the Holders.
--------------------------------
10.1 Default Event. Subject to the other provisions of this
-------------
Warrant, there shall have occurred a "Default Event" under this Agreement if:
(i) at any time after December 31, 1999 the Company fails for any reason to
honor any request for exercise of this Warrant by the holder hereof, provided
--------
that such request is validly and properly made in accordance with the provisions
of Section 2 hereof; (ii) at any time after December 31, 1999 the Company does
---------
not have a sufficient number of authorized and unissued shares of Common Stock
in order to permit the exercise in full of all of the then-outstanding Warrants;
(iii) the Company has not caused a Registration Statement (as defined in the
Registration Rights Agreement) to become effective by December 31, 1999 in
accordance with Section 2(a) of the Registration Rights Agreement; (iv) at any
------------
time after a Registration Statement has been declared effective during the term
of the Warrant, the effectiveness of such Registration Statement is suspended
for any reason other than in accordance with Section 4(c) of the Registration
------------
Rights Agreement; (v) at any time after a Registration Statement has been
declared effective during the term of the Warrant, the effectiveness of such
Registration Statement is suspended for any period which, when added to the
length of any previous such period of suspension, exceeds sixty (60) days; or
(vi) at any time after December 31, 1999 the shares of Common Stock of the
Company are not listed on the NASDAQ National Market System, the Nasdaq Small
Cap Market, or any national securities exchange.
Upon the happening of one or more Default Events, the Warrant Price
shall be reduced by five percent (5%) for each continuous 30-day period (pro-
rated for portions thereof) in which each such Default Event exists, but in no
event shall the Warrant Price be reduced below $0.45 per share. Such reduction
shall be cumulative upon the happening of multiple simultaneous Default Events.
In the event that the Investors elect to undertake an underwritten
offering of Warrant Shares pursuant to Section 2(d) of the Registration Rights
------------
Agreement and/or a Default Event has occurred that resulted in material part
from the failure of any Investor, or any underwriter selected by the Investor,
to comply in a timely manner with the reasonable requests
E-16
of the Company in effecting a registration pursuant to the Registration Rights
Agreement, then the occurrence of a Default Event shall be delayed during the
period of such noncompliance.
10.2 Protective Provisions. Until the Expiration Date, the
---------------------
Company shall not, without the prior written consent of the holders of a
majority of the then-outstanding Warrants, amend or modify the terms of the
Company's outstanding Class B Warrants or the Unit Purchase Options issued to
▇.▇. ▇▇▇▇▇ Investment Banking Company (the "Derivative Securities") so as to (i)
reduce the exercise prices of any of the Derivative Securities, (ii) extend the
expiration dates of any of the Derivative Securities, (iii) increase the number
of shares of capital stock issuable upon exercise of the Derivative Securities,
or (iv) change the forms of consideration payable to the Company upon exercise
of any of the Derivative Securities.
10.3 Observer Rights. The Company shall invite a
---------------
representative of USBL and a single representative appointed by the Agent (as
such term is defined in the Amendment) to attend all meetings of its Board of
Directors in a nonvoting observer capacity (collectively, the "Designated
Observers") and, in this respect, shall give the Designated Observers copies of
all notices, minutes, consents, and other materials that it provides to its
directors; provided, however, that the Designated Observers shall agree to hold
-------- -------
in confidence and trust all information so provided; and provided further, that
-------- -------
the Company reserves the right to withhold any information and to exclude the
Designated Observers from any meeting or portion thereof if access to such
information or attendance at such meeting could adversely affect the attorney-
client privilege between the Company and its counsel or would result in
disclosure of trade secrets to the Designated Observers or if such Investors or
their representatives are direct competitors of the Company. In the case of
telephonic meetings conducted in accordance with the Company's Certificate of
Incorporation and bylaws, and applicable law, the Designated Observers shall be
given the opportunity to listen to such telephonic meetings. The Designated
Observers shall be given reasonable notice of each meeting of the Board of
Directors (including telephonic Board meetings). The Company shall reimburse the
Designated Observers for the reasonable out-of-pocket expenses incurred by such
individuals in connection with attendance at meetings of the Board of Directors.
The Company shall notify USBL and the Agent, as promptly as practicable, of the
proposed taking of any material action by written consent of its Board of
Directors in lieu of a meeting thereof and a copy of such written consent shall
be provided to the Designated Observers as soon as possible.
11. Redemption.
----------
11.1 At any time after two (2) years from the date hereof, if
the Common Stock is at such time traded on an Exchange or quoted on NASDAQ and
the last reported sales price per share of the Common Stock on the principal
Exchange for such Common Stock (or, if the Common Stock is not then traded on an
Exchange, on NASDAQ) is greater than Four Dollars ($4.00) (such price, as
adjusted as contemplated in this Section 11, the "Target Price") on each of the
----------
twenty (20) consecutive trading days ending on the trading day immediately prior
to the day on which the notice referred to in this sentence is given, then, upon
not less than thirty (30) nor more than sixty (60) days' notice, the Company
shall have the right, in its sole discretion, to repurchase ("Call") all, but
not less than all, of the Warrants at a
E-17
purchase price per share of Common Stock equal to $1.7438 in cash (such price,
as adjusted as contemplated in this Section 11, the "Call Purchase Price");
----------
provided, however, that in the event of any adjustment in the Warrant Price
contemplated by Sections 4(b) or 4(c) hereof, the Target Price and the Call
------------- ----
Purchase Price shall each be simultaneously adjusted by multiplying it by the
same fraction used for such adjustment in Section 4(b) or 4(c), as applicable.
11.2 The Call right shall be exercisable by written notice (the "Call
Notice") given to the holder (and any applicable assigns). The Company shall
effect the repurchase of the Warrant pursuant to the Call Notice by paying the
purchase price therefor in cash to the holder not less than thirty (30) nor more
than ninety (90) days after delivery by the Company of the Call Notice; and at
such time each holder shall deliver to the Company the Warrant to be repurchased
(but not any Warrant Shares which have been issued under the Warrant) properly
endorsed for transfer; provided, however, that at any time prior to such cash
-------- -------
payment, the holder shall be entitled to exercise or convert this Warrant
pursuant to Section 2, and in the event of such exercise or conversion, the Call
---------
right shall be of no force and effect.
11.3 Recapture Provisions Upon Call.
------------------------------
a. If the Company purchases Warrants pursuant to this Section
and subsequently, at any time up to the date twelve (12) months after the
completion of such purchase (the "Resale Date") there occurs:
(1) a sale of assets or stock, reorganization,
recapitalization or other transaction the result of which is that following such
sale, reorganization, recapitalization or other transaction, there shall be a
change of control, whether in one or a series of transactions; or
(2) a sale of all or substantially all of the Company's
assets (determined on a consolidated basis) or sale of the Company's assets
(determined on a consolidated basis) that represented at least 50% of the gross
revenues of the Company (determined on a consolidated basis) for the most
recently ended twelve (12) month period; and the consideration involved in such
sale, reorganization, recapitalization or other transaction reflects a Warrant
Share value which is greater than the Call Purchase Price of a Warrant, then the
Company shall remit to the Holders from whom such Warrants were repurchased an
amount equal to the product of:
(x) the difference of:
(i) the actual fair market value of the consideration
on a per Warrant Share basis involved in such subsequent sale, reorganization,
recapitalization or other transaction; less
(ii) the Call Purchase Price;
multiplied by
-------------
E-18
(y) the number of Warrants purchased by the Company
pursuant to this Section 11 pro rata according to the quantity of the Warrants
---------- --- ----
sold by such Holders.
b. If all or any portion of the consideration involved in
any sale, reorganization, recapitalization or other transaction described in
Section 11.3(a) hereof is non-cash consideration, a determination of the fair
market value of such consideration shall be made in good faith by the Board or
as otherwise provided in the Valuation Procedure.
12. Allocated Purchase Price. The Company and the holder hereby
------------------------
acknowledge that for the purposes of Section 1273(c)(2) of the Internal Revenue
Code, this Warrant is a part of an investment unit with the loans being made by
the holder to the Company under the Amendment and that the allocated purchase
price of the Warrant is Five cents ($0.05). The Company and the holder agree to
use the foregoing allocated purchase price as the purchase price of the Warrant
for all income tax purposes.
13. Modification and Waiver. Subject to Section 23, this Warrant and
----------------------- ----------
any provision hereof may be changed, waived, discharged or terminated only by an
instrument in writing signed by the party against which enforcement of the same
is sought.
14. Notices. Unless otherwise specifically provided herein, all
--------
communications under this Warrant shall be in writing and shall be deemed to
have been duly given (i) on the date of service if served personally on the
party to whom notice is to be given, (ii) on the day of transmission if sent by
facsimile transmission to a number provided to a party specifically for such
purposes, and telephonic confirmation of receipt is obtained promptly after
completion of transmission, (iii) on the day after delivery to Federal Express
or similar overnight courier, or (iv) on the fifth day after mailing, if mailed
to the party to whom notice is to be given, by first class mail, registered or
certified, postage prepaid, and properly addressed, return receipt requested, to
each such holder at the address for notice called for under Section 11(d) of the
-------------
Registration Rights Agreement, or to the Company at the address indicated
therefor on the signature page of this Warrant. Any party hereto may change its
address for purposes of this Section 14 by giving the other party written notice
----------
of the new address in the manner set forth herein.
15. Binding Effect on Successors. This Warrant shall be binding upon
-----------------------------
any corporation succeeding the Company by merger, consolidation or acquisition
of all or substantially all of the Company's assets, and all of the obligations
of the Company relating to the Common Stock issuable upon the exercise or
conversion of this Warrant shall survive the exercise, conversion and
termination of this Warrant and all of the covenants and agreements of the
Company shall inure to the benefit of the successors and assigns of the holder
hereof. The Company will, at the time of the exercise or conversion of this
Warrant, in whole or in part, upon request of the holder hereof but at the
Company's expense, acknowledge in writing its continuing obligation to the
holder hereof in respect of any rights to which the holder hereof shall continue
to be entitled after such exercise or conversion in accordance with this
Warrant; provided, that
--------
E-19
the failure of the holder hereof to make any such request shall not affect the
continuing obligation of the Company to the holder hereof in respect of such
rights.
16. Lost Warrants or Stock Certificates. The Company covenants to
------------------------------------
the holder hereof that, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any loss, theft or destruction, upon
receipt of an executed lost securities bond or indemnity reasonably satisfactory
to the Company, or in the case of any such mutilation upon surrender and
cancellation of such Warrant or stock certificate, the Company will make and
deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost,
stolen, destroyed or mutilated Warrant or stock certificate.
17. Descriptive Headings. The descriptive headings of the several
---------------------
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
18. Governing Law. The validity, interpretation and performance of
--------------
this Warrant shall be governed by, and construed in accordance with, the laws of
the State of New York applicable to contracts made and to be performed entirely
within such State, regardless of the law that might be applied under principles
of conflicts of law.
19. Survival of Representations, Warranties and Agreements. Each of
-------------------------------------------------------
the respective representations and warranties of the Company and the holder
hereof contained herein shall survive the Date of Grant, the exercise or
conversion of this Warrant (or any part hereof) and the termination or
expiration of any rights hereunder. Each of the respective agreements of each
of the Company and the holder hereof contained herein shall survive indefinitely
until, by their respective terms, they are no longer operative.
20. Remedies. In case any one (1) or more of the covenants and
---------
agreements contained in this Warrant shall have been breached, the holders
hereof (in the case of a breach by the Company), or the Company (in the case of
a breach by a holder), may proceed to protect and enforce their or its rights
either by suit in equity and/or by action at law, including, but not limited to,
an action for damages as a result of any such breach and/or an action for
specific performance of any such covenant or agreement contained in this
Warrant.
21. Acceptance. Receipt of this Warrant by the holder hereof shall
-----------
constitute acceptance of and agreement to the foregoing terms and conditions.
22. No Impairment of Rights. The Company will not, by amendment of
------------------------
its Charter or through any other means, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
holder of this Warrant against material impairment.
23. Amendment. This Warrant may be amended by written agreement of
----------
the Company and holders of 51% of the Investor Warrants, collectively on an as-
exercised basis, and such amendment shall be binding on all holders of this
Warrant or Warrant Shares; provided,
--------
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however, the consent of any holder of Warrants affected by any amendment will be
-------
required for an amendment pursuant to which (i) the Warrant Price is increased,
(ii) the number of Warrant Shares purchasable upon exercise of the Warrant is
decreased (other than pursuant to any adjustments provided herein), (iii) the
Expiration Date is changed, or (iv) any right of a holder under the Warrant is
adversely impacted in a manner different than the other holders.
24. Registration Rights Agreement. The Company shall provide to the
-----------------------------
holder hereof, upon written request, a true copy of the Registration Rights
Agreement, as amended and modified to date.
25. Counterparts. This Warrant Agreement may be executed in any
------------
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF the parties hereto have executed this Warrant
Agreement as of the day and year first above written.
COMPANY: VIDEO UPDATE, INC.,
a Delaware corporation
By: _____________________________________
Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Chairman and Chief Executive Officer
SIGNATURES OF INITIAL HOLDERS
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EXHIBIT A
---------
NOTICE OF EXERCISE
------------------
To: Video Update, Inc.
1. The undersigned hereby elects to purchase _____ shares of Common
Stock of ______________________ pursuant to the terms of the attached Warrant,
and tenders herewith payment of the purchase price of such shares in full.
2. Please issue a certificate or certificates representing said
shares in the name of the undersigned or in such other name or names as are
specified below:
__________________________ ______________________________
(Name)
______________________________
(Address)
3. The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
In support thereof, the undersigned has executed an Investment Representation
Statement attached hereto as Schedule 1.
_________________________ (Signature) __________________(Date)
4. Please issue a new Warrant for the unexercised portion of the
attached Warrant in the name of the undersigned or in such other name as is
specified below:
______________________________________________
5. I elect to convert this Warrant pursuant to the cashless
Conversion Right described in Section 2(c) of the Warrant Agreement for
------------
____________ Warrant Shares (as such term is defined therein). [_] (check here)
Date:_____________________
By: (Warrantholder)_____________________
Name: (Print)___________________________
Its: __________________________________
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Schedule 1
----------
INVESTMENT REPRESENTATION STATEMENT
Purchaser:
Company: Video Update, Inc.
Security: Class A Common Stock
Amount:
Date:
In connection with the purchase of the above-listed securities (the
"Registrable Securities"), the undersigned (the "Purchaser") represents to the
Company as follows:
(a) The Purchaser is aware of the Company's business affairs and
financial condition, and has acquired sufficient information about the Company
to reach an informed and knowledgeable decision to acquire the Registrable
Securities. The Purchaser is purchasing the Registrable Securities for its own
account for investment purposes only and not with a view to, or for the resale
in connection with, any "distribution" thereof for purposes of the Securities
Act of 1933, as amended (the "Act").
(b) The Purchaser understands that the Registrable Securities have
not been registered under the Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of the Purchaser's investment intent as expressed herein.
(c) The Purchaser further understands that the Registrable Securities
must be held indefinitely unless subsequently registered under the Act or unless
an exemption from registration is otherwise available. In addition, the
Purchaser understands that the certificate evidencing the Registrable Securities
will be imprinted with the legend referred to in the Warrant under which the
Registrable Securities are being purchased.
(d) The Purchaser is aware of the provisions of Rule 144 and 144A,
promulgated under the Act, which, in substance, permit limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, if applicable, including, among other
things: The availability of certain public information about the Company, the
resale occurring not less than one (1) year after the party has purchased and
paid for the securities to be sold; the sale being made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the
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Securities Exchange Act of 1934, as amended) and the amount of securities being
sold during any three-month period not exceeding the specified limitations
stated therein.
(e) The Purchaser further understands that at the time it wishes to
sell the Registrable Securities there may be no public market upon which to make
such a sale, and that, even if such a public market then exists, the Company may
not be satisfying the current public information requirements of Rule 144, and
that, in such event, the Purchaser may be precluded from selling the Registrable
Securities under Rule 144 even if the one-year minimum holding period had been
satisfied.
Purchaser:______________________________
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SCHEDULE 9(f)
-------------
Capital Stock
-------------
VIDEO UPDATE CLASS A COMMON STOCK, $.01 par value per share ("Class A Shares")
Class A Shares Authorized 60,000,000
Total Class A Shares issued and outstanding 29,278,457
Warrants and Options
Class A Shares underlying the Company's Class B Warrants (exercisable @
$8.75, expiring July 19, 1999). 8,504,825
Class A Shares underlying the Unit Purchase Option ("UPO") granted to the
underwriter of the Company's initial public offering ("IPO")(exercisable
@$6.25 for 117,500 units, each unit consisting of (i) one share of Class A
Common Stock, (ii) one Class A Warrant, (which in turn is exercisable
@$6.50 until July 19, 1999, for one share of Class A Stock and one Class B
Warrant, exercisable @8.75 until July 19, 1999, for one share of Class A
Common Stock), and (iii) one Class B Warrant). The UPO expires July 19,
1999. 470,000
Class A Shares underlying the second Unit Purchase Option ("2UPO") granted
to the underwriter of the Company's secondary offering (exercisable
@$1,300 for 795 units, each unit consisting of (i) 290 Class A shares,
(ii) 290 Class A Warrants, and (iii) 290 Class B Warrants--each unit
consisting only of 290 shares of Class A Stock after July 19, 1999). The
2UPO expires April 7, 2000. 922,200
Class A Shares underlying the Warrants issued to Banque Paribas (1,000,000
warrants @ $1.37, expiring March 6, 2003; 500,000 warrants to purchase
.75 shares @$1.37, expiring March 14, 2007). 1,375,000
Class A Shares underlying the Video Update Stock Option Plans-(1994
Plan-146,150 (after exercise of 3,850), 1995 Plan-425,000 (after exercise
of 425,000), 1996 Plan-820,000, 1998 Plan-1,750,000, 1994 Formula Stock
Option Plan for Directors-50,000). 3,191,150
Class A Shares underlying the Moovies Stock Option Plans-(approximately
719,836 at exercise prices ranging from approx. $5.41 to $16.84). 719,836
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Class A Shares underlying conversion of Moovies Warrants (exercisable at
prices ranging from $.01 to $19.83). 378,719
Class A Shares underlying the ▇▇▇▇▇▇ Entertainment Inc. Warrants
(1,000,000 warrants @ $0.81, expiring May 11, 2004). 1,000,000
Class A Shares underlying the Warrants contemplated by the USBL Investors 3,937,500
June 1999 Warrant Agreements.
Class A Shares underlying the Warrants contemplated by the USBL June 1999 1,575,000
Warrant Agreement.
Class A Shares underlying the Warrants contemplated by the Banque Paribas 1,968,750
June 1999 Warrant Agreement.
Total Class A Shares underlying Options and Warrants 24,042,980
Total Shares Available on a Fully Diluted Basis 6,678,563
Registration Rights
1. Registration rights assumed under any registration rights or similar
agreement of Moovies, Inc., acquired by the Company in March 1998.
2. Registration rights relating to 50,000 shares of Class A Common Stock
issued in connection with the Company's acquisition of Video View, in January
1997.
3. Registration rights relating to 25,000 shares Class A Common Stock issued
in connection with the Company's acquisition of Video Warehouse, in January
1997.
4. Registration rights relating to 11,500 shares Class A Common Stock issued
in connection with the Company's acquisition of Tigre Holdings in March 1997.
5. Registration rights relating to 50,000 shares Class A Common Stock issued
in connection with the Company's acquisition of Superior Video, in April 1997.
6. Registration rights relating to the Unit Purchase Options granted by the
Company to ▇.▇. ▇▇▇▇▇ Investment Banking Corp. and its designees on July 27,
1994.
7. Registration rights relating to the Unit Purchase Options granted by the
Company to ▇.▇. ▇▇▇▇▇ Investment Corp. and its designees on April 17, 1995.
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8. Registration rights relating to Warrants issued pursuant to the Warrant
Agreement between the Company, American Stock Transfer & Trust Company and ▇.▇.
▇▇▇▇▇ Investment Banking Corp., dated as of July 20, 1994.
9. Registration rights relating to Warrants issued in connection with the
Credit Agreement.
10. Registration rights relating to Warrants issued to ▇▇▇▇▇▇ Entertainment
Inc., dated May 11, 1999.
11. Registration rights relating to Warrants contemplated by the Seventh
Amendment and Waiver to the Credit Agreement to: (i) USBL Investors; (ii) USBL;
and (iii) Banque Paribas.
12. Registration rights, right of first refusal and other rights granted to
USBL pursuant to the Engagement Letter, between USBL and the Company, dated
March 30, 1999 as amended by amendments on March 30, 1999 and May 7, 1999 (the
"Engagement Letter").
Rights Plans
Rights Agreement by and between the Company and American Stock Transfer &
Trust Company, as Rights Agent, dated April 13, 1998 (the "Rights Agreement"),
conferring upon each outstanding share of Class A Common Stock and each
outstanding Class B Warrant the right to purchase from the Company one one-
hundredth of a share of Series A Junior Participating Preferred Stock, par value
$.01 per share, of the Company at a price of $20.00 per one one-hundredth of a
share.
401(k) Plan
Video Update, Inc. 401(k) Plan, allowing for the purchase of the Company's
Class A Common Stock on the open market.
Class B Common Stock, $.01 par value per share
Two million (2,000,000) shares authorized, all previously issued shares of
which have been either converted into Class A Common Stock or cancelled.
Preferred Stock, $.01 par value per share
Five million (5,000,000) shares authorized, 400,000 shares of which have
been designated as "Series A Junior Participating Preferred Stock" in connection
with the Rights Plan.
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