EXHIBIT 10.38
Debenture No. 004
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR
QUALIFICATION UNDER SUCH SECURITIES LAWS OR AN OPINION OF COUNSEL, SATISFACTORY
TO THE COMPANY, THAT THE SALE OR TRANSFER IS PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH SECURITIES LAWS.
NATURAL WONDERS, INC.
15% Convertible Subordinated Debenture
(convertible into shares of common stock)
$250,000 Fremont, California
September 11, 2000
NATURAL WONDERS, INC., a Delaware corporation (the "Company"), for
value received, hereby promises to pay to XXXXXXX XXXXX and Associates, Inc. or
such other person in whose name this Debenture is registered on the Debenture
Register (as that term is defined below) (the "Holder"), the principal amount of
Two Hundred Fifty Thousand Dollars ($250,000), with simple interest on the
unpaid balance of such principal amount at the rate of fifteen percent (15%) per
annum from the date of this Debenture. Interest on the outstanding principal
balance shall be computed on the basis of a 360 day year of twelve 30-day months
and shall be paid to the Holder on March 15, 2001, September 15, 2001 and March
15, 2002 (each, an "Interest Payment Date"). Each Debenture delivered upon
registration of transfer or in exchange for or in lieu of this Debenture shall
carry the rights to interest accrued and unpaid, and to accrue, which were
carried by this Debenture.
The full principal amount of this Debenture, plus interest, will be due
and payable on March 15, 2002 (the "Maturity Date"). Payment of interest and
principal shall be made in lawful money of the United States of America by wire
transfer to an account designated by the Holder appearing on the Debenture
Register.
This Debenture is a duly authorized Debenture of the Company, limited
to the aggregate principal amount of $250,000.
1. REPRESENTATIONS, WARRANTIES AND COVENANTS.
1.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business as now conducted and as proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on its business or properties.
1.2 VALID ISSUANCE OF DEBENTURES AND SHARES. The Debenture,
when issued, sold and delivered in accordance with the terms hereof for the
consideration expressed herein, will be a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, and based
in part upon the representations of the Holder contained in the Subscription
Agreement pursuant to which this Debenture is being issued, will be issued in
compliance with all applicable federal and state securities laws. The shares of
the Company's Common Stock, $.0001 par value per share, issuable upon conversion
of the Debentures (the "Shares") have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of this Debenture,
shall be duly and validly issued, fully paid and nonassessable.
1.3 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation of or default under any provisions of its Certificate of Incorporation
or Bylaws as amended and in effect on and as of the date of this Debenture or of
any material provision of any instrument or contract to which it is a party or
by which it is bound or, to its knowledge, of any material provision of any
federal or state judgment, writ, decree, order, statute, rule or governmental
regulation applicable to the Company. The execution, delivery and issuance of
this Debenture will not result in: (a) any such violation or be in conflict with
or constitute, with or without the passage of time and giving of notice, a
default under any such provision, instrument or contract; or (b) an event which
results in the creation of any lien, charge or encumbrance upon any assets of
the Company.
2. SUBORDINATION.
2.1 SUBORDINATION. The indebtedness evidenced by this Debenture
is subordinate and junior in right of payment to all Senior Debt (as such term
is defined below) to the extent provided herein, and the Holder, by such
Xxxxxx's acceptance hereof, agrees to the subordination herein provided and
shall be bound by the provisions hereof. Senior Debt shall continue to be Senior
Debt and entitled to the benefits of these subordination provisions irrespective
of any amendment, modification or waiver of any term of the Senior Debt or
extension or renewal of the Senior Debt.
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2.2 SENIOR DEBT DEFINED. As used herein, the term "Senior Debt"
shall mean the following whether now outstanding or subsequently incurred,
assumed or created: (a) all indebtedness (whether or not secured) of the Company
or its subsidiaries to banks, insurance companies or other financial
institutions regularly engaged in the business of lending money, including
without limitation, the indebtedness now or hereafter owing to (i) IBJ Whitehall
Retail Finance and each of the other Lenders, as set forth and defined in a
certain Loan Agreement dated September 11, 2000 entered into with the Company,
and (ii) Hilco Capital, LP; (b) such other indebtedness of the Company or its
subsidiaries to the extent that the instrument creating or evidencing such
indebtedness provides that it shall constitute Senior Debt; (c) any indebtedness
issued in exchange for such Senior Debt, or any indebtedness arising from the
satisfaction of such Senior Debt by a guarantor; and (d) any deferrals,
renewals, or extensions of any such Senior Debt.
2.3 DEFAULT ON SENIOR DEBT. If an event of default occurs under
any Senior Debt, then, upon written notice of such default to the Company by the
Holders of Senior Debt or any trustee therefor, (a) the Holder may not take any
action to accelerate or enforce its rights and remedies until the holders of the
Senior Debt have confirmed in writing that such default shall have been cured or
duly waived or the Senior Debt has been paid in full or shall have ceased to
exist, and (b) no direct or indirect payment (in cash, property, securities, by
set-off or otherwise) shall be made or agreed to be made on account of the
principal of or interest on this Debenture, or in respect of any redemption,
repayment, retirement, purchase or other acquisition of this Debenture.
2.4 PRIOR PAYMENT OF SENIOR DEBT.
(a) In the event of: (i) the acceleration by any holder of
Senior Debt of the payment thereof or the commencement of an action to
enforce the rights and remedies of any holder of Senior Debt upon a
default under such Senior Debt; (ii) any insolvency, bankruptcy,
receivership, liquidation, reorganization, readjustment, composition or
other similar proceeding relating to the Company; (iii) any proceeding
for the liquidation, dissolution or other winding up of the Company,
voluntary or involuntary, whether or not involving insolvency or
bankruptcy proceedings; (iv) any assignment by the Company for the
benefit of creditors; or (v) any other marshalling of the assets of the
Company, all Senior Debt (including any interest thereon accruing after
the commencement of any such proceedings) shall first be paid in full
before any payment or distribution, whether in cash, securities or
other property, shall be made to any Holder on account of the principal
or interest on this Debenture. Any payment or distribution, whether in
cash, securities or other property (other
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than securities of the Company or any other corporation provided for by
a plan of reorganization or readjustment the payment of which is
subordinate, at least to the extent provided in these subordination
provisions with respect to the indebtedness evidenced by this
Debenture, to the payment of all Senior Debt at the time outstanding
and to any securities issued in respect thereof under any such plan of
reorganization or readjustment), which would otherwise (but for these
subordination provisions) be payable or deliverable in respect of this
Debenture shall be paid or delivered directly to the holders of Senior
Debt in accordance with the priorities then existing among such holders
until all Senior Debt (including any interest thereon accruing after
the commencement of any such proceedings) shall have been paid in full.
In the event of any such proceeding, after payment in full of all sums
owing with respect to Senior Debt, the Holder of this Debenture,
together with the holders of any obligations of the Company ranking on
a parity with this Debenture, shall be entitled to be paid from the
remaining assets of the Company the amounts at the time due and owing
on account of unpaid principal of and interest on this Debenture and
such other obligations before any payment or other distribution,
whether in cash, property or otherwise, shall be made on account of any
capital stock or any obligations of the Company ranking junior to this
Debenture and such other obligations.
(b) In the event that, notwithstanding the foregoing, any
payment or distribution of any character, whether in cash, securities
or other property (other than securities of the Company or any other
corporation provided for by a plan of reorganization or readjustment
the payment of which is subordinate, at least to the extent provided in
these subordination provisions with respect to the indebtedness
evidenced by this Debenture, to the payment of all Senior Debt at the
time outstanding and to any securities issued in respect thereof under
any such plan of reorganization or readjustment), shall be received by
any Holder in contravention of any of the terms hereof, such payment or
distribution or security shall be received in trust for the benefit of,
and shall be paid over or delivered and transferred to, the holders of
the Senior Debt at the time outstanding in accordance with the
priorities then existing among such holders for application to the
payment of all Senior Debt remaining unpaid, to the extent necessary to
pay all such Senior Debt in full. In the event of the failure of any
such Holder to endorse or assign any such payment, distribution or
security, each holder of Senior Debt is hereby irrevocably authorized
to endorse or assign the same.
2.5 NO IMPAIRMENT OF RIGHTS. Nothing contained herein shall
impair, as between the Company and the Holder, the obligation of the Company to
pay such
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Holder the principal of and interest on this Debenture or prevent such Holder
from exercising all rights, powers and remedies otherwise permitted by
applicable law or hereunder upon an Event of Default (as defined below)
hereunder, all subject to the rights of the holders of the Senior Debt to
receive cash, securities or other property otherwise payable or deliverable to
the Holder of this Debenture.
2.6 SUBROGATION. Upon the payment in full of all Senior Debt,
the Holders of the Debentures, together with all other subordinated debt of the
Company ranking on a parity therewith, shall be subrogated to all rights of any
holders of Senior Debt to receive any further payments or distributions
applicable to the Senior Debt until the indebtedness evidenced by the Debentures
shall have been paid in full, and such payments or distributions received by the
Holders thereof, by reason of such subrogation, of cash, securities or other
property which otherwise would be paid or distributed to the holders of Senior
Debt, shall, as between the Company and its creditors other than the holders of
Senior Debt, on the one hand, and such Holders on the other hand, be deemed to
be a payment by the Company on account of Senior Debt and not on account of the
Debentures.
2.7 NO IMPAIRMENT OF SECURITY INTEREST. The provisions of this
Debenture shall not impair any rights, remedies or powers of any secured
creditor of the Company in respect of any security interest. The securing of any
obligations of the Company otherwise ranking on a parity with the Debentures or
ranking junior to such Debentures shall not be deemed to prevent such
obligations from constituting, respectively, obligations ranking on a parity
with such Debentures or ranking junior to such Debentures.
2.8 AMENDMENT OF SUBORDINATION PROVISIONS. No modification or
amendment of the subordination provisions contained in Section 2 hereof in a
manner adverse to the holders of Senior Debt may be made without the consent of
all holders of Senior Debt.
2.9 UNDERTAKING. By its acceptance of this Debenture, the
Holder agrees to execute and deliver such documents as may be reasonably
requested from time to time by the Company or the lender of any Senior Debt in
order to implement the foregoing provisions of Section 2 hereof.
3. NO RESTRICTIONS ON ISSUANCE OF ADDITIONAL DEBT. Nothing contained
in this Debenture shall restrict the Company from creating, assuming or
incurring any additional indebtedness, whether ranking junior to, on par with,
or senior to, this Debenture, or require the Company to obtain the consent of
the Holder with respect thereto.
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4. DEFAULT.
4.1 EVENT OF DEFAULT. Each of the following events shall be an
Event of Default hereunder:
(a) Default in the payment of any interest on this
Debenture when due, continued for two (2) business days.
(b) Default in the payment of the principal on the Maturity
Date.
(c) Material default in the performance of any of the
covenants or agreements of the Company contained in this Debenture
continued for thirty (30) days after notice thereof (provided, however,
that if the default cannot reasonably be corrected within such period,
there shall be no event of default if corrective action is instituted
promptly and is pursued diligently until the default is corrected).
(d) If a petition in involuntary bankruptcy is filed
against the Company under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation under the
law of any jurisdiction, whether now or hereafter in effect, and is not
stayed or dismissed within thirty (30) days after such filing, or if
the Company shall make an assignment for the benefit of creditors, or
shall file a voluntary petition in bankruptcy, or shall be adjudicated
a bankrupt or insolvent, or shall file any petition or answer seeking
for itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future
statute, law or regulation, or shall seek or consent to or acquiesce in
the appointment of any trustee, receiver or liquidator of the Company
or of all or any substantial part of the properties of the Company, or
commence voluntary or involuntary dissolution proceedings.
(e) Default under Senior Debt that gives the holder thereof
the right to accelerate such Senior Debt, and such Senior Debt is in
fact accelerated by such holder.
4.2 REMEDIES ON DEFAULT, ETC.
(a) If an Event of Default occurs and is continuing after
the expiration of any applicable grace period, the Holder may declare
the Debenture immediately due and payable.
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(b) In case of a default in the payment of any principal or
interest due on this Debenture, the Company shall pay to the Holder
thereof the amount owing together with: (i) simple interest on the
amount owing at the rate per annum equal to fifteen percent (15%) on
the amounts past due; and (ii) such additional amount as shall be
sufficient to cover the cost and expenses of collection, including,
without limitation, reasonable attorneys' fees, expenses and
disbursements.
(c) No right, power or remedy conferred by this Debenture
upon any 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.
5. CONVERSION.
5.1 CONVERSION RIGHTS. The Holder may at any time, and from
time to time, prior to the first to occur of the Maturity Date or the date fixed
by the Company for redemption of this Debenture (the "Redemption Date"), convert
this Debenture or any portion of the principal amount hereof which is $50,000 or
an integral multiple of $50,000, into Shares, at a conversion price of $1.50 per
Share (the "Conversion Price"), subject to adjustment in certain events
described below.
The number of Shares that the Holder shall receive upon any such
conversion shall be determined by dividing the principal amount of this
Debenture to be so converted by the Conversion Price in effect at the time of
such conversion. In the event that this Debenture is called for redemption, the
right to convert the Debenture shall terminate at the close of business on the
Redemption Date and will be lost if not exercised prior to that time unless the
Company defaults in making the payment due upon redemption. In the event of a
partial conversion of this Debenture, the Company shall execute and deliver to
the Holder a new Debenture in the aggregate principal amount equal to and in
exchange for the unconverted portion of the principal amount of the Debenture so
surrendered for conversion.
5.2 EFFECT OF CONVERSION; ISSUANCE OF SHARES ON CONVERSION.
Conversion of this Debenture shall be deemed to have been made at the close of
business on the date that the Debenture shall have been surrendered for
conversion, accompanied by written notice of election to convert in the form of
Exhibit "A" attached hereto (or such other form reasonably acceptable to the
Company), and thereupon the Holder shall have no further rights hereunder,
except with respect to the receipt of accrued interest due hereunder and the
Shares issuable upon conversion of this Debenture. As soon as practicable after
full or partial conversion of this Debenture, the Company shall pay to the
Holder all interest accrued hereunder with
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respect to the portion of the Debenture so converted to the date of conversion.
In addition, as soon as practicable after full or partial conversion of this
Debenture, the Company shall, at its expense, cause to be issued in the name of,
and delivered to, the Holder a certificate or certificates for the number of
Shares to which the Holder shall be entitled on such conversion, together with
any other securities and property to which the Holder is entitled on such
conversion under the terms of this Debenture. No fractional shares will be
issued on conversion of this Debenture. If on any conversion of this Debenture a
fraction of a share results, the Company will pay the cash value of that
fractional share, calculated on the basis of the then effective Conversion
Price.
5.3 ADJUSTMENTS TO CONVERSION PRICE.
(a) If the Company shall at any time while this Debenture
is outstanding subdivide the outstanding shares of its Common Stock,
the Conversion Price then in effect immediately before that subdivision
shall be proportionately decreased, and if the Company shall at any
time while this Debenture is outstanding combine the outstanding shares
of Common Stock, the Conversion Price then in effect immediately before
that combination shall be proportionately increased. Except as
otherwise provided below, any adjustment under this Section 5.3 shall
become effective at the close of business on the date the subdivision
or combination becomes effective. A dividend on any security of the
Company payable in Common Stock, or a split of the Company's Common
Stock, shall be considered a subdivision of Common Stock for purposes
of this Section 5.3 at the close of business on the record date with
respect to such dividend or stock split. A reverse split of the
Company's Common Stock shall be considered a combination of Common
Stock for purposes of this Section 5.3 at the close of business on the
record date with respect to such reverse stock split.
(b) In the event the Company, at any time or from time to
time while this Debenture is outstanding, shall make or issue, or fix a
record date for the determination of holders of Common Stock entitled
to receive, a dividend or other distribution with respect to the
Company's Common Stock payable in securities of the Company other than
shares of Common Stock, then and in each such event, provisions shall
be made so that the Holder shall receive upon conversion hereof, in
addition to the number of shares of Common Stock receivable thereupon,
the amount of securities of the Company which he would have received
had this Debenture been converted into Common Stock on the date of such
event and had the Holder thereafter, during the period from the date of
such event to and including the conversion date, retained such
securities receivable by him.
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(c) If while this Debenture is outstanding, the Shares
issuable upon conversion of this Debenture shall be changed into the
same or a different number of shares of any other class or classes of
stock of the Company, whether by recapitalization, reclassification or
other exchange (other than a subdivision or combination of shares, or a
capital reorganization, merger or sale of assets, provided for
elsewhere in this Section 5.3), the Holder shall, upon the conversion
of this Debenture, be entitled to receive, in lieu of the Shares which
the Holder would have become entitled to receive but for such change, a
number of shares of such other class or classes of stock that would
have been subject to receipt by the Holder if he had exercised his
right of conversion of this Debenture immediately before that change.
(d) If while this Debenture is outstanding, there shall be
a merger or consolidation of the Company with or into another
corporation (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of outstanding
shares of Common Stock of the Company), or the sale of all or
substantially all of the Company's properties and assets to any other
person, then, as a part of such merger, consolidation or sale, lawful
provision shall be made so that the Holder shall thereafter be entitled
to receive upon conversion of this Debenture, during the period
specified in this Debenture, the number of shares of stock or other
securities or property of the Company, or of the successor corporation
resulting from such merger, consolidation or sale, to which a holder of
the Shares deliverable upon conversion of this Debenture would have
been entitled on such merger, consolidation or sale if this Debenture
had been converted immediately before such merger, consolidation or
sale. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 5.3 with respect to the
rights of the Holder after such merger, consolidation or sale to the
end that the provisions of this Section 5.3 (including adjustments of
the Conversion Price then in effect and number of shares purchasable
upon conversion of this Debenture) shall continue to be applicable
after that event and shall be as nearly equivalent to the provisions
hereof as may be practicable.
(e) The Company shall promptly and in any case not later
than ten (10) days after the date of any adjustment of the Conversion
Price give written notice of such adjustment and the number of Shares
or other securities issuable upon conversion of this Debenture, by
first-class mail, postage prepaid, to the registered Holder at the
Holder's address as shown on the Debenture Register. The certificate
shall state such adjustment and show in reasonable detail the facts on
which such adjustment is based.
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(f) The form of this Debenture need not be changed because
of any adjustment in the Conversion Price or in the number of Shares
issuable upon its conversion. A Debenture issued after any adjustment
on any partial conversion or upon replacement may continue to express
the same Conversion Price and the same number of Shares (appropriately
reduced in the case of partial conversion) as are stated on this
Debenture as initially issued, and that Conversion Price and that
number of Shares shall be considered to have been so changed as of the
close of business on the date of the adjustment.
6. OPTIONAL REDEMPTION.
6.1 RIGHT OF REDEMPTION. This Debenture may be redeemed at the
election of the Company, as a whole or from time to time in part, at any time,
at one hundred percent (100%) of the principal amount of this Debenture,
together with accrued interest to the Redemption Date.
6.2 REDEMPTION PROCEDURES.
(a) Notice of redemption shall be given by first-class
mail, postage prepaid, mailed not less than thirty (30) nor more than
sixty (60) days prior to the Redemption Date, to the Holder, at the
address appearing in the Debenture Register and to the Company at its
principal place of business.
(b) The notice of redemption shall state: (a) the
Redemption Date; (b) that on the Redemption Date the redemption price
will become due and payable on the Debenture and that interest thereon
will cease to accrue on and after said date; and (c) the place where
the Debenture is to be surrendered for payment of the redemption price.
Any notice that is mailed in the manner herein provided shall be
conclusively presumed to have been given whether or not the Holder
receives said notice.
(c) Notice of redemption having been given as aforesaid,
the Debenture shall, on the Redemption Date, become due and payable at
the redemption price therein specified, and from and after such date
(unless the Company shall default in the payment of the redemption
price and accrued interest) the Debenture shall cease to bear interest.
Upon surrender of the Debenture for redemption in accordance with said
notice, the Debenture shall be paid by the Company at the redemption
price, together with accrued interest to the Redemption Date.
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(d) If the Debenture shall not be so paid upon surrender
thereof for redemption, the principal shall, until paid, bear interest
from the Redemption Date at the rate borne by the Debenture.
7. REGISTRATION OF TRANSFER AND EXCHANGE.
7.1 DEBENTURE REGISTER. The Company shall cause to be kept at
the principal office of the Company a register (the "Debenture Register") in
which, subject to such reasonable regulations as it may prescribe, the Company
shall provide for the registration and the transfer of the Debenture subject to
the provisions regarding transferability contained in this Debenture. Upon
surrender for registration of transfer of any Debenture at the principal office
of the Company, the Company shall execute and deliver, in the name of the
designated transferee or transferees, one or more new Debentures in minimum
denominations of $50,000 and integral multiples of $50,000.
7.2 TRANSFER OF DEBENTURES. At the time the Debenture is
presented or surrendered for registration of transfer it shall (if so required
by the Company) be duly endorsed, or be accompanied by a written instrument of
transfer in form satisfactory to the Company, duly executed by the Holder
thereof or his attorney duly authorized in writing. No service charge shall be
made for any registration of transfer, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration of transfer of the Debentures.
7.3 REPLACEMENT DEBENTURE.
(a) If the Debenture is mutilated and is surrendered to the
Company, the Company shall execute and deliver in exchange therefor a
new Debenture of like tenor and principal amount and bearing a number
not contemporaneously outstanding. If there shall be delivered to the
Company: (i) evidence to its satisfaction of the destruction, loss or
theft of the Debenture; and (ii) such security or indemnity as may be
required by it to save the Company and any agent harmless. Then, in the
absence of notice to the Company that the Debenture has been acquired
by a bona fide purchaser, the Company shall execute and deliver, in
lieu of any such destroyed, lost or stolen Debenture, a new Debenture
of like tenor and principal amount and bearing a number not
contemporaneously outstanding. In the event such mutilated, destroyed,
lost or stolen Debenture has become or is about to become due and
payable, the Company in its discretion may, instead of issuing a new
Debenture, retire such Debenture.
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(b) Upon the issuance of any new Debenture under this
Section 7.3, the Company may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in
relation thereto and any other expenses connected therewith.
(c) Any new Debenture issued pursuant to this Section 7.3
in lieu of any destroyed, lost or stolen Debenture shall constitute an
original additional contractual obligation of the Company, whether or
not the destroyed, lost or stolen Debenture shall be at any time
enforceable by anyone.
(d) The provisions of this Section 7.3 are exclusive and
shall preclude (to the extent lawful) all other rights and remedies
with respect to the replacement or payment of mutilated, destroyed,
lost or stolen Debentures.
8. LIMITATIONS ON DISPOSITION. The Holder understands that this
Debenture, the Shares issuable upon conversion of this Debenture and any other
securities issued under this Debenture are "restricted securities" under the
federal securities laws inasmuch as they are being acquired from the Company in
a transaction not involving a public offering and that under such laws and
applicable restrictions such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act") only in certain limited
circumstances. In this connection, the Holder represents that it is familiar
with Rule 144 under the Act and the limitations imposed thereby and by the Act.
The Holder further agrees not to make any disposition of all or
any portion of this Debenture, the Shares or any other securities issued
hereunder unless and until: (a) there is then in effect a Registration Statement
under the Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or (b) the Holder shall have (i)
notified the Company of the proposed disposition and shall have furnished the
Company with a reasonably detailed statement of the circumstances surrounding
the proposed disposition; and (ii) furnished the Company with an opinion of
counsel, satisfactory to the Company, that such disposition will not require
registration of the securities under the Act.
The Holder understands that this Debenture, the Shares and any
other securities issued hereunder may bear the following legend, together with
any other legend required by law:
"The securities represented hereby have not been registered under
the Securities Act of 1933, or any state securities laws. These
securities may not be sold or transferred in the
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absence of an effective registration statement or qualification
under such securities laws or an opinion of counsel, satisfactory
to the Company, that the sale or transfer is pursuant to an
exemption from the registration or qualification requirements of
any applicable securities laws."
9. LIMITATIONS ON DIVIDENDS AND DISTRIBUTIONS. So long as this
Debenture is outstanding, the Company shall not declare, pay, make or set apart
any sum for a dividend or other distribution (whether in cash or other property)
with respect to any class of capital stock of the Company (other than dividends
or distributions payable in its capital stock), or for the redemption,
retirement, purchase or other acquisition for value of any share of any class of
capital stock of the Company or any warrants or rights to purchase any class of
capital stock of the Company.
10. REGISTRATION RIGHTS.
10.1 DEFINITIONS. For purposes of Section 10 hereof, terms not
otherwise defined herein shall have the following meanings:
(a) The terms "register," "registered" and "registration"
refer to the preparation and filing of a registration statement in
compliance with the Act and the rules promulgated thereunder, and the
declaration of the effectiveness of such registration statement, or the
taking of similar action under a successor statute or regulation.
(b) The term "Registrable Securities" means the Shares
issuable upon conversion of the Debenture or exercise of the Warrant,
and any securities issued or issuable with respect to such Shares by
way of a stock dividend or stock split or in connection with a
combination or shares, recapitalization, merger, consolidation or other
reorganization.
(c) The term "Rights Holder" or "Rights Holders" means any
registered holder or holders of Registrable Securities.
(d) The term "Prospectus" means a prospectus that complies
with applicable provisions of the Act.
(e) The term "Warrant" refers to the Warrant issued to
Rights Holders by the Company on September 11, 2000 concurrently with
the offer and sale of the Debentures.
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10.2 DEMAND REGISTRATION.
(a) On any date after March 15, 2001, the holders of at
least fifty percent (50%) of the Registrable Securities then
outstanding (the "Initiating Rights Holders") may request in writing
registration under the Act (a "Demand Registration"). The Demand
Registration request shall specify the amount of the Registrable
Securities proposed to be sold, the intended method of disposition
thereof and the jurisdictions in which registration is desired. Upon
the receipt of the Demand Registration request, the Company promptly
shall take such steps as are necessary or appropriate to prepare for
the registration of the Registrable Securities to be registered. Within
fifteen (15) days after the receipt of such request, the Company shall
give written notice thereof to all other Rights Holders and include in
such registration all Registrable Securities held by a Rights Holder
from whom the Company has received a written request for inclusion
therein at least ten (10) days prior to the filing of the registration
statement. Each such request will also specify the number of
Registrable Securities to be registered, the intended method of
disposition thereof and the jurisdictions in which registration is
desired.
(b) The Company shall use its reasonable best efforts to
cause any such Demand Registration to become effective not later than
one hundred twenty (120) days after it receives a request under this
Section 10.2. A registration requested pursuant to this Section 10.2
shall not count as the one Demand Registration to which the Rights
Holders are entitled to thereunder unless such registration statement
is declared effective and remains effective for at least ninety (90)
days.
(c) If Rights Holders of a majority of the Registrable
Securities proposed to be registered by the Initiating Rights Holders
so elect, the offering of such Registrable Securities pursuant to such
Demand Registration shall be in the form of a firm commitment
underwritten offering. If any Demand Registration of Registrable
Securities is in the form of an underwritten offering, the Rights
Holders holding a majority of the Registrable Securities proposed to be
registered by the Initiating Rights Holders shall select and obtain an
investment banking firm of national reputation to act as the managing
underwriter of the offering (the "Approved Underwriter"); provided,
that the Approved Underwriter shall, in any case, be acceptable to the
Company in its reasonable judgment.
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(d) The Company shall not be obligated to effect any
registration under this Section 10.2 except in accordance with the
following provisions:
(i) The Company shall not be obligated to use its
reasonable best efforts to file and cause to become effective
more than one registration statement with respect to
Registrable Securities held by the Rights Holders initiated
pursuant to this Section 10.2; provided, however, that any
registration proceeding begun pursuant to this Section 10.2
that is subsequently withdrawn at the request of the Rights
Holders shall not be so counted if such withdrawal is based
upon material adverse information relating to the Company or
its condition, business, or prospects which is different from
that generally known to the Rights Holders at the time of
their request.
(ii) The Company may delay the filing or
effectiveness of any registration statement for a period of
up to ninety (90) days after the date of a request for
registration pursuant to this Section 10.2 if (x) at the time
of such request the Company is engaged, or has formal plans
to engage within sixty (60) days of the time of such request,
in an underwritten public offering of Shares, (y) the Board
of Directors of the Company determines in good faith that (A)
it is in possession of material, non-public information
concerning an acquisition, merger, recapitalization,
consolidation, reorganization or other material transaction
by or of the Company or concerning pending or threatened
litigation and (B) disclosure of such information would
jeopardize any such transaction or litigation or otherwise
materially harm the Company, or (z) the Company shall furnish
to the Rights Holders a certificate signed by the Chief
Executive Officer or President of the Company stating that,
in the good faith judgment of the Board of Directors of the
Company, it would otherwise be seriously detrimental to the
Company and its investors for such registration statement to
be filed and it is therefore essential to defer the filing of
such registration statement.
10.3 PIGGYBACK REGISTRATION.
(a) If, at any time, through and including the third
anniversary date of the issuance of this Debenture, the Company
proposes to register any of its securities under the Act (other than in
connection with a merger pursuant to a Form S-4 Registration Statement
or an employee stock compensation plan pursuant to a Form S-8
Registration Statement), it will give written notice by
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registered mail, at least thirty (30) days prior to the filing of each
such registration statement, to the Rights Holder of its intention to
do so. If the Rights Holder notifies the Company within twenty (20)
days after receipt of any such notice of its desire to include any
Registrable Securities in such proposed registration statement, the
Company shall afford such Rights Holder the opportunity to have any of
the Registrable Securities registered under such registration statement
and included in any underwriting involved with respect thereto.
(b) Notwithstanding the provisions of this Section 10.3:
(i) the Company shall have the right at any time after it shall have
given written notice pursuant to this Section 10.3 (irrespective of
whether a written request for inclusion of any Registrable Securities
shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but
prior to the effective date thereof; and (ii) in the event a
registration under Section 10 hereof relates to an underwritten public
offering which does not include any securities being offered and sold
on behalf of selling shareholders, the inclusion of any Registrable
Securities may, at the election of the Company, be conditioned upon the
Rights Holder agreement that the public offering of such Registrable
Securities shall not commence until ninety (90) days after the
effective date of such registration.
(c) The rights of the Rights Holder pursuant to Section 10
hereof shall be conditioned upon such Rights Holder's participation in
the underwriting with respect thereto and the inclusion of such Rights
Holder's Registrable Securities in such underwriting (unless otherwise
mutually agreed by the Company, the managing underwriter or, if none, a
majority of the underwriters, and such Rights Holder) to the extent
provided herein.
(d) Notwithstanding any other provision of this Debenture,
if the managing underwriter or, if none, a majority of the
underwriters, determines that marketing factors require a limitation of
the number of shares to be underwritten or a complete exclusion of such
shares, such underwriter or underwriters may limit the number of
Registrable Securities that may be included in the registration and
underwriting or exclude all of the Registrable Securities, as
appropriate. In the case of an underwritten registration in which the
number of Registrable Securities that may be included is limited, the
Company shall advise the Rights Holder of the limited number of
Registrable Securities that may be included in the registration, and
the number of Registrable Securities that may be included in the
registration and underwriting shall be allocated among all Rights
Holders thereof in proportion, as nearly as
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practicable, to the respective amounts of Registrable Securities
entitled to inclusion in such registration held by such Rights Holders
at the time of filing the registration statement.
(e) The Company shall (together with all Rights Holders
proposing to distribute their securities through an underwriting) enter
into an underwriting agreement in customary form with the underwriter
or underwriters selected for the underwriting.
(f) If, after the third anniversary date of the issuance of
this Debenture, the Registrable Securities owned by the Holder continue
to be subject to a legend or other transfer restriction which treats
the Holder as having affiliate status as that term is used in Rule 144
of the Act, then the Holder shall continue to have a one-time right to
include any Registrable Securities in a proposed registration statement
subject to the procedures described in Section 10.2 hereof. This
registration right shall expire on the earlier of: (i) the conclusion
of the Holder's affiliate status; or (ii) the sixth anniversary date of
the issuance of this Debenture.
10.4 EXPENSES. All expenses incurred in connection with any
registration pursuant to this Debenture, including without limitation, all
registration, filing and qualification fees, printing expenses, fees and
disbursements of counsel for the Company, and expenses of any special audits
incidental to or required by such registration, shall be borne by the Company;
provided however the Company shall not be required to pay:
(a) fees of legal counsel of any Rights Holder, or
underwriters' fees, discounts, commissions or expenses relating to
Registrable Securities; and
(b) for expenses that the Company is prohibited from paying
under Blue Sky laws or by Blue Sky administrators.
10.5 COMPANY RESPONSIBILITIES. In the case of a registration
effected by the Company pursuant to this Debenture, the Company shall use its
best efforts to keep the Rights Holder advised in writing as to the initiation,
effectiveness and completion of such registration. At its expense the Company
shall:
(a) prepare and file a registration statement (and such
amendments and supplements thereto) with respect to such Registrable
Securities and use its best efforts to cause such registration
statement to become and remain effective for a period of one hundred
eighty (180) days or until the
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Rights Holder or Rights Holders have completed the distribution
described in the registration statement relating thereto, whichever
first occurs;
(b) furnish such number of copies of a Prospectus in
conformity with the requirements of applicable law, and such other
documents incident thereto as a Rights Holder from time to time may
reasonably request; and
(c) use every reasonable effort to register or qualify the
Registrable Securities covered by such registration statement under the
state Blue Sky laws of such jurisdictions as the Company's Board of
Directors may reasonably determine, and do any and all other acts and
things which may be necessary under said Blue Sky laws to enable the
sellers of the Registrable Securities to consummate the public sale or
other disposition of the Registrable Securities owned by them in such
jurisdictions, except that the Company shall not for any purpose be
required to qualify to do business as a foreign corporation in any
jurisdiction wherein the Registrable Securities are so qualified.
10.6 INDEMNIFICATION.
(a) The Company shall indemnify the Rights Holder, each of
the Rights Holder's officers and directors, and each person controlling
such Rights Holder, with respect to such registration effected pursuant
to Sections 10.2 and 10.3 hereof, and each underwriter, if any, and
each person who controls any underwriter of the Registrable Securities,
against all claims, losses, damages and liabilities (or actions in
respect thereto) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any
registration statement or related Prospectus, 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 any rule or regulation
promulgated under any securities law applicable to the Company and
relating to action or inaction required of the Company in connection
with any such registration, and shall reimburse the Rights Holder, each
of the Rights Holder's officers and directors, and each person
controlling such Rights 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 or defending any
such claim, loss, damage, liability or action, provided that the
Company shall not be liable in any such case to the extent that any
such claim, loss, damage or liability arises out of or is based on any
untrue statement or omission based
-18-
upon written information furnished to the Company in an instrument duly
executed by such Rights Holder or underwriter specifically for use
therein.
(b) The Rights Holder shall, if Registrable Securities held
by or issuable to the Rights Holder are included in the securities as
to which such registration is being effected, indemnify the Company,
each of its directors and officers who sign such registration
statement, each underwriter, if any, of the Company's securities
covered by such a registration statement, each person who controls the
Company within the meaning of the Act, and each other Rights Holder,
each of such Rights Holder's officers and directors and each person
controlling such Rights Holder, 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 such registration statement or related Prospectus, 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 shall reimburse the Company, such Rights
Holders, such directors, officers, persons, or underwriters 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 or related Prospectus
in reliance upon and in conformity with written information furnished
to the Company in an instrument duly executed by such Rights Holder
specifically for use therein.
(c) Each party entitled to indemnification under this
Section 10.6 (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual knowledge of any claim as to
which indemnity may he 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 litigation, 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 Indemnifying Party of its obligations under this Section 10.6. 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,
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the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation.
10.7 RIGHTS HOLDER'S OBLIGATIONS. The Rights Holder shall
furnish to the Company such written information regarding such Rights Holder and
the distribution proposed by such Rights Holder as the Company may reasonably
request in writing and as shall be required in connection with any registration
referred to in this Debenture.
10.8 ASSIGNMENT. The rights granted to the Rights Holder
pursuant to this Debenture may be assigned to a transferee or assignee of the
Debenture or any of the Registrable Securities, provided that the transferee or
assignee is an affiliated entity of the Rights Holder and the Company is given
written notice at the time of or within 10 days after said transfer, stating the
name and address of said transferee or assignee and identifying the Registrable
Securities with respect to which such registration rights are being assigned.
11. MISCELLANEOUS.
11.1 AMENDMENT. The provisions of this Debenture may be amended
or modified only with the written consent of the Company and the Holder.
11.2 ENTIRE AGREEMENT. This Debenture constitutes the entire
agreement among the parties with regard to the subject matter hereof, and
supersedes and replaces any and all prior to contemporaneous agreements, written
or oral. The terms and conditions of this Debenture shall inure to the benefit
of, and be binding upon, the respective successors and assigns of the parties.
Nothing in this Debenture is intended to confer on any third party any rights,
liabilities or obligations, except as specifically provided.
11.3 HEADINGS. The titles and subtitles used in this Debenture
are for convenience only and are not to be used in construing or interpreting
this Debenture.
11.4 SEC FILINGS. During the term of this Debenture the Company
shall promptly forward to the Holder annual and periodic reports and proxy
statements required to be filed by the Company with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.
11.5 GOVERNING LAW. This Debenture shall be governed by the laws
of the State of Delaware.
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11.6 ATTORNEYS' FEES. The prevailing party in any action or
proceeding between the parties arising out of or related to this Debenture shall
be entitled to recover all reasonable expenses, including without limitation
attorneys, fees and costs, incurred in connection with any such action or
proceeding.
IN WITNESS WHEREOF, the undersigned have executed this Debenture
on the date first above written.
NATURAL WONDERS, INC.
By:
---------------------------------
Xxxxx X. Xxxxxx
Chief Executive Officer
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EXHIBIT "A"
Form of Conversion Notice
To Natural Wonders, Inc.:
The undersigned Holder hereby irrevocably exercises the option to convert this
Debenture, or portion hereof (which is in the amount of not less than $50,000
and in increments of not less than $50,000 thereafter) below designated, into
shares of the Company's Common Stock, $.0001 par value per share, in accordance
with the terms of the Debenture, and directs that the shares issuable and
deliverable upon such conversion, together with any check in payment for
fractional shares and any Debentures representing any unconverted principal
amount hereof, be issued and delivered to the undersigned unless a different
name has been indicated below. If shares or Debentures are to be issued in the
name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto. Any amount required to be paid by
the undersigned on account of interest accompanies this Debenture.
Dated:_________________________________ _______________________________
Signature
_______________________________
Taxpayer Identification Number
Principal Amount to be Converted: $_______________
If shares or Debentures are to be registered in the name of a person other than
the Holder, please print such person's name and address below:
Name:_____________________________________________________________
Address:__________________________________________________________
__________________________________________________________
A-1
