Exhibit 4b
----------
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.
------------------
WARRANT TO PURCHASE [___________] SHARES
OF CLASS A COMMON STOCK
VIDEO UPDATE, INC., a Delaware corporation (the "Company"), hereby
certifies that, for value received, [PARIBAS BANK GROUP] (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
---------
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
---------
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
----------
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 issued to the
other Investors as of the date hereof, are referred to herein as the "Investor
Warrants".
E-28
1. Term. The purchase right represented by this Warrant is exercisable,
----
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.
--------
a. Method of Exercise; Payment; Issuance of New Warrant. Subject to
----------------------------------------------------
Section 1 hereof, the purchase right represented by this Warrant may be
---------
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
---------
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)
------------
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.
b. Automatic Exercise. In the event that any portion of this Warrant
------------------
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
------------
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
------------
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
E-29
of the Automatic Exercise Date pursuant to the conversion provisions of Section
-------
2(c) below (without payment by 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.
--------
(1) Right to Convert. In addition to and without limiting
----------------
the 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 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
---------------
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:
X = A - B
-----
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
E-30
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 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 2(c)(1) hereof as the Converted Warrant Shares) in exercise of the
---------------
Conversion 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 Section 2(c), "fair market value" of a share of Common Stock shall have the
------------
meaning set forth in Section 4(h) below.
------------
3. Stock Fully Paid; Reservation of Shares. All Warrant Shares that
---------------------------------------
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.
4. Adjustment of Warrant Price and Number of Shares. The number and
------------------------------------------------
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)
------------------------------
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
E-31
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 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 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 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
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
----------------
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
E-32
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 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 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.
e. Other Special Distributions. In case the Company shall fix a
---------------------------
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
------------ ------------ -------
4(d) above, and other than cash dividends to the extent paid out of the
----
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
------------
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
E-33
Stock outstanding as of such record date, provided, that 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 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 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.
-------------------------------
(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),
-------------
4(c), 4(d) or 4(e) above, (ii) shares issued upon the exercise of such rights,
------------------
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 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 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
E-34
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 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), 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
E-35
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 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 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 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.
g. Adjustment of Number of Shares. Upon each adjustment in the
------------------------------
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
----------------------------------
provisions of this Warrant requiring a determination in accordance with this
Section 4(h), "fair market value" as of a particular date (the "Determination
------------
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
E-36
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.
"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
E-37
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 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
E-38
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, 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
E-39
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 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
E-40
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;
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-41
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 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
E-42
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 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 X.X. Xxxxx
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
E-43
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 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.
------------------------------
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:
E-44
(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
-------------
(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)
E-45
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 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
E-46
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, 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.
26. Limitations on Certain Holders.
------------------------------
26.1 Limitation on Certain Transactions; Notice to Regulated
-------------------------------------------------------
Holders. The Company shall not convert or directly or indirectly redeem,
-------
purchase or otherwise acquire or take any other action affecting the outstanding
voting capital stock of the Company or take any other action affecting the
outstanding voting capital stock of the Company or take any other action
affecting the voting rights of such shares, if, after giving effect to such
redemption, purchase, acquisition or other action, any Regulated Holder,
together with its Affiliates and transferees, would own more voting shares of
the Company than are permitted to such Regulated Holder,
E-47
Affiliate or transferee under the Bank Holding Company Act (12 U.S.C. (S) 1841
et seq.) other than any class of voting securities which is (or is made prior to
any such redemption, purchase, acquisition or other action) convertible into a
class of non-voting securities which are otherwise identical to the voting
securities and convertible into such voting securities on terms reasonably
acceptable to such Regulated Holder), determined by assuming such Regulated
Holder and its Affiliates and transferees (but no other holder) has exercised
all of its Warrants and other convertible or exchangeable securities (each
Regulated Holder being an "Affected Regulated Holder"), unless the Company first
gives each Affected Regulated Holder advance written notice (the "Deferral
Notice") of such action. The Company shall defer making any such conversion,
redemption, purchase or other acquisition, or taking any such other action for a
period of twenty (20) Business Days (the "Deferral Period") after delivering the
Deferral Notice. The Company shall promptly take such actions as reasonably
requested by each Affected Regulated Holder including, but not limited to,
cooperating with each Affected Regulated Holder in any efforts by such Regulated
Holder to dispose of its Excess Shares in a prompt and orderly manner, including
providing (and authorizing such Regulated Holder to provide) financial and other
information concerning the Company to any prospective purchaser of such
Restricted Shares.
26.2 For purposes of this Section 26, the following definitions shall
----------
apply:
a. "Affiliate" shall mean, as applied to any Person, any other
Person directly or indirectly controlling (including, but not limited to, all
directors and officers of such Person), controlled by, or under direct or
indirect common control with, such Person. A Person shall be deemed to "control"
another Person if such Person possesses, directly or indirectly, the power to
direct or cause the direction of the management policies of such other Person,
whether through the ownership of voting securities, by contract or otherwise.
b. "Conversion Event," with respect to the exercise of a Warrant by
a Regulated Holder or its Affiliate that will result in such Regulated Holder or
Affiliate owning more than 4.9% of the outstanding shares of the Company, shall
mean (a) any public offering or public sale of securities of the Company
(including a public offering registered under the 1933 Act and a public sale
pursuant to Rule 144 of the Commission or any similar rule then in force), (b)
any sale of securities of the Company to a person or group of persons (within
the meaning of the 0000 Xxx) if, after such sale, such person or group of
persons in the aggregate would own or control securities which possess in the
aggregate the ordinary voting power to elect a majority of the Company's
directors (provided that such sale has been approved by the Company's Board of
Directors of a committee thereof), (c) any sale of securities of the Company to
a person or group of persons (within the meaning of the 0000 Xxx) if, after such
sale, such person or group of persons in the aggregate would own or control
securities of the Company (excluding any Warrant Shares disposed of in
connection with such Conversion Event) which possess in the aggregate the
ordinary voting power to elect a majority of the Company's directors, (d) any
sale of securities of the Company to a person or group of persons (within the
meaning of the 0000 Xxx) if, after such sale, such person or group of persons
would not, in the aggregate, own, control or have the right to acquire more than
two percent (2%) of the outstanding securities of any class of voting securities
of the Company and (e) a merger, consolidation or similar transaction involving
the Company if, after such transaction, a person or group of persons (within the
meaning of the 0000 Xxx) in the
E-48
aggregate would own or control securities which possess in the aggregate the
ordinary voting power to elect a majority of the surviving company's directors
(provided that the transaction has been approved by the Company's Board of
Directors of a committee thereof).
c. "Excess Shares" shall mean the number of shares of any class of
voting securities of the Company held by an Affected Regulated Holder, together
with its Affiliates and transferees (other than any class of voting securities
which is (or is made prior to any redemption, purchase, acquisition or other
action) convertible into a class of non-voting securities which are otherwise
identical to the voting securities and convertible into such voting securities
on terms reasonably acceptable to such Regulated Holder), determined by assuming
such Affected Regulated Holder and its Affiliates and transferees (but no other
holder) has exercised all of its Warrants and other convertible or exchangeable
securities, in excess of the ownership threshold set forth above.
d. "Person" shall mean an individual, corporation, partnership,
limited liability company, joint venture, trust, unincorporated organization or
any other entity of whatever nature or any governmental authority, including but
not limited to, any federal, state, local or other governmental department,
commission, board, bureau, agency, central bank, court, tribunal or other
instrumentality or authority, domestic or foreign, exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
e. "Regulated Holder" means any stockholder of the Company (i) that,
directly or indirectly because of its ownership by an entity that is subject to
Regulation Y, is subject to Regulation Y, and (ii) that holds Common Stock or
warrants to purchase Common Stock.
f. "Regulation Y" means Regulation Y of the Board of Governors of
the Federal Reserve System, 12 C.F.R. Part 225 (or any successor to such
Regulation).
g. "Restricted Shares" means the shares of Common Stock issued upon
exercise of the Restricted Warrants.
h. "Restricted Warrant" means, with respect to any Regulated Holder,
any outstanding Warrant ever held of record by such Regulated Holder or its
Affiliates which, upon the exercise of such Warrant, would cause such Regulated
Holder to own more than 4.9% of any class of voting securities of the Company;
provided, that any Warrant that is a Restricted Warrant shall cease to be a
--------
Restricted Warrant if it is exercised in connection with a Conversion Event and
the Warrant Share(s) issued upon the exercise of such Warrant(s) are transferred
in connection with such Conversion Event.
E-49
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: Xxxxxx X. Xxxxxx
Title: Chairman and Chief Executive Officer
SIGNATURES OF INITIAL HOLDERS
E-50
