EXHIBIT 4
EXCHANGE AND EXTENSION AGREEMENT
THIS EXCHANGE AND EXTENSION AGREEMENT ("AGREEMENT") is made and entered
into as of June 30, 2006 by and between Crown EMAK Partners, LLC, a Delaware
limited liability company (the "INVESTOR"), and EMAK Worldwide, Inc., a Delaware
corporation (the "COMPANY").
RECITALS
A. The Investor and the Company entered into a Securities Purchase
Agreement, dated as of March 29, 2000 (the "PURCHASE AGREEMENT"), pursuant to
which the Investor acquired an aggregate of 25,000 shares of Series A
mandatorily redeemable senior cumulative participating convertible preferred
stock, par value $.001 per share, (the "SERIES A Stock"). In connection with
such purchase, the Company granted to the Investor five year warrants
(collectively, the "PREFERRED WARRANTS") to purchase shares of Series B senior
cumulative participating convertible preferred stock, par value $.001 per share,
(the "SERIES B STOCK"), and Series C senior cumulative participating convertible
preferred stock, par value $.001 per share, (the "SERIES C STOCK").
B. On March 19, 2004, the Company and the Investor entered into a
Warrant Exchange Agreement whereby the Investor received new warrants to
purchase an aggregate of 916,666 shares of Common Stock ("COMMON WARRANTS") in
exchange for cancellation of the existing Preferred Warrants (which would also
have been convertible into 916,666 shares of Common Stock) (the "EXCHANGE
TRANSACTION"). As a result of the Exchange Transaction, the Investor received an
extension of time in which to exercise its right to purchase additional equity
in the Company, and the Company obtained an elimination of the preferred rights
and preferences as well as the preferred dividend associated with the Series B
Stock and Series C Stock.
C. On December 30, 2004, the Company entered into an Exchange Agreement
with the Investor whereby the Investor received 25,000 shares of Series AA
mandatorily redeemable senior cumulative preferred stock, par value $0.001 per
share, (the "SERIES AA STOCK") in exchange for 25,000 shares of Series A Stock.
Also on December 30, 2004, the Company filed with the Delaware Secretary of
State a Certificate of Designation of Series AA Senior Cumulative Convertible
Preferred Stock (the "CERTIFICATE OF DESIGNATION").
D. The Investor and the Company now desire to provide for certain
modifications to the rights and preferences of the Series AA Stock, as well as
for the amendment of the Common Warrants, pursuant to the terms and conditions
set forth in this Agreement (the "TRANSACTIONS").
E. The Investor and the Company intend that the amendment of the Common
Warrants be exempt from registration pursuant to Section 3(a)(9) of the
Securities Act of 1933, as amended.
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the Company and the Investor hereby agree as follows:
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1. Exchange of Rights and Obligations under Certificate of
Designation.
1.1 Elimination of Preferred Dividend. Upon the terms and
subject to the conditions hereof, the Investor agrees to the elimination
of the 6% cumulative dividend on the Series AA Stock effective as of
April 1, 2006 (after accrual of the March 31, 2006 dividend, which
remains due and will continue to accrue interest at 6% per annum,
compounded quarterly, until paid). The elimination of the dividend will
be effected pursuant to an amendment to the Certificate of Designation
in the form attached hereto as Exhibit A (the "AMENDED SERIES AA
CERTIFICATE").
1.2 Reduction of Conversion Price. Upon the terms and subject to
the conditions hereof, the Company agrees to change the Conversion Price
(as defined in the Certificate of Designation) of the Series AA Stock
from Fourteen Dollars and Seventy-Five Cents ($14.75) per share to Nine
Dollars ($9.00) per share. The change in the Conversion Price will be
effected pursuant to the Amended Series AA Certificate.
1.3 Extension of Common Warrants. Upon the terms and subject to
the conditions hereof, the Company agrees that effective upon the
Closing (as defined in Section 2.1 below), the expiration date of each
of the Common Warrants to purchase shares of Common Stock ("WARRANT
SHARES"), shall be extended for two (2) years, as set forth below:
Number of Exercise Price Current New
Warrant Shares Per Share Expiration Date Expiration Date
-------------- -------------- --------------- ---------------
357,000 $16.00 Xxxxx 00, 0000 Xxxxx 29, 2012
79,333 $18.00 March 29, 2010 March 29, 2012
393,000 $16.00 June 20, 2010 June 20, 2012
87,333 $18.00 June 20, 2010 June 20, 2012
1.4 Change of Voting Rights for Preferred Directors. Upon and
subject to the conditions hereof, the Investor agrees to amendment of
the rights of the holders Series AA Stock pertaining to election of
Series AA Directors to permit the designation of two directors unless
the number of Common Directors exceeds seven, except in situations
involving a potential Change of Control (as defined in the Certificate
of Designation) triggering the right to appoint a third director. The
change in the voting rights for preferred directors is subject to the
approval of the Company's stockholders and will be effected pursuant to
the Amended Series AA Certificate.
2. Closing.
2.1 The closing of the Transactions (the "CLOSING") will occur
as soon as reasonably practicable following (but no later than June 30,
2006) delivery of (i) the Rights Amendment (as defined in Section 3.8
below), (ii) drafts of the various filings to be made pursuant to
federal securities laws with respect to consummation of the
Transactions, and (iii) the opinion of the Company's general counsel in
substantially the
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form attached hereto as Exhibit B, in each case in form and substance
reasonably satisfactory to the Investor (together, the "CLOSING
CONDITIONS").
2.2 Upon satisfaction of the Closing Conditions, the Investor,
by its execution of this Agreement, hereby consents to the amendment of
the Certificate of Designation and the filing of the Amended Series AA
Certificate with the Delaware Secretary of State.
2.3 Upon satisfaction of the Closing Conditions, the Company
agrees to cause to be filed with the Delaware Secretary of State the
Amended Series AA Certificate.
2.4 All acts, deliveries and confirmations comprising the
Closing regardless of chronological sequence shall be deemed to occur
contemporaneously and simultaneously upon the occurrence of the last
act, delivery of confirmation of the Closing and none of such acts,
deliveries or confirmations shall be effective unless and until the last
of the same has occurred.
3. Representations and Warranties of the Company. The Company
hereby represents and warrants to the Investor as follows:
3.1 Organization, Standing and Power. The Company is duly
organized, validly existing and in good standing under the laws of the
State of Delaware and has the requisite power and authority to carry on
its business as now being conducted.
3.2 Authority; Binding Obligations. The Company has all
requisite power and authority to enter into this Agreement and to
consummate the Transactions. The execution and delivery of this
Agreement by the Company and the consummation by the Company of the
Transactions have been duly authorized by all necessary action on the
part of the Company. This Agreement has been duly executed and delivered
by, and constitutes the valid and binding obligation of, the Company,
enforceable against the Company in accordance with its terms, subject to
the effect of applicable bankruptcy, insolvency, reorganization,
moratorium and other similar laws affecting the rights of creditors
generally and the effect of general principles of equity. The Amended
Series AA Certificate, when executed, delivered and filed with the
Secretary of State of Delaware, will be duly executed and delivered by,
and constitute the valid and binding obligation of, the Company,
enforceable against the Company in accordance with its terms.
3.3 Capitalization. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock and 1,000,000 shares of
preferred stock, $0.001 par value per share, of which 25,000 shares are
designated as Series AA Stock and 25,000 are designated as Series A
junior participating preferred stock ("JUNIOR PREFERRED"). As of March
31, 2006, there were (i) 5,836,609 shares of Common Stock issued and
outstanding, (ii) 3,167,258 shares of Common Stock held in the treasury
of the Company or held by any subsidiary of the Company; (iii) 683,914
shares of Common Stock reserved for issuance under the Company's stock
option plans upon exercise of authorized but unissued stock options;
(iv) 1,998,793 shares of Common Stock issuable
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upon exercise of outstanding stock options issued under the Company's
stock option plans; (v) 25,000 shares of Series AA Stock issued and
outstanding; and (vi) no shares of Junior Preferred issued or
outstanding. All shares of Common Stock issuable pursuant to the terms
of the Series AA Stock and the Common Warrants (as amended) have been
reserved and kept available for issuance by the Board of Directors of
the Company.
3.4 Non-Contravention. The execution and delivery of this
Agreement does not, and the consummation of the Transactions and
compliance with the provisions hereof will not, conflict with, or result
in any breach or violation of, or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of or "put" right with respect to any
obligation or to loss of a benefit under, or result in the creation of
any pledges, claims, liens, charges, encumbrances and security interests
of any kind or nature (collectively, "LIENS") upon its properties or
assets under (i) the Company's Certificate of Incorporation, (ii) any
loan or credit agreement, note, bond, mortgage, indenture, lease,
contract or other agreement, instrument, permit, concession, franchise
or license applicable to the Company or any of its properties or assets
which is material to the Company, each as amended to date or (iii) any
judgment, order, decree, statute, law, ordinance, rule, regulation or
arbitration award applicable to the Company (including the rules and
regulations of the Nasdaq Stock Market), or its properties or assets,
other than, in the case of clauses (ii) and (iii), any such conflicts,
breaches, violations, defaults, rights, losses or Liens that
individually or in the aggregate would not have a material adverse
effect with respect to the Company or would not prevent or materially
hinder or delay the ability of the Company to consummate the
Transactions.
3.5 Valid Issuance. The Warrant Shares upon receipt of the
consideration called for in the Common Warrants (as amended), will be
duly authorized, validly issued, fully paid and non-assessable and free
and clear of any lien, security interest, option or other charge or
encumbrance, and free of all preemptive and other third party rights.
3.6 Rights Agreement. Consummation of the Transactions will not
result in any of the Investor or its affiliates becoming an "Acquiring
Person" under the Rights Agreement dated as of March 15, 2006, between
the Company and Continental Stock Transfer & Trust Company, as amended
by the Rights Amendment (defined in Section 3.8 below).
3.7 Stockholder Approval. The Company has received the requisite
approval of its common stockholders for the Amended Series AA
Certificate.
3.8 Amendment of Rights Agreement. The Company has entered into
an amendment of the Rights Agreement dated as of March 15, 2006, between
the Company and Continental Stock Transfer & Trust Company providing
that the consummation of the Transactions will not result in any of the
Investor or its affiliates becoming an "Acquiring Person" thereunder
(the "RIGHTS AMENDMENT").
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4. Representations of the Investor. The Investor represents to the
Company that:
4.1 Organization, Standing and Power. The Investor is duly
organized, validly existing and in good standing under the laws of the
State of Delaware and has the requisite power and authority to carry on
its business as now being conducted.
4.2 Authority. The Investor has all requisite power and
authority to enter into this Agreement and to consummate the
Transactions. The execution and delivery of this Agreement by the
Investor and the consummation by the Investor of the Transactions have
been duly authorized by all necessary action on the part of the
Investor. This Agreement has been duly executed and delivered by, and
constitutes the valid and binding obligation of, the Investor,
enforceable against the Investor in accordance with its terms, subject
to the effect of applicable bankruptcy, insolvency, reorganization,
moratorium and other similar laws affecting the rights of creditors
generally and the effect of general principles of equity.
4.3 Non-contravention. The execution and delivery of this
Agreement does not, and the consummation of the Transactions and
compliance with the provisions hereof will not, conflict with, or result
in any breach or violation of, or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of or "put" right with respect to any
obligation or to loss of a benefit under, or result in the creation of
Liens upon its properties or assets under, (i) the Investor's
Certificate of Formation or operating agreement, each as amended to
date, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease, contract or other agreement, instrument, permit,
concession, franchise or license applicable to the Investor or any of
its properties or assets which is material to the Investor, each as
amended to date or (iii) any judgment, order, decree, statute, law,
ordinance, rule, regulation or arbitration award applicable to the
Investor, or its properties or assets, other than, in the case of
clauses (ii) and (iii), any such conflicts, breaches, violations,
defaults, rights, losses or Liens that individually or in the aggregate
would not have a material adverse effect with respect to the Investor or
would not prevent or materially hinder or delay the ability of the
Investor to consummate the Transactions.
4.4 Series AA Stock and Common Warrant Ownership. The Investor
owns beneficially and of record, and has good and valid title to, all of
the Series AA Stock and all of the Common Warrants, free and clear of
any Liens. There are no agreements affecting the right of the Investor
to enter into this Agreement with respect to the Series AA Stock or the
Common Warrants.
4.5 Brokers. No broker, investment banker, financial advisor or
other person is entitled to any broker's, finder's, financial advisor's
or other similar fee or commission in connection with the Transactions
based upon arrangements made by or on behalf of the Investor.
4.6 Investor Status. The Investor has such knowledge and
experience in financial and business matters as to be capable of
evaluating the merits and risks of its investment in the Series AA Stock
(as amended hereby), the Common Stock (issuable
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upon conversion of the Series AA Stock), the Common Warrants (as
amended) and the Warrant Shares, and is able to bear the economic risks
of such investment.
4.7 Accredited Investor. The Investor is an "accredited
investor" as defined in Rule 501(a) under the 1933 Act. The Investor is
acquiring the Series AA Stock (as amended hereby) and the Common
Warrants (as amended) for its own account and not with a view to any
resale, distribution or other disposition thereof (or the Common Stock
issuable upon conversion or exercise thereof) in violation of the United
States securities laws.
4.8 No Other Agreements. The Investor has made no other
agreements, arrangements or understandings concerning the Transactions
or the Company or any of its subsidiaries with (a) any director,
officer, employee or consultant of the Company or any of its
subsidiaries, or (b) any stockholder beneficially owning at least 5% of
the outstanding Common Stock.
5. Covenants and Other Agreements.
5.1 Further Amendment of Series AA Certificate. The Company
covenants and agrees that at its next annual meeting of stockholders
expected to be held in June 2007 (the "2007 ANNUAL MEETING"), it will
seek the approval of its stockholders to further amend the Amended
Series AA Certificate to delete the last sentence of paragraph 2(iii),
which provides as follows: "Notwithstanding the foregoing, in no event
shall the Conversion Price be adjusted pursuant to this paragraph 2(iii)
to less than the current market price per share of Common Stock
(determined as provided in paragraph 3(xii)) on the Exchange Date." (the
"SUBSEQUENT STOCKHOLDER APPROVAL"). Until such time as the Subsequent
Stockholder Approval is obtained, and an amendment to the Amended Series
AA Certificate is filed with the Secretary of State of Delaware deleting
the last sentence of paragraph 2(iii), the Company shall not pay any
cash dividend on Common Stock. The Company also covenants and agrees
that no changes to paragraph 6 in the Certificate of Designation as
reflected in the Amended Series AA Certificate will impair or limit the
Investor's right to designate or elect directors at a special meeting or
by written consent, and that promptly following the Closing, the Company
will file an Amended and Restated Certificate of Designation in form and
substance reasonably satisfactory to the Investor.
5.2 Standstill Agreement. Section 5.6 of the Purchase Agreement
is hereby amended in the following respects:
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(a) the date of March 29, 2010 shall be deemed to be March
29, 2012;
(b) the capitalized term "Warrants" shall be deemed to refer
to the Common Warrants as amended pursuant to Section
1.3 of this Agreement; and
(c) the capitalized term "Series A Preferred Stock" shall be
deemed to refer to the Series AA Stock as amended
pursuant to the Amended Series AA Certificate.
5.3 Registration Rights Agreement. The Registration Rights
Agreement (as defined in the Purchase Agreement) between the Investor
and the Company, dated as of March 29, 2000, is hereby deemed amended,
to the extent necessary, to provide that the term "Registrable
Securities" shall be deemed to include all shares of Common Stock
issuable upon conversion of the Series AA Stock (as amended hereby) or
upon exercise of the Common Warrants, as amended.
5.4 Public Announcements. The Investor and the Company will
consult with each other before issuing, and provide each other the
opportunity to review and comment upon, any press release or other
public statements with respect to the Transactions, and shall not issue
any such press release or make any such public statement prior to such
consultation, except as may be required by applicable law, court process
or by obligations pursuant to any listing agreement with any national
securities exchange or as are agreed upon in advance. The parties agree
that the initial press release or releases to be issued with respect to
the Transactions shall be mutually agreed upon prior to the issuance
thereof.
5.5 Tax Treatment. The Investor and the Company agree that, for
federal and applicable state income tax purposes, they will treat the
Transactions as deemed exchanges of the Common Warrants and the Series
AA Preferred Stock for new Common Warrants and new Series AA Preferred
Stock governed by Sections 368(a)(1)(E) and 354 of the Internal Revenue
Code of 1986, as amended (the "Code"), Section 1036 of the Code, or all
such sections (and corresponding provisions of state income tax law), in
which no gain or loss is recognized by the Investor for such purposes.
The parties shall file their applicable tax returns in a manner
consistent with such treatment.
5.6 Reservation of Shares. The Company will reserve and keep
available at all times shares of Common Stock for the purpose of
enabling the Company to satisfy its obligations to issue shares of
Common Stock pursuant to the terms of the Series AA Stock and the Common
Warrants (as amended).
6. Miscellaneous.
6.1 Entire Agreement. This Agreement, the Purchase Agreement (as
amended hereby), the Registration Rights Agreement (as amended hereby),
the Warrants (as amended hereby), and the exhibits hereto and thereto
and the other documents referenced herein and therein constitute the
entire understanding and agreement of the parties hereto with respect to
the subject matter hereof and thereof and supersede all prior and
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contemporaneous agreements or understandings, inducements or conditions,
express or implied, written or oral, between the parties with respect
hereto and thereto.
6.2 Governing Law. This Agreement will be governed by and
construed in accordance with the laws of the State of Delaware
regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
6.3 Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in
whole or in part, by operation of law or otherwise, by any of the
parties without the prior written consent of the other parties. Any
assignment in violation of the preceding sentence shall be void. Subject
to the preceding two sentences, this Agreement will be binding upon,
inure to the benefit of, and be enforceable by, the parties and their
respective successors and assigns.
6.4 Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to
an injunction or injunctions to prevent breaches of this Agreement and
to enforce specifically the terms and provisions of this Agreement in
any court of the State of Delaware or of the United States located in
the State of Delaware in the event any dispute arises out of this
Agreement or any of the Transactions, and each party agrees (a) it will
not attempt to deny or defeat personal jurisdiction or venue in any such
court by motion or other request for leave from any such court and (b)
it will not bring any action relating to this Agreement or any of the
Transactions in any court other than any such court.
6.5 Severability. Whenever possible, each provision or portion
of any provision of this Agreement will be interpreted in such manner as
to be effective and valid under applicable law but if any provision or
portion of any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule
in any jurisdiction, such invalidity, illegality or unenforceability
will not affect any other provision or portion of any provision in such
jurisdiction, and this Agreement will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision or portion of any provision had never been
contained herein, so long as the economic and legal substance of the
Transactions are not affected in a manner materially adverse to any
party hereto.
6.6 Further Assurances. The parties agree (i) to furnish upon
request to each other such further information, (ii) to execute and
deliver to each other such other documents, and (iii) to do such other
acts and things, all as the other party may reasonably request for the
purpose of carrying out the intent of this Agreement and the documents
referred to in this Agreement.
6.7 Construction. In entering into this Agreement, each party
represents and warrants that such party does so freely and voluntarily,
after having had the opportunity to meet and confer with such party's
respective attorneys regarding the contents and legal effect of this
Agreement. Each party represents and warrants that such party has full
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power and authority to enter into and execute this Agreement. Every
covenant, term, and provision of this Agreement shall be construed
simply according to its fair meaning and not strictly for or against any
party. In the event any claim is made by any party relating to any
conflict, omission, or ambiguity in this Agreement, no presumption or
burden of proof or persuasion shall be implied by virtue of the fact
that this Agreement was prepared by or at the request of a particular
party or such party's counsel.
6.8 Amendment. This Agreement may be amended by mutual agreement
of the parties at any time, but only pursuant to an instrument in
writing duly executed on behalf of each of the Company and the Investor.
6.9 Counterparts. This Agreement may be executed concurrently in
two or more counterparts, each of which will be deemed an original, but
all of which together will constitute one and the same instrument.
6.10 Fees and Expenses. All fees and expenses incurred by the
Investor in connection with this Agreement and the Transactions, whether
or not consummated, shall be paid by the Company.
(Signature page follows)
IN WITNESS WHEREOF, the Investor and the Company have caused this
Agreement to be signed by their respective officers hereunto duly authorized as
of the date first written above.
CROWN EMAK PARTNERS, LLC
----------------------------------------
Xxxxxxx X. Xxxxxxxxxx, its Manager
EMAK WORLDWIDE, INC.
By:
-------------------------------------
Xxxxxx X. Xxxxxx, its Chief
Administrative Officer
(Signature page to Exchange and Extension Agreement)
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