SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Materials Pursuant to ss. 240.14a-12
SVI SOLUTIONS, INC.
Name of Registrant as Specified In Its Charter
N/A
Name of Person(s) Filing Proxy Statement if other than the Registrant
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how
it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which such offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
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4) Date Filed:
SVI SOLUTIONS, INC.
5607 PALMER WAY
CARLSBAD, CALIFORNIA 92008
NOTICE OF SPECIAL MEETING
OF SHAREHOLDERS
TO BE HELD ON JULY 9, 2003, AT 8:00 A.M.
The Special Meeting of the Shareholders ("Special Meeting") of SVI Solutions,
Inc., a Delaware corporation (the "Company"), will be held at the Irvine office
of the Company, 19800 MacArthur Boulevard, Suite 1200, Irvine, California 92612
on July 9, 2003, at 8:00 a.m. for the following purposes:
1. To consider and act upon a proposal to ratify the sale and issuance of up
to $6,500,000 of 9% convertible debentures and accompanying warrants to
purchase shares of common stock to certain investors;
2. To consider and act upon a proposal to change the Company's name from
"SVI Solutions, Inc." to "Island Pacific, Inc."; and
3. To consider and act upon a proposal to amend and restate the Company's
Restated Certificate of Incorporation to reflect the removal of Article
XII, which restricts the shareholders' ability to take actions by written
consent.
The Board of Directors has fixed the close of business on June 5, 2003 as the
record date for the determination of the holders of the Company's capital stock
entitled to notice of and to vote at the Special Meeting.
All shareholders are cordially invited to attend the Special Meeting in person.
Regardless of whether you plan to attend the Special Meeting, please sign and
date the enclosed Proxy and return it as promptly as possible in the enclosed
pre-addressed and postage paid envelope. The prompt return of Proxies will
ensure a quorum and save the Company the expense of further solicitation. Any
shareholder returning the enclosed Proxy may revoke it prior to its exercise by
voting in person at the Special Meeting or by filing with the Secretary of the
Company a written revocation or duly executed Proxy bearing a later date.
By Order of the Board of Directors,
Barry Schechter
Chairman of the Board
San Diego, California
June 3, 2003
2
SVI SOLUTIONS, INC.
5607 PALMER WAY
CARLSBAD, CALIFORNIA 92008
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 9, 2003
I. PROXIES
This Proxy Statement is furnished in connection with the solicitation of proxies
by or on behalf of the Board of Directors ("Board") of SVI Solutions, Inc., a
Delaware corporation (the "SVI" or "Company"), for use at the Company's Special
Meeting of Shareholders to be held on July 9, 2003 at the Irvine office of the
Company, 19800 MacArthur Boulevard, Suite 1200, Irvine, California 92612 at 8:00
a.m., and at any and all adjournments thereof (the "Special Meeting"), for the
purposes set forth in the accompanying Notice of Special Meeting of
Shareholders.
Any shareholder may revoke his or her proxy by delivering written notice of
revocation to the Secretary of the Company at its principal office, 5607 Palmer
Way, Carlsbad, California 92008, by delivery of a proxy bearing a later date, or
by attendance at the Special Meeting and voting in person.
This Proxy Statement will be mailed on or about June 25, 2003, to each
shareholder of record as of the close of business on June 5, 2003.
The solicitation of proxies is being made by use of the mails. The cost of
preparing, assembling and mailing these proxy materials will be paid by the
Company. Following the mailing of this Proxy Statement, directors, officers and
regular employees of the Company may solicit proxies by mail, telephone,
telegraph or personal interview. Such persons will receive no additional
compensation for such services. Brokerage houses and other nominees, fiduciaries
and custodians nominally holding shares of the Company's capital stock of record
will be requested to forward proxy soliciting material to the beneficial owners
of the shares, and will be reimbursed by the Company for their reasonable out-of
pocket expenses incurred in forwarding these materials.
When your proxy is returned properly signed, the shares represented will be
voted in accordance with your directions. Where specific votes are not
indicated, proxies will be voted in favor of the proposal for which a specific
vote is not given. If a proxy indicates that a shareholder or nominee abstains
from voting or that shares are not to be voted on a particular proposal, the
shares will not be counted as having been voted on that proposal, and those
shares will not be reflected in the final tally of the votes cast with regard to
that proposal, although such shares will be counted as in attendance at the
Special Meeting for purposes of determining a quorum. Additionally, broker
non-votes are not counted as votes cast on any matter to which they relate.
3
The presence at the Special Meeting in person or by proxy of the holders of a
majority of the shares of common stock entitled to vote at the Special Meeting
is necessary to constitute a quorum for the transaction of business. Holders of
common stock are entitled to one vote per share.
An affirmative vote of a majority of the shares of common stock represented and
voting at the Special Meeting is required for approval of all proposals.
The Company had 31,499,632 shares of common stock outstanding at the close of
business on March 31, 2003. Holders of record of shares of the capital stock at
the close of business on June 5, 2003 will be entitled to notice of and to vote
at the Special Meeting.
II. PROPOSAL NUMBER ONE
TO CONSIDER AND ACT UPON A PROPOSAL RATIFY THE SALE AND ISSUANCE OF UP TO
$6,500,000 OF 9% CONVERTIBLE DEBENTURES AND ACCOMPANYING WARRANTS TO
PURCHASE SHARES OF COMMON STOCK TO CERTAIN INVESTORS.
A. BACKGROUND
The Company entered into a Securities Purchase Agreement dated March 31, 2003
with Midsummer Investment, Ltd., Omicron Master Trust, and Islandia, L.P.
(collectively, the "Investors") for the sale by SVI to the Investors of 9%
debentures, convertible into shares of SVI common stock, for an aggregate amount
of up to $5,500,000, to be sold in two separate closings. The debentures are
accompanied by a certain number of warrants to purchase shares of SVI common
stock equal to 40% of (a) the dollar amount of debentures purchased by the
Investors and (b) divided by the daily volume weighted average price of SVI's
common stock on the American Stock Exchange for the ten consecutive days
immediately prior to the closing date the debentures were sold (the "Closing
Price"). At the first closing, the Closing Price was $.8901. The first closing
occurred on March 31, 2003. The Closing Price for the second closing will be
determined at that time. For a full understanding of this transaction,
shareholders should review the entire Securities Purchase Agreement and certain
exhibits thereto, including the form of the debentures and warrants, which are
attached as APPENDIX I.
The first closing for the sale of debentures aggregating $3,500,000 occurred on
March 31, 2003. Additional debentures aggregating up to $2,000,000 will be sold
to the Investors in a second closing if within one year after the date of first
sale of debentures there occurs a period of 15 consecutive trading days during
which the daily volume weighted average closing price of the SVI common stock is
maintained at a price at or above $1.75 per share, subject to certain
conditions.
The debentures bear an interest rate of 9% per annum, and they provide for
interest only payments on a quarterly basis, payable, at SVI's option, in cash
or shares of SVI common stock. The debentures sold in the first closing for
$3,500,000 mature in May 2005, and the additional debentures that may be sold
for up to $2,000,000 in the second closing would mature in November 2005. The
debentures are convertible into shares of SVI common stock at a conversion price
equal to 115% of the daily volume weighed average price of the SVI common stock
4
on the American Stock Exchange on the date the debentures were sold. The
debentures sold at the first closing have a conversion price of $1.0236. If
certain conditions are met, the Company has the option to redeem the debentures
at 110% of their face value, plus accrued interest. The Company must redeem the
debentures at the initial monthly amount of $218,750, commencing on February 1,
2004. If the second closing occurs, this redemption amount will be increased to
$300,000, commencing on the later of February 1, 2004 or the fifth month
following the second closing. Furthermore, if the daily volume weighed average
price of the SVI common stock on the American Stock Exchange exceeds the Closing
Price (which was $0.8901 at the first closing) by more than 200% for 15
consecutive trading days, SVI will have the option to convert the debentures
into SVI common stock at the conversion price then in effect.
At the first closing, Midsummer Investment was issued 629,143 warrants, Omicron
Master Trust was issued 674,082 warrants, and Islandia, L.P. was issued 269,633
warrants. These warrants, as well as the warrants to be issued in the second
closing, are for a 5-year term, with an exercise price equal to 115% of the
daily volume weighed average price of the SVI common stock on the American Stock
Exchange on the date the accompanying debentures were sold. The warrants issued
in the first closing have an exercise price of $1.0236.
The Investors were granted the right of first refusal to participate in certain
future offerings by SVI of its common stock or equivalent securities so long as
any Investor owns at least 5% of the debentures purchased on the first closing.
The Investors were also given registration rights under a Registration Rights
Agreement requiring SVI to file a registration statement respecting the common
stock issuable upon the conversion of the debentures and the warrants within 30
days after the first closing, and to use best efforts to have the registration
statement declared effective at the earliest date. If the registration statement
is not filed within these time frames or declared effective within 90 days
following the closing date of the debentures sold in the first phase, or within
120 days in the event of a review by the Securities and Exchange Commission, SVI
shall be obligated to pay liquidated damages to the Investors equal to 2% of the
sum of the amount of debentures subscribed to by the Investors and the value of
the warrants for each month until the registration statement becomes effective.
For a full understanding of these registration rights, shareholders should
review the entire Registration Rights Agreement and certain exhibits thereto,
which are attached as APPENDIX II.
On April 1, 2003, SVI also entered into a similar Securities Purchase Agreement
with MBSJ Investors LLC ("MBSJ") for the sale by SVI to MBSJ of 9% debentures,
convertible into shares of SVI common stock at a conversion price of $1.0236,
for $400,000. These debentures were accompanied by 5-year warrants to purchase
156,311 shares of SVI common stock. The debentures sold to MBSJ mature in
October 2005. The debentures are convertible into shares of SVI common stock at
a conversion price equal to $1.0236. If certain conditions are met, the Company
has the option to redeem the debentures at 110% of their face value, plus
accrued interest. The Company must redeem the debentures at the initial monthly
amount of $20,000, commencing on February 1, 2004. MBSJ was also granted
registration rights for the shares underlying the debentures and warrants under
a Registration Rights Agreement ("MBSJ Registration Rights Agreement") and
certain other rights similar to those granted to
5
Midsummer, Omicron, and Islandia. For a full understanding of this transaction,
shareholder should review the MBSJ Securities Purchase Agreement and its
exhibits, which include the form of debentures and warrants, and which are
attached as APPENDIX III, and the MBSJ Registration Rights Agreement, which is
attached as APPENDIX IV.
On May 5, 2003, SVI also entered into an agreement with Crestview Capital Fund
I, L.P., Crestview Capital Fund II, L.P. and Crestview Capital Offshore Fund,
Inc. (collectively, the "Crestview Investors") for the sale by SVI to the
Crestview Investors of 9% debentures convertible into shares of SVI common
stock, for an aggregate amount of $600,000 to be sold in two separate closings.
The debentures are accompanied by a certain number of warrants to purchase
shares of SVI common stock equal to 30% of (a) the dollar amount of debentures
purchased by the Crestview Investors, and (b) divided by the daily volume
weighted average price of SVI's common stock on the American Stock Exchange for
the ten consecutive days immediately prior to the closing date the debentures
were sold (the "Crestview Closing Price"). For purposes of determining the
Crestview Closing Price, the first closing was deemed to be March 31, 2002 and
the Crestview Closing Price was $.8901. The Crestview Closing Price for the
second closing will be determined at that time.
The terms of the debentures issued or to be issued to the Crestview Investors
are similar to the terms of the debentures issued or to be issued to the
Investors. The first sale of debentures to the Crestview Investors aggregating
$300,000 occurred on May 5, 2003. Additional debentures aggregating up to
$300,000 will be sold to the Crestview Investors in a second closing if within
one year after the date of first sale of debentures there occurs a period of 15
consecutive trading days during which the daily volume weighted average closing
price of the SVI common stock is maintained at a price at or above $1.75 per
share, subject to certain conditions. Interest on the debentures is due on a
quarterly basis, payable in cash or shares of common stock at our option.
Commencing on February 1, 2004, SVI must initially redeem $18,750 per month of
the debentures, increasing to $32,727 if a second closing occurs. The debentures
mature in October 2005.
The debentures initially sold to the Crestview Investors were accompanied by
five-year warrants to purchase an aggregate of 101,112 shares of common stock
with an exercise price of $1.0236 per share. The terms of the warrants issued or
to be issued to the Crestview Investors are similar to the terms of the warrants
issued or to be issued to the Investors.
The Crestview Investors were also granted registration rights for the shares
underlying the debentures and warrants under the Registration Rights Agreement
between SVI and the Investors.
For a full understanding of the transaction with the Crestview Investors,
shareholders should review the entire agreement (the "Crestview Agreement"),
which is attached as Appendix V, and the documents referenced in the Crestview
Agreement. Except as set forth therein, the Crestview Agreement incorporates the
terms and conditions of the Securities Purchase Agreement and the Registration
Rights Agreement between SVI and the Initial Debenture Investors.
We are seeking your approval because the Securities Purchase Agreement, the MBSJ
Registration Rights Agreement, and the agreement with the Crestview Investors
require that the Company seek shareholder approval.
None of the Investors, MBSJ or the Crestview Investors, or any of their
respective affiliates, maintains or has maintained in the past, any affiliation
with SVI or its officers, directors or affiliates.
B. SUMMARY CONSOLIDATED DATA.
The following financial information should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements and unaudited
financial information included elsewhere in this Proxy.
6
SUMMARY CONSOLIDATED FINANCIAL DATA FOR THE 9 MONTHS ENDED
DECEMBER 31, 2002 AND 2001:
NINE MONTHS ENDED DECEMBER 31,
------------------------------
2002 2001
--------- ---------
(unaudited)
(in thousands except for
per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 16,918 $ 21,446
Cost of sales 5,997 9,247
--------- ---------
Gross profit 10,921 12,199
Expenses:
Product development 2,894 2,932
Depreciation and amortization 3,122 4,991
Selling, general and administrative expenses 7,365 10,388
--------- ---------
Total expenses 13,381 18,311
--------- ---------
Loss from operations (2,460) (6,112)
Other income (expense):
Interest income 1 8
Other income (expense) 8 (35)
Interest expense (894) (2,795)
Gain on foreign currency transaction 23 --
--------- ---------
Total other expense (862) (2,822)
--------- ---------
Loss before provision for income taxes (3,322) (8,934)
Provision for income tax benefits (57) (2)
--------- ---------
Loss before cumulative effect of a
change in accounting principle (3,265) (8,932)
Cumulative effect of changing accounting
principle - goodwill valuation under SFAS 142 (627) --
--------- ---------
Loss from continuing operations (3,892) (8,932)
Loss from discontinued operations (1,140)
--------- ---------
Net loss $ (3,892) $(10,072)
========= =========
Basic and diluted loss per share:
Loss before cumulative effect
of change in accounting principle $ (0.11) $ (0.23)
Cumulative effect of change in
accounting principle (0.02) --
--------- ---------
Loss from continuing operations (0.13) (0.23)
Loss from discontinued operations -- (0.03)
--------- ---------
Net loss $ (0.13) $ (0.26)
========= =========
Weighted average common shares 29,257 38,092
BALANCE SHEET DATA:
Working Capital $(11,109) $(13,371)
Total assets $ 38,419 $ 52,712
Long-term obligations $ 99 $ 12,379
Stockholders' equity $ 20,497 $ 19,003
7
SUMMARY CONSOLIDATED FINANCIAL DATA FOR THE LAST 5 FISCAL YEARS (1):
SIX MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, SEPTEMBER 30,
--------------------------------------------- --------- ---------
2002 2001 2000 1999 1998 1997
--------- --------- --------- --------- --------- ---------
(in thousands except for per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 27,109 $ 27,713 $ 26,652 $ 5,010 $ 414 $ 800
Cost of sales 10,036 9,188 6,421 1,401 37 66
--------- --------- --------- --------- --------- ---------
Gross profit 17,073 18,525 20,231 3,609 377 734
Application development expenses 4,203 5,333 4,877 -- -- --
Depreciation and amortization 6,723 8,616 7,250 1,672 1,611 1,018
Selling, general and administrative expenses 13,144 18,037 14,817 4,265 418 1,312
Impairment of intangible assets -- 6,519 -- -- -- --
Impairment of note receivable received in
connection with the sale of IBIS Systems
Limited -- 7,647 -- -- -- --
--------- --------- --------- --------- --------- ---------
Total expenses 24,070 46,152 26,944 5,937 2,029 2,330
--------- --------- --------- --------- --------- ---------
Loss from operations (6,997) (27,627) (6,713) (2,328) (1,652) (1,596)
Other income (expense):
Interest income 10 628 1,074 520 274 33
Other income (expense) (46) 63 (206) 828 49 627
Interest expense (3,018) (3,043) (1,493) (1) (35) (102)
Gain on disposals of Softline Limited shares -- -- -- -- 4,388 3,974
Gain (loss) on foreign currency transaction (9) 2 (10) (58) (14) (120)
--------- --------- --------- --------- --------- ---------
Total other income (expense) (3,063) (2,350) (635) 1,289 4,662 4,412
--------- --------- --------- --------- --------- ---------
Income (loss) before provision (benefit)
for income taxes (10,060) (29,977) (7,348) (1,039) 3,010 2,816
Provision (benefit) for income taxes 39 (4,778) (2,414) 30 887 190
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations (10,099) (25,199) (4,934) (1,069) 2,123 2,626
Income (loss) from discontinued operations (4,559) (3,746) 880 6,654 3,696 2,222
--------- --------- --------- --------- --------- ---------
Net income (loss) $(14,658) $(28,945) $ (4,054) $ 5,585 $ 5,819 $ 4,848
========= ========= ========= ========= ========= =========
Basic earnings (loss) per share:
Income (loss) from continuing operations $ (0.28) $ (0.72) $ (0.15) $ (0.04) $ 0.08 $ 0.19
Income (loss) from discontinued operations (0.13) (0.11) 0.03 0.24 0.13 0.16
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (0.41) $ (0.83) $ (0.12) $ 0.20 $ 0.21 $ 0.35
========= ========= ========= ========= ========= =========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (0.28) $ (0.72) $ (0.15) $ (0.03) $ 0.07 $ 0.17
Income (loss) from discontinued operations (0.13) (0.11) 0.03 0.20 0.12 0.14
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (0.41) $ (0.83) $ (0.12) $ 0.17 $ 0.19 $ 0.31
========= ========= ========= ========= ========= =========
Weighted average common shares:
Basic 35,698 34,761 32,459 28,600 27,768 13,971
Diluted 35,698 34,761 32,459 33,071 31,046 15,618
BALANCE SHEET DATA:
Working capital $ (5,337) $ (2,782) $ 2,628 $ 26,387 $ 9,763 $ 596
Total assets $ 40,005 $ 56,453 $ 94,083 $ 52,374 $ 46,481 $ 19,230
Long-term obligations $ 8,013 $ 18,554 $ 21,586 $ 2,043 $ 771 $ 545
Stockholders' equity $ 21,952 $ 26,993 $ 53,497 $ 45,270 $ 37,075 $ 10,885
(1) Certain reclassifications are reflected in the above data since the filing
of such annual reports on forms 10KSB and 10K.
8
C. FINANCIAL STATEMENTS. We have attached to this Proxy the unaudited
consolidated balance sheet of SVI and its subsidiaries as of December 31, 2002,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the 9 month period then ended, and the audited consolidated
balance sheets of SVI and its subsidiaries as of March 31, 2002 and March 31,
2001, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended.
D. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows. We are exposed to
market risks, which include changes in interest rates and changes in foreign
currency exchange rate as measured against the U.S. dollar.
We conduct business in various foreign currencies, primarily in Europe and until
February 2002, Australia. Sales are typically denominated in the local foreign
currency, which creates exposures to changes in exchange rates. These changes in
the foreign currency exchange rates as measured against the U.S. dollar may
positively or negatively affect our sales, gross margins and retained earnings.
We attempt to minimize currency exposure risk through decentralized sales,
development, marketing and support operations, in which substantially all costs
are local currency based. There can be no assurance that such an approach will
be successful, especially in the event of a significant and sudden decline in
the value of the foreign currency. We do not hedge against foreign currency
risk. Approximately 12% and 18% of our total net sales were denominated in
currencies other than the U.S. dollar for the nine-month period ending December
31, 2002 and 2001, respectively. Approximately 17%, 22%, and 37% of our total
net sales were denominated in currencies other than the U.S. dollar for the
periods ended March 31, 2002, 2001 and 2000, respectively.
We have no direct equity investments.
E. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We are an independent provider of multi-channel application software technology
and associated services for the retail industry including enterprise,
9
direct-to-consumer and store solutions and related training products and
professional and support services. Our applications and services represent a
full suite of offerings that provide retailers with a complete end-to-end
business solution. We also develop and distribute PC courseware and skills
assessment products for both desktop and retail applications.
We developed our retail application software technology and services business
through acquisitions. The largest and most important of these acquisitions were:
o APPLIED RETAIL SOLUTIONS, INC. (ARS) IN JULY 1998 FOR AGGREGATE
CONSIDERATION OF $7.9 MILLION IN CASH AND STOCK PAID TO THE FORMER
STOCKHOLDERS; AND
o ISLAND PACIFIC SYSTEMS CORPORATION IN APRIL 1999 FOR $35 MILLION CASH.
Island Pacific is one of the leading providers of retail enterprise
applications. ARS was one of the leading providers of store applications, and
the technology we acquired and have subsequently enhanced now forms the core of
our SVI Store Solutions.
We accounted for both the Island Pacific and ARS acquisitions using purchase
accounting, which has resulted in the addition of significant goodwill and
capitalized software assets on our balance sheet. See "Significant Accounting
Policies."
We are organized into two strategic business units with separate management
teams and reporting infrastructures. Each unit is evaluated primarily based on
total revenues and operating income. Identifiable assets are also managed by
business units. The units are as follows:
o Island Pacific - PROVIDES RETAIL ENTERPRISE SOLUTIONS AND ASSOCIATED
PROFESSIONAL SERVICES FOR MULTI-CHANNEL RETAILERS IN THE SPECIALTY,
MASS MERCHANDISING AND DEPARTMENT STORE MARKETS.
o SVI Store Solutions - OFFERS RETAILERS MULTI-PLATFORM, CLIENT SERVER
IN-STORE SOLUTIONS PROVIDING ALL POINT-OF-SALE AND IN-STORE PROCESSOR
FUNCTIONS.
Our operations are conducted principally in the United States and the United
Kingdom. Prior to February 2002, we also conducted business in Australia.
Effective April 1, 2003, we sold our shares in SVI Training Products, Inc. to
Arthur Klitofsky, President of SVI Training Products, Inc., a third unit we
previously operated. The financial statements and certain other information
contained in this prospectus include the results of operating this unit.
We currently derive the majority of our revenues from the sale of application
software licenses and the provision of related professional and support
services. Application software license fees are dependent upon the sales volume
of our customers, the number of users of the application(s), and/or the number
of locations in which the customer plans to install and utilize the
application(s). As the customer grows in sales volume, adds additional users
and/or adds additional locations, we charge additional license fees. We
10
typically charge for support, maintenance and software updates on an annual
basis pursuant to renewable maintenance contracts. We typically charge for
professional services including consulting, implementation and project
management services on an hourly basis. Our sales cycles for new license sales
historically ranged from three to twelve months, but new license sales were
limited during the past two fiscal years and sales cycles are now difficult to
estimate. Our long sales cycles have in the past caused our revenues to
fluctuate significantly from period to period. The reduction of new license
sales caused the revenues of our Australian subsidiary to decrease substantially
prior to discontinuation of operations in February 2002, and caused our sales
mix in the US and the UK to shift to lower margin services.
We evaluate local operations primarily based on total revenues and earnings
before interest expense, provision for income taxes, depreciation and
amortization and impairment charges. Our evaluation for the nine-month period
ending December 31, 2002 and for the fiscal years ended December 31, 2002, 2001
and 2000 are shown below:
NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
--------------------------- ----------------------------
PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE
------------ ------------- ------------- --------------
(UNAUDITED AND IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net Sales $ 16,918 100 % $ 21,446 100 %
Cost of sales 5,997 35 % 9,247 43 %
------------ ------------- ------------- --------------
Gross profit 10,921 65 % 12,199 57 %
------------ ------------- ------------- --------------
Product development expense 2,894 17 % 2,932 14 %
Selling, general and administration
expenses 7,365 44 % 10,388 48 %
Other income (expense) 32 0 % (27) 0 %
------------ ------------- ------------- --------------
Income (loss) before interest expenses,
provision for income taxes,
depreciation and amortization and
impairment 694 4 % (1,148) (5)%
Depreciation and amortization (3,122) (18)% (4,991) (23)%
Cumulative effect of change in accounting
principle (627) (4)% -- --
Interest expense (894) (5)% (2,795) (13)%
Provision for income tax benefits (57) 0 % (2) 0 %
------------ ------------- ------------- --------------
Loss from continuing
operations (3,892) (23)% (8,932) (41)%
Loss from discontinued
operations, net of taxes -- (1,140)
------------ -------------
Net loss $ (3,892) $ (10,072)
============ =============
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YEARS ENDED MARCH 31, 2002, 2001 AND 2000
YEAR ENDED MARCH 31,
2002 2001 2000
-------------------------- --------------------------- -------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE AMOUNT OF REVENUE
------------ ------------ ------------- ------------ ------------ -----------
Net sales $ 27,109 100 % $ 27,713 100 % $ 26,652 100 %
Cost of sales 10,036 37 % 9,188 33 % 6,421 24 %
------------ ------------ ------------- ------------ ------------ -----------
Gross profit 17,073 63 % 18,525 67 % 20,231 76 %
Application development expense 4,203 16 % 5,333 19 % 4,877 18 %
Selling, general and administration
expenses 13,144 48 % 18,037 65 % 14,817 56 %
Other income (expense) (45) 0 % 693 3 % 858 3 %
------------ ------------ ------------- ------------ ------------ -----------
Income (loss) before interest expenses,
provision for income taxes,
depreciation and amortization and
impairment (319) (1)% (4,152) (14)% 1,395 5 %
Depreciation and amortization (6,723) (25)% (8,616) (31)% (7,250) (27)%
Impairment of intangible assets (6,519) (24)%
Impairment of note receivable received in
connection with the sale of IBIS
Systems Limited -- -- (7,647) (28)% -- --
Interest expense (3,018) (11)% (3,043) (11)% (1,493) (6)%
Provision (benefit) for income taxes 39 0 % (4,778) 17 % (2,414) 9 %
------------ ------------ ------------- ------------ ------------ -----------
Loss from continuing operations (10,099) (37)% (25,199) (91)% (4,934) (19)%
Income (loss) from discontinued
operations, net of taxes (4,559) (3,746) 880
------------ ------------- ------------
Net loss $ (14,658) $ (28,945) $ (4,054)
============ ============= ============
We also manage long-lived assets by geographic region. The geographic
distribution of our revenues and long-lived assets for the nine months ended
December 31, 2002 and December 31, 2001, and for the fiscal years ended December
31, 2002, 2001 and 2000, is as follows (in thousands):
NINE MONTHS ENDED DECEMBER 31, 2002 AND 2001
NINE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
----------- -----------
(unaudited and in thousands)
Net Sales:
United States $ 14,885 $ 19,278
Australia (discontinued operations) -- 2,110
United Kingdom 2,033 2,168
----------- -----------
Total net sales $ 16,918 $ 23,556
=========== ===========
Long-lived assets:
United States $ 32,594 $ 44,506
Australia (discontinued operations) -- 1,138
United Kingdom 28 26
----------- -----------
Total long-lived assets $ 32,622 $ 45,670
=========== ===========
12
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2000
----------- ----------- -----------
(in thousands)
Net Sales:
United States $ 24,559 $ 25,457 $ 22,820
Australia (discontinued operations) 2,363 4,959 8,372
South Africa (discontinued operations) -- -- 1,090
United Kingdom 2,550 2,256 3,832
----------- ----------- -----------
Total net sales $ 29,472 $ 32,672 $ 36,114
=========== =========== ===========
Long-lived assets:
United States $ 35,280 $ 48,270 $ 60,909
Australia (discontinued operations) -- 1,370 11,471
United Kingdom 22 59 75
----------- ----------- -----------
Total long-lived assets $ 35,302 $ 49,699 $ 72,455
=========== =========== ===========
Up to March 31, 2002, we classified our operations into two lines of business:
retail solutions and training products. As revenues, results of operations and
assets related to our training products subsidiary were below the threshold
established for segment reporting, we consider our business for the fiscal year
ended March 31, 2002 to have consisted of one reportable operating segment.
Effective April 1, 2002, we operated under three strategic business units;
however, we have since sold one of those units-SVI Training Products.
Accordingly, we now operate under two strategic business units, each of which
will be measured separately against their individual business plans, and we will
classify our operations as one line of business-retail solutions beginning in
fiscal year 2004.
Results of operations for fiscal 2002 and the first nine months of fiscal year
2003 reflect continued weakness in new license sales of our application software
suites. As a result of our net losses, we experienced significant strains on our
cash resources throughout the 2002 fiscal year and the first nine months of
fiscal year 2003.
We have taken a number of affirmative steps to address our operating situation
and liquidity problems, and to position us for improved results of operations.
o In October 2002, we appointed Steven Beck, a retail industry expert, to
the position of President of Island Pacific. Mr. Beck's vision for
Island Pacific is to become the dominant provider of "Thoughtware" to
the retail industry. Mr. Beck's goals are to develop high quality, high
value products and services to the retail industry; using breakthrough
technologies and processes, and to provide these products and their
associated services in partnership with major consulting organizations
and other best of breed solution providers. These products and services
will be offered to small and mid-size retailers. Our goal is to expand
alternatives to retailers, matching innovative solutions to emerging
industry complexities so retailers will realize ongoing successes. We
will make available to retailers at what we believe to be affordable
prices a "dashboard" of decision makers, and experienced minds,
yielding a range of velocity management alternatives for review and
actions that span merchandising and marketing activities from
conception to consumption. Effective April 1, 2003, Mr. Beck was
appointed as our President, Chief Operating Officer and a director.
o In January 2003, we appointed Harvey Braun, a well-known and
highly-respected retail industry veteran, to the position of Chief
13
Executive Officer of Island Pacific. Together with Mr. Beck, we
anticipate Mr. Braun will lead Island Pacific through the next
evolution of product and service offerings to meet the ever-changing
needs of retailers worldwide. Effective April 1, 2003, Mr. Braun was
appointed as our Chief Executive Officer, replacing Barry Schechter,
and a director.
o We are increasing our product offerings through strategic relationships
with Planalytics, KMG Solutions, VisionCompass Inc., Raymark, Inc.,
Wazagua LLC, ANT USA, Inc. and IT Resources Inc.
o Under a partnership agreement with Planalytics Inc., Island Pacific
will market Impact LR, an internet-based application that measures the
specific effects of future weather on consumer demand by product,
location and time. Using Impact LR, our customers can plan the timing
of in-season markdowns, as well as the season-to-season flow of
merchandise into their stores with maximum effectiveness.
o Under a marketing license agreement with KMG Solutions, Island Pacific
will integrate, market and support Traxion(TM) process management
solutions. Traxion's business process management solution consists of
three modules. Traxion ProcessEngine(TM) is the real-time process
management platform that retailers use to actively manage and support
their organizations' unique business processes. Traxion
ProcessModeler(TM), includes simulation functions such as same-time
comparison of process variations and the use of actual cost data to
produce process-based financial estimates. Traxion
OrganizationModeler(TM) simplifies the creation of sophisticated models
including inter-company workgroups, payroll information, and roles.
o Island Pacific will market VisionCompass(TM) collaborative enterprise
management software, which uniquely combines the best of performance
management, business intelligence, resource planning, and collaboration
capabilities into one straightforward, web-based application. The
system enables decision makers and teams to develop specific business
goals, work on them together, and measure their collective results
objectively. The highly flexible system is easily customizable to fit
each organization's unique needs and leads directly to improved quality
and visibility of key indicators throughout the enterprise.
o Under an OEM agreement with Raymark, Inc., Island Pacific will
integrate, market and support Xpert Store point-of-sale ("POS")
software solution under the Island Pacific brand. Raymark's
full-featured POS solution streamlines the checkout process in order to
increase sales associate efficiency and augment customer satisfaction.
The software supports multi-channel, multi-language, multi-currency and
multi-taxation requirements.
o Under an agreement with Wazagua LLC, Island Pacific will exclusively
offer to retailers worldwide Wazagua's products and services including
web-based Loss Prevention Case Management Package, ASP Data Hosting and
POS Exception Reporting. WAZAGUA(TM) ASP Hosted Suite of Modules
14
automates data management for the Loss Prevention, Operations, Human
Resources, Safety & Risk Management community. These ASP-hosted
productivity tools allow retailers to capture the power of the
internet. Retailers can create efficiencies, manage and share
information, make better use of their staff, eliminate redundant data
entry - and work from virtually any point in the world.
o Under terms of a reseller agreement, Island Pacific will market, sell,
install, interface to, and support ANT USA's products including Buyer's
Toolbox(tm), a leading suite of merchandise and assortment planning
software that has been successfully implemented by over 140 retailers
worldwide. The software will extend Island Pacific's assortment and
planning capabilities by providing a solid planning methodology
accessed through an easy-to-use interface, in a cost-effective
offering.
o A marketing license agreement with IT Resources Inc. allows Island
Pacific to market, sell, install, support and integrate IT Resources'
Buyer's WorkMate(r) Suite, an innovative decision support software
platform developed for merchandising organizations. The software will
bring mobility and other timesaving benefits to the buying process.
o In the third quarter of 2002, we completed an analysis of our
operations and concluded that it was necessary to restructure the
composition of our management and personnel. We were concerned that the
new management team had not been able to close a number of new business
opportunities or to raise capital. We were also concerned with general
economic conditions, especially after the terrorist attacks of
September 11, 2001, and the resulting ongoing hostilities in the world.
Our CEO, Thomas A. Dorosewicz, and our CFO, Kevin C. O'Neill, elected
to leave to pursue other interests, and both resigned from our board of
directors. We appointed Barry M. Schechter, our Chairman, as Chief
Executive Officer. Mr. Schechter remains our Chairman, but resigned as
our CEO effective April 1, 2003. We also reduced our staff by a total
of 20%, and restructured and refocused our sales force toward
opportunities available in the current economic climate. This
reorganization resulted in costs savings of approximately $3 million
per year.
o In the fourth quarter of 2001, we appointed experienced managers to
manage our Island Pacific and SVI Store Solutions operations. These
managers report directly to the CEO. We also appointed an experienced
vice president of sales to the team.
o We developed measurable budgets for each divisional operation so as to
measure performance directly and maintain control over expenditures.
o We restructured our application development efforts in concert with our
new Marketing and Technology Management team to work more closely with
customers for improvements to our offerings. We expect the result will
be application technology that more closely meets the needs of our
customers. Additionally, more of the costs of development may be offset
against customer specific revenues.
15
o We relocated our principal executive offices to smaller and less
expensive premises in Carlsbad, California.
o In July 2002, we negotiated an extension of our senior bank lending
facility to August 31, 2003, and then we subsequently satisfied this
debt in full under the Discounted Loan Payoff Agreement dated March 31,
2003. See "Liquidity and Capital Resources -- Contractual Obligations
-- Union Bank."
o We completed an integrated series of transactions with Softline to
repay our subordinated note to Softline, to transfer to Softline our
note received in connection with the sale of IBIS Systems Limited, and
to issue new Series A Convertible Preferred securities in exchange for
10,700,000 SVI common shares. See "Financing Transactions -- Softline."
o Our Australian subsidiary ceased operations in February 2002. See
"Discontinued Operations."
o In fiscal 2001, we issued a total of $1.25 million in convertible notes
to a limited number of accredited investors related to ICM Asset
Management, Inc. of Spokane, Washington, a significant beneficial owner
of our common stock. In July 2002, we amended these convertible notes
to extend the maturity date to September 30, 2003 and we replaced the
warrants issued to these investors. See "Financing Transactions -- ICM
Asset Management, Inc." below.
o In May 2002, we entered into a new two-year software development and
services agreement with our largest customer, Toys "R' Us, Inc.
("Toys"). Toys also agreed to invest $1.3 million for the purchase of a
non-recourse convertible note and a warrant to purchase up to 2,500,000
common shares. See "Financing Transactions -- Toys "R" Us' below.
o In March 2003, we issued a total of $3.5 million in 9% convertible
debentures to Midsummer Investment, Ltd., Omicron Master Trust and
Islandia, L.P. Along with these debentures, warrants to purchase an
aggregate of 1,572,858 shares of common stock were issued to these
investors. See "Financing Transactions - Midsummer/Omicron/Islandia"
below. We used most of the proceeds from this issuance to repay our
debt to Union Bank.
o On April 1, 2003, we issued a total of $400,000 in 9% convertible
debentures to MSBJ Investors LLC. Along with these debentures, warrants
to purchase an aggregate of 156,863 shares of common stock were issued
to this investors. See "Financing Transactions - MSBJ" below.
o On May 5, 2003, we issued a total of $300,000 in 9% convertible
debentures to Crestview Capital Fund I, L.P., Crestview Capital Fund
II, L.P. and Crestview Capital Offshore Fund, Inc. Along with these
debentures, warrants to purchase an aggregate of 101,112 shares of
common stock were issued to these investors. See "Financing
Transactions - Crestview Investors" below.
o Effective April 1, 2003, we sold SVI Training Products, Inc. to Arthur
S. Klitofsky for $180,000, plus earnout payments equal to 20% of the
total gross revenues of SVI Training Products in each of its next two
fiscal years, to the extent the revenues in each of those years exceed
$1.4 million. Mr. Klitofsky delivered to us a promissory note for the
amount of $180,000, and the earnout payments, if any, will be made in
quarterly installments following each fiscal year, bearing an annual
interest rate of five percent (5%).
Discontinued Operations
-----------------------
Due to the declining performance of our Australian subsidiary, we decided in the
third quarter of fiscal 2002 to sell certain assets of the Australian subsidiary
to the former management of such subsidiary, and then cease Australian
16
operations. Such sale was, however, subject to the approval of National
Australia Bank, the subsidiary's secured lender. The bank did not approve the
sale and the subsidiary ceased operations in February 2002. The bank caused a
receiver to be appointed in April 2002 to sell substantially all of the assets
of the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the assets for
$300,000 in May 2002 to the entity affiliated with former management, and is
actively pursuing the collection of receivables. If the sale proceeds plus
collections on receivables are insufficient to discharge the indebtedness to
National Australia Bank, we may be called upon to pay the deficiency under our
guarantee to the bank. We have accrued $187,000 as our potential exposure. The
receiver has also claimed that we are obligated for inter-company balances of
$636,000. We do not believe any amounts are owed to the receiver, who has not as
of the date of this report acknowledged the monthly corporate overhead recovery
fees and other amounts charged by us to the Australian subsidiary offsetting the
amount claimed to be due. For further details, see "Liquidity and Capital
Resources -- Contractual Obligations -- National Australia Bank."
The disposal of our Australian subsidiary resulted in a loss of $3.2 million.
The operating results of the Australian subsidiary are shown on our financial
statements as discontinued operations with the prior period results restated.
Effective April 1, 2003, we sold our shares in SVI Training Products, Inc. to
Arthur Klitofsky. This business unit accounted for less than 7% of our total
revenues in the nine month period ending December 31, 2002. The selling price
was $180,000, plus earnout payments equal to 20% of the total gross revenues of
SVI Training Products in each of its next two fiscal years, to the extent the
revenues in each of those years exceed $1.4 million. Mr. Klitofsky delivered to
us a promissory note for the amount of $180,000. The earnout payments, if any,
will be made in quarterly installments following each fiscal year, bearing an
annual interest rate of five percent (5%).
Critical Accounting Policies and Estimates
------------------------------------------
Our discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, based on
historical experience, and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect significant
judgments and estimates used in the preparation of our consolidated financial
statements:
o Revenue recognition. Our revenue recognition policy is significant
because our revenue is a key component of our results of operations. In
addition, our revenue recognition determines the timing of certain
expenses such as commissions and royalties. We follow specific and
detailed guidelines in measuring revenue; however, certain judgments
affect the application of our revenue policy.
17
We license software under non-cancelable agreements and provide
related services, including consulting and customer support. We
recognize revenue in accordance with Statement of Position 97-2 (SOP
97-2), Software Revenue Recognition, as amended and interpreted by
Statement of Position 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with respect to certain transactions, as well as Technical
Practice Aids issued from time to time by the American Institute of
Certified Public Accountants. We adopted Staff Accounting Bulletin No.
101 (SAB 101), Revenue Recognition in Financial Statements, during the
first quarter of 2000. SAB 101 provides further interpretive guidance
for public companies on the recognition, presentation, and disclosure
of revenue in financial statements. The adoption of SAB 101 did not
have a material impact on our licensing or revenue recognition
practices.
Software license revenue is generally recognized when a license
agreement has been signed, the software product has been delivered,
there are no uncertainties surrounding product acceptance, the fees are
fixed and determinable, and collection is considered probable. If a
software license contains an undelivered element, the fair value of the
undelivered element is deferred and the revenue recognized once the
element is delivered. In addition, if a software license contains
customer acceptance criteria or a cancellation right, the software
revenue is recognized upon the earlier of customer acceptance or the
expiration of the acceptance period or cancellation right. Typically,
payments for our software licenses are due in installments within
twelve months from the date of delivery. Where software license
agreements call for payment terms of twelve months or more from the
date of delivery, revenue is recognized as payments become due and all
other conditions for revenue recognition have been satisfied. Deferred
revenue consists primarily of deferred license, prepaid services
revenue and maintenance support revenue.
Consulting services are separately priced, are generally available
from a number of suppliers, and are not essential to the functionality
of our software products. Consulting services, which include project
management, system planning, design and implementation, customer
configurations, and training are billed on both an hourly basis and
under fixed price contracts. Consulting services revenue billed on an
hourly basis is recognized as the work is performed. On fixed price
contracts, consulting services revenue is recognized using the
percentage of completion method of accounting by relating hours
incurred to date to total estimated hours at completion. We have from
time to time provided software and consulting services under fixed
price contracts that require the achievement of certain milestones. The
revenue under such arrangements is recognized as the milestones are
achieved.
Customer support services include post-contract support and the
rights to unspecified upgrades and enhancements. Maintenance revenues
from ongoing customer support services are billed on a monthly basis
and recorded as revenue in the applicable month, or on an annual basis
18
with the revenue being deferred and recognized ratably over the
maintenance period. If an arrangement includes multiple elements, the
fees are allocated to the various elements based upon vendor-specific
objective evidence of fair value.
o Accounts Receivable. We typically extend credit to our customers.
Software licenses are generally due in installments within twelve
months from the date of delivery. Billings for customer support and
consulting services performed on a time and material basis are due upon
receipt. From time to time software and consulting services are
provided under fixed price contracts where the revenue and the payment
of related receivable balances are due upon the achievement of certain
milestones. Management estimates the probability of collection of the
receivable balances and provides an allowance for doubtful accounts
based upon an evaluation of our customers ability to pay and general
economic conditions.
o Valuation of long-lived and intangible assets and goodwill. We assess
the impairment of identifiable intangibles, long-lived assets and
related goodwill whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. When we determine that
the carrying value of intangibles, long-lived assets and related
goodwill may not be recoverable we measure any impairment based on a
projected discounted cash flow method using a discount rate determined
by our management to be commensurate with the risk inherent in our
current business model. Net intangible assets, long-lived assets, and
goodwill amounted to $35.5 million as of March 31, 2002.
In our 2003 fiscal year, Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets became
effective and as a result, we will cease to amortize approximately
$14.8 million of goodwill. We had recorded approximately $2.2 million
of amortization during fiscal 2002 and would have recorded
approximately $2.2 million of amortization during fiscal 2003.
We review for impairment at least annually or on an interim basis
if an event occurs or circumstances change that would indicate that the
value of intangible assets has diminished or been impaired. Other
intangible assets will continue to be amortized over their estimate
useful lives. We evaluate the remaining useful lives of these
intangibles on an annual basis to determine whether events or
circumstances warrant a revision to the remaining period of
amortization.
Financing Transactions.
-----------------------
AMRO International, S.A.
------------------------
On October 24, 2000, the SEC declared effective a registration statement
registering up to 700,000 shares of our common stock for resale by AMRO
International, S.A. AMRO purchased 344,948 shares in March 2000 for
approximately $2.9 million, and under the terms of the purchase agreement, was
entitled to receive additional shares of our common stock if the average of the
closing price of our stock for the five days preceding the effective date of the
registration statement was less than $10.34. Pursuant to the repricing formula,
19
we issued to AMRO 375,043 additional shares of common stock. We became obligated
to pay to AMRO liquidated damages for late effectiveness of the registration
statement in the amount of $286,000. AMRO agreed in March 2001 to accept 286,000
shares of common stock in satisfaction of the liquidated damages, and agreed to
purchase an additional 214,000 shares of common stock for $214,000. In
connection with this agreement, we issued AMRO a two-year warrant to purchase up
to 107,000 shares of common stock at $1.50 per share, which has since expired.
We agreed to register all of the shares sold in March 2001, and those that we
may sell under the warrant, with the SEC. We became obligated to pay to AMRO as
liquidated damages the amount of $60,000. In April 2002, AMRO agreed to accept
140,000 shares of common stock in satisfaction of the liquidated damages
ICM Asset Management, Inc.
--------------------------
In December 2000, we entered into an agreement to sell up to 2,941,176 common
shares to a limited number of accredited investors related to ICM Asset
Management, Inc. for cash at $0.85 per share. We sold 1,764,706 of such shares
in December 2000, for gross proceeds of $1.5 million, and an additional 588,235
shares in January 2001, for additional gross proceeds of $0.5 million. Two of
the investors exercised a right to purchase an additional 588,235 shares in
February 2001 for additional gross proceeds of $0.5 million.
We also agreed to issue to each investor a warrant to purchase one common share
at $1.50 for each two common shares purchased in the private placement
(aggregate warrants exercisable for 1,470,590 option shares). We had the right
to call 50% of the warrants, subject to certain conditions, if our common shares
traded at a price above $2.00 per share for thirty consecutive days. We had the
right to call the remaining 50% of the warrants, subject to certain conditions,
if our common shares traded at a price above $3.00 per share for thirty
consecutive days.
We agreed to register all of the shares sold under the purchase agreement or
upon exercise of the warrants with the SEC. Our agreement with the investors
provided that if a registration statement was not effective on or before April
21, 2001, we would be obligated to issue two-year warrants to each investor,
entitling the investor to purchase additional shares of our common stock at
$0.85 per share. We filed a registration statement in January 2001 to register
these shares, but it did not become effective. As of June 28, 2002, we had
issued the investors warrants to purchase 1,249,997 common shares under this
agreement.
In May and June 2001, we issued a total of $1.25 million in convertible notes to
a limited number of accredited investors related to ICM Asset Management, Inc.
The notes were originally due August 30, 2001, and required interest at the rate
of 12% per annum to be paid until maturity, with the interest rate increasing to
17% in the event of a default in payment of principal or interest. Any portion
of the unpaid amount of principal and interest was convertible at any time by
the investors into common shares valued at $1.35 per share. We also agreed to
issue to the investors three-year warrants to purchase 250 common shares for
each $1,000 in notes purchased, at an exercise price of $1.50 per share.
20
In July 2002, we agreed to amend the terms of the notes and warrants issued to
the investors related to ICM Asset Management, Inc. The investors agreed to
replace the existing notes with new notes having a maturity date of September
30, 2003. The interest rate on the new notes was reduced to 8% per annum,
increasing to 13% in the event of a default in payment of principal or interest.
We are required to pay accrued interest on the new notes calculated from July
19, 2002, in quarterly installments beginning September 30, 2002. The investors
agreed to reduce accrued interest and late charges on the original notes by up
to $16,000, and to accept the reduced amount in 527,286 shares of our common
stock valued at $0.41 per share which was the average closing price of our
shares on the American Stock Exchange for the 10 trading days prior to July 19,
2002. The new notes are convertible at the option of the holders into shares of
our common stock valued at $0.60 per share. We do not have a right to prepay the
notes. In December 2002, the investors agreed to extend the payments of accrued
interest to September 30, 2003.
We also agreed that the warrants previously issued to the investors to purchase
an aggregate of 3,033,085 shares at exercise prices ranging from $0.85 to $1.50,
and expiring on various dates between December 2002 and June 2004, would be
replaced by new warrants to purchase an aggregate of 1,600,000 shares at $0.60
per share, expiring July 19, 2007. The replacement warrants are not callable by
us.
We also agreed to file a registration statement for the resale of all shares
held by or issuable to these investors. In the event such registration statement
is not declared effective by the SEC by June 30, 2003, we will be obligated to
issue five-year warrants for the purchase of 5% of the total number of
registrable securities at an exercise price of $0.60 per share. For the first
and second 30 day periods after June 30, 2003 in which the registration
statement is not effective, we will be obligated to issue additional warrants
for the purchase of 5% of the total number of registrable securities at an
exercise price of $0.60 per share. For each 30 day period thereafter in which
the registration statement is not effective, we will be obligated to issue
additional warrants for the purchase of 2.5% of the total number of registrable
securities at an exercise price of $0.60 per share.
Softline
In May 2002, we entered into an integrated series of transactions with Softline
by which:
1. We transferred to Softline the note received in connection with the
sale of IBIS Systems Limited.
2. We issued to Softline 141,000 shares of newly-designated Series A
Convertible Preferred Stock .
3. Softline released us from approximately $12.3 million in indebtedness
due to Softline under a promissory note.
4. Softline surrendered 10,700,000 shares of our common shares held by
Softline.
21
The Series A Preferred Stock has a stated value of $100 per share and is
redeemable at our option any time prior to the maturity date of December 31,
2006 for 107% of the stated value and accrued and unpaid dividends. The shares
are entitled to cumulative dividends of 7.2% per annum, payable semi-annually
when, as and if declared by the board of directors. Softline may convert each
share of Series A Preferred Stock at any time into the number of common shares
determined by dividing the stated value plus all accrued and unpaid dividends,
by a conversion price initially equal to $0.80. The conversion price increases
at an annual rate of 3.5% calculated on a semi-annual basis. The Series A
Preferred Stock is entitled upon liquidation to an amount equal to its stated
value plus accrued and unpaid dividends in preference to any distributions to
our common stockholders. The Series A Preferred Stock has no voting rights prior
to conversion into common stock, except with respect to proposed impairments of
the Series A Preferred rights and preferences, or as provided by law. We have
the right of first refusal to purchase all but not less than all of any shares
of Series A Preferred Stock or common shares received on conversion which
Softline may propose to sell to a third party, upon the same price and terms as
the proposed sale to a third party. We also granted Softline certain
registration rights for the common shares into which the Series A Preferred
Stock is convertible, including the right to demand registration on Form S-3 if
such form is available to us and Softline proposes to sell at least $5 million
of registrable common shares, and the right to include shares obtainable upon
conversion of the Series A Preferred Stock in other registration statements we
propose to file.
These transactions were recorded for accounting purposes on January 1, 2002, the
date when Softline took effective control of the IBIS note and we ceased
accruing interest on the Softline note. We did not recognize any gain or loss in
connection with the disposition of the IBIS note or the other components of the
transactions.
Toys "R" Us, Inc.
-----------------
In May 2002, Toys "R" Us, Inc. ("Toys") agreed to invest $1.3 million for the
purchase of a non-recourse convertible note and a warrant to purchase 2,500,000
common shares. The purchase price was received in installments through September
27, 2002. The note is non-interest bearing, and the face amount was either
convertible into shares of our stock valued at $0.553 per share or payable in
cash at our option, at the end of the term. In November 2002, the Board decided
that this note will be converted solely for equity and will not be repaid in
cash. The note is due May 29, 2009, or if earlier than that date, three years
after the completion of the development project contemplated in the development
agreement between us and Toys entered into at the same time. We do not have the
right to prepay the convertible note before the due date. The face amount of the
note is 16% of the $1.3 million purchase price as of May 29, 2002, and increases
by 4% of the $1.3 million purchase price on the last day of each succeeding
month, until February 28, 2004, when the face amount is the full $1.3 million
purchase price. The face amount will cease to increase if Toys terminates its
development agreement with us for a reason other than our breach. The face
amount will be zero if we terminate the development agreement due to an uncured
breach by Toys of the development agreement.
22
The warrant entitles Toys to purchase up to 2,500,000 of our common shares at
$0.553 per share. The warrant is initially vested as to 400,000 shares as of May
29, 2002, and vests at the rate of 100,000 shares per month until February 28,
2004. The warrant will cease to vest if Toys terminates its development
agreement with us for a reason other than our breach. The warrant will become
entirely non-exercisable if we terminate the development agreement due to an
uncured breach by Toys of the development agreement. Toys may elect a "cashless
exercise" where a portion of the warrant is surrendered to pay the exercise
price. As of March 31, 2003, 1.4 million shares of the warrant are exercisable.
The note conversion price and the warrant exercise price are each subject to a
10% reduction in the event of an uncured breach by us of certain covenants to
Toys. These covenants do not include financial covenants. Conversion of the note
and exercise of the warrant each require 75 days advance notice to us. As a
result, under the rules of the SEC, Toys will not be considered the beneficial
owner of the common shares into which the note is convertible and the warrant is
exercisable until 15 days after it has given notice of conversion or exercise,
and then only to the extent of such noticed conversion or exercise. We also
granted Toys certain registration rights for the common shares into which the
note is convertible and the warrant is exercisable, including the right to
demand registration on Form S-3 if such form is available to us, and the right
to include shares into which the note is convertible and the warrant is
exercisable in other registration statements we propose to file.
Midsummer/Omicron/Islandia
--------------------------
On March 31, 2003, we entered into a Securities Purchase Agreement with
Midsummer Investment, Ltd. ("Midsummer"), Omicron Master Trust ("Omicron"), and
Islandia, L.P. ("Islandia") for the sale to these investors of 9% debentures,
convertible into shares of SVI common stock at a conversion price equal to
$1.0236 per share, for an aggregate amount of $3,500,000. The investors also
each received a warrant to purchase up to, in the aggregate, 1,572,858 shares of
common stock with an exercise price equal to $1.0236 per share.
The debentures bear an interest rate of 9% per annum, and they provide for
interest only payments on a quarterly basis, payable, at our option, in cash or
shares of common stock. The debentures mature in May 2005. If certain conditions
are met, we have the right, but not the obligation, to redeem the debentures at
110% of their face value, plus accrued interest. Commencing on February 1, 2004,
we must redeem $218,750 per month of the debenture. Furthermore, if the daily
volume weighed average price of the our common stock on the American Stock
Exchange exceeds $1.0236 by more than 200% for 15 consecutive trading days, we
will have the option to cause the investors to convert their debentures into
common stock.
The warrants issued to the investors are for a 5-year term, with an exercise
price equal to $1.0236 per share.
The investors were granted the right of first refusal to participate in our
future offerings of common stock or equivalent securities so long as any one of
them owns at least 5% of the debentures purchased by them. Monthly redemptions
shall be in cash, or, provided certain conditions are met, such as an effective
23
registration statement, in shares of common stock. If we elect to pay in shares
of common stock, the conversion price shall be the lessor of $1.0236 and 90% of
the average of the daily volume weighted average price of the common stock for
the 20 trading days immediately prior to the redemption date. The investors were
also given registration rights under a Registration Rights Agreement requiring
us to file by April 30, 2003 a registration statement respecting 130% of the
common stock issuable upon the conversion of the debentures and the warrants,
and to use best efforts to have the registration statement declared effective at
the earliest date. If the registration statement is not filed within these
timeframes or declared effective by June 29, 2003 following the closing date of
the debentures sold in the first phase, or within 120 days in the event of a
review by the Securities and Exchange Commission, we will be obligated to pay
liquidated damages to the investors equal to 2% of the sum of the amount of
debentures subscribed to by the investors and the value of the warrants for each
month until the registration statement becomes effective.
Additional debentures aggregating up to $2,000,000 will be sold to these
investors in a second closing if within one year after the date of first sale of
debentures there occurs a period of 15 consecutive trading days during which the
daily volume weighted average closing price of our common stock is maintained at
a price at or above $1.75 per share, subject to certain conditions. The shares
of common stock underlying these debentures and warrants are not included for
registration in this prospectus.
MBSJ Investors, LLC
-------------------
On April 1, 2003, we entered into a Securities Purchase Agreement with MBSJ
Investors, LLC ("MBSJ") for the sale to MBSJ of a 9% debenture, convertible to
shares of our common stock at a conversion price of $1.0236, for $400,000. This
debenture was accompanied by a five-year warrant to purchase 156,311 shares of
common stock with an exercise price of $1.0236 per share. Interest is due on a
quarterly basis, payable in cash or shares of common stock at our option.
Commencing on February 1, 2004, we must redeem $20,000 per month of the
debenture. The debenture matures in October 2005. MBSJ was also granted
registration rights under a Registration Rights Agreement, and certain other
rights similar to those granted to Midsummer, Omicron and Islandia.
Crestview Investors
-------------------
On May 5, 2003, we entered into an agreement with Crestview Capital Fund I,
L.P., Crestview Capital Fund II, L.P. and Crestview Capital Offshore Fund, Inc.
for the sale to these investors of 9% debentures, convertible into shares of our
common stock at a conversion price of $1.0236, for $300,000. These debentures
were accompanied by five-year warrants to purchase an aggregate of 101,112
shares of common stock with an exercise price of $1.0236 per share. Interest is
due on a quarterly basis, payable in cash or shares of common stock at our
option. Commencing on February 1, 2004, we must initially redeem $18,750 per
month of the debentures. The debentures mature in October 2005. The Crestview
Investors were also granted registration rights under a registration rights
agreement, and certain other rights similar to those granted to Midsummer,
Omnicron and Islandia.
24
Results of Operations
---------------------
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales for the
interim nine-month periods ending December 31, 2002 and December 31, 2001:
NINE MONTHS ENDED DECEMBER 31,
-------------------------------------------------
2002 2001
---------------------- -----------------------
PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE
--------- ---------- --------- ----------
(unaudited
and in
thousands)
Net sales $ 16,918 100 % $ 21,446 100 %
--------- ---------- --------- ----------
Cost of sales 5,997 35 % 9,247 43 %
Gross profit 10,921 65 % 12,199 57 %
Product development expense 2,894 17 % 2,932 14 %
Depreciation and amortization 3,122 18 % 4,991 23 %
Selling, general and administration expenses 7,365 44 % 10,388 48 %
--------- ---------- --------- ----------
Total expenses 13,381 79 % 18,311 85 %
--------- ---------- --------- ----------
Loss from operations (2,460) (14)% (6,112) (28)%
Other income (expense)
Interest income 1 0 % 8 0 %
Other income (expense) 8 0 % (35) 0 %
Interest expense (894) (5)% (2,795) (13)%
Gain (loss) on foreign currency translation 23 0 % 0 %
--------- ---------- --------- ----------
Total other expense (862) (5)% (2,822) (13)%
--------- ---------- --------- ----------
Loss before provision (benefit) for income taxes (3,322) (19)% (8,934) (41)%
Provision for income tax benefits (57) 0 % (2) 0 %
--------- ---------- --------- ----------
Loss before cumulative effect of a change in
accounting principle (3,265) (19)% (8,932) (41)%
Cumulative Effect of Change of Accounting
Principle - Goodwill under SFAS 142 (627) (4)% (0) 0 %
--------- ---------- --------- ----------
Loss from continuing operation (3,892) (23)% (8,932) (41)%
Loss from discontinued Australian operation -- (1,140)
--------- ---------
Net loss $ (3,892) $(10,072)
========= =========
25
NINE MONTH PERIOD ENDED DECEMBER 31, 2002 COMPARED TO NINE MONTH
PERIOD ENDED DECEMBER 31, 2001 (Unaudited)
Net Sales
---------
Net sales decreased by $4.5 million, or 21%, to $16.9 million in the nine months
ended December 31, 2002 from $21.4 million in the nine months ended December 31,
2001. The decrease is due to $3.0 million decrease in modification service
revenue and $2.4 million decrease in professional service revenues. The decrease
is offset by $1.1 million increase in software license revenue. In May 2002, we
entered into a new development agreement services through February 2004. We
expect that the overall level of services to be performed for Toys "R" Us, Inc.
in fiscal 2003 will be substantially less than fiscal 2002.
Cost of Sales/Gross Profit
--------------------------
Cost of sales decreased by $3.2 million, or 35%, to $6.0 million in the nine
months ended December 31, 2002 from $9.2 million in the nine months ended
December 31, 2001. Gross profit as a percentage of net sales increased to 65% in
the nine months ended December 31, 2002 from 57% in the prior comparative
period. The decrease in cost of sales and the increase in gross profit as a
percentage of net sales were due to increases in software license and
maintenance sales as percentage of sales of 48% and 32%, respectively, in the
nine months ended December 31, 2002 compared to the nine months ended December
31, 2001.
Product Development Expense
---------------------------
Product development expense was $2.9 million in each of the nine months ended
December 31, 2002 and 2001. We focus on the on-going enhancement of our existing
26
products and research for new value-added products. The new version 2.0 of our
Retail Enterprise Solutions will be released in the fourth quarter of the
current fiscal year.
Depreciation and Amortization
-----------------------------
Depreciation and amortization decreased by $1.9 million, or 3.8%, to $3.1
million in the nine months ended December 31, 2002 from $5.0 million in the nine
months ended December 31, 2001, as a result of our ceasing to amortize goodwill
upon adoption of SFAS No. 142.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses decreased by $3.0 million, or 29%,
to $7.4 million in the nine months ended December 31, 2002 from $10.4 million in
the nine months ended December 31, 2001. The decrease was primarily related to
the 20% reduction of non-essential personnel in the third quarter of fiscal 2002
and improved management of expenditures.
Operating Loss
--------------
Operating loss from continuing operations, which included depreciation and
amortization expense, was $2.5 million for the nine months ended December 31,
2002, compared to a loss from operations of $6.1 million for the nine months
ended December 31, 2001.
Interest Expense
----------------
Interest expense decreased by $1.9 million, or 68%, to $0.9 million in the nine
months ended December 31, 2002 from $2.8 million in the nine months ended
December 31, 2001. Interest expense in the 2001 period included $1.2 million
interest expense on the note due Softline Limited. Our obligations related to
this note were released by Softline effective January 1, 2002 in connection with
the integrated series of recapitalization transactions with Softline. The
balance of the difference was a $0.7 million decrease in amortization of debt
discount.
Cumulative Effect of Change in Accounting Principle
---------------------------------------------------
Pursuant to SFAS 142, we completed the transitional analysis of goodwill
impairment as of April 1, 2002 and recorded an impairment of $0.6 million as the
cumulative effect of a change in accounting principle in the quarter ended June
30, 2002. We also evaluated the remaining useful lives of our intangibles in the
quarter ended June 30, 2002 and no adjustments have been made to the useful
lives of our intangible assets.
27
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net sales for the
fiscal years ended March 31, 2002, March 31, 2001 and March 31, 2000:
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- ---------------------
PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF REVENUE AMOUNT OF REVENUE AMOUNT OF REVENUE
--------- --------- --------- --------- --------- ---------
Net sales $ 27,109 100 % $ 27,713 100 % $ 26,652 100 %
Cost of sales 10,036 37 % 9,188 33 % 6,421 24 %
--------- --------- --------- --------- --------- ---------
Gross profit 17,073 63 % 18,525 67 % 20,231 76 %
Application development expense 4,203 16 % 5,333 19 % 4,877 18 %
Depreciation and amortization 6,723 25 % 8,616 31 % 7,250 27 %
Selling, general and administration expenses 13,144 48 % 18,037 65 % 14,817 56 %
Impairment of intangible assets 6,519 24 %
Impairment of note receivable received in
connection with the sale of IBIS
Systems Limited 7,647 (28)%
--------- --------- --------- --------- --------- ---------
Total expenses 24,070 89 % 46,152 167 % 26,944 101 %
--------- --------- --------- --------- --------- ---------
Loss from operations (6,997) (26)% (27,627) (100)% (6,713) (25)%
Other income (expense)
Interest income 10 0 % 628 2 % 1,074 4 %
Other income (expense) (46) 0 % 63 0 % (206) (1)%
Interest expense (3,018) (11)% (3,043) (11)% (1,493) (6)%
Gain (loss) on foreign currency translation (9) 0 % 2 0 % (10) 0 %
--------- --------- --------- --------- --------- ---------
Total other expense (3,063) (11)% (2,350) (8)% (635) (2)%
--------- --------- --------- --------- --------- ---------
Loss before provision (benefit) for income taxes (10,060) (37)% (29,977) (108)% (7,348) (28)%
Provision (benefit) for income taxes 39 0 % (4,778) 17 % (2,414) 9 %
--------- --------- --------- --------- --------- ---------
Loss from continuing operations (10,099) (37)% (25,199) (91)% (4,934) (19)%
Income (loss) from discontinued operations,
net of taxes (4,559) (3,746) 880
--------- --------- ---------
Net loss $(14,658) $(28,945) $ (4,054)
========= ========= =========
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2001
Net Sales
---------
Net sales decreased slightly by $0.6 million, or 2%, to $27.1 million in the
fiscal year ended March 31, 2002 from $27.7 million in the fiscal year ended
March 31, 2001. Fiscal year 2001 revenues included recognition of $2.0 million
in revenue from a one-time sale of technology rights which was signed in fiscal
2000.
Fiscal 2002 was a challenging year in which to close new application license
sales. We believe our difficulties initially arose from insufficient staffing of
our sales force. Although we significantly increased the staffing of our sales
force in the first quarter of fiscal 2002, the economic slowdown and the
terrorist attacks of September 11, 2001, and the ongoing hostilities in the
world increased the challenges faced by our sales force. In addition, our
financial condition may have interfered with our ability to sell new application
software licenses, as implementation of our applications generally requires
extensive future services and support, and some potential customers have
28
expressed concern about our financial ability to provide these ongoing services.
We believe strongly that we provide and will continue to provide excellent
support to our customers, as demonstrated by the continuing upgrade purchases by
our top-tier established customer base. Significant sales growth may, however,
depend in part on our ability to improve our financial condition.
In October 2001, we took aggressive steps designed to improve sales of new
application software licenses, and to streamline our operations around services
to our existing customers. These steps included a restructuring of our
operations and repositioning of the sales force to better focus on the
historical markets of our retail enterprise solution and our retail store
solution. This strategy has permitted us to reduce overhead expenses, while
allowing us to target those markets most likely to result in sales in the
current economic climate. Our newly focused sales force has also begun to
aggressively market individual modules within our suites. These modules have
been improved through modification services performed for existing customers,
and may now be marketed as separate applications to new customers. These modules
are suited to those potential customers looking for incremental upgrades to
their systems at a substantially lower cost, and with a substantially reduced
implementation commitment, than an upgrade to our full suite would require. We
intend to add additional sales personnel at such time as the economic climate
and market for our products permits. In July 2001, we entered into an agreement
to expand our current professional services activities with Toys "R" Us
significantly through September 2003. In May 2002, we entered into a new
development agreement with Toys for the provision of development services
through February 2004. We expect the overall dollar amount of professional
services we perform for Toys in 2003 to be comparable to fiscal 2002, and to
continue to be a significant source of professional services revenues in fiscal
2004. Toys accounted for 42% of our net sales in fiscal 2002 compared to 29% of
net sales in fiscal 2001.
Cost of Sales/Gross Profit
--------------------------
Cost of sales increased $0.8 million, or 9%, to $10.0 million in the fiscal year
ended March 31, 2002 from $9.2 million in the fiscal year ended March 31, 2001.
Gross profit as a percentage of net sales decreased to 63% in fiscal 2002 from
67% in fiscal 2001. The decrease in gross profit margin was due to a further
shift in the sales mix from high margin application licenses to lower margin
software modification and professional services. During fiscal 2002, application
technology license revenues represented 17% of net sales and related services
represented 76% of net sales, compared to 25% and 69% of net sales,
respectively, of net sales during fiscal 2001.
Cost of sales for fiscal 2002 and 2001 included $3.6 million and $3.4 million,
respectively, in costs associated with the development or modification of
modules for Toys "R" Us, including the use of higher cost outsource development
services (subcontractors) for certain components of the overall project. These
costs are neither capitalized nor included in application technology development
expenses, but we consider them to be part of our overall application technology
development program.
Application Development Expense
-------------------------------
Application development expense for the fiscal year ended March 31, 2002 was
$4.2 million compared to $5.3 million for the fiscal year ended March 31, 2001,
29
a decrease of 21%. The decrease primarily reflects a shift toward
customer-funded development expenses. For a further discussion of our
application technology development program, see "Description of Business" under
the heading "Application Technology Development."
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses for the first year ended March 31,
2002 decreased by $4.9 million, or 27%, to $13.1 million compared to $18.0
million in the fiscal year ended March 31, 2001. The decrease was due to the
following:
o PERSONNEL REDUCTION IMPLEMENTED IN THE FOURTH QUARTER OF 2001 AND THIRD
QUARTER OF 2002 AND CONTROL OF EXPENDITURES.
o A $0.9 MILLION RESERVE FOR BAD DEBTS IN FISCAL 2001.
During the third quarter of 2002, we completed an analysis of our operations and
concluded that it was necessary to restructure the composition of our management
and personnel. We anticipated that the restructuring would result in an
approximately $3.0 million annual reduction in our expense levels compared to
expenses prior to implementation of the plan. To the extent resources are
available, we expect to slowly increase our expense levels in fiscal 2003 from
the reduced level after the reductions in the third quarter of fiscal 2002.
Additional planned expenditures are for the building of our sales force and for
additions to our Professional Services group for US and UK retail operations as
new licenses and services are sold.
Earnings (Loss) from Continuing Operations and Before Interest Expense, Income
------------------------------------------------------------------------------
Taxes, Depreciation, Amortization and Impairments
-------------------------------------------------
The loss from continuing operations and before interest expense, income taxes,
depreciation, amortization, and impairments of intangible assets and notes
receivable was $0.3 million for the year ended March 31, 2002 as compared to a
comparable loss from continuing operations of $4.2 million in the year ended
March 31, 2001, representing an improvement of $3.9 million. The gross profit
for the year decreased by $1.5 million and other income by $3.9 million, but was
offset by improvements primarily from reduced application development expenses
in the amount of $1.1 million, and reduced selling, general and administrative
expenses of $4.9 million.
Depreciation and Amortization
-----------------------------
Depreciation and amortization decreased by $1.9 million, or 22%, to $6.7 million
in the fiscal year ended March 31, 2002 from $8.6 million in the fiscal year
ended March 31, 2001. The decrease reflected the reduction in the base amounts
of goodwill and capitalized software assets resulting from the recognition of
impairments of those assets in the fourth quarter of fiscal 2001. As a result of
the implementation of SFAS No. 142, we will not amortize goodwill in fiscal
2003. We will however record in the first quarter of fiscal 2003 a $0.6 million
30
impairment charge based upon the transitional analysis of goodwill impairment
required by SFAS 142, and we may record impairment charges based upon the
impairment testing procedures required by SFAS 144.
Interest Income and Expense
---------------------------
Interest expense was $3.0 million in the fiscal years ended March 31, 2002 and
2001.Interest income decreased $0.6 million to $0.1 million in fiscal 2002,
compared to $0.7 million in fiscal 2001 due to cessation of the accrual of
interest income on the note receivable received in connection with the sale of
IBIS after the second quarter of fiscal 2001.
Discontinued Operations
-----------------------
Loss from discontinued operations in fiscal 2002 was $4.6 million, which
included $1.4 million of net loss from Australian operations and $3.2 million of
loss on disposal. Loss from discontinued operations in fiscal 2001 was $3.7
million. Net sales from Australian operations decreased from $5.0 million in
fiscal 2001 to $2.4 million in fiscal 2002, due primarily to its disposal during
the fiscal year 2002.
FISCAL YEAR ENDED MARCH 31, 2001 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2000
Net Sales
---------
Net sales increased by $1.0 million, or 4%, to $27.7 million in the fiscal year
ended March 31, 2001 from $26.7 million in the fiscal year ended March 31, 2000.
Fiscal year 2001 revenues included recognition of $2.0 million in revenue from a
one-time sale of technology rights which was signed in fiscal 2000. Excluding
that transaction, overall net rates decreased principally due to a $1.6 million
reduction in revenue from our United Kingdom retail operations reflecting a
substantial decrease in new application license sales. The substantial decrease
in new application license sales was due in part to our inability to close
several larger application license transactions in our sales pipeline.
Cost of Sales/Gross Profit
--------------------------
Cost of sales increased $2.8 million, or 43%, to $9.2 million in the fiscal year
ended March 31, 2001 from $6.4 million in the fiscal year ended March 31, 2000.
Gross profit as a percentage of net sales decreased to 67% in fiscal 2001 from
76% in fiscal 2000. The decrease in gross profit margin was due to a shift in
the sales mix from high margin application licenses to lower margin software
modification and professional services. During fiscal 2001, application
technology license revenues represented 23% of net sales and related services
represented 77% of net sales, compared to 30% and 70% of net sales,
respectively, of net sales during fiscal 2000.
Cost of sales for fiscal 2001 included $4.9 million in costs associated with the
development or modification of modules for Toys "R" Us, including the use of
higher cost outsource development services (subcontractors) for certain
31
components of the overall project. These costs are neither capitalized nor
included in application technology development expenses, but we consider them to
be part of our overall application technology development program.
Application Development Expense
-------------------------------
Application development expense for the fiscal year ended March 31, 2001 was
$5.3 million compared to $4.9 million for the fiscal year ended March 31, 2000,
an increase of 8%. During fiscal 2001, we continued our application technology
development program begun in fiscal 2000 to improve and integrate our
application software. For a further discussion of our application technology
development program, see "Description of Business" under the heading
"Application Technology Development."
Depreciation and Amortization
-----------------------------
Depreciation and amortization increased by $1.3 million, or 18%, to $8.6 million
in the fiscal year ended March 31, 2001 from $7.3 million in the fiscal year
ended March 31, 2000. The increase was due to the amortization of software
purchased in connection with the acquisition of MarketPlace Systems Corporation
in March 2000, and to amortization of capitalized software that was made
available for sale in fiscal 2001.
Impairment of Assets
--------------------
Our March 31, 2001 balance sheet includes a $7.0 million note receivable. This
note was secured by 1,536,000 shares or approximately 11% of the outstanding
common stock of Integrity Software, Inc. We do not believe the obligor under the
note has significant assets other than the Integrity shares securing the note.
The obligor is an entity affiliated with Integrity, and its ability to sell the
Integrity shares to repay the note is limited by law and by market conditions.
During the fiscal year ended March 31, 2001, we determined that the value of
this note receivable was impaired, and we wrote off a total of $7.6 million as a
valuation allowance. We obtained an independent valuation of the Integrity
shares securing the note at March 31, 2001, which supported the value shown on
our March 31, 2001 balance sheet. This note and the shares securing it were
transferred to Softline effective January 1, 2002. See "Financing Transactions
-- Softline."
We also recorded in the fourth quarter of fiscal 2001 an impairment of $6.5
million in capitalized software and goodwill associated with Australian
operations. In determining the amount of impairment, we compared the net book
value of the long-lived assets associated with the Australian subsidiary,
primarily consisting of recorded goodwill and software intangibles, to their
estimated fair values. Fair values were estimated based on anticipated future
cash flows of the Australian operations, discounted at a rate commensurate with
the risk involved.
Interest Income and Expense
---------------------------
Interest expense increased $1.5 million, or 100%, to $3.0 million in the fiscal
year ended March 31, 2001 from $1.5 million in the fiscal year ended March 31,
32
2000. The increase was due to inclusion for the full 2001 fiscal year of
interest from indebtedness incurred in June 1999 to purchase Island Pacific, and
an increase in our average interest rate to 12% in fiscal 2001 compared to 9% in
fiscal 2000. The increase also included $0.5 million in amortized loan
refinancing costs, including $0.2 million of amortized loan cost reimbursement
to Softline.
Interest income decreased $0.5 million to $0.6 million in fiscal 2001, compared
to $1.1 million in fiscal 2000 due to decreased cash and cash equivalents.
Liquidity and Capital Resources
-------------------------------
CASH FLOWS DURING THE NINE MONTH PERIOD ENDED DECEMBER 31, 2002
During the nine months ended December 31, 2002, we financed our operations using
cash on hand, internally generated cash, proceeds from the sale of a convertible
note to Toys "R" Us, Inc. and loans from an entity affiliated with Donald S.
Radcliffe, one of our directors. At December 31, 2002 and March 31, 2002, we had
cash of $0.7 million and $1.3 million, respectively.
Operating activities used cash of $1.3 million and $0.7 million in the nine
months ended December 31, 2002 and 2001, respectively. Cash used for operating
activities in the nine months ended December 31, 2002 resulted from $3.9 million
of net losses and $2.7 million increase in accounts receivable; offset in part
by $3.1 million of depreciation and amortization, $0.6 million of goodwill
impairment, $1.0 million increase in accounts payable and accrued expenses and
$0.7 million increase in accrued interest on notes payable.
Investing activities used cash of $0.1 million and $0.2 million in the nine
months ended December 31, 2002 and 2001, respectively. Cash used for investing
activities in the current quarter was primarily for capitalization of software
development costs.
Financing activities provided cash of $0.8 million and $0.2 million in the nine
months ended December 31, 2002 and 2001, respectively. The 2002 financing
activities included $1.4 million of proceeds from a convertible note issued to
Toys "R" Us, Inc.; offset in part by $0.3 million payments on a stockholder loan
and $0.3 million payments on term loan.
Accounts receivable increased to $4.7 million at December 31, 2002 from $1.9
million at March 31, 2002. The increase was due to increase in sales and
invoicing semi-annual maintenance contracts in the quarter ended December 31,
2002.
Accounts payable increased to $2.2 million at December 31, 2002 from $1.5
million at March 31, 2002.
Deferred revenue decreased to $2.9 million at December 31, 2002 from $3.5
million at March 31, 2002. The decrease was primarily due to decreases in
33
prepare paid modification and services revenue of $1.5 million from our major
customer, Toys "R" Us, Inc., and $0.5 million from other customers; offset in
party by $1.4 million increase in prepaid support services revenue.
CASH FLOWS DURING FISCAL YEAR ENDED MARCH 31, 2002
During the fiscal year ended March 31, 2002, we financed our operations using
cash on hand, internally generated cash, cash from the issuance of convertible
notes and loans from an entity affiliated with Donald S. Radcliffe, a director.
During the fiscal year ended March 31, 2001, we financed our operations using
cash on hand, internally generated cash, cash from the sale of common stock,
proceeds from the exercise of options, lines of credit and loans from each of
Softline, a subsidiary of Softline and Barry M. Schechter, our Chairman. During
the fiscal year ended March 31, 2000, we financed our operations through
internally generated cash, proceeds from bank and other loans (including a loan
from a major stockholder), proceeds from the sale of common stock and the
exercise of options, and bank lines of credit. At March 31, 2002 and 2001, we
had cash of $1.3 million.
Operating activities provided cash of $1.6 million in the fiscal year ended
March 31, 2002 and used cash of $2.4 million in the fiscal year ended March 31,
2001 and $2.3 million in the fiscal year ended March 31, 2000. Cash provided for
operating activities in fiscal 2002 resulted primarily from $2.5 million
decrease in accounts receivable and other receivables, $1.6 million increase in
deferred revenue, $7.1 million in non-cash depreciation and amortization, $3.2
million of loss on disposal of Australian operations, $2.3 million increase in
interest payable and $1.0 million in non-cash charges for stock-based
compensation and interest related to convertible notes due stockholders; offset
by $14.7 million of net losses and $1.9 million decrease in accounts payable and
accrued expenses. Cash used for operating activities in fiscal 2001 resulted
primarily from $28.9 million of net losses, a $4.4 million decrease in net
deferred tax liability and a $4.4 million decrease in deferred revenue; offset
by $16.5 million in non-cash impairments of assets, $9.5 million in non-cash
depreciation and amortization, a $5.1 million decrease in accounts receivable,
and a $4.4 million increase in accounts payable and accrued expenses. Cash used
for operating activities during fiscal year 2000 primarily resulted from a $4.1
million net loss, a $4.6 million increase in accounts receivable and other
receivables, a $0.6 million decrease in accounts payable and accrued expenses, a
$0.8 million increase in interest receivable, a $2.6 million decrease in income
tax payable, and a $2.6 million increase in deferred income taxes liability;
offset in part by $7.9 million of non-cash depreciation and amortization expense
and a $5.0 million increase in deferred revenue.
Accounts receivable decreased during fiscal year 2002 primarily due to a
write-off of $367,000 in receivables in connection with the discontinuation of
Australian operations in February 2002 and a significant improvement in
collection efforts. Accounts receivable decreased during fiscal year 2001
primarily due to payment during fiscal 2001 of $2.0 million from the one-time
sale of technology rights during fiscal 2000, the write-off during the fourth
quarter of fiscal 2001 of the $1.6 million outstanding balance remaining from
the one-time sale of technology rights and a decrease in trade receivables aged
over 30 days as a result of improvement in collection efforts. Accounts
receivable increased during fiscal year 2000 primarily due to the inclusion of
Island Pacific accounts receivable of $4.0 million at March 31, 2000 and the
34
$3.3 million total receivable associated with the non-recurring sale of
technology rights. Accounts receivable balances fluctuate significantly due to a
number of factors including acquisitions and dispositions, seasonality, shifts
in customer buying patterns, contractual payment terms, the underlying mix of
applications and services sold, and geographic concentration of revenues.
Investing activities used cash of $0.7 million, $3.0 million, and $36.5 million
in the fiscal years ended March 31, 2002, 2001 and 2000. Investing activities
during fiscal 2002 included a $0.4 million increase in capitalized software
development costs and $0.3 million in furniture and equipment purchases.
Investing activities during fiscal year 2001 included a $2.5 million increase in
purchase of software and capitalized software development costs and $0.5 million
in furniture and equipment purchases. Investing activities during fiscal year
2000 included a $33.8 million net cash payment for the acquisition of Island
Pacific, $1.8 million in software purchases and capitalized software development
costs and $0.8 million in capital expenditures.
Financing activities used cash of $0.8 million in the fiscal year ended March
31, 2002 and provided cash of $1.9 million and $30.9 million in the fiscal years
ended March 31, 2001 and 2000. Financing activities during fiscal year 2002
included $1.2 million in note payments and $0.8 million decrease in amounts due
to stockholders; offset in part by $1.3 million in proceeds from issuance of
convertible notes. Financing activities during fiscal year 2001 included $3.8
million in proceeds from the sale of common stock, $9.9 million increase in
amounts due to stockholders and $1.6 million in proceeds from lines of credit,
offset by $13.2 million in note payments. Financing activities during fiscal
year 2000 included $18.5 million in proceeds from loans obtained to acquire
Island Pacific, $9.6 million in proceeds from the exercise of options and
private sale of common stock and $2.3 million in proceeds from lines of credit,
offset in part by $1.5 million in loan payments.
Changes in the currency exchange rates of our foreign operations had the effect
of decreasing cash by $0.1 million in the fiscal years ended March 31, 2002 and
2001 and $0.3 million in the fiscal year ended March 31, 2000.
35
Contractual Obligations
-----------------------
The following table summarizes our contractual obligations, including purchase
commitments at March 31, 2002, and the effect such obligations are expected to
have on our liquidity and cash flow in future periods.
For the fiscal years ending March 31,
-------------------------------------------
Contractual Cash Obligations 2003 2004 2005 2006 Thereafter
---------------------------- ------- ------- ------- ------- -------
(in thousands)
Operating leases $ 752 $ 724 $ 704 $ 192 $ 7
Capital leases 73 18
Term loans (a) 3,303 500
Convertible debentures (a) 839 3,276 575
Convertible notes (a) 1,370
Demand loans due stockholders 618
Payables aged over 90 days 449
Other long-term obligations 200
------- ------- ------- ------- -------
Total contractual cash obligations $5,395 $4,872 $3,980 $ 767 $ 7
======= ======= ======= ======= =======
For the fiscal years ending March 31,
-------------------------------------------
Other Commercial Commitments 2003 2004 2005 2006 Thereafter
---------------------------- ------- ------- ------- ------- -------
(in thousands)
Guarantees $ 187
------- ------- ------- ------- -------
Total commercial commitments $ 187
======= ======= ======= ======= =======
(a) Reflects certain transactions that occurred in March and April 2003.
Union Bank
----------
On June 29, 2001, we entered into an amended and restated loan agreement with
Union Bank with respect to the $7.4 million owing under the our term loan. The
maturity date under the restated agreement was May 1, 2002, but we had a right
to extend that date to November 1, 2002 if we satisfied certain conditions,
including our achieving certain earnings targets. We were required to pay
monthly interest at 5% over the bank reference rate, increased by an additional
2% for late payments of principal and interest. We were required to make an
initial $210,000 principal payment in August 2001, and monthly principal
payments of $50,000 beginning October 1, 2001. Monthly principal payments were
to increase to $100,000 on May 1, 2002 upon an extension of the maturity date.
We had difficulty making both interest and principal payments during fiscal
2002, and the bank extended on several occasions the due dates for required
payments. We were required to use any proceeds in excess of $6 million we
received from private equity placements to reduce principal under the loan. We
were also prohibited from making any payments on certain subordinated
obligations, including the convertible notes held by entities related to ICM
Asset Management, Inc. The entire amount owed to the bank was secured by
substantially all of our assets and those of our subsidiaries and 10,700,000
shares of our treasury stock. The restated agreement also contained limitations
on acquisitions, investments and other borrowings.
36
We agreed to pay the bank a loan restructuring fee of $200,000, originally due
May 1, 2002 (or if the maturity date was extended, $150,000 on May 1, 2002 and
$50,000 on November 1, 2002), but the fee would be waived if we discharged the
loan before May 1, 2002. We were also required to reimburse the bank for certain
other expenses incurred during the term of the loan.
On March 18, 2002, the loan agreement was amended to release certain collateral
from the pledge to Union Bank, and to instead pledge to the bank the 10,700,000
shares of our common stock surrender by Softline in the related recapitalization
transactions with Softline described under the heading "Financing Transactions
-- Softline." The released collateral was our shares in our Australian
subsidiary, and the IBIS note and related shares of Integrity Software.
On May 21, 2002, the bank further amended the agreement to extend the maturity
date to May 1, 2003 and to revise other terms and conditions. We agreed to pay
to the bank $100,000 as a loan extension fee, payable in four monthly
installments of $25,000 each commencing on June 30, 2002. If we failed to pay
any installment when due, the loan extension fee was to increase to $200,000,
and the monthly payments were to increase accordingly. We also agreed to pay all
overdue interest and principal by June 30, 2002, and to pay monthly installments
of $24,000 commencing on June 30, 2002 and ending April 30, 2003 for the bank's
legal fees. Effective July 15, 2002, the bank further amended the restated term
loan agreement, and waived the then existing defaults. Under this third
amendment to the restated agreement, the bank agreed to waive the application of
the additional 2% interest rate for late payments of principal and interest, and
to waive the additional $100,000 refinance fee required by the second amendment.
The bank also agreed to convert $361,000 in accrued and unpaid interest and fees
to term loan principal, and we executed a new term note in total principal
amount of $7.2 million. We were required to make a principal payment of $35,000
on October 15, 2002, principal payments of $50,000 on each of November 15, 2002
and December 15, 2002, and consecutive monthly principal payments of $100,000
each on the 15th day of each month thereafter through August 15, 2003. The
entire amount of principal and accrued interest was due August 31, 2003. The
bank also agreed to eliminate certain financial covenants and to ease others. We
were not in compliance with the revised financial covenants.
On January 2, 2003, we issued a warrant to an affiliate of the bank to purchase
up to 1.5 million shares of our common stock for $0.01 per share. The warrant
was exercisable for shares equal to 1% of our outstanding common stock on
January 2, 2003, and would have become exercisable for shares equal to an
additional 0.5% of the outstanding common stock on the first day each month
thereafter, until it was exercisable for the full 4.99% of the outstanding
common stock. To the extent we discharged in full our bank obligations before
any warrants became exercisable, those warrants would not have become
exercisable.
On March 31, 2003, we entered into a Discounted Loan Payoff Agreement with the
bank. Under that agreement, we paid the bank $2,800,000 from the sale of
debentures to Midsummer, Omicron and Islandia. We also issued to the bank
1,000,000 shares of our common stock and a $500,000 one-year unsecured
non-interest bearing convertible note payable in either cash or stock, at our
option. The cash payment, shares and convertible note were accepted by the bank
in full satisfaction of our $7.1 million debt. The bank also cancelled the
37
warrant to purchase 1.5 million shares of our common stock and returned all
collateral held, including 10,700,000 shares of our common stock pledged as
security.
National Australia Bank Limited
-------------------------------
Our Australian subsidiary maintained an AUS$1,000,000 (approximately US$510,000)
line of credit facility with National Australia Bank Limited. The facility was
secured by substantially all of the assets of our Australian subsidiary, and we
have guaranteed all amounts owing on the facility. In April 2001, we received a
formal demand under our guarantee for the full AUS$971,000 (approximately
US$495,000) then alleged by the bank to be due under the facility. Due to the
declining performance of our Australian subsidiary, we decided in the third
quarter of fiscal 2002 to sell certain assets of the Australian subsidiary to
the former management of such subsidiary, and then cease Australian operations.
Such sale was, however, subject to the approval of National Australia Bank, the
subsidiary's secured lender. The bank did not approve the sale and the
subsidiary ceased operations in February 2002. The bank caused a receiver to be
appointed in February 2002 to sell substantially all of the assets of the
Australian subsidiary and pursue collections on any outstanding receivables. The
receiver proceeded to sell substantially all of the Australian subsidiary's
assets for $300,000 in May 2002 to the entity affiliated with former management,
and is actively pursuing the collection of receivables. If the sale proceeds
plus collections on receivables are insufficient to discharge the indebtedness
to National Australia Bank, we may be called upon to pay the deficiency under
our guarantee to the bank. We have accrued $187,000 as the maximum amount of our
potential exposure. The receiver has also claimed that we are obligated to it
for inter-company balances of $636,000, but we do not believe any amounts are
owed to the receiver, who has not as of the date of this report acknowledged the
monthly corporate overhead recovery fees and other amounts charged by us to the
Australian subsidiary offsetting the amount claimed to be due.
Other Indebtedness, Including Related Parties
---------------------------------------------
In connection with our acquisition of Island Pacific effective April 1999, we
also borrowed $2.3 million with no stated maturity date from three entities in
June 1999. $1.5 million of this amount was borrowed from Claudav Holdings Ltd.
B.V., a significant stockholder. The balance due on these loans were paid off in
full at January 31, 2003. The loans bore interest at the prime rate and were due
upon demand.
In May and June 2001, we issued convertible notes to entities related to ICM
Asset Management, Inc., these notes were amended in July 2002. See "Financing
Transactions -- ICM Asset Management, Inc."
In May 2001, December 2001, May 2002 and September 2002, we borrowed $50,000,
$125,000, $70,000 and $50,000, respectively, from World Wide Business Centres, a
company affiliated with Donald S. Radcliffe, a director, to meet payroll
expenses. These amounts have been repaid in full together with interest at the
then-effective prime rate, as cash flows have been received.
38
In March 2003, we issued convertible debentures to Midsummer, Omicron, and
Islandia for $3.5 million. See "Financing Transactions -
Midsummer/Omicron/Islandia."
On April 1, 2003, we issued convertible debentures to MBSJ Investors, LLC for
$400,000. See "Financing Transactions - MBSJ."
On May 5, 2003, we issued convertible debentures to Crestview Capital Fund I,
L.P., Crestview Capital Fund II, L.P. and Crestview Capital Offshore Fund, Inc.
for $300,000. See "Financing Transactions - Crestview Investors."
Cash Position
-------------
As a result of our indebtedness and net losses for the past three years, we have
experienced significant strain on our cash resources. In order to manage our
cash resources, we reduced expenses and discontinued our Australian operations.
We have also extended payment terms with many of our trade creditors wherever
possible and have diligently focused our collection efforts on our accounts
receivable. We had a negative working capital of $5.3 million and $2.8 million
at March 31, 2002 and 2001, respectively.
We were unable to make timely monthly rent payments for our Irvine and Carlsbad
facilities during the first quarter of fiscal 2003. We renegotiated rent terms
with the landlords of our Irvine and Carlsbad facilities in June 2002, and we
are currently in compliance with the renegotiated terms.
As discussed above, we renegotiated our agreements with Union Bank on several
occasions after we were unable to make payments which would have otherwise been
required. Other than cash on hand, we have no unused sources of liquid assets at
March 31, 2003.
Management has been actively engaged in attempts to resolve our liquidity
problems. We recently issued $3.5 million in convertible debentures to
Midsummer, Omicron, and Islandia and used most of those proceeds to satisfy our
indebtedness to Union Bank, which would have been due in full in the second
quarter of fiscal 2004. If certain conditions are satisfied, we will issue an
additional $2,000,000 in convertible debentures to those investors by April
2004. We also recently issued $400,000 in convertible debentures to MBSJ
Investors, LLC. We also recently issued $300,000 in convertible debentures to
Crestview Fund I, L.P., Crestview Fund II, L.P. and Crestview Capital Offshore
Fund, Inc., and, if certain conditions are satisfied, we may issue an additional
$300,000 in convertible debentures to those investors by April 2004. As a
result, we believe we will have sufficient cash to remain in compliance with our
debt obligations, and meet our critical operating obligations, for the next
twelve months. We are nonetheless actively seeking a private equity placement to
help discharge aged payables, pursue growth initiatives and repay the bank
indebtedness of $500,000. We have no binding commitments for funding at this
time. Financing may not be available on terms and conditions acceptable to us,
or at all.
Recent Accounting Pronouncements
--------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The adoption of SFAS 141 did not have a significant impact on our financial
statements.
39
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective for
fiscal years beginning after December 15, 2001. SFAS 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives but
requires that these assets be reviewed for impairment at least annually or on an
interim basis if an event occurs or circumstances change that could indicate
that their value has diminished or been impaired. Other intangible assets will
continue to be amortized over their estimated useful lives. We evaluate the
remaining useful lives of these intangibles on an annual basis to determine
whether events or circumstances warrant a revision to the remaining period of
amortization. Pursuant to SFAS 142, amortization of goodwill and assembled
workforce intangible assets recorded in business combinations prior to June 30,
2001 ceased effective March 31, 2002. Goodwill resulting from business
combinations completed after June 30, 2001, will not be amortized. We recorded
amortization expense of approximately $2.2 million on goodwill during the fiscal
year ended March 31, 2002. We currently estimate that application of the
non-amortization provisions of SFAS 142 will reduce amortization expense and
increase net income by approximately $2.2 million in fiscal 2003.
We tested goodwill for impairment during the 2003 fiscal year, and a resulting
impairment of $0.6 million will be recorded as a cumulative effect of a change
in accounting principle in the first quarter of fiscal 2003.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS 143"), "Accounting for Asset Retirement Obligations." This statement
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or the normal
operation of long-lived assets, except for certain obligations of lessees. The
adoption of SFAS No. 143 did not have a significant impact on our consolidated
financial statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 supercedes SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 applies
to all long-lived assets (including discontinued operations) and consequently
amends APB Opinion 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 develops one
accounting model for long-lived assets that are to be disposed of by sale. SFAS
144 requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value cost to sell. Additionally
SFAS 144 expands the scope of discontinued operations to include all components
of an entity with operations that (1) can be distinguished from the rest of the
entity and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The accounting prescribed in SFAS 144 was applied in
connection with the disposal of our Australian subsidiary.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
40
FASB Statement No. 13, and Technical Corrections." SFAS No. 145 updates,
clarifies, and simplifies existing accounting pronouncements. This statement
rescinds SFAS No. 4, which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. As a result, the criteria in APB No. 30 will now
be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4 and
is no longer necessary as SFAS No. 4 has been rescinded. SFAS No. 44 has been
rescinded as it is no longer necessary. SFAS No. 145 amends SFAS No. 13 to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions to be accounted for in the same manner as sale-lease
transactions. This statement also makes technical corrections to existing
pronouncements. While those corrections are not substantive in nature, in some
instances, they may change accounting practice. We do not expect adoption of
SFAS No. 145 to have material impact, if any, on our financial position or
results of operations.
In November 2001, the FASB issued an Emerging Issues Task Force Issue No. 01-14
("EITF No. 01-14") "Income Statement Characterization of Reimbursements Received
for Out-of-Pocket Expenses Incurred". EITF No. 01-14 establishes that
reimbursements received for out-of-pocket expenses should be reported as revenue
in the income statement. Currently, we classify reimbursed out-of-pocket
expenses as a reduction in cost of consulting services. We are required to adopt
the guidance of EITF No. 01-14 in the first quarter of fiscal year 2003 and our
consolidated statements of operations for prior periods will be reclassified to
conform to the new presentation. The adoption of EITF No. 01-14 will result in
an increase in reported net sales and cost of sales; however, it will not affect
net income or loss in any past or future periods.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS 146 replaces current accounting standards and requires the
recognition of costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan. The
provisions of the SFAS 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not expect adoption of
SFAS No. 146 to have a significant effect on its results of operations or
financial condition.
In October 2002, the FASB issued Statement of Financial Accounting Standards No.
147 ("SFAS 147"), "Acquisition of certain Financial Institutions". SFAS 147
removes the requirement in SFAS 72 and Interpretation 9 thereto, to recognize
and amortize any excess of the fair value of liabilities assumed over the fair
value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset. This statement requires that those transactions
be accounted for in accordance with SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". In addition, this
statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets, to include certain financial institution related intangibles.
We do not expect SFAS 147 to have a material impact on the Company's financial
statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation-Transition and
Disclosure". This Statement amends SFAS 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
41
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The transition guidance
and annual disclosure provisions of SFAS 148 are effective for fiscal years
ending after December 15, 2002, with earlier application permitted in certain
circumstances. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. We do not expect SFAS 148 to have a material impact on the
Company's financial statements.
Employees
---------
At March 31, 2003, we had a total of 130 employees, 114 of which were based in
the United States and 16 of which were based in the United Kingdom. Of the
total, 12% were engaged in sales and marketing, 40% were engaged in application
technology development projects, 30% were engaged in professional services, and
18% were in general and administrative. We believe our relations with our
employees overall are good. We have never had a work stoppage and none of our
employees are subject to a collective bargaining agreement.
Facilities
----------
Our principal corporate headquarters consists of 13,003 square feet in a
building located at 5607 Palmer Way, Carlsbad, California. The lease for this
facility is currently being negotiated. The current monthly rent is $13,680. Our
primary operational office is in Irvine, California, where we occupy 26,521
square feet in a building located at 19800 MacArthur Blvd. This facility is
occupied under a lease that expires on June 30, 2005. The current monthly rent
is $55,620. We also occupy premises in the United Kingdom located at The Old
Building, Mill House Lane, Wendens Ambo, Essex, England. The lease for this
office building expires August 31, 2003. Annual rent is $43,646 (payable
quarterly) plus common area maintenance charges and real estate taxes.
Legal Proceedings
-----------------
In April of 2002, our former CEO, Thomas Dorosewicz, filed a demand with the
California Labor Commissioner for $256,250 in severance benefits allegedly due
under a disputed employment agreement, plus attorney's fees and costs. Mr.
Dorosewicz's demand was later increased to $283,893.53. On June 18, 2002, we
filed an action against Mr. Dorosewicz, Michelle Dorosewicz and an entity
affiliated with him in San Diego Superior Court, Case No. GIC790833, alleging
fraud and other causes of action relating to transactions Mr. Dorosewicz caused
us to enter into with his affiliates and related parties without proper board
approval. On July 31, 2002, Mr. Dorosewicz filed cross-complaints in that action
alleging breach of statutory duty, breach of contract, fraud and other causes of
action related to his employment with the Company and other transactions he
entered into with the Company. These matters are still pending and the parties
have agreed to resolve all claims in binding arbitrations.
42
Due to the declining performance of our Australian subsidiary, we decided in the
third quarter of fiscal 2002 to sell certain assets of our Australian subsidiary
to the former management of such subsidiary, and then cease Australian
operations. Such sale was, however, subject to the approval of National
Australia Bank, the subsidiary's secured lender. The bank did not approve the
sale and the subsidiary ceased operations in February 2002. The bank caused a
receiver to be appointed in February 2002 to sell substantially all of the
assets of the Australian subsidiary and pursue collections on any outstanding
receivables. The receiver proceeded to sell substantially all of the assets for
$300,000 in May 2002 to an entity affiliated with former management, and is
actively pursuing the collection of receivables. If the sale proceeds plus
collections on receivables are insufficient to discharge the indebtedness to
National Australia Bank, we may be called upon to pay the deficiency under our
guarantee to the bank. We have accrued $187,000 as our potential exposure. The
receiver has also claimed that we are obligated to it for inter-company balances
of $636,000, but we do not believe any amounts are owed to the receiver, who has
not as of the date of this report acknowledged the monthly corporate overhead
recovery fees and other amounts charged by us to the Australian subsidiary
offsetting the amount claimed to be due.
On May 15, 2002, an employee who is currently out on disability/worker's
compensation leave, Debora Hintz, filed a claim with the California Labor
Commissioner seeking $41,000 in alleged unpaid commissions. In or about December
of 2002, Ms. Hintz filed a discrimination claim against the Company with the
Department of Fair Employment and Housing, alleging harassment and sexual
orientation discrimination. The Company has responded appropriately to both the
wage claim and the discrimination allegations, which the Company believes lack
merit based on present information.
On August 30, 2002, Cord Camera Centers, Inc., an Ohio corporation ("Cord
Camera"), filed a lawsuit against one of our subsidiaries, SVI Retail, Inc. as
the successor to Island Pacific Systems Corporation, in the United States
District Court for the Southern District of Ohio, Eastern Division, Case No. C2
02 859. The lawsuit claims damages in excess of $1.5 million, plus punitive
damages of $250,000, against SVI Retail for alleged fraud, negligent
misrepresentation, breach of express warranties and breach of contract. These
claims pertain to the following agreements between Cord Camera and Island
Pacific: (i) a License Agreement, dated December 1999, as amended, for the use
of certain software products, (ii) a Services Agreement for consulting, training
and product support for the software products and (iii) a POS Software Support
Agreement for the maintenance and support services for a certain software
product. At this time, we cannot predict the merits of this case because it is
in its preliminary state and discovery has not yet commence. However, SVI Retail
intends to defend vigorously the action and possibly file one or more
counter-claims.
In mid-2002, the Company is the subject of an adverse judgment entered against
it in favor of Randall's Family Golf Centers, ("Randall") in the approximate sum
of $61,000. The judgment was entered as a default judgment, and is based on
allegations that the Company received a preferential transfer of funds within 90
days of the filing by Randall of a chapter 11 case in the United States
Bankruptcy Court for the Southern District of New York. We believe we have
viable defenses to the allegations if the default is set aside. We are
determining whether the matter can be settled without the necessity of
43
litigation to set aside the default, but we are unable to ascertain the likely
outcome of this matter at this time.
On December 16, 2002, Chapter 11 Debtors Natural Wonders, Inc. and World of
Science, Inc. (collectively "Debtors") filed an adversary proceeding against our
subsidiary SVI Retail, Inc. seeking to avoid and recover preferential transfers.
The Debtors sought recovery of approximately $84,000, which it had previously
paid to SVI Retail for goods and services rendered. On March 12, 2003, the
Debtors and SVI Retail settled the adversary proceeding for $18,000.
On November 22, 2002, UDC Homes, Inc and UDC Corporation now known as Shea
Homes, Inc. served Sabica Ventures, Inc. ("Sabica") and Island Pacific, an
operating division of SVI Solutions, Inc. ("Island Pacific") with a
cross-complaint for indemnity on behalf of an entity identified in the summons
as Pacific Cabinets. Sabica and Island Pacific filed a notice of motion and
motion to quash service of summons on the grounds that neither Sabica nor Island
Pacific has ever done business as Pacific Cabinets and has no other known
relation to the construction project that is the subject of the cross-complaint
and underlying complaint. The hearing on Sabica and Island Pacific's motion to
quash is scheduled for May 22, 2003.
Except as set forth above, we are not involved in any material legal
proceedings, other than ordinary routine litigation proceedings incidental to
our business, none of which are expected to have a material adverse effect on
our financial position or results of operations. However, litigation is subject
to inherent uncertainties, and an adverse result in existing or other matters
may arise from time to time which may harm our business.
D. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On November 30, 2001, Deloitte & Touche LLP notified us that they were resigning
as our independent certified public accountants. On December 5, 2001, we engaged
Singer Lewak Greenbaum & Goldstein LLP ("Singer Lewak") as our new independent
auditors. Singer Lewak previously audited our financial statements for the
fiscal years ended March 31, 1998 and September 30, 1997, 1996, 1995 and 1994.
The decision to engage Singer Lewak was recommended by the Audit Committee of
the Board of Directors and approved by the Board of Directors.
Deloitte & Touche's reports on the financial statements for the fiscal years
ended March 31, 2001 and 2000 did not contain an adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles, except as noted in the following sentence. Deloitte &
Touche's audit report on the financial statements for the year ended March 31,
2001, dated July 13, 2001, expressed an unqualified opinion and included an
explanatory paragraph relating to substantial doubt about our ability to
continue as a going concern. Further, in connection with its audits of our
financial statements for the past two fiscal years and the subsequent interim
period immediately preceding the date of resignation of Deloitte & Touche, we
had no disagreements with Deloitte & Touche on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
44
procedure, which disagreements, if not resolved to the satisfaction of Deloitte
& Touche, would have caused them to make a reference to the subject matter of
the disagreements in connection with their reports on our consolidated financial
statements.
A representative of our independent auditor, Singer Lewak, is not expected to be
present at the meeting.
F. VOTING SECURITIES AND PRINCIPAL SECURITIES AND PRINCIPAL HOLDERS THEREOF.
The Company had 31,499,632 shares of common stock outstanding at the close of
business on March 31, 2003. Each share of common stock is entitled to one vote.
Holders of record of shares of common stock at the close of business on May 1,
2003 will be entitled to notice of and to vote at the Special Meeting. The
Company also had 141,000 shares of Series A Preferred Stock. The shares of
Series A Preferred Stock have no voting rights with respect to the proposals in
this Proxy.
The following table shows beneficial ownership of shares of our common stock as
of March 31, 2003 (except as otherwise stated below) (i) by all persons known by
us to beneficially own more than 5% of such stock (ii) each of the holders of
debentures described in Proposal Number One, and (iii) by each director, each of
the named executive officers, and all directors and executive officers as a
group. Except as otherwise specified, the address for each person is 5607 Palmer
Way, Carlsbad, California 92007. As of March 31, 2003, there were 31,499,632
shares of common stock outstanding. Each of the named persons has sole voting
and investment power with respect to the shares shown (subject to community
property laws), except as stated below.
Name and Address of Amount and Nature of Percent of
Beneficial Owner (1) Beneficial Ownership Class
-------------------- -------------------- ----------
Softline Limited 27,240,800 (2) 54.7%
16 Commerce Crescent
Eastgate Extension 13
Sandton 2148
South Africa
Claudav Holdings Ltd. B.V. 3,892,742 (3) 11.9%
9 Rue Charles Humbert
1205 Geneva
Switzerland
The Ivanhoe Irrevocable Trust 3,892,742 (3) 11.9%
Barry M. Schechter 3,892,742 (3) 11.9%
ICM Asset Management, Inc. 7,103,028 (4) 20.2%
601 W. Main Ave., Suite 600
Spokane, WA 99201
45
Current
Name and Address of Amount and Nature of Percent of
Beneficial Owner (1) Beneficial Ownership Class
-------------------- -------------------- ----------
Midsummer Investment 1,996,865 (9) 6.0%
c/o Midsummer Capital, LLC
485 Madison Avenue, 23rd Floor
New York, NY 10022
Omnicron Master Trust 2,139,498 (10) 6.4%
c/o Omnicron Capital, LP
810 Seventh Avenue, 39th Floor
New York, NY 10019
Islandia, L.P. 855,799 (11) 2.6%
c/p John Lang, Inc.
485 Madison Avenue, 23rd Floor
New York, NY 10022
MBSJ Investors, Inc. 547,089 (12) 1.7%
c/o Randy Siller
60 Butler Lane
New Canaan, Connecticut 06480
Crestview Capital Fund I, L.P. 131,498 (13) < 1%
c/o Richard Levy
Crestview Capital Funds
95 Revere Drive, Suite F
Northbrook, IL 60062
Crestview Capital Fund II, L.P. 229,947 (14) < 1%
c/o Richard Levy
Crestview Capital Funds
95 Revere Drive, Suite F
Northbrook, IL 60062
Crestview Capital Offshore Fund, Inc. 32,850 (15) < 1%
c/o Richard Levy
Crestview Capital Funds
95 Revere Drive, Suite F
Northbrook, IL 60062
Arthur S. Klitofsky 425,728 (5) 1.3%
Steven Beck 2,000,000 (6) 6.0%
Harvey Braun 2,000,000 (6) 6.0%
Randy Pagnotta 46,958 (6) < 1%
Cheryl Valencia 1,000 < 1%
Kavindra Malik 50,000 < 1%
Ronald Koren 400 < 1%
Mike Dotson 23,535 (6) < 1%
Donald S. Radcliffe 905,091 (7) 2.8%
575 Madison Avenue
New York, NY 10022
Michael Silverman 143,291 (8) <1%
10675 Sorrento Valley Road, Suite 200
San Diego, CA 92121
Ian Bonner 116,291 (6) <1%
5527 Inverrary Court
Dallas, Texas 75287
Ivan M. Epstein 117,208 (6) <1%
2 Victoria
Eastgate Extension 13
Sandton 2148
South Africa
Robert P. Wilkie 5,000 (6) <1%
16 Commerce Crescent
Eastgate Extension 13
Sandton 2148
South Africa
All directors and executive officers as 9,727,244 (16) 25.6%
a group (14 persons)
(1) This table is based on information supplied by officers, directors and
principal stockholders. The inclusion in this table of such shares does
not constitute an admission that the named stockholder is a direct or
indirect beneficial owner of, or receives the economic benefit of, such
shares.
(2) Includes 61,812 shares pursuant to outstanding options exercisable
within 60 days of March 31, 2003 and 18,255,073 shares obtainable upon
conversion of Series A Convertible Preferred Stock. The nine directors
of the Softline Limited board are Ivan M. Epstein, Steven Cohen, Carlos
Soares dos Santos, Eric Ellerine, Mac Maharaj, Robert Wilkie, Gerald
Rubenstein, John Copelyn and Marcel Golding. Mr. Epstein serves as
Chief Executive Officer, Mr. Cohen serves as Chief Operating Officer,
and Mr. Wilkie serves as Group Financial Director of Softline. Each of
the foregoing persons disclaims beneficial ownership of the shares and
options held by Softline.
46
(3) Claudav Holdings Ltd. B.V., the Ivanhoe Irrevocable Trust and Barry M.
Schechter may be deemed a group pursuant to Rule 13d-5 promulgated
under the Exchange Act. Claudav holds 462,300 shares, for which it
shares voting power with Mr. Schechter pursuant to a proxy. Claudav is
managed by Erwin Wachter, Trustee. Mr. Wachter therefore shares
beneficial ownership with Mr. Schechter of the shares held by Claudav.
Ivanhoe holds 2,008,237 shares for which it shares voting and
investment power with Mr. Schechter pursuant to Mr. Schechter's
position as a trustee. Includes 2,000 shares held by Mr. Schechter's
minor children and 1,420,205 shares issuable upon exercise of options
of Mr. Schechter exercisable within 60 days of March 31, 2003. Excludes
10,000 shares held by Mr. Schechter's spouse, for which Mr. Schechter
disclaims beneficial ownership.
(4) Includes 2,716,637 shares held by Koyah Leverage Partners, L.P., 53,014
shares held by Raven Partners, L.P. and 659,399 shares held by Koyah
Partners, L.P. Also includes 1,257,925 shares issuable upon exercise of
outstanding warrants and 1,562,500 shares issuable upon conversion of a
convertible note held by Koyah Leverage Partners, L.P., 309,784 shares
issuable upon exercise of outstanding warrants and 312,500 shares
issuable upon conversion of a convertible note held by Koyah Partners,
L.P., and 12,535 shares pursuant to outstanding warrants and 208,334
shares obtainable upon conversion of convertible notes held by Raven
Partners, L.P. Koyah Ventures, LLC is the general partner of Koyah
Leverage Partners, L.P., Koyah Partners, L.P. and Raven Partners, L.P.,
and as a result has shared voting and investment power over shares held
by all three entities. Raven Ventures, LLC is an additional general
partner of Raven Partners, L.P. and as a result has shared voting and
investment power over shares held by Raven Partners, L.P. ICM Asset
Management, Inc. is the investment advisor to Koyah Leverage Partners,
L.P., Koyah Partners, L.P. and Raven Partners, L.P., and as a result
has shared voting and investment power over shares held by all three
entities. Also includes 10,400 shares held by other clients of ICM
Asset Management, Inc. ICM Asset Management, Inc. has discretionary
authority over shares held by these other clients and as a result has
shared voting and investment power over these shares. James M. Simmons
is the managing member of Koyah Ventures, LLC and Raven Ventures, LLC
and the chief investment officer and controlling stockholder of ICM
Asset Management, Inc. and as a result has shared voting and investment
power over shares held by Koyah Leverage Partners, L.P., Koyah
Partners, L.P., Raven Partners, L.P., ICM Asset Management, Inc. and
the other clients of ICM Asset Management, Inc. Each of these entities
or persons disclaims beneficial ownership in these securities except to
the extent of such entity's or person's pecuniary interest in these
securities and disclaims membership in a group with any other entity or
person within the meaning of Rule 13d-5(b)(1) under the Exchange Act.
(5) Includes 162,828 shares pursuant to outstanding options exercisable
within 60 days of March 31, 2003.
(6) Consists of outstanding options exercisable within 60 days of March 31,
2003.
(7) Includes 430,000 shares pursuant to outstanding options exercisable
within 60 days of March 31, 2003. Also includes 17,600 shares held by
an entity for which Mr. Radcliffe has sole voting and investment power.
Also includes an aggregate of 82,100 shares held by three entities for
which Mr. Radcliffe has shared voting and investment power. Excludes
124,500 shares held by Mr. Radcliffe's spouse, for which Mr. Radcliffe
disclaims beneficial ownership.
(8) Includes 143,291 shares pursuant to outstanding options exercisable
within 60 days of March 31, 2003.
(9) Includes 629,143 shares pursuant to outstanding warrants and 1,367,722
shares obtainable upon conversion of convertible debenture. Midsummer's
beneficial ownership is limited to 4.99% pursuant to limitations
contained in the debentures and warrants.
(10)Includes 674,082 shares pursuant to outstanding warrants and 1,465,416
shares obtainable upon conversion of convertible debenture. Omicron's
beneficial ownership is limited to 4.99% pursuant to limitations
contained in the debentures and warrants.
(11)Includes 586,166 shares pursuant to outstanding warrants and 269,633
shares obtainable upon conversion of convertible debenture. Islandia's
beneficial ownership is limited to 4.99% pursuant to limitations
contained in the debentures and warrants.
(12)Includes 390,778 shares pursuant to outstanding warrants and 156,311
shares obtainable upon conversion of convertible debenture. MBSJ's
beneficial ownership is limited to 4.99% pursuant to limitations
contained in the debentures and warrants.
(13)Includes 33,704 shares pursuant to outstanding warrants and 97,694
shares obtainable upon conversion of convertible debenture. Crestview
Capital Fund I's beneficial ownership is limited to 4.99% pursuant
to limitations contained in the debentures and warrants.
(14)Includes 58,982 shares pursuant to outstanding warrants and 170,965
shares obtainable upon conversion of convertible debenture. Crestview
Capital Fund II's beneficial ownership is limited to 4.99% pursuant
to limitations contained in the debentures and warrants.
(15)Includes 8,426 shares pursuant to outstanding warrants and 24,424
shares obtainable upon conversion of convertible debenture. Crestview
Capital Fund Offshore Fund's beneficial ownership is limited to 4.99%
pursuant to limitations contained in the debentures and warrants.
(16)Includes 6,321,607 shares pursuant to outstanding options exercisable
within 60 days of March 31, 2003.
The following table shows pro forma beneficial ownership of shares of our common
stock with respect to the beneficial owners in the above table after giving
effect to all transactions described in Proposal Number One, including the
issuance of debentures and warrants in any second closings. The table makes
various assumptions, including: (1) 31,499,632 shares of common stock will
remain outstanding before any of the beneficial owners shown below exercise or
convert any convertible securities held by them; (2) additional debentures
aggregating $2.3 million and accompanying warrants will be issued in a second
closing; (3) the daily volume weighted average price of common stock on the
American Stock Exchange for the ten consecutive days immediately prior to any
second closing will be $1.75; and (4) the debentures and accompanying warrants
will have a conversion or exercise price of $2.01 per share. Since the table
below is based on assumptions that may vary significantly from actual events, it
should be used only to facilitate your understanding as to the possible, but not
actual, effect of all transactions described in Proposal Number One.
Pro forma
Name and Address of Amount and Nature of Percent of
Beneficial Owner (1) Beneficial Ownership Class
-------------------- -------------------- ----------
Softline Limited 27,240,800 54.7%
Claudav Holdings Ltd. B.V. 3,892,742 11.9%
The Ivanhoe Irrevocable Trust 3,892,742 11.9%
Barry M. Schechter 3,892,742 11.9%
ICM Asset Management, Inc. 7,103,028 20.2%
45
Pro Forma
Name and Address of Amount and Nature of Percent of
Beneficial Owner (1) Beneficial Ownership Class
-------------------- -------------------- ----------
Midsummer Investment 2,813,518 (1) 8.0%
Omnicron Master Trust 3,005,484 (2) 8.5%
Islandia, L.P. 1,205,793 (3) 3.7%
MBSJ Investors, Inc. 547,089 (4) 1.7%
Crestview Capital Fund I, L.P. 205,684 (5) < 1%
Crestview Capital Fund II, L.P. 359,947 (6) 1.0%
Crestview Capital Offshore Fund, Inc. 51,421 (7) < 1%
Arthur S. Klitofsky 425,728 1.3%
Steven Beck 2,000,000 6.0%
Harvey Braun 2,000,000 6.0%
Randy Pagnotta 46,958 < 1%
Cheryl Valencia 1,000 < 1%
Kavindra Malik 50,000 < 1%
Ronald Koren 400 < 1%
Mike Dotson 23,535 < 1%
Donald S. Radcliffe 905,091 2.8%
Michael Silverman 143,291 <1%
Ian Bonner 116,291 <1%
Ivan M. Epstein 117,208 <1%
Robert P. Wilkie 5,000 <1%
All directors and executive officers as 9,727,244 25.6%
a group (14 persons)
(1) Assumes 988,653,143 shares pursuant to outstanding warrants and
1,824,865 shares obtainable upon conversion of convertible debenture.
Midsummer's beneficial ownership is limited to 4.99% pursuant to
limitations contained in the debentures and warrants.
(2) Assumes 1,059,272 shares pursuant to outstanding warrants and 1,946,212
shares obtainable upon conversion of convertible debenture. Omicron's
beneficial ownership is limited to 4.99% pursuant to limitations
contained in the debentures and warrants.
(3) Assumes 740,242 shares pursuant to outstanding warrants and 465,551
shares obtainable upon conversion of convertible debenture. Islandia's
beneficial ownership is limited to 4.99% pursuant to limitations
contained in the debentures and warrants.
(4) Assumes 390,778 shares pursuant to outstanding warrants and 156,311
shares obtainable upon conversion of convertible debenture. MBSJ's
beneficial ownership is limited to 4.99% pursuant to limitations
contained in the debentures and warrants.
(5) Assumes 50,847 shares pursuant to outstanding warrants and 154,837
shares obtainable upon conversion of convertible debenture. Crestview
Capital Fund I's beneficial ownership is limited to 4.99% pursuant
to limitations contained in the debentures and warrants.
(6) Assumes 88,982 shares pursuant to outstanding warrants and 270,965
shares obtainable upon conversion of convertible debenture. Crestview
Capital Fund II's beneficial ownership is limited to 4.99% pursuant
to limitations contained in the debentures and warrants.
(7) Assumes 12,708 shares pursuant to outstanding warrants and 38,710
shares obtainable upon conversion of convertible debenture. Crestview
Capital Fund Offshore Fund's beneficial ownership is limited to 4.99%
pursuant to limitations contained in the debentures and warrants.
BOARD RECOMMENDATION. The Board has determined that the Company's shareholders
will benefit from the sale and issuance of the convertible debentures and
warrants as described above. The Company used $2,800,000 of the proceeds from
47
the first sale of debentures to pay Union Bank of California, N.A. ("UBOC"),
under that certain Discounted Loan Payoff Agreement dated March 31, 2003 by and
among UBOC, SVI, SVI Retail, Inc., Sabica Ventures, Inc. and SVI Training
Products, Inc. That payment, combined with SVI's issuance to UBOC of 1,000,000
shares of SVI common stock and a $500,000 one-year unsecured non-interest
bearing convertible note payable in either cash or stock, at SVI's option, was
accepted by UBOC as full satisfaction of SVI's $7.1 million debt to it. UBOC
also cancelled options to purchase 1.5 million shares of SVI common stock of
which 565,500 had vested as of March 31, 2003, and it returned all collateral
held by it, including 10,700,000 shares of SVI common stock pledged as security.
In addition to allowing the Company to fully satisfy its $7.1 million debt to
UBOC, which would have been due in full in September 2003, the Board has
determined that the sale of the debentures provides the Company with working
capital to operate its business. For the foregoing reasons, the Board approved
the above actions on March 30, 2003, and it recommends a vote FOR ratification
of these actions.
II. PROPOSAL NUMBER TWO
TO CONSIDER AND ACT UPON A PROPOSAL TO CHANGE THE COMPANY'S NAME FROM "SVI
SOLUTIONS, INC." TO "ISLAND PACIFIC, INC."
On April 8, 2003, the Board adopted a resolution approving the amendment of the
Company's Certificate of Incorporation to change the name of the Company to
Island Pacific, Inc. If the shareholders adopt this resolution, the Company will
be traded on the American Stock Exchange under symbol "IPI". The Board
determined that it would be in the Company's best interest to focus its business
strategy on delivering a wide range of solutions to retailers centered around
the Island Pacific platform. This would allow the Company to consolidate its
resources with the goal of building a more powerful brand of products and
services. For these reasons, the Board recommends a vote FOR the proposal to
change the Company's name to "Island Pacific, Inc."
48
III. PROPOSAL NUMBER THREE
TO CONSIDER AND ACT UPON A PROPOSAL TO AMEND AND RESTATE THE COMPANY'S
RESTATED CERTIFICATE OF INCORPORATION TO REFLECT THE REMOVAL OF ARTICLE XII,
WHICH RESTRICTS THE SHAREHOLDERS' ABILITY TO TAKE ACTIONS BY WRITTEN CONSENT.
Article XII of the Company's Restated Certificate of Incorporation ("Certificate
of Incorporation") prohibits stockholders from taking action by written consent.
It states:
"All actions of the stockholders shall be taken at an annual or
special meeting of the stockholders call in the manner set forth in
the Bylaws. No action shall be taken by the stockholders by written
consent."
If this article is removed, shareholders would be able to approve of certain
transactions or take corporate actions requiring shareholder approval by written
consent in lieu of a meeting pursuant to Delaware General Corporation Law ss.228
("Del. Corp. Law ss.228").
In summary, Del. Corp. Law ss.228 provides that any action that is to be or may
be taken at any annual meeting or special of shareholders may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, is signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted and properly delivered to the
Company. If any action is taken by less than the unanimous written consent of
the shareholders in accordance with Del. Corp. Law ss.228, prompt notice must be
given to all stockholders who have not consented in writing and would have been
entitled to notice of a meeting on the effective date of the action.
Under this Proposal, the Certificate of Incorporation will be amended and
restated in the form attached as Appendix VI ("Amended Certificate"). In
addition to reflecting the removal of Article XII, the Amended Certificate
reflects the provisions of the Certificate of Designation filed with the
Delaware Secretary of State on April 1, 2002, which may be incorporated into the
Certificate of Incorporation pursuant to Delaware General Corporation Law.
49
BOARD RECOMMENDATION
The Board has determined that the Company will benefit by the removal of the
restriction on the shareholders' ability to approve transaction or actions by
written consent. Shareholders will, therefore, have the authority to approve of
transactions or actions by written consent in lieu of meeting. This would
facilitate the Company's ability to consummate transactions or take other
corporate actions. It would eliminate the requirement of calling and holding
shareholder meetings, possibly saving the Company meeting and other expenses.
For these reasons, the Board recommends a FOR vote in favor of this proposal to
remove Article XII by approving the form of the Amended Certificate.
By Order of the Board of Directors,
Barry Schechter, Chairman of the Board
Carlsbad, California
June 3, 2003
50
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
SVI Solutions, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheet of SVI Solutions,
Inc. and subsidiaries as of March 31, 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SVI Solutions, Inc.
and subsidiaries as of March 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 30, 2002
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
SVI Solutions, Inc.:
We have audited the accompanying consolidated balance sheet of SVI Solutions,
Inc. and subsidiaries (collectively, the "Company") (a majority owned subsidiary
of Softline Limited) as of March 31, 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of March 31, 2001,
and the results of its operations and its cash flows for each of the two years
in the period then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and
negative working capital raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
July 13, 2001
F-2
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
2002 2001
------------ ------------
(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 1,309 $ 1,208
Accounts receivable, net of allowance for doubtful
accounts of $446 and $790, respectively 1,946 3,394
Income tax refund receivable -- 380
Other receivables, including $31 and $61 from related parties, respectively 255 253
Inventories 126 138
Current portion - non-compete agreements 917 1,017
Net assets from discontinued operations -- 1,441
Prepaid expenses and other current assets 150 293
------------ ------------
Total current assets 4,703 8,124
Note receivable, net -- 7,000
Property and equipment, net 641 976
Purchased and capitalized software, net 17,612 20,074
Goodwill, net 15,422 17,642
Non-compete agreements, net 1,585 2,597
Other assets 42 40
------------ ------------
Total assets $ 40,005 $ 56,453
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand loans due to stockholders $ 618 $ 1,333
Current portion of term loans 435 --
Accounts payable 1,497 2,868
Accrued expenses 3,864 4,911
Deferred revenue 3,528 1,794
Income tax payable 98 --
------------ ------------
Total current liabilities 10,040 10,906
Term loans refinanced in July 2002 and May 2001 6,472 7,325
Convertible notes due to stockholders 1,421 --
Subordinated term loan due to stockholder -- 11,037
Other long-term liabilities 120 192
------------ ------------
Total liabilities 18,053 29,460
------------ ------------
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $.0001 par value; 5,000,000 shares authorized; Series A
Convertible Preferred stock, 7.2% cumulative convertible 141,100
shares authorized and outstanding with a stated value of $100 per
share, dividends in arrears of $254 14,100 --
Common stock, $.0001 par value; 100,000,000 shares authorized;
28,293,609 and 37,836,669 shares issued and outstanding 4 4
Additional paid-in capital 54,685 57,108
Retained (deficit) earnings (37,772) (23,114)
Treasury stock, at cost; shares - 10,700,000 in 2002 and 444,641 in 2001 (8,580) (4,306)
Shares receivable (485) --
Accumulated other comprehensive loss -- (2,699)
------------ ------------
Total stockholders' equity 21,952 26,993
------------ ------------
Total liabilities and stockholders' equity $ 40,005 $ 56,453
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
(in thousands, except per share data)
Net sales $ 27,109 $ 27,713 $ 26,652
Cost of sales 10,036 9,188 6,421
--------- --------- ---------
Gross profit 17,073 18,525 20,231
--------- --------- ---------
Expenses:
Application development 4,203 5,333 4,877
Depreciation and amortization 6,723 8,616 7,250
Selling, general and administrative 13,144 18,037 14,817
Impairment of capitalized software and goodwill -- 6,519 --
Impairment of note receivable received in
connection with the sale of IBIS Systems Limited -- 7,647 --
--------- --------- ---------
Total expenses 24,070 46,152 26,944
--------- --------- ---------
Loss from operations (6,997) (27,627) (6,713)
Other income (expense):
Interest income 10 628 1,074
Other income (expense) (46) 63 (206)
Interest expense, including $1,988, $1,391 and $114 to
related parties (3,018) (3,043) (1,493)
Gain (loss) on foreign currency transaction (9) 2 (10)
--------- --------- ---------
Total other expense (3,063) (2,350) (635)
--------- --------- ---------
Loss before provision (benefit) for income taxes (10,060) (29,977) (7,348)
Provision (benefit) for income taxes 39 (4,778) (2,414)
--------- --------- ---------
Loss from continuing operations (10,099) (25,199) (4,934)
Income (loss) from discontinued Australian operations,
net of estimated income taxes expense (benefit)
of $0, ($833) and $2 (4,559) (3,746) 880
--------- --------- ---------
Net loss $(14,658) $(28,945) $ (4,054)
========= ========= =========
Basic and diluted earnings (loss) per share:
Continuing operations $ (0.28) $ (0.72) $ (0.15)
Discontinued operations (0.13) (0.11) 0.03
--------- --------- ---------
Net loss $ (0.41) $ (0.83) $ (0.12)
========= ========= =========
Basic and diluted weighted average common shares outstanding 35,698 34,761 32,459
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER OTHER
ADDITIONAL RETAINED COMPRE- COMPRE-
PREFERRED COMMON PAID-IN TREASURY SHARES EARNINGS HENSIVE HENSIVE
STOCK STOCK CAPITAL STOCK RECEIVABLE (DEFICIT) LOSS LOSS TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except share amounts)
Balance, March 31, 1999 -- $ 3 $ 39,436 $ (951) $ (2,142) $ 9,885 -- $ (961) $ 45,270
Issuance of common stock
in connection with the
purchase of technology
rights and subsidiaries -- -- 3,654 -- -- -- -- -- 3,654
Exercise of stock options -- -- 6,992 -- -- -- -- -- 6,992
Income tax benefit on
stock options exercised -- -- 424 -- -- -- -- -- 424
Compensation expense for
stock options granted -- -- 55 -- -- -- -- -- 55
Repurchase of common stock -- -- -- (1,213) -- -- -- -- (1,213)
Shares receivable from
stockholder in connection
with the sale of
IBIS Systems Limited -- -- -- (2,142) 2,142 -- -- -- --
Issuance of common stock
for services -- -- 20 -- -- -- -- -- 20
Private placement of common
stock -- -- 2,873 -- -- -- -- -- 2,873
Comprehensive loss:
Net loss -- -- -- -- -- (4,054) $ (4,054) -- (4,054)
Other comprehensive loss:
Translation adjustment -- -- -- -- -- -- (524) (524) (524)
----------
Comprehensive loss -- -- -- -- -- -- $ (4,578) -- --
---------- ---------- ---------- ---------- ---------- ---------- ========== ---------- ----------
Balance, March 31, 2000 -- $ 3 $ 53,454 $ (4,306) $ -- $ 5,831 -- $ (1,485) $ 53,497
Exercise of stock options -- -- 792 -- -- -- -- -- 792
Income tax benefit on stock
options exercised -- -- 84 -- -- -- -- -- 84
Compensation expense for
stock options -- -- 28 -- -- -- -- -- 28
Issuance of common stock
warrants for services -- -- 6 -- -- -- -- -- 6
Issuance of common stock
(net of financing costs
of $40,035) -- 1 2,460 -- -- -- -- -- 2,461
Issuance of common stock
(net of $286,000 late
registration fees) -- -- 214 -- -- -- -- -- 214
Issuance of common stock
for services -- -- 70 -- -- -- -- -- 70
Comprehensive loss:
Net loss -- -- -- -- -- (28,945) $ (28,945) -- (28,945)
Other comprehensive loss:
Translation adjustment -- -- -- -- -- -- (1,214) (1,214) (1,214)
----------
Comprehensive loss -- -- -- -- -- -- $ (30,159) -- --
---------- ---------- ---------- ---------- ---------- ---------- ========== ---------- ----------
Balance, March 31, 2001 -- $ 4 $ 57,108 $ (4,306) $ -- $ (23,114) -- $ (2,699) $ 26,993
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
ACCUMULATED
OTHER OTHER
ADDITIONAL RETAINED COMPRE- COMPRE-
PREFERRED COMMON PAID-IN TREASURY SHARES EARNINGS HENSIVE HENSIVE
STOCK STOCK CAPITAL STOCK RECEIVABLE (DEFICIT) LOSS LOSS TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except share amounts)
Balance, March 31, 2001 -- $ 4 $ 57,108 $ (4,306) $ -- $ (23,114) -- $ (2,699) $ 26,993
Issuance of common stock
for services and
severance payments -- -- 441 -- -- -- -- -- 441
Common stock to be returned -- -- 485 -- (485) -- -- -- --
Compensation expense for
warrants granted -- -- 579 -- -- -- -- -- 579
Interest charges on
convertible notes due to
stockholders -- -- 438 -- -- -- -- -- 438
Warrants issued for late
effectiveness of the
registration for common
stock sold in a private
placement in fiscal 2001 -- -- 711 -- -- -- -- -- 711
Offering costs -- -- (711) -- -- -- -- -- (711)
Liquidated damages for late
effectiveness of the
registration statement -- -- (60) -- -- -- -- -- (60)
Issuance of Series A
Preferred stock in
exchange for common
stock, sale of IBIS note
receivable and settlement
of Softline note payable $ 14,100 -- -- (8,580) -- -- -- -- 5,520
Retired treasury stock -- -- (4,306) 4,306 -- -- -- -- --
Comprehensive loss:
Net loss -- -- -- -- -- (14,658) $ (14,658) -- (14,658)
Other comprehensive loss:
Disposal of Australian
operation -- -- -- -- -- -- 2,699 2,699 2,699
----------
Comprehensive loss -- -- -- -- -- -- $ (11,959) -- --
---------- ---------- ---------- ---------- ---------- ---------- ========== ---------- ----------
Balance, March 31, 2002 $ 14,100 $ 4 $ 54,685 $ (8,580) $ (485) $ (37,772) -- $ -- $ 21,952
========== ========== ========== ========== ========== ========== ========== ==========
(Concluded)
The accompanying notes are an integral part of these consolidated financial statements.
F-6
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
(in thousands, except share amounts)
Cash flows from operating activities:
Net loss $ (14,658) $ (28,945) $ (4,054)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Depreciation and amortization 7,069 9,540 7,942
Impairment of note receivable -- 7,647 --
Impairment of intangible assets associated with discontinued operations -- 8,886 --
Loss on disposal of Australian operations 3,171
(Gain)/Loss on foreign currency transactions 41 (9) 12
Compensation expense for stock options and warrants 579 112 55
Interest charges on convertible notes due to stockholders 438 -- --
Common stock issued for services rendered and severance
payments 245 -- --
Deferred income tax provision (149) (4,396) (2,614)
Loss on sale of furniture and equipment 64 3 177
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable and other receivables 2,548 5,126 (4,586)
Accrued interest on note receivable -- (555) (840)
Inventories 61 (8) (34)
Prepaid expenses and other current assets 60 157 (197)
Accounts payable and accrued expenses (1,892) 3,506 (576)
Accrued interest on stockholders' loans and note payable 2,295 944 --
Deferred revenue 1,642 (4,438) 5,023
Income taxes payable 98 -- (2,576)
---------- ---------- ----------
Net cash provided by (used for) operating activities 1,612 (2,430) (2,268)
---------- ---------- ----------
Cash flows from investing activities:
Acquisitions, net of cash acquired -- -- (33,898)
Purchase of furniture and equipment (301) (534) (849)
Proceeds from sale of furniture and equipment 13 -- 83
Purchase of software and capitalized software development costs (409) (2,471) (1,831)
---------- ---------- ----------
Net cash used for investing activities (697) (3,005) (36,495)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 3,754 9,615
Increase (decrease) in amounts due to stockholders, net (844) 9,855 1,982
Proceeds from lines of credit -- 1,555 2,281
Proceeds from convertible notes due to stockholders 1,260 -- --
Proceeds from term loans -- -- 18,500
Payments on term loans (1,243) (13,231) (1,458)
---------- ---------- ----------
Net cash provided by (used for) financing activities (827) 1,933 30,920
---------- ---------- ----------
Effect of exchange rate changes on cash (46) (69) (325)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 42 (3,571) (8,168)
Cash and cash equivalents, beginning of year 1,267 4,838 13,006
---------- ---------- ----------
Cash and cash equivalents, end of year $ 1,309 $ 1,267 $ 4,838
========== ========== ==========
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-7
SVI SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED MARCH 31,
-------------------------------------
2002 2001 2000
----------- ----------- -----------
(in thousands, except share amounts)
Supplemental disclosure of non-cash information:
Interest paid $ 1,194 $ 1,990 $ 1,417
Income taxes paid -- $ 665 $ 2,163
Supplemental disclosure of non-cash investing and financing activities:
Issued 38,380 shares of common stock for services to be
provided $ 31 -- --
644,715 shares of common stock to be returned for services
canceled after shares were issued $ 485 -- --
Issuance of 141,000 shares of Series A Preferred Stock and
Transfer of note receivable received from the sale of IBIS
Systems Limited in exchange for 10,700,000 shares
of common stock and settlement of Softline note payable $ 5,520 -- --
Issued 46,774 shares of common stock in connection
with the acquisition of Triple-S -- -- $ 213
Issued 168,208 and 54,845 shares of common stock for
services rendered $ 165 $ 70 --
Issued 500,000 shares of common stock for $214,000 in cash
and $286,000 in accrued costs related to penalty for
late effectiveness of the registration statement -- $ 286 --
Issued 5,000 warrants in connection with an equity financing -- $ 8 --
Received 178,500 treasury shares as settlement for a
Receivable -- -- $ (2,142)
Issued 220,000 shares of common stock in connection
with prior acquisitions -- -- $ 2,402
Received 78,241 shares from Softline for Triple-S -- -- $ (665)
Issued 93,023 shares of common stock in connection
with acquisition of MarketPlace Systems Corporation -- -- $ 1,000
(Concluded)
The accompanying notes are an integral part of these consolidated financial statements.
F-8
SVI SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS CONDITIONS - SVI Solutions, Inc. (the "Company") is a holding
company which, through its subsidiaries, is an independent provider of
multi-channel application software technology and associated services
for the retail industry. The Company also develops and distributes PC
courseware and skills assessment products for both desktop and retail
applications.
MANAGEMENT'S PLAN TO CONTINUE AS A GOING CONCERN - The accompanying
consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the ordinary course of business. As shown in the
accompanying consolidated financial statements, the Company has
incurred net losses of $14.7 million, $28.9 million and $4.1 million
from operations for the years ended March 31, 2002, 2001 and 2000,
respectively.
The loss for the year ended March 31, 2002 included a $4.6 million
loss from the discontinued Australian operations and non-cash charges
of $6.7 million in depreciation and amortization. While net sales
decreased slightly by 2%, the selling, general and administrative
expense decreased by 25%.
The loss for the year ended March 31, 2001 included a non-cash
impairment of charges totaling $14.2 million for goodwill and
capitalized software write-downs related to its discontinued Australian
subsidiary and its note receivable in connection with a prior sale of a
foreign subsidiary. In addition, the Company recorded a $3.7 million
loss from the discontinued Australian operations, non-cash charges of
$8.6 million in depreciation and amortization, which related primarily
to its intangible assets, and $900,000 for severance and related
personnel reductions in the fourth quarter of the year ended March 31,
2001. Overall, the Company's general and administrative expense
increased 22% during fiscal 2001.
In addition, the Company's balance sheet reflects negative working
capital of $5.3 million and $2.8 million as of March 31, 2002 and 2001,
respectively. At March 31, 2002, the Company has a substantial amount
of debt, including $6.9 million due to Union Bank of California and
$2.0 million due to other stockholders. The Company experienced
significant strains on its cash resources during the years ended March
31, 2002 and 2001, and had difficulty meeting its current obligations,
including principal and interest payments on indebtedness and lease
payments due on its two facilities in the US.
The Company experienced a reduction in sales of its high margin
application software licenses in its U.S. and U.K. operations. The
Company believes its difficulties initially arose from insufficient
staffing of its sales force. Although the Company significantly
increased the staffing of the sales force in the first quarter of
fiscal 2002, the economic slowdown and the terrorist attacks of
September 11, 2001, and the ongoing hostilities in the world, increased
the challenges faced by the sales force. In addition, the Company's
financial condition may have interfered with its ability to sell new
application software licenses. The Company was dependent on one
customer for 42% of its net sales in fiscal 2002. The Company needs to
generate additional sales and revenue and to control expenditures to
return to profitability and to achieve positive cash flow.
In October 2001, the Company completed an analysis of its operations
and concluded that it was necessary to restructure the composition of
management and personnel. The CEO, CFO and general manager of the
Company's retail operations elected to leave to pursue other interests.
The Company appointed the Chairman as the Chief Executive Officer. The
Company reduced its staff by a total of 20%, and restructured and
refocused the sales force toward opportunities available in the current
economic climate.
As of April 1, 2002, the Company has refocused the company into three
strategic business units lead by experienced managers. The units are
Island Pacific, SVI Store Solutions and SVI Training Products, Inc.
F-9
The management team developed and presented to the Board of Directors
in June 2002, an operating plan for the current fiscal year that, if
achieved, will return the Company to positive cash flow from
operations. This improvement is based on a restructuring of the
Company's debt with Union Bank of California ("Union Bank"), on an
aggressive sales campaign for its applications and related services and
on rigorous management of its costs and expenses.
In May and July 2002, the Company extended its term loan facility with
Union Bank (see Note 10). In May 2002, the Company also entered into an
agreement with its major customer, Toys "R" Us ("Toys"), to issue a
$1.3 million non-interest bearing convertible note, a warrant to
purchase up to 2.5 million shares of the Company's common stock at the
exercise price of $0.553 per share and to provide development and
professional services to Toys through February 2004. In July 2002, the
Company extended its notes payable to certain stockholders which were
in default (see Note 11).
Management is now actively seeking additional financing to provide
needed working capital for operations and to reduce its overall debt
burden. Management believes additional financings, if completed, would
provide the cash required for operations during the current fiscal
year, thus enabling the Company the opportunity to increase sales of
its applications and services. However, there can be no assurance that
the Company will be successful in obtaining new financing, increasing
sales or producing incremental profits and cash flow.
PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION - The
consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, SVI Retail, Inc. and SVI Training
Products, Inc., based in US and SVI Retail (Pty) Limited based in
Australia. Effective February 2002, the Australian subsidiary ceased
operation (see Note 3). All material intercompany balances and
transactions have been eliminated in consolidation.
RECLASSIFICATIONS - Certain amounts in the prior periods have been
reclassified to conform to the presentation for the fiscal year ended
March 31, 2002. Such reclassifications did not have any effect on
losses reported in prior periods.
ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash and
highly liquid investments with original maturities of not more than
three months.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of short-term
financial instruments, including cash and cash equivalents, trade
accounts receivable, other receivables, prepaid expenses, other assets,
accounts payable, accrued expenses, lines of credit and demands due to
stockholders approximate their carrying amounts in the financial
statements due to the short maturity of and/or the variable nature of
interest rates associated with such instruments.
The fair value of the long-term note receivable is discussed in Note 5.
The amounts shown for term loans and convertible notes due to
stockholders approximate fair value because current interest rates
offered to the Company for debt of similar maturity are substantially
the same or the difference is immaterial.
INVENTORIES - Inventories consist of finished goods and are stated at
the lower of cost or market, on a first-in, first-out basis.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, generally ranging from 4 to 10
years.
Leasehold improvements are amortized using the straight-line method,
over the shorter of the life of the improvement or lease term.
Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized.
GOODWILL - Goodwill, the excess of cost over the fair value of net
assets acquired, is being amortized using the straight-line method over
various periods not exceeding 10 years. The Company periodically
F-10
reviews goodwill to evaluate whether changes have occurred that would
suggest that goodwill may be impaired based on the estimated
undiscounted cash flows of the assets acquired over the remaining
amortization period. If this review indicates that the remaining
estimated useful life of goodwill requires revision or that the
goodwill is not recoverable, the carrying amount of the goodwill is
reduced to its fair value, generally using the estimated shortfall of
cash flows on a discounted basis. As described in Note 8 to the
consolidated financial statements, effective April 1, 1999, the Company
revised its estimate of the useful life of goodwill from twenty years
to ten years.
PURCHASED AND CAPITALIZED SOFTWARE COSTS - Pursuant to the provisions
of Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed," the Company capitalizes internally developed software and
software purchased from third parties if the related software product
under development has reached technological feasibility or if there are
alternative future uses for the purchased software. These costs are
amortized on a product-by-product basis typically over three to ten
years using the greater of the ratio that current gross revenue for a
product bears to the total of current and anticipated future gross
revenue for that product or the straight-line method over the remaining
estimated economic life of the product. At each balance sheet date, the
Company evaluates on a product-by-product basis the unamortized
capitalized cost of computer software compared to the net realizable
value of that product. The amount by which the unamortized capitalized
costs of a computer software product exceed its net realizable value is
written off (see Note 7).
NON-COMPETE AGREEMENTS - Non-compete agreements represent agreements to
retain key employees of acquired subsidiaries for a certain period of
time and prohibit those employees from competing with the Company
within a stated period of time after terminating employment with the
Company. The amounts incurred are capitalized and amortized over the
life of the agreements, generally ranging from two to six years.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
- The Company evaluates its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
such assets or intangibles may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets (see
Notes 4, 7, 8 and 9). Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
REVENUE RECOGNITION - The Company recognizes revenues in accordance
with the provisions of the American Institute of Certified Public
Accountants Statement of Position 97-2, "Software Revenue Recognition."
The Company licenses its software products under nonexclusive,
nontransferable license agreements. For software arrangements that
require significant production, modification or customization, the
entire arrangement is accounted for in conformity with Accounting
Research Bulletin No. 45, "Long-term Construction-Type Contracts",
using the relevant guidance Statement of Position 81-1, "Accounting for
Performance of Construction-Type Contracts and Certain Production-Type
Contracts". For those arrangements that do not require significant
production, modification or customization, revenue is recognized when a
license agreement has been signed, delivery of the software product has
occurred, the related fee is fixed or determinable and collectibility
is probable. The Company also licenses non-software training products
under nonexclusive, nontransferable licenses. Revenue related to such
license agreements is recognized ratably over the license agreement, or
at such time that no further obligation to the customer exists.
Professional services are billed on an hourly basis and revenue is
recognized as the work is performed.
In December 1999, SEC Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements" was issued. SAB 101
provides the SEC staff's views in applying generally accepted
accounting principles to selected revenue recognition issues, including
software revenue recognition. There was no impact on the financial
statements as a result of the adoption of SAB 101. Therefore, no
adjustment was recorded.
In November 2001, the Financial Accounting Standards Board ("FASB")
issued a Staff Announcement Topic D-103 ("Topic D-103"), "Income
Statement Characterization of Reimbursements Received for Out-of-Pocket
Expenses Incurred". Topic D-103 establishes that reimbursements
received for out-of-pocket expenses should be reported as revenue in
the income statement. Currently, the Company classifies reimbursed
out-of-pocket expenses as a reduction in cost of consulting services.
The Company is required to adopt the guidance of Topic D-103 in the
first quarter of fiscal year 2003 and its consolidated statements of
operations for prior periods will be reclassified to conform to the new
presentation. The adoption of Topic D-103 will result in an increase in
reported net sales and cost of sales; however, it will not affect the
net income or loss in any past or future periods.
F-11
NET INCOME (LOSS) PER SHARE - As required by Statement of Financial
Accounting Standards No. 128, "Earnings per Share," the Company has
presented basic and diluted earnings per share amounts. Basic earnings
per share is calculated based on the weighted-average number of shares
outstanding during the year, while diluted earnings per share also
gives effect to all potential dilutive common shares outstanding during
the year such as stock options, warrants and contingently issuable
shares.
INCOME TAXES - The Company utilizes Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
TRANSLATION OF FOREIGN CURRENCY - The financial position and results of
operations of the Company's foreign subsidiaries are measured using
local currency as the functional currency. Revenues and expenses of
such subsidiaries have been translated into U.S. dollars at average
exchange rates prevailing during the period. Assets and liabilities
have been translated at the rates of exchange at the balance sheet
date. Transaction gains and losses are deferred as a separate component
of stockholders' equity, unless there is a sale or complete liquidation
of the underlying foreign investments. Aggregate foreign currency
transaction gains and losses are included in determining net earnings.
ADVERTISING AND PROMOTIONAL EXPENSES - Advertising and promotional
expenses are charged to expense as incurred and amounted to $38,000,
$198,000 and $497,000 for the years ended March 31, 2002, 2001 and
2000, respectively.
COMPREHENSIVE INCOME - The Company utilizes Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting comprehensive income and
its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gains and
losses on available-for-sale securities and are included as a component
of stockholders' equity.
STOCK-BASED COMPENSATION - As permitted under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", the Company accounts for costs of stock based
compensation in accordance with the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
accordingly, discloses the pro forma effect on net income (loss) and
related per share amounts using the fair-value method defined in SFAS
No. 123.
In April 2000, the FASB issued FASB Interpretation (FIN) No. 44,
"Accounting for Certain Transactions Involving Stock Compensation and
Interpretation of APB No. 25," which is effective July 1, 2000 except
for certain conclusions which cover specific events after either
December 15, 1998 or January 12, 2000. FIN No. 44 clarifies the
application of APB No. 25 related to modifications of stock options,
changes in grantee status, and options issued on a business
combination, among other things. The adoption of FIN No. 44 did not
have a significant impact on the consolidated financial position or
results of operations.
CONCENTRATIONS - The Company maintains cash balances and short-term
investments at several financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up
to $100,000. As of March 31, 2002, the uninsured portion of these
balances held at financial institutions aggregated to approximately
$973,000. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk on cash
and cash equivalents.
For the fiscal years ended March 31, 2002, 2001 and 2000, sales to one
customer accounted for 42%, 29% and 15%, respectively, of total
consolidated net revenues. As of March 31, 2002 and 2001, the Company's
trade receivables from this customer accounted for 40% and 26%,
respectively, of total consolidated receivables. As of March 31, 2002,
deferred revenues from this customer accounted for 48% of total
consolidated deferred revenue.
F-12
RECENT ACCOUNTING PRONOUNCEMENTS - In July 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The adoption of SFAS 141 did not have a
significant impact on the Company's financial statements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets,"
which is effective for fiscal years beginning after December 15, 2001.
SFAS 142 prohibits the amortization of goodwill and intangible assets
with indefinite useful lives but requires that these assets be reviewed
for impairment at least annually or on an interim basis if an event
occurs or circumstances change that could indicate that their value has
diminished or been impaired. Other intangible assets will continue to
be amortized over their estimated useful lives. The Company evaluates
the remaining useful lives of these intangibles on an annual basis to
determine whether events or circumstances warrant a revision to the
remaining period of amortization. Pursuant to SFAS 142, amortization of
goodwill and assembled workforce intangible assets recorded in business
combinations prior to June 30, 2001 ceased effective March 31, 2002.
Goodwill resulting from business combinations completed after June 30,
2001 will not be amortized. The Company recorded amortization expense
of approximately $2.2 million on goodwill during the fiscal year ended
March 31, 2002. The Company currently estimates that application of the
non-amortization provisions of SFAS 142 will reduce amortization
expense and increase net income by approximately $2.2 million in fiscal
2003.
The Company will test goodwill and intangible assets with indefinite
lives for impairment during the fiscal year beginning April 1, 2002 and
any resulting impairment charge will be reflected as a cumulative
effect of a change in accounting principle. Under SFAS 142, the Company
is required to screen goodwill for potential impairment by September
30, 2002 and measure the amount of impairment, if any, by March 31,
2003. Subsequent to March 31, 2002, the Company completed the
transitional analysis of goodwill impairment required by the adoption
of SFAS 142 in fiscal 2003, and the Company will record in the first
quarter of fiscal 2003 an impairment of $627,000 as a cumulative effect
of a change in accounting principles.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 ("SFAS 143"), "Accounting for Asset Retirement
Obligations." This statement applies to legal obligations associated
with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of
long-lived assets, except for certain obligations of lessees. The
adoption of SFAS No. 143 did not have a material impact on the
Company's consolidated financial statements.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets
(including discontinued operations) and consequently amends APB Opinion
30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS 144 develops one
accounting model for long-lived assets that are to be disposed of by
sale. SFAS 144 requires that long-lived assets that are to be disposed
of by sale be measured at the lower of book value or fair value cost to
sell. Additionally SFAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that
(1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The accounting prescribed in SFAS 144 was applied in
connection with the disposal of the Australian operations.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 updates, clarifies, and simplifies existing
accounting pronouncements. This statement rescinds SFAS No. 4, which
required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. As a result, the criteria in APB No. 30
will now be used to classify those gains and losses. SFAS No. 64
amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been
rescinded. SFAS No. 44 has been rescinded as it is no longer necessary.
SFAS No. 145 amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback
transactions to be accounted for in the same manner as sale-lease
transactions. This statement also makes technical corrections to
existing pronouncements. While those corrections are not substantive in
nature, in some instances, they may change accounting practice. The
Company does not expect adoption of SFAS No. 145 to have material
impact, if any, on its financial position or results or operations.
F-13
2. ACQUISITIONS
MARKETPLACE SYSTEM CORPORATION - Effective March 16, 2000, Island
Pacific acquired certain assets and liabilities of Marketplace System
Corporation ("Marketplace"), a privately-held software development and
consulting firm headquartered in Austin, Texas. The purchase price for
the acquisition was $750,000 in cash and 93,023 shares of the Company's
common stock with the fair value of $1 million at the date of
acquisition. The acquisition has been accounted for as a purchase.
The fair value of assets acquired and liabilities assumed were as
follows (in thousands):
Assets acquired, including goodwill $ 1,621
Liabilities assumed -
Common stock issued (1,000)
Liability for purchase consideration (500)
--------------
Net cash paid for acquisition $ 121
==============
3. DISCONTINUED OPERATIONS
The Company's Australian subsidiary maintained an AUS$1,000,000
(approximately US$510,000) line of credit facility with National
Australia Bank Limited. The facility was secured by substantially all
of the assets of the Australian subsidiary, and the Company has
guaranteed all amounts owing on the facility. The facility became due
in February of each year, but had renewed annually. In April 2001, the
Company received a formal demand under the guarantee for the full
AUS$971,000 (approximately US$495,000) then alleged by the bank to be
due under the facility. Due to the declining performance of the
Australian subsidiary, management decided in the third quarter of
fiscal 2002 to sell certain assets of the Australian subsidiary to the
former management of such subsidiary, and then cease Australian
operations. Such sale was however subject to the approval of National
Australia Bank, the subsidiary's secured lender. The bank did not
approve the sale and the subsidiary ceased operations in February 2002.
The bank caused a receiver to be appointed in February 2002 to sell
substantially all of the assets of the Australian subsidiary and pursue
collections on any outstanding receivables. The receiver proceeded to
sell substantially all of the assets for $300,000 in May 2002 to the
entity affiliated with former management, and is actively pursuing the
collection of receivables. If the sale proceeds plus collections on
receivables are insufficient to discharge the indebtedness to National
Australia Bank, the Company may be called upon to pay the deficiency
under its guarantee to the bank. The Company has accrued $187,000 as
the maximum amount of our potential exposure. The receiver has also
claimed that the Company is obligated to it for inter-company balances
of $636,000, but the Company does not believe any amounts are owed to
the receiver, who has not as of the date of this report acknowledged
the monthly corporate overhead recovery fees and other amounts charged
by us to the Australian subsidiary offsetting the amount claimed to be
due.
The disposal of the Australian subsidiary resulted in a loss of $3.2
million. The operating results of the Australian subsidiary are shown
as discontinued operations with the prior period results restated. The
operating results reflected in loss from discontinued operations are
summarized as follows (in thousands):
Year ended March 31,
2002 2001 2000
---- ---- ----
Net sales $ 2,363 $ 4,959 $ 9,462
Income (loss) before taxes $ (1,056) $ (4,580) $ 882
Provision (benefit) for income taxes 332 (833) 2
Net income (loss) $ (1,388) $ (3,746) $ 880
Net income (loss) per share of common stock $ (0.04) $ (0.11) $ 0.03
Net assets from discontinued operations at March 31, 2001 consisted of
the following (in thousands):
Net assets available for sale $ 1,595
Current assets 1,102
Line of credit (485)
Current liabilities (771)
---------
$ 1,441
=========
F-14
4. ASSET IMPAIRMENT CHARGES
In the fiscal year ended March 31, 2001, the Company evaluated the
recoverability of the long-lived assets in accordance with the
evaluation of its long-lived assets as described in Note 1. In
determining the amount of impairment, the Company compared the net book
value of the long-lived assets associated with the Australian
operations, primarily consisting of recorded goodwill and software
intangibles, to their estimated fair values. Fair values were estimated
based on anticipated future cash flows of the Company's operations
consistent with the assets' remaining useful lives. The anticipated
future cash flows were then discounted at 13%, which approximates the
Company's interest rate on its amended and restated loan agreement in
fiscal year ended March 31, 2001. Accordingly, the Company recorded
impairment of goodwill of $2.3 million and capitalized software of $6.6
million in the fiscal year ended March 31, 2001.
The Company also recorded an impairment charge to its note receivable
in the fiscal year ended March 31, 2001 (See Note 5.).
Subsequent to March 31, 2002, the Company completed the transitional
analysis of intangible asset impairment required by the adoption of
Statement of Financial Accounting Standards No. 147 in fiscal 2003, and
the Company will record in the first quarter of fiscal 2003 impairments
of $627,000, $1,182,000 and $161,000 to goodwill, capitalized software
and non-compete agreements, respectively, as a cumulative effect of a
change in accounting principles.
5. NOTE RECEIVABLE
In connection with the sale of its United Kingdom subsidiary, IBIS
Systems Limited ("IBIS") to Kielduff Investments Limited ("Kielduff")
in the fourth quarter of fiscal 1999, the Company recorded a note
receivable (the "Note") of $13.6 million. The Note bore interest at 2%
over the base prime rate for United States dollar deposits quoted by
the Hong Kong Shanghai British Columbia Bank plc, and principal and
interest were originally due October 1, 1999. In September 1999, the
Note was extended to February 15, 2000 to allow Kielduff sufficient
time to complete a combination of several companies under a common
name, Integrity Software, Inc. ("Integrity"), and register this newly
formed entity for trading on a United States exchange. The Note was
further extended to November 15, 2000 to accommodate the registration
and underwriting process related to Integrity. In September 2000, the
Company discontinued accruing interest on the Note. The Note was
secured by approximately 11% of the outstanding shares of Integrity.
The Company also had the right to convert all sums due from Kielduff
into shares of Integrity at its option. The Company did not exercise
its option to convert any amount of the Note into shares of Integrity.
Kielduff did not pay the Note on the November 15, 2000 due date. Given
the Company's lack of ability to enforce collection on the due date,
the Company classified the Note as long term. The Company engaged
Business Valuation Services, Inc. ("BVS") to perform an analysis of the
fair value of the Note's underlying collateral at each quarter during
fiscal year 2001. After consideration of the BVS reports and other
relevant data, the Company concluded that the fair value of the
collateral underlying the Note was impaired. Thus, during the fiscal
year ended March 31, 2001, the Company recorded an impairment of $7.6
million. The carrying value of the Note at March 31, 2001 was $7.0
million.
Effective January 1, 2002, the Company transferred the Note to Softline
Limited ("Softline"), a major stockholder, in connection with an
integrated series of transactions with Softline (see Notes 10 and 13).
The transactions with Softline were as follows:
1. The Company transferred to Softline the note received
in connection with the sale of IBIS.
2. The Company issued to Softline 141,000 shares of
newly-designated Series A Convertible Preferred Stock
("Series A Preferred").
3. In consideration of the above, Softline released the
Company from its obligations related to the note and
financing costs payable due to Softline. Softline
also surrendered 10,700,000 shares of the Company's
common stock held by Softline.
No gain or loss was recognized in connection with the disposition of
the Note or the other components of the transactions.
F-15
6. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2002 and 2001 consisted of the
following (in thousands):
2002 2001
-------------- --------------
Computer equipment and purchased software $ 2,299 $ 2,451
Furniture and fixtures 473 492
Leasehold improvements 400 338
-------------- --------------
3,172 3,281
Less accumulated depreciation and amortization 2,531 2,305
-------------- --------------
Total $ 641 $ 976
============== ==============
Depreciation and amortization expense from continuing operations for
the fiscal years ended March 31, 2002, 2001 and 2000 was $520,000,
$698,000 and $414,000, respectively. Depreciation and amortization
expense from discontinued operations for the fiscal years ended March
31, 2002, 2001 and 2000 was $46,000, $173,000 and $241,000,
respectively.
7. CAPITALIZED SOFTWARE
Capitalized software at March 31, 2002 and 2001 consisted of the
following (in thousands):
2002 2001
-------------- --------------
Software $ 28,128 $ 27,873
Less accumulated amortization 10,516 7,799
-------------- --------------
Total $ 17,612 $ 20,074
============== ==============
Amortization expense from continuing operations for the fiscal years
ended March 31, 2002, 2001 and 2000 was $2.9 million, $3.4 million and
$2.8 million, respectively. Amortization expense from discontinued
operations for the fiscal years ended March 31, 2002, 2001 and 2001 was
$300,000, $751,000 and $451,000, respectively. The Company recorded an
impairment of $6.6 million to the capitalized software associated with
its discontinued Australian subsidiary at 2001 (see Note 4).
8. GOODWILL
In evaluating the economic benefit and useful lives of goodwill
obtained in connection with the Company's acquisition of Divergent
Technologies Pty. Ltd., Chapman Computers Pty. Ltd., Applied Retail
Solutions, Inc. and Island Pacific Systems Corporation, management
determined that the period of amortization should be revised from
twenty years to ten years effective April 1, 1999. Accordingly, the
unamortized cost of such assets at April 1, 1999 have been allocated to
the reduced number of remaining periods in the revised useful life.
Goodwill at March 31, 2002 and 2001 consisted of the following (in
thousands):
2002 2001
-------------- --------------
Cost $ 21,915 $ 21,914
Less accumulated amortization 6,493 4,272
-------------- --------------
Total $ 15,422 $ 17,642
============== ==============
The amortization expense for twelve months ended March 31, 2002, 2001
and 2000 was $2.2 million, $2.6 million, and $2.4 million,
respectively. The Company recorded an impairment to the goodwill
associated with its discontinued Australian subsidiary of approximately
$2.3 million at March 31, 2001 (see Note 4).
F-16
9. NON-COMPETE AGREEMENTS
Non-compete agreements as of March 31, 2002 and 2001 are as follows (in
thousands):
2002 2001
-------------- --------------
Cost $ 6,986 $ 6,986
Less accumulated amortization 4,484 3,372
-------------- --------------
Total 2,502 3,614
Current portion 917 1,017
-------------- --------------
Long-term portion $ 1,585 $ 2,597
============== ==============
The amortization expense for the twelve months ended March 31, 2002,
2001 and 2000 was $1.1 million , $1.6 million and $1.5 million,
respectively.
10. TERM LOANS
TERM LOANS DUE TO BANK
The Company's term loans at March 31, 2002 and 2001 consist of the
following (in thousands):
2002 2001
-------------- --------------
Term loans payable to bank $ 6,907 $ 7,325
Less term loans payable to bank classified
as long-term as discussed below 6,472 7,325
-------------- --------------
Current portion of term loans $ 435 $ -
============== ==============
In June 1999, the Company obtained two term loans from Union Bank of
California, N.A. (the "Bank") in the aggregate amount of $18.5 million
as partial funding for the acquisition of Island Pacific Systems
Corporation. During the first quarter of fiscal 2001, the Company
agreed to consolidate the approximately $14.75 million balance of the
two loans into a single term loan, and to extend the maturity date of
the renegotiated loan to August 1, 2000. The Company also agreed to
reduce the outstanding principal amount by $10 million. During the
second quarter of fiscal 2001, Softline loaned the Company $10 million
for the purpose of making this $10 million principal reduction. The
Company then refinanced the $4.75 million balance due on the term loan.
Under the terms of this arrangement, the Company was required beginning
August 1, 2000 to pay interest on the outstanding balance at the rate
of 5% over the Bank's prime rate, increasing to 6.25% over the Bank's
prime rate after December 31, 2000. The Company was also required to
pay $200,000 per month toward reduction of principal, and to pay as
further reduction of principal one half of amounts received from a
$1.75 million contract receivable, any amounts received from sale of
shares of Integrity Software, Inc. which secure a related note
receivable (see Note 4), and any amounts received from the issuance of
debt or equity securities other than stock option exercises. The
Company's $3 million revolving line of credit with the Bank also became
subject to the terms of this agreement. The entire amount of
indebtedness was due April 1, 2001.
During the third quarter of fiscal 2001, the Bank agreed to waive the
required $200,000 monthly principal payments and to allow the Company
to pay a reduced monthly interest rate of 2% over prime, with the
balance of the contractual interest accruing and payable upon maturity.
The Bank also agreed to permit the Company to apply up to $2.5 million
in private placement proceeds (see Note 12) and the full $100,000 paid
on the contract receivable during the third quarter of the fiscal year
toward working capital instead of reduction of principal. The Company
also agreed to terminate the revolving line of credit arrangement,
which as of December 31, 2000, was fully drawn, and to a restriction on
payments toward subordinated loan obligations until the Bank
obligations are discharged. The restriction did not apply to the
repayment of amounts due to a subsidiary of Softline (see Note 17).
F-17
The entire amount owed to the Bank is secured by the Company's assets,
10,700,000 shares of the Company's common stock and stock of its U.S.
retail and training products subsidiaries. The loan is subject to
certain financial covenants and contains limitations on acquisitions,
investments and other borrowings.
Effective June 28, 2001, the term loan was amended and restated. Under
the restated term loan agreement, the Bank extended the maturity date
to May 1, 2002. The restated agreement also provided for the Company,
at its option, to receive a further extension of six months (i.e.,
until November 1, 2002), subject to certain conditions. Interest on the
term loan accrues and is payable monthly at a rate per annum equal to
the Bank's reference rate plus five percentage points. The restated
agreement includes affirmative covenants regarding the Company
maintaining and obtaining certain financial ratios. The Company was
required to make monthly principal payments of $50,000 starting October
1, 2001.
On March 18, 2001, the loan agreement was amended to release certain
collateral from the pledge to the Bank, and to instead pledge to the
Bank 10,700,000 shares of the Company's common stock surrendered by
Softline in the related recapitalization transactions with Softline
described in Notes 5, 10 and 13. The release collateral consisted of
shares of capital stock of our Australian subsidiary, and the IBIS note
and related shares of Integrity Software.
On May 21, 2002, the Bank further amended the loan agreement to extend
the maturity date to May 1, 2003 and to revise other terms and
conditions. We agreed to pay to the Bank $100,000 as a loan extension
fee, payable in four monthly installments of $25,000 each commencing on
June 30, 2002. If we fail to pay any installment when due, the loan
extension fee increases to $200,000, and the monthly payments increase
accordingly. We also agreed to pay all overdue interest and principal
by June 30, 2002, and to pay monthly installments of $24,000 commencing
on June 30, 2002 and ending April 30, 2003 for the Bank's legal fees.
The Company was not able to make the payments required in June 2002.
The Company was also out of compliance with certain financial covenants
as of June 28, 2002. Effective July 15, 2002, the Bank further amended
the restated term loan agreement, and waived the then existing
defaults. Under this third amendment to the restated agreement, the
Bank agreed to waive the application of the additional 2% interest rate
for late payments of principal and interest, and to waive the
additional $100,000 refinance fee required by the second amendment. The
Bank also agreed to convert $361,000 in accrued and unpaid interest
and fees to term loan principal, and the Company executed a new term
note in total principal amount of $7.2 million. The Company is required
to make a principal payment of $35,000 on October 15, 2002, principal
payments of $50,000 on each of November 15, 2002 and December 15, 2002,
and consecutive monthly principal payments of $100,000 each on the 15th
day of each month thereafter through August 15, 2003. The entire amount
of principal and accrued interest is due August 31, 2003. The Bank also
agreed to eliminate certain financial covenants and to ease others, and
the Company is in compliance with the revised covenants.
The Company also agreed to issue a contingent warrant to an affiliate
of the Bank to purchase up to 4.99% of the number of outstanding shares
of common stock on January 2, 2003 for $0.01 per share. The warrant
will be issued and exercisable for shares equal to 1% of the
outstanding common stock on January 2, 2003, and will become
exercisable for shares equal to an additional 0.5% of the outstanding
common stock on the first day each month thereafter, until it is
exercisable for the full 4.99% of the outstanding common stock. The
warrant will not become exercisable to the extent that the Company
discharged in full the Bank indebtedness prior to a vesting date.
Accordingly, the warrant will not become exercisable for any shares if
the Company discharges its bank indebtedness in full prior to January
2, 2003; and if the warrant does become partially exercisable on such
date, it will cease further vesting as of the date the Company
discharges in full the bank indebtedness.
F-18
SUBORDINATED TERM LOAN DUE TO STOCKHOLDER
During the second quarter of fiscal 2001, Softline loaned the Company
$10 million for the purpose of making a $10 million principal reduction
on the Bank term loan. This loan was unsecured and was subordinated to
the term loan. The loan bore interest at 14% per annum, payable
monthly, and had a stated due date of August 1, 2001. The Company did
not pay monthly interest and had accrued $1.0 million interest as of
March 31, 2001. There were no financial covenants or restrictions
related to the Softline loan. Effective June 30, 2001, the terms of the
loan with Softline were amended. Included in the amendment was an
extension of the maturity date to November 1, 2002.
The Company agreed to reimburse Softline for costs associated with this
loan in the amount of $326,000, which was fully accrued for as of March
31, 2001. These costs were to be amortized over the initial 13 month
life of the loan.
Effective January 1, 2002, the Company entered into an integrated
series of transactions with Softline where Softline agreed to release
the Company's obligations relating to this loan, including the $326,000
refinancing costs. As a result, the Company recorded a reduction of
refinancing cost equal to the $224,000 previously amortized. For
further discussion of the transactions with Softline, see Notes 5 and
13.
During the fiscal year ended March 31, 2001, the Company borrowed $0.6
million from a subsidiary of Softline on a short-term basis (see Note
16).
Interest expense included interest due to Softline and its subsidiary
for the fiscal years ended March 31, 2002, 2001 and 2000 of $1.3
million, $1.0 million and $0, respectively. Interest expense for the
fiscal years ended March 31, 2002, 2001 and 2000 also included interest
due to other stockholders in the amount of $56,000, $130,000 and
$31,000, respectively.
11. CONVERTIBLE NOTES
CONVERTIBLE NOTES DUE TO STOCKHOLDERS
In May and June 2001, the Company entered into Subscription Agreements
with a limited number of accredited investors related to existing
stockholders for gross proceeds of $1.3 million. Each unit consisted of
a convertible promissory note and warrants to purchase 250 shares of
the Company's common stock for each $1,000 borrowed by the Company. The
holders of the notes had the option to convert the unpaid principal and
interest at any time at a conversion price of $1.35. The notes matured
on August 30, 2001 and earned interest at 12% per annum to be paid at
maturity. The notes were not paid or converted at March 31, 2002.
The interest rate increased to 17% per annum on August 30, 2001 as a
result of the non-payment on the maturity date. As of March 31, 2002,
the balance of these convertible notes is $1.4 million, including
$171,000 in accrued interest.
In accordance with generally accepted accounting principles, the
difference between the conversion price of $1.35 and the Company's
stock price on the date of issuance of the notes is considered to be
interest expense. It is recognized in the statement of operations
during the period from the issuance of the debt to the time at which
the debt first becomes convertible. The Company recognized interest
expense of $191,000 in the accompanying statement of operations for the
fiscal year ended March 31, 2002.
Each warrant entitled the holder to purchase one share of the Company's
common stock at an exercise price of $1.50. The warrants were to expire
three years from the date of issuance. The Company allocates the
proceeds received from debt or convertible debt with detachable
warrants using the relative fair value of the individual elements at
the time of issuance. The amount allocated to the warrants was
determined to be $247,000 and is included in interest expense in the
accompanying statement of operations for the year ended March 31, 2002.
Interest expense for the fiscal year ended March 31, 2002 was $609,000.
F-19
Subsequent to March 31, 2002, the Company agreed to amend the terms of
the notes and warrants issued to these investors. The investors agreed
to replace the existing notes with new notes having a maturity date of
September 30, 2003. The interest rate on the new notes was reduced to
8% per annum, increasing to 13% in the event of a default in payment of
principal or interest. The Company is required to pay accrued interest
on the new notes calculated from July 19, 2002, in quarterly
installments beginning September 30, 2002. The investors agreed to
reduce accrued interest and late charges on the original notes by up to
$85,000, and to accept the reduced amount in shares of the Company's
common stock valued at the average closing price of the shares on the
American Stock Exchange for the 10 trading days prior to July 19, 2002.
The new notes are convertible at the option of the holders into shares
of the Company's common stock valued at $0.60 per share.
The Company also agreed that the warrants previously issued to the
investors to purchase an aggregate of 3,033,085 shares of common stock
at exercise prices ranging from $0.85 to $1.50, and expiring on various
dates between December 2002 and June 2004, would be replaced by new
warrants to purchase an aggregate of 1,600,000 shares at $0.60 per
share, expiring July 19, 2007. The Company also agreed to file a
registration statement with the Securities and Exchange Commission for
the resale of all shares held by or obtainable by these investors. In
the event such registration statement is not declared effective within
120 days after July 19, 2002, the Company will be obligated to issue
five-year penalty warrants for the purchase of 5% of the total number
of registrable securities at an exercise price of $0.60 per share. The
Company will be obligated to issue additional penalty warrants for each
30 day period after such date in which the registration statement is
not effective. No further penalty warrants will accrue from the
original registration obligation to these investors (see Note 13).
CONVERTIBLE NOTE DUE TO MAJOR CUSTOMER
Subsequent to March 31, 2002, Toys agreed to invest $1.3 million for
the purchase of a non-recourse convertible note and a warrant to
purchase 2,500,000 shares of common stock. In connection with this
transaction, Toys signed a two-year software development and services
agreement (the "Development Agreement") that expires in February 2004.
The purchase price is payable in installments through September 27,
2002. The note is non-interest bearing, and the face amount is payable
in shares of common stock valued at $0.553 per share. The note is due
May 29, 2009, or if earlier than that date, three years after the
completion of the development project contemplated in the Development
Agreement. The Company does not have the right to prepay the
convertible note before the due date, but upon the due date, the
Company may at its option pay the principal amount in cash rather than
shares of common stock to the extent Toys did not earlier convert the
note to shares of common stock. The face amount of the note is 16% of
the $1.3 million purchase price as of May 29, 2002, and increases by 4%
of the $1.3 million purchase price on the last day of each succeeding
month, until February 28, 2004, when the face amount is the full $1.3
million purchase price. The face amount will cease to increase if Toys
terminates the Development Agreement for a reason other than the
Company's breach. The face amount will be zero if the Company
terminates the Development Agreement due to an uncured breach by Toys
of the Development Agreement.
The warrant entitles Toys to purchase up to 2,500,000 of shares of our
common stock at $0.553 per share. The warrant is initially vested as to
400,000 shares as of May 29, 2002, and vests at the rate of 100,000
shares per month until February 28, 2004. The warrant will cease to
vest if Toys terminates the Development Agreement for a reason other
than the Company's breach. The warrant will become entirely
non-exercisable if the Company terminates the Development Agreement due
to an uncured breach by Toys of the Development Agreement. Toys may
elect a "cashless exercise" where a portion of the warrant is
surrendered to pay the exercise price.
The note conversion price and the warrant exercise price are each
subject to a 10% reduction in the event of an uncured breach by the
Company of certain covenants to Toys. These covenants do not include
financial covenants. Conversion of the note and exercise of the warrant
each require 75 days advance notice. The Company also granted Toys
certain registration rights for the shares of common stock into which
the note is convertible and the warrant is exercisable.
F-20
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases office space and various
automobiles under non-cancelable operating leases that expire at
various dates through the year 2006. Certain leases contain renewal
options. Future annual minimum lease payments for non-cancelable
operating leases at March 31, 2002 are summarized as follows (in
thousands):
YEAR ENDING MARCH 31:
2003 $ 753
2004 724
2005 704
2006 192
2007 7
--------------
$ 2,380
==============
Rent expense was $1.2 million, $1.5 million and $1.3 million for the
fiscal years ended March 31, 2002, 2001 and 2000, respectively.
EMPLOYEE BENEFIT PLAN - Effective January 1, 1999, the Company adopted
a defined contribution plan under Section 401(k) of the Internal
Revenue Code covering all eligible employees employed in the United
States ("401(k) Plan"). Eligible participants may contribute up to
$10,000 or 20% of their total compensation, whichever is lower. The
Company matched 50% of the employee's contributions, up to 3% of the
employee's total compensation, and may make discretionary contributions
to the plan. Participants will be immediately vested in their personal
contributions and over a six year graded schedule for amounts
contributed by the Company. Effective, July 1, 2000, the Company
amended the 401(k) Plan to for the following items: (a) Company
matching contribution equal to 50% of the employee's contributions, up
to 6% of the employee's total compensation and (b) eligible
participants may defer up to $10,500 or 18% of their total
compensation, whichever is lower. Effective January 1, 2002, the
Company ceased matching contributions. The Company made matching
contributions to the 401(k) Plan of approximately $125,000, $359,000
and $192,000 in the fiscal years ended March 31, 2002, 2001 and 2000,
respectively.
LITIGATION -In April of 2002, the Company's former CEO, Thomas
Dorosewicz, filed a demand with the California Labor Commissioner for
$256,250 in severance benefits allegedly due under a disputed
employment agreement, plus attorney's fees and costs. On June 18, 2002,
the Company filed an action against Mr. Dorosewicz and an entity
affiliated with him in San Diego Superior Court, Case No. GIC790833,
alleging fraud and other causes of action relating to transactions Mr.
Dorosewicz caused the Company to enter into with his affiliates and
related parties without proper board approval. The Company expects one
or more cross-claims from Mr. Dorosewicz in that action. The Company
does not believe it has any obligation to pay the severance benefits
alleged by Mr. Dorosewicz to be due, and it intends to vigorously
pursue its causes of action against Mr. Dorosewicz. The Company cannot
at this time predict what will be the outcome of these matters, as
discovery has not yet commenced in either action.
13. PREFERRED STOCK, COMMON STOCK, TREASURY STOCK, STOCK OPTIONS AND
WARRANTS
PRIVATE PLACEMENTS - In March 2000, the Company received $2.9 million
from the sale of common stock to an investor. The Company agreed to
register the shares with the Securities and Exchange Commission
("SEC"). The shares carried a "repricing right" which entitled the
investor to receive additional shares upon the occurrence of certain
events. In October 2000, the Company issued 375,043 shares in
satisfaction of the repricing right.
F-21
In October 2000, the SEC declared effective the registration statement.
The Company became obligated to pay to the investor liquidated damages
for late effectiveness of the registration statement in the amount of
$286,000. The investor agreed in March 2001 to accept 286,000 shares of
common stock in satisfaction of the liquidated damages and agreed to
purchase an additional 214,000 shares of common stock for $214,000. In
connection with this agreement, the Company issued the investor a
two-year warrant to purchase up to 107,000 shares of common stock at
$1.50 per share. The Company may call the warrants for $0.001 per share
upon the occurrence of certain events. The investor will have thirty
days after the call to exercise the warrant, after which time the
warrant will expire.
The Company agreed to register all of the shares sold in March 2001,
and those that it may sell under the warrant, with the SEC. The Company
became obligated to pay to the investor liquidated damages in the
amount of $60,000. Subsequent to March 31, 2002, the investor agreed to
accept 140,000 shares of common stock in satisfaction of the liquidated
damages.
In December 2000, the Company received $1.5 million from the sale of
common stock and warrants to a limited number of accredited investors.
As part of the same transaction, the investors purchased in January
2001 an additional $0.5 million of common stock and warrants, and two
of the investors purchased in February 2001 an additional $0.5 million
of common stock and warrants on the same terms and conditions. The
Company issued a total of 2,941,176 shares of common stock and
1,470,590 warrants to purchase common stock at an exercise price of
$1.50 as a result of the aforementioned transaction. The Company agreed
to register the common shares purchased and the common shares issuable
upon the exercise of warrants with the Securities and Exchange
Commission. The Company filed a registration statement in January 2001
to register these shares, but it did not become effective. As of March
31, 2002, the Company has not registered these shares and has issued
1,029,410 penalty warrants with a strike price of $0.85 per share, with
fair value of $711,000, as required under an agreement with the
investors. The Company was obligated to issue to each investor a
warrant for an additional 2.5% of the number of shares purchased by
that investor in the private placement for each continuing 30-day
period during which a registration statement is not effective.
Subsequent to March 31, 2002, the Company and the investors agreed to
revise the terms of the foregoing warrants, and to cease accruing
penalty warrants (see Note 11).
PREFERRED STOCK - The Series A Preferred has a stated value of $100 per
share and is redeemed at the option of the Company any time prior to
the maturity date of December 31, 2006 for 107% of the stated value and
accrued and unpaid dividends. The shares are entitled to cumulative
dividends of 7.2% per annum, payable semi-annually. At March 31, 2002,
dividends in arrears amount to $254,000 or $1.80 per share. The holders
may convert each share of Series A Preferred at any time into the
number of shares of the Company's common stock determined by dividing
the stated value plus all accrued and unpaid dividends, by a conversion
price initially equal to $0.80. The conversion price will increase at
an annual rate of 3.5% calculated on a semi-annual basis. The Series A
Preferred is entitled upon liquidation to an amount equal to its stated
value plus accrued and unpaid dividends in preference to any
distributions to common stockholders. The Series A Preferred has no
voting rights prior to conversion into common stock, except with
respect to proposed impairments of the Series A Preferred rights and
preferences, or as provided by law. The Company has the right of first
refusal to purchase all but not less than all of any shares of Series A
Preferred or shares of common stock received on conversion which the
holder may propose to sell to a third party, upon the same price and
terms as the proposed sale to a third party.
F-22
COMMON STOCK - During fiscal year ended March 31, 2002, the Company
issued the following:
o An aggregate of 573,845 shares of common stock for
services rendered and severance payments totaling
$490,000.
o 38,380 shares of common stock for investor relations
services. The $31,000 value of these shares was
recorded subsequent to year end when the services
were performed.
o 644,715 shares of common stock totaling $485,000
which are to be returned as a result of early
termination of investor relations service contracts.
The value of these shares is recorded as a share
receivable component of stockholders' equity.
TREASURY STOCK - In November 1998, the Board of Directors authorized
the Company to purchase up to 1,000,000 shares of the Company's common
stock. As of March 31, 2001 and 2000, the Company had repurchased
444,641 shares of its common stock at a cost of $4.3 million. The
purchased shares were canceled as of March 31, 2002.
The Company received 10,700,000 shares of the Company's common stock
valued at $8.6 million from Softline in connection with the
transactions between the Company and Softline described in Notes 5, 10
and 13. These shares are pledged to the Bank as collateral for the term
loans (see Note 10).
STOCK OPTION PLAN - The Company adopted an incentive stock option plan
during fiscal year 1990 (the "1989 Plan"). Options under this plan may
be granted to employees and officers of the Company. There were
initially 1,000,000 shares of common stock reserved for issuance under
this plan. Effective April 1, 1998, the board of directors approved an
amendment to the 1989 Plan increasing the number of shares of common
stock authorized under the 1989 Plan to 1,500,000. The exercise price
of the options is determined by the board of directors, but the
exercise price may not be less than the fair market value of the common
stock on the date of grant. Options vest immediately and expire between
three to ten years from the date of grant. The 1989 Plan terminated in
October 1999.
On October 5, 1998, the board of directors and stockholders approved a
new plan entitled the 1998 Incentive Stock Plan (the "1998 Plan"). The
1998 Plan authorizes 3,500,000 shares to be issued pursuant to
incentive stock options, non-statutory options, stock bonuses, stock
appreciation rights or stock purchases agreements. The options may be
granted at a price not less than the fair market value of the common
stock at the date of grant. The options generally become exercisable
over periods ranging from zero to five years, commencing at the date of
grant, and expire in one to ten years from the date of grant. The 1998
Plan terminates in October 2008. On August 18, 2000, the Board approved
certain amendments to the 1998 Plan. On November 16, 2000, certain of
the amendments were approved by the shareholders. These amendments: (a)
increased number of shares authorized in the Plan from 3,500,000 to
4,000,000, (b) authorized an "automatic" annual increase in the number
of shares reserved for issuance by an amount equal to the lesser of 2%
of total number of shares outstanding on the last day of the fiscal
year, 600,000 shares, or an amount approved by the Board of Directors,
and (c) to limit the number of stock awards of any one participant
under the 1998 Plan to 500,000 shares in any calendar year.
F-23
The following summarizes the Company's stock option transactions under
the stock option plans:
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
----------- -----------
Options outstanding, April 1, 1999 1,369,285 $ 4.05
Exercised (190,075) $ 3.63
Granted 730,150 $ 7.87
Expired/canceled (119,100) $ 7.28
-----------
Options outstanding, March 31, 2000 1,790,260 $ 5.44
Exercised (131,300) $ 6.24
Granted 2,891,929 $ 1.35
Expired/canceled (589,855) $ 4.88
-----------
Options outstanding, March 31, 2001 3,961,034 $ 2.55
Granted 2,117,300 $ 0.89
Expired/canceled (1,592,445) $ 1.84
-----------
Options outstanding March 31, 2002 4,485,889 $ 2.05
===========
Exercisable, March 31, 2000 1,169,160 $ 4.37
===========
Exercisable, March 31, 2001 922,885 $ 4.01
===========
Exercisable, March 31, 2002 2,030,673 $ 2.63
===========
In addition to options issued pursuant to the stock option plans
described above, the Company issued additional options outside the
plans to employees, consultants, and third parties. The following
summarizes the Company's other stock option transactions:
WEIGHTED
AVERAGE
EXERCISE
PRICE PER
OPTIONS SHARE
----------- -----------
Options outstanding, April 1, 1999 5,388,700 $ 1.95
Exercised (3,247,188) $ 1.92
Granted 15,000 $ 9.50
-----------
Options outstanding, March 31, 2000 2,156,512 $ 2.02
Exercised (289,700) $ 1.82
Granted 300,000 $ 0.95
Expired/Canceled (800,000) $ 1.25
-----------
Options outstanding, March 31, 2001 1,366,812 $ 2.28
Expired/Canceled (320,000) $ 1.08
-----------
Options outstanding, March 31, 2002 1,046,812 $ 2.61
===========
Exercisable, March 31, 2000 2,156,512 $ 2.02
===========
Exercisable, March 31, 2001 1,166,812 $ 2.51
===========
Exercisable, March 31, 2002 1,046,812 $ 2.61
===========
F-24
During the fiscal years ended March 31, 2001 and 2000, the Company
recognized compensation expense of $28,000 and $55,000, respectively,
for stock options granted to non-employees for services provided to the
Company.
The following table summarizes information as of March 31, 2002
concerning currently outstanding and exercisable options:
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range Of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
---------------- ------------ ------------- ----------- ------------ --------
(years)
$0.50 - 1.75 4,020,664 8.28 $ 1.15 1,720,728 $ 1.13
$1.76 - 4.00 631,812 5.32 $ 2.45 631,812 $ 2.45
$4.01 - 7.00 464,575 4.06 $ 5.36 444,575 $ 5.32
$7.01 - 11.75 415,650 4.25 $ 7.83 280,370 $ 7.87
-------------------------------------------------- ------------------------------
5,532,701 7.28 $ 2.16 3,077,485 $ 2.62
================================================== ==============================
The Company has adopted the disclosure-only provision of SFAS No. 123.
The following pro forma information presents net income and basic and
diluted earnings per share as if compensation expense had been
recognized for stock options granted in the fiscal years ended March
31, 2002, 2001 and 2000, as determined under the fair value method
prescribed by SFAS No. 123 (in thousands, except per share amounts):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2000
------------ ------------ ------------
Net loss:
As reported $ (14,658) $ (28,945) $ (4,054)
Pro forma $ (15,963) $ (29,408) $ (5,305)
Basic and diluted loss per share:
As reported $ (0.41) $ (0.83) $ (0.12)
Pro forma $ (0.45) $ (0.85) $ (0.16)
Weighted average assumptions:
Dividend yield None None None
Volatility 77% 140% 49%
Risk free interest rate 3.9% 5.8% 5.8%
Expected life of options 4 years 10 years 1-4 years
For options granted during the year ended March 31, 2002 where the
exercise price was greater than the stock price at the date of grant,
the weighted-average fair value of such options was $0.46, and the
weighted-average exercise price of such options was $0.89. For options
granted during the year ended March 31, 2002 where the exercise price
was equal to the stock price at the date of grant, the weighted average
fair value of such options was $0.53, and the weighted-average exercise
price of such options was $0.89. No options granted during the year
ended March 31, 2002 where the exercise price was less than the stock
price at the date of grant.
F-25
WARRANTS - At March 31, 2002 and 2001, the Company had outstanding
warrants to purchase 4,040,168 and 1,614,925 shares of common stock,
respectively, at exercise prices ranging from $0.79 to $7.00 per share.
The lives of the warrants range from two to five years from the grant
date. During the fiscal year ended March 31, 2002, the Company
recognized compensation expense of $579,000 for warrants granted to
non-employees for services provided to the Company. Subsequent to March
31, 2002, the Company agreed to replace warrants to purchase an
aggregate of 3,033,085 shares of common stock at exercise prices
ranging from $0.85 to $1.50, and expiring on various dates between
December 2002 and June 2004, with new warrants to purchase an aggregate
of 1,600,000 shares of common stock at $0.60 per share, expiring July
17, 2007 (see Note 11).
14. INCOME TAXES
The provision (benefit) for income taxes consisted of the following
components (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2000
--------------- ---------------- ---------------
Current:
Federal $ 39 $ (1,261) $ 681
State - 45 103
Foreign - 1,048
--------------- ---------------- ---------------
Total 39 (1,216) 1,832
--------------- ---------------- ---------------
Deferred:
Federal - (3,523) (3,325)
State - (774) 261
Foreign - (99) (1,180)
--------------- ---------------- ---------------
Total 39 (4,396) (4,244)
--------------- ---------------- ---------------
Provision (benefit) for income taxes $ 39 $ (5,612) $ (2,412)
=============== ================ ===============
F-26
Significant components of the Company's deferred tax assets and
liabilities at March 31, 2002 and 2001 are as follows (in
thousands):
MARCH 31,
--------------------------------
2002 2001
-------------- --------------
Current deferred tax assets/(liabilities):
State taxes $ - $ 1
Accrued expenses 1,107 728
Related party interest 852 511
Prepaid services 284 -
Warrants for services 344 -
Allowance for bad debts 191 99
-------------- --------------
Net current deferred tax assets 2,778 1,339
-------------- --------------
Non-current deferred tax assets/(liabilities):
Research and expenditure credits - 1,656
Net operating loss 11,040 3,994
Fixed assets - 117
Other credits - 123
Deferred rent 82 82
Accrued expenses 84 3,567
-------------- --------------
Total non-current deferred tax assets 11,206 9,539
Intangible assets (9,908) (5,678)
Accumulated capitalized research and development costs (749) (749)
Other (17) (227)
-------------- --------------
Total non-current deferred tax liability (10,674) (6,654)
-------------- --------------
Net non-current deferred tax asset/(liability) 3,310 2,885
-------------- --------------
Valuation allowance (3,310) (2,885)
-------------- --------------
Net deferred tax liability $ - $ -
============== ==============
The difference between the actual provision (benefit) and the amount
computed at the statutory United States federal income tax rate of 34%
for the fiscal years ended March 31, 2002, 2001 and 2000 is
attributable to the following:
YEAR YEAR YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2000
--------------- ---------------- ---------------
Provision (benefit) computed at statutory rate (34.0)% (34.0)% (34.0)%
Nondeductible goodwill 5.1 4.8 12.8
Change in valuation allowance 20.4 9.1
Foreign income taxed at different rates 9.7 5.0 (4.7)
Tax credits (2.9)
State income tax, net of federal tax benefit (0.7) (1.4) (4.3)
Other 2.4 0.3 (7.1)
--------------- ---------------- ----------------
Total provision (benefit) for income taxes (-)% (16.2)% (37.3)%
=============== ================ ================
F-27
At March 31, 2002, the Company had Federal and California tax net
operating loss carryforwards of approximately $29.4 million and $15.2
million, respectively. The Federal and California tax net operating
loss carryforwards will begin expiring after 2008 and 2002,
respectively.
The Company also has Federal and California research and development
tax credit carryforwards of approximately $960,000 and $696,000,
respectively. The Federal credits will begin expiring after 2008. The
California credits may be carried forward indefinitely.
15. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share for the fiscal years ended March 31, 2002,
2001 and 2000, are as follows (in thousands, except share amounts and
per share data):
FISCAL YEAR ENDED MARCH 31, 2002
---------------------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- -----------
Basic and diluted EPS:
Loss available to common stockholders $ (14,658) 35,697,999 $ (0.41)
=========== =========== ===========
FISCAL YEAR ENDED MARCH 31, 2001
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- -----------
Basic and diluted EPS:
Loss available to common stockholders $ (28,945) 34,761,386 $ (0.83)
=========== =========== ===========
FISCAL YEAR ENDED MARCH 31, 2000
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- -----------
Basic and Diluted EPS:
Loss available to common stockholders $ (4,054) 32,458,902 $ (0.12)
=========== =========== ===========
The following potential common shares have been excluded from the
computation of diluted net loss per share for the periods presented
because the effect would have been anti-dilutive:
For the years ended March 31,
2002 2001 2000
---- ---- ----
Options outstanding under the Company's
stock option plans 4,485,889 3,961,034 1,790,260
Options granted outside the Company's
stock option plans 1,046,812 1,366,812 2,156,212
Warrants issued in conjunction with private placements 2,944,499 1,602,590 25,000
Warrants issued for services rendered 1,095,669 12,336
Convertible notes due to stockholders 1,037,037
Series A Convertible Preferred Stock 17,625,000
F-28
16. RELATED PARTIES
Included in other receivables at March 31, 2002 and 2001 are amounts
due from officers and employees of the Company in the amount of $31,000
and $65,000, respectively.
The office space for the Company's Sydney office was leased from a
former officer of the Company. During the year ended March 31, 2000,
the Company paid $163,000 in rent to this related party. The former
officer was terminated in fiscal year ended March 31, 2001.
The Company began occupying its current principal executive offices in
July 2001. At that time, the premises were owned by an affiliate of the
Company's then Chief Executive Officer. Monthly rent for these premises
was set at $13,783. In April, 2002, the premises were sold to an entity
unrelated to the former Chief Executive Officer. As of the date of this
report, the Company is negotiating the terms of a written lease with
the new owner.
In November 2000, the Company borrowed $600,000 from a wholly-owned
subsidiary of Softline to help meet operating expenses. This loan
called for interest at 10% per annum, and was discharged in full in
February 2001. Interest expense under this loan was $3,000 for the year
ended March 31, 2001. In order to discharge the remaining balance of
that loan while meeting other critical operational expenses, the
Company borrowed $400,000 from Barry M. Schechter, the Company's
Chairman. The Company borrowed an additional $164,000 from Mr.
Schechter in March 2001, which funds were needed to meet operational
requirements of our Australian subsidiary. The advances from Mr.
Schechter bore interest at prime rate and were due on demand, subject
to a limit on demand rights of $50,000 per payment. Interest expense
under the loans from Mr. Schechter was $0 and $7,000 for the fiscal
year ended March 31, 2002 and 2001, respectively. The loans were paid
in full in June 2001.
Included in demand loans due to stockholders totaling $618,000 and
$1.3 million as of March 31, 2002 and 2001, respectively, was $122,000
and $552,000, respectively, owed to a stockholder who together with
Barry M. Schechter and an irrevocable trust forms a beneficial
ownership group. The original loan amounts totaling $2.3 million ($1.5
million of which was from the stockholder included in the group
described above) were borrowed in June 1999 to fund the acquisition of
Island Pacific Systems Corporation on April 1, 1999. Interest is
calculated monthly at the current prime rate with no stated maturity
date. Interest expense under these loans for the years ended March 31,
2002, 2001 and 2000 was $26,000, $74,000 and $80,000, respectively.
The Company retains an entity affiliated with a director of the board
to provide financial advisory services. During the years ended March
31, 2002, 2001 and 2000, the expenses for these services were $42,000,
$112,000 and $36,000, respectively. The Company also incurred $19,000
and $25,000 in expenses to the same director for accounting services
during the fiscal years ended March 31, 2002 and 2001, respectively.
The Company borrowed $50,000 and $125,000 from another entity
affiliated with this director in May 2001 and December 2001,
respectively, to meet payroll expenses. The Company also borrowed
$70,000 from this entity subsequent to March 31, 2002 for the same
purpose. These amounts were repaid together with interest at the
then-effective prime rate, promptly as revenues were received, and are
paid in full as of the date of this report.
Effective October 1, 1999, the Company sold its Triple-S Computers
(Pty) Limited subsidiary ("Triple-S") to Softline. Triple-S developed
and installed retail point of sale systems throughout Southern Africa.
Softline transferred 78,241 shares of the Company's common stock valued
at the October 1, 1999 closing price of $8.50 per share as
consideration for the acquisition. The transfer of Triple-S was
recorded at the Company's historical book basis and was not material to
the operations of the Company.
17. BUSINESS SEGMENTS AND GEOGRAPHIC DATA
The Company classifies its operations into two lines of business,
retail solutions and training products. As revenues, reported
profit/(loss) and assets related to the Company's training products
subsidiary are below the threshold established for segment reporting,
the Company considers its business to consist of one reportable
operating segment.
F-29
The Company currently operates in the United States and the United
Kingdom. In February 2002, the Australian subsidiary ceased operations
after National Australian Bank, the subsidiary's secured lender, placed
it in receivership (see Note 3). In the fiscal year ended March 31,
2000, the Company also had limited operations in South Africa. The
following is a summary of local operations by geographic area (in
thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2002 2001 2000
--------------- ---------------- ---------------
Net sales:
United States $ 24,559 $ 25,457 $ 22,820
Australia (discontinued
operations) 2,363 4,959 8,372
South Africa (discontinued
operations 1,090
United Kingdom 2,550 2,256 3,832
--------------- ---------------- ---------------
Total net sales $ 29,472 $ 32,672 $ 36,114
=============== ================ ===============
Long-lived assets:
United States $ 35,280 $ 48,270 $ 60,909
Australia (discontinued
operations) 1,370 11,471
South Africa - -
United Kingdom 22 59 75
--------------- ---------------- ---------------
Total long-lived assets $ 35,302 $ 49,699 $ 72,455
=============== ================ ===============
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
MARCH 31, 2002 JUNE 30 SEPT 30 DEC 31 MAR 31 TOTAL
------------------------------------------------------------------------------------------------------------------
NET SALES $ 7,851 $ 8,419 $ 6,317 $ 6,885 $ 29,472
GROSS PROFIT 4,376 5,195 3,795 4,918 18,284
NET LOSS (3,514) (3,588) (2,970) (4,586) (14,658)
DILUTED LOSS PER SHARE $ (0.09) $ (0.09) $ (0.08) $ (0.16) $ (0.41)
MARCH 31, 2001 JUNE 30 SEPT 30 DEC 31 MAR 31 TOTAL
------------------------------------------------------------------------------------------------------------------
NET SALES $ 11,000 $ 7,993 $ 7,737 $ 5,942 $ 32,672
GROSS PROFIT 8,314 4,004 3,861 4,824 21,003
NET INCOME (LOSS) 546 (4,741) (5,997) (18,753) (28,945)
DILUTED (LOSS) PER SHARE $ 0.02 $ (0.14) $ (0.17) $ (0.54) $ (0.83)
The summation of quarterly net income (loss) per share may not equate
to the year-end calculation as quarterly calculations are performed on
a discrete basis.
F-30
APPENDIX I
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "AGREEMENT") is dated as of
March 31, 2003, among SVI Solutions, Inc., a Delaware corporation (the
"COMPANY"), and the purchasers identified on the signature pages hereto (each,
including its successors and assigns, a "PURCHASER" and collectively the
"PURCHASERS").
WHEREAS, subject to the terms and conditions set forth in this
Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "SECURITIES Act") and Rule 506 promulgated thereunder, the Company desires
to issue and sell to the Purchasers, and each Purchaser, severally and not
jointly, desires to purchase from the Company, securities of the Company as more
fully described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and the Purchasers agree
as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Debenture (as defined herein), and (b) the
following terms have the meanings indicated in this Section 1.1:
"ACTUAL MINIMUM" means, as of any date, the maximum aggregate
number of shares of Common Stock then issued or potentially issuable in
the future pursuant to the Transaction Documents, including any
Underlying Shares issuable upon exercise or conversion in full of all
Warrants and Debentures, ignoring any conversion or exercise limits set
forth therein, and assuming (i) any previously unconverted Debentures
from the First Closing are held until the 26th month anniversary of
their date of issuance and (ii) assuming the Second Closing occurs, any
previously unconverted Debentures from the Second Closing are held
until the 30th month anniversary the First Closing, or, if earlier,
until maturity, and all interest thereon is paid in shares of Common
Stock.
"AFFILIATE" means any Person that, directly or indirectly
through one or more intermediaries, controls or is controlled by or is
under common control with a Person, as such terms are used in and
construed under Rule 144 under the Securities Act.
"CAPITAL SHARES" means the Common Stock and any shares of any
other class of common stock whether now or hereafter authorized, having
the right to participate in the distribution of earnings and assets of
the Company.
"CAPITAL SHARES EQUIVALENTS" means any securities, rights or
obligations that are convertible into or exchangeable for or give any
right to subscribe for or purchase, directly or indirectly, any Capital
Shares of the Company or any warrants, options or other rights to
subscribe for or purchase, directly or indirectly, Capital Shares or
any such convertible or exchangeable securities.
"CLOSING" means the closing of the purchase and sale of the
Securities pursuant to SECTION 2.1.
"CLOSING PRICE" means the average of the 10 VWAPs immediately
prior to the date in question.
"CLOSINGS" means, collectively, the First Closing and the
Second Closing.
"CLOSING DATES" means the dates of the First Closing and
Second Closing.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock of the Company, par
value $0.0001 per share, and any securities into which such common
stock shall hereinafter have been reclassified into.
"COMPANY COUNSEL" means Solomon, Ward, Seidenwurm & Smith,
LLP.
"DEBENTURE" means, the 9% Convertible Debenture due, with
respect to each Debenture issued in the First Closing, 26 months from
its date of issuance, and with respect to each Debenture issued in the
Second Closing, 30 months from the date of the First Closing, unless
otherwise set forth therein, issued by the Company to the Purchasers
hereunder, in the form of EXHIBIT A.
"DISCLOSURE SCHEDULES" shall have the meaning ascribed to such
term in Section 3.1 hereof.
"EFFECTIVE DATE" means the date a Registration Statement is
first declared effective by the Commission.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"FIRST CLOSING" means the closing of the sale of the
Securities pursuant to Section 2.1(a) hereof.
"FIRST CLOSING DATE" means the date of the First Closing,
which shall occur concurrently with the retirement by the Company of
all its outstanding obligations to Union Bank of California, N.A. or
such other time and date as may be agreed to in writing by the Company
and each Purchaser.
"FW" means Feldman Weinstein LLP with offices at 420 Lexington
Avenue, Suite 2620, New York, New York 10170-0002.
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"GAAP" shall have the meaning ascribed to such term in Section
3.1(h) hereof.
"LIENS" shall have the meaning ascribed to such term in
Section 3.1(a) hereof.
"LOSSES" means any and all losses, claims, damages,
liabilities, settlement costs and expenses, including without
limitation costs of preparation and reasonable attorneys' fees.
"MATERIAL ADVERSE EFFECT" shall have the meaning assigned to
such term in Section 3.1(b) hereof.
"MILESTONE DATE" means the first Trading Day immediately
following a period of 15 consecutive Trading Days during which the VWAP
for each such Trading Date is at least $1.75 (as appropriately adjusted
for any stock splits, stock dividends, stock combinations and other
similar transactions of the Common Stock that occur after the date of
this Agreement).
"PERSON" means an individual or corporation, partnership,
trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an
agency or subdivision thereof) or other entity of any kind.
"PRINCIPAL MARKET" means initially the American Stock Exchange
and shall also include the New York Stock Exchange, the NASDAQ
Small-Cap Market or the NASDAQ National Market, whichever is at the
time the principal trading exchange or market for the Common Stock,
based upon share volume.
"PROCEEDING" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated the Closing Date, among the Company and the
Purchasers, in the form of EXHIBIT B.
"REQUIRED APPROVALS" shall have the meaning ascribed to such
term in Section 3.1(e) hereof.
"REQUIRED MINIMUM" means, as of any date, the maximum
aggregate number of shares of Common Stock then issued or potentially
issuable in the future pursuant to the Transaction Documents, including
any Underlying Shares issuable upon exercise or conversion in full of
all Warrants and Debentures, ignoring any conversion or exercise limits
set forth therein, and assuming that (a) (i) any previously unconverted
Debenture from the First Closing is held until the 26th month
anniversary of its date of issuance and (ii) any previously unconverted
Debenture from the Second Closing held until the 30th month anniversary
of the First Closing, or, if earlier, until maturity, and all interest
is paid in shares of Common Stock and (b) the VWAP at all times on and
after the date of determination equals 50% of the actual VWAP on the
Trading Day immediately prior to the date of determination.
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"RULE 144" means Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time
to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same effect as such Rule.
"SEC REPORTS" shall have the meaning ascribed to such term in
Section 3.1(h) hereof.
"SECOND CLOSING" shall mean the closing of the sale of the
Securities pursuant to Section 2.1(b) hereof.
"SECOND CLOSING DATE" shall mean the date of the Second
Closing, which shall occur within 5 Trading Days of the Milestone Date.
"SECURITIES" means the Debentures, Warrants and the Underlying
Shares.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SET PRICE" shall have the meaning ascribed to such term in
the Debentures.
"SHAREHOLDER APPROVAL" shall have the meaning ascribed to such
term in Section 4(a)(ii)(B) of the Debenture.
"SUBSCRIPTION AMOUNT" means, (i) as to each Purchaser and the
First Closing, the amount set forth below such Purchaser's signature
block on the signature pages hereto and next to the heading "First
Closing Subscription" in United States dollars and in immediately
available funds, and (ii) as to each Purchaser and the Second Closing,
the amount set forth below such Purchaser's signature block on the
signature pages hereto and next to the heading "Second Closing
Subscription" in United States dollars and in immediately available
funds.
"SUBSIDIARY" means any subsidiary of the Company that is
required to be listed in SCHEDULE 3.1(A).
"TRADING DAY" means any day during which the Principal Market
shall be open for business.
"TRANSACTION DOCUMENTS" means this Agreement, the Debentures,
the Warrants, the Registration Rights Agreement and any other documents
or agreements executed in connection with the transactions contemplated
hereunder.
"UNDERLYING SHARES" means the shares of Common Stock issuable
upon conversion of the Debentures and upon exercise of the Warrants and
issued and issuable in lieu of the cash payment of interest on the
Debentures.
"UNDERLYING SHARES REGISTRATION STATEMENT" OR "REGISTRATION
STATEMENT" means a registration statement meeting the requirements set
-4-
forth in the Registration Rights Agreement and covering the resale of
the Underlying Shares by each Purchaser as provided for in the
Registration Rights Agreement.
"VWAP" means, for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Principal Market, the daily volume weighted
average price of the Common Stock for such date (or the nearest
preceding date) on the Principal Market on which the Common Stock is
then listed or quoted as reported by Bloomberg Financial L.P. (based on
a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time);
(b) if the Common Stock is not then listed or quoted on a Principal
Market and if prices for the Common Stock are then quoted on the OTC
Bulletin Board, the volume weighted average price of the Common Stock
for such date (or the nearest preceding date) on the OTC Bulletin
Board; (c) if the Common Stock is not then listed or quoted on the OTC
Bulletin Board and if prices for the Common Stock are then reported in
the "Pink Sheets" published by the National Quotation Bureau
Incorporated (or a similar organization or agency succeeding to its
functions of reporting prices), the average of the most recent bid and
ask price per share of the Common Stock so reported; or (d) in all
other cases, the fair market value of a share of Common Stock as
determined by a nationally recognized-independent appraiser selected in
good faith by Purchasers holding a majority of the principal amount of
Debentures then outstanding.
"WARRANTS" means collectively the Common Stock purchase
warrants, in the form of EXHIBIT C delivered to the Purchasers at the
Closing in accordance with Section 2.2 hereof.
ARTICLE II
PURCHASE AND SALE
2.1 Upon the terms and subject to the conditions set forth herein, the
Company agrees to sell, and each Purchaser agrees to purchase, severally and not
jointly, the Debentures as set forth next to the respective Purchaser's name on
the signature pages hereto for an aggregate purchase price of up to
$5,500,000.00 ("PURCHASE PRICE") in two Closings as follows:
(a) FIRST CLOSING. On the First Closing Date, each Purchaser
shall purchase, severally and not jointly, the principal amount of
Debentures equal to each Purchaser's Subscription Amount, amounting in
the aggregate to $3,500,000 principal amount of Debentures and the
Company shall sell each such principal amount of Debentures to each
such Purchaser.
(b) SECOND CLOSING. On the Second Closing Date, each Purchaser
shall purchase, severally and not jointly, the principal amount of
Debentures equal to each Purchaser's Subscription Amount as to the
Second Closing, amounting in the aggregate to $2,000,000 principal
amount of Debentures and the Company shall sell each such principal
amount of Debentures to each such Purchaser.
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(c) EACH CLOSING. Each Closing shall take place at the offices
of FW or at such other location as the parties may agree.
2.2 CLOSING CONDITIONS. Upon satisfaction or waiver by the party sought
to be benefited thereby of the conditions set forth in this Section 2.2, each
Closing shall occur.
(a) At or prior to each Closing (unless otherwise specified
below), the Company shall deliver or cause to be delivered to each
Purchaser the following:
(i) a Debenture with a principal amount equal to such
Purchaser's Subscription Amount as to such Closing, registered
in the name of such Purchaser;
(ii) a Warrant to purchase up to a number of shares
of Common Stock equal to 40% of such Purchaser's Subscription
Amount divided by the Closing Price as to the Debentures
purchased by such Purchaser at such Closing with a term of 5
years and an exercise price per Warrant Share equal to 115% of
the Closing Price on such Closing Date, subject to adjustment
therein;
(iii) as to the First Closing only, a legal opinion
of Company Counsel, in the form of EXHIBIT D attached hereto,
addressed to the Purchasers;
(iv) as to the First Closing only, written consents
of a majority of the voting shareholders of the Company
approving Shareholder Approval;
(v) as to the First Closing only, the Registration
Rights Agreement duly executed by the Company;
(vi) as to the First Closing only, instructions to
the Purchasers to wire transfer $2,800,000 of the proceeds
raised hereunder to Union Bank of California, N.A. in
satisfaction of the Company's obligations under that certain
Discounted Loan Payoff Agreement, dated March 31, 2003, by and
among Union Bank of California, SVI Solutions, Inc., SVI
Retail, Inc., Sabica Ventures, Inc. and SVI Training Products,
Inc. (the "PAYOFF AGREEMENT") and copies of the Payoff
Agreement duly executed by all the parties thereto; and
(vii) as to the First Closing only, lock-up
agreements from each of Softline Limited and Steven Beck &
Associates in form and substance reasonably acceptable to each
Purchaser.
(b) At or prior to each Closing, each Purchaser shall deliver
or cause to be delivered to the Company the following:
(i) such Purchaser's Subscription Amount as to such
Closing by wire transfer to the instructions set forth on
ANNEX 1 attached hereto;
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(ii) as to the First Closing only, the Registration
Rights Agreement duly executed by such Purchaser.
(c) All representations and warranties of the other party
contained herein shall remain true and correct as of such Closing Date
and all covenants of the other party shall have been performed;
(d) There shall have been no Material Adverse Effect (as
defined in Section 3.1(b) hereof) with respect to the Company since the
date hereof;
(e) As to the Second Closing only:
(i) the Milestone Date shall have occurred within 365
days of the First Closing Date and the Company shall have
provided any representations and documents reasonably required
by any Purchaser evidencing that the Milestone Date has
occurred;
(ii) the Second Closing shall have occurred with 5
Trading Days of the Milestone Date;
(iii) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for
an issuance of all of the Underlying Shares relating to the
Debentures and Warrants issued at the First Closing and Second
Closing;
(iv) the Company shall have obtained Shareholder
Approval;
(v) no Event of Default nor any event that with the
passage of time would constitute an Event of Default shall
have occurred and is continuing with respect to the
outstanding Debentures;
(vi) the Registration Statement relating to the
Securities issued at the First Closing shall have been
declared effective and shall be effective on the Second
Closing Date; and
(vii) no public announcement of a pending or proposed
Change of Control Transaction or Fundamental Transaction (as
such terms are defined in the Debenture) has occurred that has
not been consummated.
(f) From the date hereof to each such Closing Date, trading in
the Common Stock shall not have been suspended by the Commission
(except for any suspension of trading of limited duration agreed to by
the Company, which suspension shall be terminated prior to such
Closing), and, at any time prior to such Closing Date, trading in
securities generally as reported by Bloomberg Financial Markets shall
not have been suspended or limited, or minimum prices shall not have
been established on securities whose trades are reported by such
service, or on the Principal Market, nor shall a banking moratorium
have been declared either by the United States or New York State
authorities.
-7-
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth
in the disclosure schedules delivered to the Purchasers concurrently herewith
(the "DISCLOSURE SCHEDULES") which Disclosure Schedules shall be deemed a part
hereof, or, other than with respect to Sections 3.1(g), 3.1(u), 3.1(v), 3.1(w),
3.1(z) and 3.1(dd), except as set forth in the SEC Reports, the Company hereby
makes the representations and warranties set forth below to the Purchasers.
(a) SUBSIDIARIES. The Company has no direct or indirect
subsidiaries. The Company owns, directly or indirectly, all of the
capital stock or other equity interests of each Subsidiary free and
clear of any lien, charge, security interest, encumbrance, right of
first refusal or other restriction (collectively, "LIENS"), and all the
issued and outstanding shares of capital stock of each Subsidiary are
validly issued and are fully paid, non-assessable and free of
preemptive and similar rights. If the Company has no subsidiaries, then
references in the Transaction Documents to the Subsidiaries will be
disregarded.
(b) ORGANIZATION AND QUALIFICATION. Each of the Company and
the Subsidiaries is an entity duly incorporated or otherwise organized,
validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization (as applicable), with
the requisite power and authority to own and use its properties and
assets and to carry on its business as currently conducted. Neither the
Company nor any Subsidiary is in violation of any of the provisions of
its respective certificate or articles of incorporation, bylaws or
other organizational or charter documents. Each of the Company and the
Subsidiaries is duly qualified to do business and is in good standing
as a foreign corporation or other entity in each jurisdiction in which
the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or
in good standing, as the case may be, could not, individually or in the
aggregate: (i) adversely affect the legality, validity or
enforceability of any Transaction Document, (ii) have or result in or
be reasonably likely to have or result in a material adverse effect on
the results of operations, assets, prospects, business or condition
(financial or otherwise) of the Company and the Subsidiaries, taken as
a whole, or (iii) adversely impair the Company's ability to perform
fully on a timely basis its obligations under any of the Transaction
Documents (any of (i), (ii) or (iii), a "MATERIAL ADVERSE EFFECT").
(c) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by each of the Transaction Documents and
otherwise to carry out its obligations hereunder or thereunder. The
execution and delivery of each of the Transaction Documents by the
Company and the consummation by it of the transactions contemplated
hereby or thereby have been duly authorized by all necessary action on
the part of the Company and no further consent or action is required by
the Company other than Required Approvals. Each of the Transaction
Documents has been (or upon delivery will be) duly executed by the
Company and, when delivered in accordance with the terms hereof, will
constitute the valid and binding obligation of the Company enforceable
-8-
against the Company in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies
generally and general principles of equity. Neither the Company nor any
Subsidiary is in violation of any of the provisions of its respective
certificate or articles of incorporation, by-laws or other
organizational or charter documents.
(d) NO CONFLICTS. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated thereby do not and will not:
(i) conflict with or violate any provision of the Company's or any
Subsidiary's certificate or articles of incorporation, bylaws or other
organizational or charter documents, or (ii) subject to obtaining the
Required Approvals, conflict with, or constitute a default (or an event
that with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or
both) of, any agreement, credit facility, debt or other instrument
(evidencing a Company or Subsidiary debt or otherwise) or other
understanding to which the Company or any Subsidiary is a party or by
which any property or asset of the Company or any Subsidiary is bound
or affected, or (iii) result, in a violation of any law, rule,
regulation, order, judgment, injunction, decree or other restriction of
any court or governmental authority to which the Company or a
Subsidiary is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company or a
Subsidiary is bound or affected; except in the case of each of clauses
(ii) and (iii), such as could not, individually or in the aggregate,
have or result in a Material Adverse Effect.
(e) FILINGS, CONSENTS AND APPROVALS. Neither the Company nor
any Subsidiary is required to obtain any consent, waiver, authorization
or order of, give any notice to, or make any filing or registration
with, any court or other federal, state, local or other governmental
authority or other Person in connection with the execution, delivery
and performance by the Company of the Transaction Documents, other than
(i) the filings required under SECTION 4.8, (ii) the filing with the
Commission of the Underlying Shares Registration Statement, (iii) the
notice and/or application(s) to each applicable Principal Market for
the issuance and sale of the Debentures and Warrants and the listing of
the Underlying Shares for trading thereon in the time and manner
required thereby, and (iv) the filing of Form D with the Commission and
applicable Blue Sky filings (collectively, the "REQUIRED APPROVALS").
(f) ISSUANCE OF THE SECURITIES. The Securities are duly
authorized and, when issued and paid for in accordance with the
applicable Transaction Documents, will be duly and validly issued,
fully paid and non-assessable, free and clear of all Liens. The Company
has reserved from its duly authorized capital stock a number of shares
of Common Stock for issuance of the Underlying Shares at least equal to
the Required Minimum on the date hereof. The Company has not, and to
the knowledge of the Company, no Affiliate of the Company has sold,
-9-
offered for sale or solicited offers to buy or otherwise negotiate in
respect of any security (as defined in Section 2 of the Securities Act)
that would be integrated with the offer or sale of the Securities in a
manner that would require the registration under the Securities Act of
the sale of the Securities to the Purchasers, or that would be
integrated with the offer or sale of the Securities for purposes of the
rules and regulations of any Principal Market.
(g) CAPITALIZATION. The number of shares and type of all
authorized, issued and outstanding capital stock of the Company is set
forth in the Disclosure Schedules attached hereto. No securities of the
Company are entitled to preemptive or similar rights, and no Person has
any right of first refusal, preemptive right, right of participation,
or any similar right to participate in the transactions contemplated by
the Transaction Documents. Except as a result of the purchase and sale
of the Securities, there are no outstanding options, warrants, script
rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities, rights or obligations
convertible into or exchangeable for, or giving any Person any right to
subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common
Stock, or securities or rights convertible or exchangeable into shares
of Common Stock. The issuance and sale of the Securities will not
obligate the Company to issue shares of Common Stock or other
securities to any Person (other than the Purchasers) and will not
result in a right of any holder of Company securities to adjust the
exercise, conversion, exchange or reset price under such securities.
(h) SEC REPORTS; FINANCIAL STATEMENTS. The Company has filed
all reports required to be filed by it under the Securities Act and the
Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for
the two years preceding the date hereof (or such shorter period as the
Company was required by law to file such material) (the foregoing
materials being collectively referred to herein as the "SEC REPORTS"
and, together with the Schedules to this Agreement, the "DISCLOSURE
MATERIALS") on a timely basis or has received a valid extension of such
time of filing and has filed any such SEC Reports prior to the
expiration of any such extension. The Company has identified and made
available to the Purchasers a copy of all SEC Reports filed within the
10 days preceding the date hereof. As of their respective dates, the
SEC Reports complied in all material respects with the requirements of
the Securities Act and the Exchange Act and the rules and regulations
of the Commission promulgated thereunder, and none of the SEC Reports,
when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Reports comply in all
material respects with applicable accounting requirements and the rules
and regulations of the Commission with respect thereto as in effect at
the time of filing. Such financial statements have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved ("GAAP"), except as may be
otherwise specified in such financial statements or the notes thereto,
and fairly present in all material respects the financial position of
the Company and its consolidated subsidiaries as of and for the dates
thereof and the results of operations and cash flows for the periods
then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments.
-10-
(i) MATERIAL CHANGES. Since the date of the latest audited
financial statements included within the SEC Reports, except as
specifically disclosed in the SEC Reports: (i) there has been no event,
occurrence or development that has had or that could result in a
Material Adverse Effect, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and
accrued expenses incurred in the ordinary course of business consistent
with past practice and (B) liabilities not required to be reflected in
the Company's financial statements pursuant to GAAP or required to be
disclosed in filings made with the Commission, (iii) the Company has
not altered its method of accounting or the identity of its auditors,
(iv) the Company has not declared or made any dividend or distribution
of cash or other property to its stockholders or purchased, redeemed or
made any agreements to purchase or redeem any shares of its capital
stock, and (v) the Company has not issued any equity securities to any
officer, director or Affiliate, except pursuant to existing Company
stock option or similar plans.
(j) LITIGATION. There is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of
the Company, threatened against or affecting the Company, any
Subsidiary or any of their respective properties before or by any
court, arbitrator, governmental or administrative agency or regulatory
authority (federal, state, county, local or foreign) (collectively, an
"ACTION") which: (i) adversely affects or challenges the legality,
validity or enforceability of any of the Transaction Documents or the
Securities or (ii) could, if there were an unfavorable decision,
individually or in the aggregate, have or reasonably be expected to
result in a Material Adverse Effect. Neither the Company nor any
Subsidiary, nor any director or officer thereof, is or has been the
subject of any Action involving a claim of violation of or liability
under federal or state securities laws or a claim of breach of
fiduciary duty. The Company does not have pending before the Commission
any request for confidential treatment of information. There has not
been, and to the knowledge of the Company, there is not pending or
contemplated, any investigation by the Commission involving the Company
or any current or former director or officer of the Company. The
Commission has not issued any stop order or other order suspending the
effectiveness of any registration statement filed by the Company or any
Subsidiary under the Exchange Act or the Securities Act.
(k) COMPLIANCE. Neither the Company nor any Subsidiary: (i) is
in default under or in violation of (and no event has occurred that has
not been waived that, with notice or lapse of time or both, would
result in a default by the Company or any Subsidiary under), nor has
the Company or any Subsidiary received notice of a claim that it is in
default under or that it is in violation of, any indenture, loan or
credit agreement or any other agreement or instrument to which it is a
party or by which it or any of its properties is bound (whether or not
such default or violation has been waived), (ii) is in violation of any
order of any court, arbitrator or governmental body, or (iii) is or has
been in violation of any statute, rule or regulation of any
-11-
governmental authority, except in each case as could not, individually
or in the aggregate, have or result in a Material Adverse Effect.
(l) LABOR RELATIONS. No material labor dispute exists or, to
the knowledge of the Company, is imminent with respect to any of the
employees of the Company.
(m) REGULATORY PERMITS. The Company and the Subsidiaries
possess all certificates, authorizations and permits issued by the
appropriate federal, state, local or foreign regulatory authorities
necessary to conduct their respective businesses as described in the
SEC Reports, except where the failure to possess such permits could
not, individually or in the aggregate, have or reasonably be expected
to result in a Material Adverse Effect ("MATERIAL PERMITS"), and
neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material
Permit.
(n) TITLE TO ASSETS. The Company and the Subsidiaries have
good and marketable title in fee simple to all real property owned by
them that is material to the business of the Company and the
Subsidiaries and good and marketable title in all personal property
owned by them that is material to the business of the Company and the
Subsidiaries, in each case free and clear of all Liens, except for
Liens as do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such
property by the Company and the Subsidiaries. And to the Company's
knowledge, any real property and facilities held under lease by the
Company and the Subsidiaries are held under valid, subsisting and
enforceable leases of which the Company and the Subsidiaries are in
compliance.
(o) PATENTS AND TRADEMARKS. The Company and the Subsidiaries
have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names,
copyrights, licenses and other similar rights necessary or material for
use in connection with their respective businesses as described in the
SEC Reports and which the failure to so have could have a Material
Adverse Effect (collectively, the "INTELLECTUAL PROPERTY RIGHTS").
Neither the Company nor any Subsidiary has received a written notice
that the Intellectual Property Rights used by the Company or any
Subsidiary violates or infringes upon the rights of any Person. To the
knowledge of the Company, all such Intellectual Property Rights are
enforceable and there is no existing infringement by another Person of
any of the Intellectual Property Rights.
(p) INSURANCE. The Company and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are reasonably prudent and customary in
the businesses in which the Company and the Subsidiaries are engaged. A
list of the Company's insurance contracts and policies are set forth on
the Disclosure Schedules. To the best of Company's knowledge, such
insurance contracts and policies are accurate and complete. Neither the
Company nor any Subsidiary has any reason to believe it will not be
able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business without a significant increase in
cost.
-12-
(q) TRANSACTIONS WITH AFFILIATES AND EMPLOYEES. Except as set
forth in SEC Reports, none of the officers or directors of the Company
and, to the knowledge of the Company, none of the employees of the
Company is presently a party to any transaction with the Company or any
Subsidiary (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental
of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the
knowledge of the Company, any entity in which any officer, director, or
any such employee has a substantial interest or is an officer,
director, trustee or partner.
(r) INTERNAL ACCOUNTING CONTROLS. The Company and the
Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only
in accordance with management's general or specific authorization, and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences. The Company has established disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the Company and designed such disclosures controls and
procedures to ensure that material information relating to the Company,
including its subsidiaries, is made known to the certifying officers by
others within those entities, particularly during the period in which
the Company's Form 10-K or 10-Q, as the case may be, is being prepared.
The Company's certifying officers have evaluated the effectiveness of
the Company's controls and procedures as of a date within 90 days prior
to the filing date of the Form 10-Q for the quarter ended September 30,
2002 (such date, the "EVALUATION DATE"). The Company presented in the
Form 10-Q for the quarter ended September 30, 2002 the conclusions of
the certifying officers about the effectiveness of the disclosure
controls and procedures based on their evaluations as of the Evaluation
Date. Since the Evaluation Date, there have been no significant changes
in the Company's internal controls (as such term is defined in Item
307(b) of Regulation S-K under the Exchange Act) or, the Company's
knowledge, in other factors that could significantly affect the
Company's internal controls.
(s) SOLVENCY/INDEBTEDNESS. Based on the financial condition of
the Company as of each Closing Date: (i) the fair saleable value of the
Company's assets exceeds the amount that will be required to be paid on
or in respect of the Company's existing debts and other liabilities
(including known contingent liabilities) as they mature; (ii) the
Company's assets do not constitute unreasonably small capital to carry
on its business for the current fiscal year as now conducted and as
proposed to be conducted including its capital needs taking into
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account the particular capital requirements of the business conducted
by the Company, and projected capital requirements and capital
availability thereof; and (iii) the current cash flow of the Company,
together with the proceeds the Company would receive, were it to
liquidate all of its assets, after taking into account all anticipated
uses of the cash, would be sufficient to pay all amounts on or in
respect of its debt when such amounts are required to be paid. The
Company does not intend to incur debts beyond its ability to pay such
debts as they mature (taking into account the timing and amounts of
cash to be payable on or in respect of its debt). The Company has no
knowledge of any facts or circumstances which lead it to believe that
it will file for reorganization or liquidation under the bankruptcy or
reorganization laws of any jurisdiction within one year from the
Closing Date. The SEC Reports set forth as of the dates thereof all
outstanding secured and unsecured Indebtedness of the Company or any
Subsidiary, or for which the Company or any Subsidiary has commitments.
For the purposes of this Agreement, "INDEBTEDNESS" shall mean (a) any
liabilities for borrowed money or amounts owed in excess of $50,000
(other than trade accounts payable incurred in the ordinary course of
business), (b) all guaranties, endorsements and other contingent
obligations, whether or not the same are or should be reflected in the
Company's balance sheet or the notes thereto, except guaranties by
endorsement of negotiable instruments for deposit or collection in the
ordinary course of business, and (c) the present value of any lease
payments in excess of $50,000 due under leases required to be
capitalized in accordance with GAAP. Neither the Company nor any
Subsidiary is in default with respect to any Indebtedness.
(t) CERTAIN FEES. No brokerage or finder's fees or commissions
are or will be payable by the Company to any broker, financial advisor
or consultant, finder, placement agent, investment banker, bank or
other Person with respect to the transactions contemplated by this
Agreement other than Century Capital, and the Company has not taken any
action that would cause any Purchaser to be liable for any such fees or
commissions. The Company agrees that the Purchasers shall have no
obligation with respect to any fees or with respect to any claims made
by or on behalf of any Person for fees of the type contemplated by this
Section with the transactions contemplated by this Agreement.
(u) PRIVATE PLACEMENT. Assuming the accuracy of the
representations and warranties of the Purchasers set forth in Sections
3.2(b)-(f), the offer, issuance and sale of the Securities to the
Purchasers as contemplated hereby are exempt from the registration
requirements of the Securities Act. The issuance and sale of the
Securities hereunder does not contravene the rules and regulations of
the Principal Market and no shareholder approval is required for the
Company to fulfill its obligations under the Transaction Documents.
(v) LISTING AND MAINTENANCE REQUIREMENTS. The Company has not,
in the 12 months preceding the date hereof, received notice from any
Principal Market on which the Common Stock is or has been listed or
quoted to the effect that the Company is not in compliance with the
listing or maintenance requirements of such Principal Market. The
Company is, and has no reason to believe it will not in the foreseeable
future continue to be, in compliance with all such listing and
maintenance requirements.
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(w) REGISTRATION RIGHTS. The Company has not granted or agreed
to grant to any Person any rights (including "piggy-back" registration
rights) to have any securities of the Company registered with the
Commission or any other governmental authority that have not been
satisfied.
(x) APPLICATION OF TAKEOVER PROTECTIONS. The Company and its
Board of Directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Company's
Certificate of Incorporation (or similar charter documents) or the laws
of its state of incorporation that is or could become applicable to the
Purchasers as a result of the Purchasers and the Company fulfilling
their obligations or exercising their rights under the Transaction
Documents, including without limitation as a result of the Company's
issuance of the Securities and the Purchasers' ownership of the
Securities.
(y) SENIORITY. As of the Closing Date, no indebtedness of the
Company is senior to the Debentures in right of payment, whether with
respect to interest or upon liquidation or dissolution, or otherwise,
other than indebtedness secured by purchase money security interests
(which is senior only as to underlying assets covered thereby) and
capital lease obligations (which is senior only as to the property
covered thereby).
(z) DISCLOSURE. The Company confirms that neither it nor any
other Person acting on its behalf has provided any of the Purchasers or
their agents or counsel with any information that constitutes or might
constitute material, nonpublic information. The Company understands and
confirms that the Purchasers will rely on the foregoing representations
in effecting transactions in securities of the Company. All disclosure
provided to the Purchasers regarding the Company, its business and the
transactions contemplated hereby, including the Schedules to this
Agreement, furnished by or on behalf of the Company with respect to the
representations and warranties made herein are true and correct with
respect to such representations and warranties and do not contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The Company
acknowledges and agrees that no Purchaser makes or has made any
representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in Section
3.2 hereof.
(aa) TAX STATUS. The Company and each of its Subsidiaries has
made or filed all federal, state and foreign income and all other tax
returns, reports and declarations required by any jurisdiction to which
it is subject (unless and only to the extent that the Company and each
of its Subsidiaries has set aside on its books provisions reasonably
adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are
material in amount, shown or determined to be due on such returns,
reports and declarations, except those being contested in good faith
and has set aside on its books provisions reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which
such returns, reports or declarations apply. There are no unpaid taxes
in any material amount claimed to be due by the taxing authority of any
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jurisdiction, and the officers of the Company know of no basis for any
such claim. The Company has not executed a waiver with respect to the
statute of limitations relating to the assessment or collection of any
foreign, federal, statue or local tax. None of the Company's tax
returns is presently being audited by any taxing authority.
(bb) ACKNOWLEDGMENT REGARDING PURCHASERS' PURCHASE OF
SECURITIES. The Company acknowledges and agrees that the Purchasers are
acting solely in the capacity of arm's length purchasers with respect
to this Agreement and the transactions contemplated hereby. The Company
further acknowledges that no Purchaser is acting as a financial advisor
or fiduciary of the Company (or in any similar capacity) with respect
to this Agreement and the transactions contemplated hereby and any
statement made by any Purchaser or any of their respective
representatives or agents in connection with this Agreement and the
transactions contemplated hereby is not advice or a recommendation and
is merely incidental to the Purchasers' purchase of the Securities. The
Company further represents to each Purchaser that the Company's
decision to enter into this Agreement has been based solely on the
independent evaluation of the Company and its representatives.
(cc) NO GENERAL SOLICITATION OR ADVERTISING IN REGARD TO THIS
TRANSACTION. Neither the Company nor, to the knowledge of the Company,
any of its directors or officers (i) has conducted or will conduct any
general solicitation (as that term is used in Rule 502(c) of Regulation
D) or general advertising with respect to the sale of the Debentures or
the Warrants, or (ii) made any offers or sales of any security or
solicited any offers to buy any security under any circumstances that
would require registration of the Debentures, the Underlying Shares or
the Warrants under the Securities Act or made any "directed selling
efforts" as defined in Rule 902 of Regulation S.
(dd) NO DISAGREEMENTS WITH ACCOUNTANTS AND LAWYERS. There are
no disagreements of any kind presently existing, or reasonably
anticipated by the Company to arise, between the accountants and
lawyers formerly or presently employed by the Company and the Company
is current with respect to any fees owed to its accountants and
lawyers.
3.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants to the
Company as follows:
(a) ORGANIZATION; AUTHORITY. Such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite corporate or
partnership power and authority to enter into and to consummate the
transactions contemplated by the Transaction Documents and otherwise to
carry out its obligations thereunder. The purchase by such Purchaser of
the Securities hereunder has been duly authorized by all necessary
action on the part of such Purchaser. Each of this Agreement and the
Registration Rights Agreement have been duly executed by such
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Purchaser, and when delivered by such Purchaser in accordance with the
terms hereof, will constitute the valid and legally binding obligation
of such Purchaser, enforceable against it in accordance with its terms.
(b) INVESTMENT INTENT. Such Purchaser is acquiring the
Securities as principal for its own account for investment purposes
only and not with a view to or for distributing or reselling such
Securities or any part thereof, without prejudice, however, to such
Purchaser's right, subject to the provisions of this Agreement, at all
times to sell or otherwise dispose of all or any part of such
Securities pursuant to an effective registration statement under the
Securities Act or under an exemption from such registration and in
compliance with applicable federal and state securities laws. Nothing
contained herein shall be deemed a representation or warranty by such
Purchaser to hold Securities for any period of time. Such Purchaser is
acquiring the Securities hereunder in the ordinary course of its
business. Such Purchaser does not have any agreement or understanding,
directly or indirectly, with any Person to distribute any of the
Securities.
(c) PURCHASER STATUS. At the time such Purchaser was offered
the Securities, it was, and at the date hereof it is, and on each date
on which it exercises any Warrants or converts any Debentures it will
be, an "accredited investor" as defined in Rule 501(a) under the
Securities Act. Such Purchaser has not been formed solely for the
purpose of acquiring the Securities. Such Purchaser is not a registered
broker-dealer under Section 15 of the Exchange Act.
(d) EXPERIENCE OF SUCH PURCHASER. Such Purchaser, either alone
or together with its representatives, has such knowledge,
sophistication and experience in business and financial matters so as
to be capable of evaluating the merits and risks of the prospective
investment in the Securities, and has so evaluated the merits and risks
of such investment. Such Purchaser is able to bear the economic risk of
an investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.
(e) GENERAL SOLICITATION. Such Purchaser is not purchasing the
Securities as a result of any advertisement, article, notice or other
communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or
presented at any seminar or any other general solicitation or general
advertisement.
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES
4.1 TRANSFER RESTRICTIONS.
(a) The Securities may only be disposed of in compliance with
state and federal securities laws. In connection with any transfer of
Securities other than pursuant to an effective registration statement,
to the Company or to an Affiliate of a Purchaser, the Company may
require the transferor thereof to provide to the Company an opinion of
counsel selected by the transferor and reasonably acceptable to the
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Company, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer does not
require registration of such transferred Securities under the
Securities Act. As a condition of transfer, any such transferee shall
agree in writing to be bound by the terms of this Agreement and shall
have the rights of a Purchaser under this Agreement and the
Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is
required by this SECTION 4.1(B), of the following legend on any
certificate evidencing Securities:
[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF
COUNSEL TO THE TRANSFEROR REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH
EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF
THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
The Company acknowledges and agrees that a Purchaser may from
time to time pledge pursuant to a bona fide margin agreement or grant a
security interest in some or all of the Securities and, if required
under the terms of such arrangement, such Purchaser may transfer
pledged or secured Securities to the pledgees or secured parties, so
long as any such grant, pledge or transfer does not individually or in
the aggregate violate the Securities Act or any rule or regulation
promulgated thereunder. If required by the Company's transfer agent in
order to effect a pledge, the Company shall cause its counsel, at no
cost to the Purchasers, to issue an opinion of counsel to the Company's
transfer agent. At the appropriate Purchaser's expense, the Company
will execute and deliver such reasonable documentation as a pledgee or
secured party of Securities may reasonably request in connection with a
pledge or transfer of the Securities, including the preparation and
filing of any required prospectus supplement under Rule 424(b)(3) of
the Securities Act or other applicable provision of the Securities Act
to appropriately amend the list of Selling Stockholders thereunder.
(c) Certificates evidencing Underlying Shares shall not
contain any legend (including the legend set forth in Section 4.1(b)
hereof): (i) while a registration statement (including the Underlying
Shares Registration Statement) covering the resale of such security is
effective under the Securities Act, or (ii) following any sale of such
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Underlying Shares pursuant to Rule 144, or (iii) if such Underlying
Shares are eligible for sale under Rule 144(k), or (iv) if such legend
is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the
staff of the Commission); PROVIDED, HOWEVER, in connection with the
issuance of the Underlying Shares, each Purchaser, severally and not
jointly with the other Purchasers, hereby agrees to adhere to and abide
by all prospectus delivery requirements under the Securities Act and
Commission Regulations. If all or any portion of a Debenture or Warrant
is converted or exercised (as applicable) at a time when there is an
effective registration statement to cover the resale of the Underlying
Shares, or if such Underlying Shares may be sold under Rule 144(k) or
if such legend is not otherwise required under applicable requirements
of the Securities Act (including judicial interpretations thereof) then
such Underlying Shares shall be issued free of all legends. The Company
agrees that following the Effective Date or at such time as such legend
is no longer required under this Section 4.1(c), it will, no later than
five Trading Days following the delivery by a Purchaser to the Company
or the Company's transfer agent of a certificate representing
Underlying Securities issued with a restrictive legend, deliver or
cause to be delivered to such Purchaser a certificate representing such
shares that is free from all restrictive and other legends. The Company
may not make any notation on its records or give instructions to any
transfer agent of the Company that enlarge the restrictions on transfer
set forth in this Section.
(d) In addition to such Purchaser's other available remedies,
the Company shall pay to a Purchaser, in cash, as liquidated damages
and not as a penalty, for each $1,000 of Underlying Shares (based on
the VWAP of the Common Stock on the date such Securities are submitted
to the Company's transfer agent) delivered for removal of the
restrictive legend and subject to this Section 4.1(c), $10 per Trading
Day (increasing to $20 per Trading Day 3 Trading Days after such
damages have begun to accrue) for each Trading Day after such fifth
Trading Day until such certificate is delivered without a legend.
4.2 ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the
issuance of the Securities may result in dilution of the outstanding shares of
Common Stock, which dilution may be substantial under certain market conditions.
The Company further acknowledges that its obligations under the Transaction
Documents, including without limitation its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not subject to any right of set off, counterclaim, delay or reduction,
regardless of the effect of any such dilution or any claim the Company may have
against any Purchaser and regardless of the dilutive effect that such issuance
may have on the ownership of the other stockholders of the Company.
4.3 FURNISHING OF INFORMATION. As long as any Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. Upon the request of any Purchaser, the Company shall deliver to
such Purchaser a written certification of a duly authorized officer as to
whether it has complied with the preceding sentence. As long as any Purchaser
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owns Securities, if the Company is not required to file reports pursuant to such
laws, it will prepare and furnish to the Purchasers and make publicly available
in accordance with Rule 144(c) such information as is required for the
Purchasers to sell the Securities under Rule 144. The Company further covenants
that it will take such further action as any holder of Securities may reasonably
request, all to the extent required from time to time to enable such Person to
sell such Securities without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144.
4.4 INTEGRATION. The Company shall not, and shall use its best efforts
to ensure that no Affiliate of the Company shall, sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with the
offer or sale of the Securities in a manner that would require the registration
under the Securities Act of the sale of the Securities to the Purchasers, or
that would be integrated with the offer or sale of the Securities for purposes
of the rules and regulations of any Principal Market.
4.5 RESERVATION AND LISTING OF SECURITIES.
(a) The Company shall maintain a reserve from its duly
authorized shares of Common Stock for issuance pursuant to the
Transaction Documents in such amount as may be required to fulfill its
obligations in full under the Transaction Documents.
(b) If, on any date, the number of authorized but unissued
(and otherwise unreserved) shares of Common Stock is less than 200% of
(i) the Actual Minimum on such date, minus (ii) the number of shares of
Common Stock previously issued pursuant to the Transaction Documents,
then the Board of Directors of the Company shall use commercially
reasonable efforts to amend the Company's certificate or articles of
incorporation to increase the number of authorized but unissued shares
of Common Stock to at least the Required Minimum at such time (minus
the number of shares of Common Stock previously issued pursuant to the
Transaction Documents), as soon as possible and in any event not later
than the 75th day after such date; provided that the Company will not
be required at any time to authorize a number of shares of Common Stock
greater than the maximum remaining number of shares of Common Stock
that could possibly be issued after such time pursuant to the
Transaction Documents.
(c) The Company shall: (i) in the time and manner required by
the Principal Market, prepare and file with such Principal Market an
additional shares listing application covering a number of shares of
Common Stock at least equal to the Required Minimum on the date of such
application, (ii) take all steps reasonably necessary to cause such
shares of Common Stock to be approved for listing on the Principal
Market as soon as possible thereafter, (iii) provide to the Purchasers
evidence of such listing, and (iv) use its commercially reasonably best
efforts to maintain the listing of such Common Stock on such Principal
Market or another Principal Market. In addition, within 30 days of the
First Closing Date, the Company shall have filed an information
statement with the Commission relating to the Shareholder Approval and
shall use reasonable best efforts to cause the Shareholder Approval to
be deemed effective as promptly as possible thereafter.
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4.6 CONVERSION AND EXERCISE PROCEDURES. The form of Election to
Purchase included in the Warrants and the form of Conversion Notice included in
the Debentures set forth the totality of the procedures required of the
Purchasers in order to exercise the Warrants or convert the Debentures. No
additional legal opinion or other information or instructions shall be required
of the Purchasers to exercise their Warrants or convert their Debentures. The
Company shall honor exercises of the Warrants and conversions of the Debentures
and shall deliver Underlying Shares in accordance with the terms, conditions and
time periods set forth in the Transaction Documents.
4.7 FUTURE FINANCINGS. From the date hereof until 90 days after the
Effective Date of the initial Registration Statement relating to the Securities
issued at the First Closing and, if applicable, from the Second Closing Date
until 60 days after the Effective Date of the initial Registration Statement
relating to the Securities issued at the Second Closing, neither the Company nor
any Subsidiary shall issue or sell any Capital Shares or Capital Shares
Equivalents. Notwithstanding anything herein to the contrary, the 90 day period
set forth in this Section 4.7 shall be extended for the number of Trading Days
during such period in which (y) trading in the Common Stock is suspended by any
Principal Market, or (z) following the Effective Date, the Registration
Statement is not effective or the prospectus included in the Registration
Statement may not be used by the Purchasers for the resale of the Underlying
Shares. Notwithstanding anything to the contrary herein, this Section 4.7 shall
not apply to the following (a) the granting or issuance of shares of Common
Stock or options to employees, officers and directors of the Company pursuant to
any stock option plan or employee incentive plan or agreement duly adopted or
approved by a majority of the non-employee members of the Board of Directors of
the Company or a majority of the members of a committee of non-employee
directors established for such purpose, (b) the exercise of a Debenture or any
other security issued by the Company in connection with the offer and sale of
this Company's securities pursuant to this Agreement, or (c) the exercise of or
conversion of any convertible securities, options or warrants issued and
outstanding on the date hereof, provided that such securities have not been
amended since the date hereof, or (d) the issuance of any securities in
connection with acquisitions, strategic investments or strategic partnering
arrangements, the primary purpose of which is not to raise capital, or (e) a
one-time issuance to Harvey Braun on or prior to the fifth Trading Day after the
date hereof of convertible debentures with a principal amount equal to $500,000
and a conversion price equal to the greater of the Set Price and the average of
the 5 VWAPs immediately prior to such issuance, otherwise in the form of the
Debentures, or (f) prior to the Effective Date of the initial Registration
Statement relating to the Securities issued at the First Closing, a one-time
issuance of up to $2,000,000 of Capital Shares or Capital Shares Equivalents,
provided such securities have an effective price per share of Common Stock of at
least $1.75, subject to adjustment for reverse and forward stock splits, stock
dividends, stock combinations and other similar transactions of the Common Stock
that occur after the date of this Agreement and provided the effective price of
such security is not adjustable thereafter, other than for stock splits, stock
dividends, stock combinations and the like. In addition, unless Shareholder
Approval has been obtained and deemed effective in accordance with Section
4.5(c), the Company shall not make any issuance whatsoever of Capital Shares or
Capital Shares Equivalents which would cause any adjustment of the Set Price
(other than pursuant to Section 4(c)(ii) of the Debentures) to the extent the
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holders of Debentures would not be permitted, pursuant to Section 4(a)(ii)(B) of
the Debenture, to convert their respective outstanding Debentures and exercise
the Warrants in full.
4.8 SECURITIES LAWS DISCLOSURE; PUBLICITY. The Company shall, by 8:30
a.m. Eastern time on the Trading Day following the date of this Agreement, issue
a press release or file a Current Report on Form 8-K reasonably acceptable to
each Purchaser disclosing all material terms of the transactions contemplated
hereby. The Company and the Purchasers shall consult with each other in issuing
any press releases with respect to the transactions contemplated hereby.
Notwithstanding the foregoing, other than in any registration statement filed
pursuant to the Registration Rights Agreement and filings related thereto, the
Company shall not publicly disclose the name of any Purchaser, or include the
name of any Purchaser in any filing with the Commission or any regulatory agency
or Principal Market, without the prior written consent of such Purchaser, except
to the extent such disclosure is required by law or Principal Market
regulations, in which case the Company shall provide the Purchasers with prior
notice of such disclosure.
4.9 NON-PUBLIC INFORMATION. The Company covenants and agrees that it
will not and will instruct any other Person acting on its behalf to not provide
any Purchaser or its agents or counsel with any information that the Company
believes constitutes material non-public information, unless prior thereto such
Purchaser shall have executed a written agreement regarding the confidentiality
and use of such information. The Company understands and confirms that each
Purchaser shall be relying on the foregoing representations in effecting
transactions in securities of the Company.
4.10 USE OF PROCEEDS. The Company shall use the net proceeds from the
sale of the Securities hereunder for working capital purposes and not for the
satisfaction of any portion of the Company's debt (other than payment of trade
payables, capital lease obligations, and accrued expenses in the ordinary course
of the Company's business and prior practices), to redeem any Company equity or
equity-equivalent securities or to settle any outstanding litigation. Prior to
the receipt of Shareholder Approval, the Company shall not declare or pay any
cash dividend on its shares of Common Stock while any Debentures remains
outstanding.
4.11 REIMBURSEMENT. If any Purchaser becomes involved in any capacity
in any Proceeding by or against any Person who is a stockholder of the Company,
solely as a result of such Purchaser's acquisition of the Securities under this
Agreement and without causation by any other activity, obligation, condition or
liability on the part of, or pertaining to such Purchaser and not to the
purchase of Securities pursuant to this Agreement, the Company will reimburse
such Purchaser, to the extent such reimbursement is not provided for in Section
4.12, for its reasonable legal and other expenses (including the cost of any
investigation, preparation and travel in connection therewith) incurred in
connection therewith, as such expenses are incurred. The reimbursement
obligations (and limitations thereon) of the Company under this paragraph shall
be in addition to any liability which the Company may otherwise have, shall
extend upon the same terms and conditions to any Affiliates of the Purchasers
who are actually named in such action, proceeding or investigation, and
partners, directors, agents, employees and controlling persons (if any), as the
case may be, of the Purchasers and any such Affiliate, and shall be binding upon
and inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither the Purchasers nor any such
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Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company solely as a result of acquiring the Securities under
this Agreement except to the extent any covenant or warranty owing to the
Company is breached.
4.12 INDEMNIFICATION OF PURCHASERS. Subject to the provisions of this
Section 4.12, each party (the "INDEMNIFYING PARTY") will indemnify and hold the
other parties and their directors, officers, shareholders, partners, employees
and agents (each, an "INDEMNIFIED PARTY") harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including all judgments, amounts paid in settlements, court costs and reasonable
attorneys' fees and costs of investigation that any such Indemnified Party may
suffer or incur as a result of or relating to any breach of any of the
representations, warranties, covenants or agreements made by the Indemnifying
Party in this Agreement or in the other Transaction Documents. If any action
shall be brought against any Indemnified Party in respect of which indemnity may
be sought pursuant to this Agreement, such Indemnified Party shall promptly
notify the Indemnifying Party in writing, and the Indemnifying Party shall have
the right to assume the defense thereof with counsel of its own choosing. Any
Indemnified Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Indemnified Party except to the extent
that (i) the employment thereof has been specifically authorized by the
Indemnifying Party in writing, (ii) the Indemnifying Party has failed after a
reasonable period of time to assume such defense and to employ counsel or (iii)
in such action there is, in the reasonable opinion of such separate counsel, a
material conflict on any material issue between the position of the Indemnifying
Party and the position of such Indemnified Party. The Indemnifying Party will
not be liable to any Indemnified Party under this Agreement (i) for any
settlement by an Indemnified Party effected without the Indemnifying Party's
prior written consent, which shall not be unreasonably withheld or delayed; or
(ii) to the extent, but only to the extent that a loss, claim, damage or
liability is attributable to any Indemnified Party's breach of any of the
representations, warranties, covenants or agreements made by the Purchasers in
this Agreement or in the other Transaction Documents. In no event shall the
liability of any Purchaser hereunder be greater in amount than the dollar amount
of the net proceeds received by such Purchaser upon the sale of the Securities;
provided that this provision shall not limit the Company's rights and remedies
under any other provision pursuant to this Agreement, including but not limited
to, the Company's rights under Section 5.15.
4.13 SHAREHOLDERS RIGHTS PLAN. In the event that a shareholders rights
plan is adopted by the Company, no claim will be made or enforced by the Company
or any other Person that any Purchaser is an "Acquiring Person" under the plan
or in any way could be deemed to trigger the provisions of such plan by virtue
of receiving Securities under the Transaction Documents.
4.14. PARTICIPATION IN FUTURE FINANCING. From the date hereof until
such time as a Purchaser no longer holds at least 5% of the Debentures initially
purchased hereunder at the First Closing, the Company shall not effect a
financing of its Capital Shares or Capital Shares Equivalents (a "SUBSEQUENT
FINANCING") unless (i) the Company delivers to each of such Purchasers a written
notice at least 5 Trading Days prior to the closing of such Subsequent Financing
(the "SUBSEQUENT FINANCING NOTICE") of its intention to effect such Subsequent
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Financing, which Subsequent Financing Notice shall describe in reasonable detail
the proposed terms of such Subsequent Financing, the amount of proceeds intended
to be raised thereunder, the Person with whom such Subsequent Financing is
proposed to be effected, and attached to which shall be a term sheet or similar
document relating thereto and (ii) such Purchaser shall not have notified the
Company by 6:30 p.m. (New York City time) on the fifth (5th) Trading Day after
its receipt of the Subsequent Financing Notice of its willingness to provide (or
to cause its designee to provide), subject to completion of mutually acceptable
documentation, all or part of such financing to the Company on the same terms
set forth in the Subsequent Financing Notice. If one or more Purchasers shall
fail to so notify the Company of their willingness to participate in the
Subsequent Financing, the Company may effect the remaining portion of such
Subsequent Financing on the terms and to the Persons set forth in the Subsequent
Financing Notice; provided that the Company must provide the Purchasers with a
second Subsequent Financing Notice, and the Purchasers will again have the right
of first refusal set forth above in this Section 4.14, if the Subsequent
Financing subject to the initial Subsequent Financing Notice is not consummated
for any reason on the terms set forth in such Subsequent Financing Notice within
60 Trading Days after the date of the initial Subsequent Financing Notice with
the Person identified in the Subsequent Financing Notice. In the event the
Company receives responses to Subsequent Financing Notices from Purchasers
seeking to purchase more than the financing sought by the Company in the
Subsequent Financing such Purchasers shall have the right to purchase their Pro
Rata Portion (as defined below) of the Capital Shares or Capital Shares
Equivalents to be issued in such Subsequent Financing. "PRO RATA PORTION" is the
ratio of (x) the principal amount of Debentures purchased by a Purchaser and (y)
the sum of the aggregate principal amount of Debentures issued hereunder. If any
Purchaser no longer holds any Debentures, then the Pro Rata Portions shall be
re-allocated among the remaining Purchasers. Notwithstanding anything to the
contrary herein, this Section 4.7 shall not apply to the following (a) the
granting or issuance of shares of Common Stock or options to employees,
officers, consultants and directors of the Company pursuant to any stock option
plan or incentive plan or agreement or arrangement duly adopted or approved by a
majority of the non-employee members of the Board of Directors of the Company or
a majority of the members of a committee of non-employee directors established
for such purpose, provided the primary purpose of such plan, agreement or
arrangement is not to raise capital, (b) the exercise of a Debenture or any
other security issued by the Company in connection with the offer and sale of
this Company's securities pursuant to this Agreement, or (c) the exercise of or
conversion of any convertible securities, options or warrants issued and
outstanding on the date hereof, provided that such securities have not been
amended since the date hereof, or (d) the issuance of any securities in
connection with acquisitions, strategic investments or strategic partnering
arrangements, the primary purpose of which is not to raise capital.
4.15 LIMITATIONS ON SHORT SALES. Each Purchaser agrees, severally and
not jointly, that it will not enter into any Short Sales (as hereinafter
defined) from the period commencing on the First Closing Date and ending on the
date that all of the Debentures have been converted and all of the Warrants have
been exercised. For purposes of this Section 3.2(h), a "SHORT SALE" by any
Purchaser shall mean a sale of Common Stock by such Purchaser that is marked as
a short sale and that is made at a time when there is no equivalent offsetting
long position in Common Stock held by such Purchaser. For purposes of
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determining whether there is an equivalent offsetting long position in Common
Stock held by a Purchasers, in addition to shares of Common Stock held by such
Purchaser, Underlying Shares that have not yet been converted pursuant to such
Purchaser's Debenture and that have not yet been issued upon exercise of such
Purchaser's Warrant shall be deemed to be held long by such Purchaser.
ARTICLE V
MISCELLANEOUS
5.1 TERMINATION. This Agreement may be terminated by any Purchaser, by
written notice to the other parties, if the First Closing has not been
consummated on or before April 4, 2003; provided that no such termination will
affect the right of any party to sue for any breach by the other party (or
parties).
5.2 FEES AND EXPENSES. The Company has agreed to reimburse $35,000 to
Midsummer Capital, LLC ("MIDSUMMER") (of which $15,000 has been received) as
reimbursement for its legal, administrative and due diligence fees and expenses
incurred to prepare and negotiate the Transaction Documents. On the First
Closing Date, the Company shall wire $20,000 to Midsummer as payment of the
remaining portion of the $35,000 referenced above. Except as expressly set forth
in the Transaction Documents to the contrary, each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any, and
all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement. The Company
shall pay all transfer agent fees, stamp taxes and other taxes and duties levied
in connection with the issuance of any Securities.
5.3 ENTIRE AGREEMENT. The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.
5.4 NOTICES. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
specified in this Section prior to 5:30 p.m. (New York City time) on a Trading
Day, (b) the next Trading Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section on a day that is not a Trading Day or later than 5:30 p.m. (New
York City time) on any Trading Day, or (c) the Trading Day following the date of
mailing, if sent by U.S. nationally recognized overnight courier service. The
addresses for such notices and communications are those set forth on the
signature pages hereof, or such other address as may be designated in writing
hereafter, in the same manner, by such Person.
5.5 AMENDMENTS; WAIVERS. No provision of this Agreement may be waived
or amended except in a written instrument signed, in the case of an amendment,
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by the Company and each of the Purchasers or, in the case of a waiver, by the
party against whom enforcement of any such waiver is sought. No waiver of any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.
5.6 CONSTRUCTION. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
5.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Purchasers. Any Purchaser may assign
its rights under this Agreement and the Registration Rights Agreement to any
Person to whom such Purchaser assigns or transfers any Securities.
5.8 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Sections 4.12.
5.9 GOVERNING LAW; VENUE; WAIVER OF JURY TRIAL. All questions
concerning the construction, validity, enforcement and interpretation of this
Agreement shall be governed by and construed and enforced in accordance with the
internal laws of the State of California, without regard to the principles of
conflicts of law thereof. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of San Diego,
California for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of any of the Transaction Documents),
and hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such suit, action or proceeding is improper or inconvenient
venue for such proceeding. Each party hereby irrevocably waives personal service
of process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in
effect for notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. The parties hereby waive all rights to a trial
by jury. If either party shall commence an action or proceeding to enforce any
provisions of this Agreement, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its attorneys fees and
other costs and expenses incurred with the investigation, preparation and
prosecution of such action or proceeding.
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5.10 SURVIVAL. The representations and warranties contained herein
shall survive the earlier of (a) 18 months after the Second Closing Date if the
Second Closing occurs, (b) 18 months after the First Closing Date if the Second
Closing does not occur, and (c) the date on which the Debentures and Warrants
are no longer outstanding. The agreements and covenants of the Company contained
herein shall survive, as to a Purchaser and unless otherwise set forth in the
Transaction Documents, until such Purchaser no longer holds any Securities.
5.11 EXECUTION. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.
5.12 SEVERABILITY. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.
5.13 RESCISSION AND WITHDRAWAL RIGHT. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice, demand or election in whole
or in part without prejudice to its future actions and rights, provided,
however, in the case of a rescission of a conversion of a Debenture or exercise
of a Warrant, the Purchaser shall be required to return any shares of Common
Stock subject to any such conversion or exercise notice.
5.14 REPLACEMENT OF SECURITIES. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Securities.
5.15 REMEDIES. Notwithstanding any provision to the contrary in Section
4.12, in addition to being entitled to exercise all rights provided herein or
granted by law, including recovery of damages, each of the Purchasers and the
Company will be entitled to specific performance under the Transaction
Documents. The parties agree that monetary damages may not be adequate
compensation for any loss incurred by reason of any breach of obligations
described in the foregoing sentence and hereby agrees to waive in any action for
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specific performance of any such obligation the defense that a remedy at law
would be adequate. Without limiting the generality of the foregoing, the Company
expressly agrees that its breach of the next-to-last last sentence of Section
4.7 would cause each Purchaser irreparable harm, and consents to the granting of
injunctive relief by any court having jurisdiction to preclude any such issuance
of securities.
5.16 PAYMENT SET ASIDE. To the extent that the Company makes a payment
or payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
5.17 USURY. To the extent it may lawfully do so, the Company hereby
agrees not to insist upon or plead or in any manner whatsoever claim, and will
resist any and all efforts to be compelled to take the benefit or advantage of,
usury laws wherever enacted, now or at any time hereafter in force, in
connection with any claim, action or proceeding that may be brought by any
Purchaser in order to enforce any right or remedy under any Transaction
Document. Notwithstanding any provision to the contrary contained in any
Transaction Document, it is expressly agreed and provided that the total
liability of the Company under the Transaction Documents for payments in the
nature of interest shall not exceed the maximum lawful rate authorized under
applicable law (the "MAXIMUM RATE"), and, without limiting the foregoing, in no
event shall any rate of interest or default interest, or both of them, when
aggregated with any other sums in the nature of interest that the Company may be
obligated to pay under the Transaction Documents exceed such Maximum Rate. It is
agreed that if the maximum contract rate of interest allowed by law and
applicable to the Transaction Documents is increased or decreased by statute or
any official governmental action subsequent to the date hereof, the new maximum
contract rate of interest allowed by law will be the Maximum Rate applicable to
the Transaction Documents from the effective date forward, unless such
application is precluded by applicable law. If under any circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to any
Purchaser with respect to indebtedness evidenced by the Transaction Documents,
such excess shall be applied by such Purchaser to the unpaid principal balance
of any such indebtedness or be refunded to the Company, the manner of handling
such excess to be at such Purchaser's election.
5.18 INDEPENDENT NATURE OF PURCHASERS' OBLIGATIONS AND RIGHTS. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
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joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Document. Each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose. Each Purchaser was introduced to the Company by Century Capital, which
has acted solely as agent for the Company and not for any Purchaser. Each
Purchaser has been represented by its own separate legal counsel in their review
and negotiation of the Transaction Documents. For reasons of administrative
convenience only, Purchasers and their respective counsel have chosen to
communicate with the Company through FW. FW does not represent all of the
Purchasers but only Midsummer. The Company has elected to provide all Purchasers
with the same terms and Transaction Documents for the convenience of the Company
and not because it was required or requested to do so by the Purchasers.
5.19 LIQUIDATED DAMAGES. The Company's obligations to pay any
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
liquidated damages and other amounts have been paid notwithstanding the fact
that the instrument or security pursuant to which such liquidated damages or
other amounts are due and payable shall have been canceled.
***********************
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IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
SVI SOLUTIONS, INC.
By:_________________________________________
Name:
Title:
ADDRESS FOR NOTICE:
------------------
5607 Palmer Way
Carlsbad, CA 92008
Attn:
Tel: (858) 481-4405
Fax:
With a copy to: [Attorneys for SVI]
Attn:
Tel:
Fax:
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
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PURCHASERS SIGNATURE PAGE
IN WITNESS WHEREOF, the undersigned have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
MIDSUMMER INVESTMENT, LTD. ADDRESS FOR NOTICE:
------------------
By: MIDSUMMER CAPITAL, LLC, C/o Midsummer Capital, LLC
As investment advisor 485 Madison Avenue, 23rd Floor
New York, New York 10022
By:______________________________________ Tel: (212) 584-2140
Scott Kaufman, Managing Director Fax: (212) 584-2142
Attn: Scott Kaufman
First Closing Subscription:
Second Closing Subscription:
WITH A COPY TO:
--------------
Feldman Weinstein LLP
420 Lexington Avenue
New York, New York 10170
Attn: Joseph A. Smith
Tel: (212) 869-7000
Fax: (212) 401-4741
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PURCHASERS SIGNATURE PAGE (CONT. . . )
OMICRON MASTER TRUST ADDRESS FOR NOTICE:
------------------
By: Omicron Capital L.P., as subadvisor c/o Omicron Capital L.P.
By: Omicron Capital Inc., its general partner 810 Seventh Avenue, 39th Floor
New York, New York 10019
Attn: Brian Daly
By: ___________________________________ Fax: (212) 803-5269
Bruce Bernstein, President
First Closing Subscription:
Second Closing Subscription:
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PURCHASERS SIGNATURE PAGE (CONT. . . )
ISLANDIA, L.P. ADDRESS FOR NOTICE:
------------------
By: John Lang, Inc., its general partner C/o John Lang, Inc.
485 Madison Avenue, 23rd Floor
New York, New York 10022
By:______________________________________ Tel: (212) 584-2100
Name: Richard Berner Fax: (212) 584-2199
Title: Attn: Fund Manager
First Closing Subscription:
Second Closing Subscription:
-33-
EXHIBIT A
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
Date of Issuance: ____________ , 200__
$_______________
9% CONVERTIBLE DEBENTURE
DUE ____________ __, 200__
THIS DEBENTURE is one of a series of duly authorized and issued
Debentures of SVI Solutions, Inc., a Delaware corporation, having a principal
place of business at 5607 Palmer Way, Carlsbad, CA 92008 (the "COMPANY"),
designated as its 9% Convertible Debenture, due, with respect to the aggregate
principal amount of $3,500,000 issued at the First Closing, _________ __, 2005,
and with respect to the aggregate principal amount of $2,000,000 if issued at
the Second Closing due 30 months from the First Closing Date (the "DEBENTURES").
FOR VALUE RECEIVED, the Company promises to pay to
________________________ or its registered assigns (the "HOLDER"), the principal
sum of $_______________ on _____ __, 200__ or such earlier date as the
Debentures are required or permitted to be repaid as provided hereunder (the
"MATURITY DATE") and to pay interest to the Holder on the aggregate unconverted
and then outstanding principal amount of this Debenture at the rate of 9% per
annum, payable quarterly on March 1, June 1, September 1 and December 1,
beginning on the first such date after the Original Issue Date and on each
Conversion Date (as to that principal amount then being converted), on each
Monthly Redemption Date (as to that principal amount then being redeemed) and on
the Maturity Date (except that, if any such date is not a Business Day, then
such payment shall be due on the next succeeding Business Day) (each such date,
an "INTEREST PAYMENT DATE"), in cash or shares of Common Stock at the Interest
Conversion Rate, or a combination thereof; PROVIDED, HOWEVER, payment in shares
of Common Stock may only occur if: (i) there is an effective Underlying Shares
Registration Statement pursuant to which the Holder is permitted to utilize the
prospectus thereunder to resell all of the shares of Common Stock to be issued
in lieu of cash (and the Company believes, in good faith, that such
effectiveness will continue uninterrupted for the foreseeable future), (ii) the
Common Stock is listed for trading on a Principal Market (and the Company
believes, in good faith, that trading of the Common Stock on a Principal Market
will continue uninterrupted for the foreseeable future), (iii) there is a
sufficient number of authorized but unissued and otherwise unreserved shares of
Common Stock for the issuance of all of the shares issuable pursuant to the
Transaction Documents, including the shares to be issued for interest in lieu of
cash and (iv) such issuance would be permitted to the extent it would not
violate the limitations set forth in clauses (A) or (B) of Section 4(a)(ii).
Subject to the terms and conditions herein, the decision whether to pay interest
hereunder in shares of Common Stock or cash shall be at the discretion of the
Company. Not less than 20 Trading Days prior to each Interest Payment Date, the
Company shall provide the Holder with written notice of its election to pay
interest hereunder either in cash or shares of Common Stock (the Company may
indicate in such notice that the election contained in such notice shall
continue for later periods until revised). Subject to the aforementioned
conditions, failure to timely provide such written notice shall be deemed an
election by the Company to pay the interest on such Interest Payment Date in
cash. Interest shall be calculated on the basis of a 360-day year and shall
accrue daily commencing on the Original Issue Date until payment in full of the
principal sum, together with all accrued and unpaid interest and other amounts
which may become due hereunder, has been made. Payment of interest in shares of
Common Stock shall otherwise occur pursuant to Section 4(b) and for purposes of
the payment of interest in shares only, the Interest Payment Date shall be
deemed the Conversion Date. Interest shall cease to accrue with respect to any
principal amount converted, provided that the Company in fact delivers the
Underlying Shares within the time period required by Section 4(b)(i). Interest
hereunder will be paid to the Person in whose name this Debenture is registered
on the records of the Company regarding registration and transfers of Debentures
(the "DEBENTURE REGISTER"). Except as otherwise provided herein, if at anytime
the Company pays interest partially in cash and partially in shares of Common
Stock, then such payment shall be distributed ratably among the Holders based
upon the principal amount of Debentures held by each Holder. All overdue accrued
and unpaid interest to be paid hereunder shall entail a late fee at the rate of
12% per annum (or such lower maximum amount of interest permitted to be charged
under applicable law) ("LATE FEE") which will accrue daily, from the date such
interest is due hereunder through and including the date of payment. EXCEPT AS
SET FORTH IN SECTION 5(A) OF THIS DEBENTURE, THE COMPANY MAY NOT PREPAY ANY
PORTION OF THE PRINCIPAL AMOUNT ON THIS DEBENTURE WITHOUT THE PRIOR WRITTEN
CONSENT OF THE HOLDER.
This Debenture is subject to the following additional provisions:
SECTION 1. This Debenture is exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be made
for such registration of transfer or exchange.
2
SECTION 2. This Debenture has been issued subject to certain investment
representations of the original Holder set forth in the Purchase Agreement and
may be transferred or exchanged only in compliance with the Purchase Agreement
and applicable federal and state securities laws and regulations. The Holder
hereof, by acceptance of this Debenture, agrees to be bound by the covenants
made by the original Holder contained in the Purchase Agreement. Prior to due
presentment to the Company for transfer of this Debenture, the Company and any
agent of the Company may treat the Person in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.
SECTION 3. EVENTS OF DEFAULT.
(a) "EVENT OF DEFAULT", wherever used herein, means any one of
the following events (whatever the reason and whether it shall be
voluntary or involuntary or effected by operation of law or pursuant to
any judgment, decree or order of any court, or any order, rule or
regulation of any administrative or governmental body):
(i) any default in the payment of the principal of,
interest on or liquidated damages in respect of, any
Debentures, free of any claim of subordination, as and when
the same shall become due and payable (whether on a Conversion
Date or the Maturity Date or by acceleration or otherwise)
which default is not cured, if possible to cure, within 3 days
of notice of such default sent by the Holder;
(ii) the Company shall fail to observe or perform any
other covenant, agreement or warranty contained in, or
otherwise commit any breach of any of the Transaction
Documents (other than a breach by the Company of its
obligations to deliver shares of Common Stock to the Holder
upon conversion or interest payment which breach is addressed
in clause (x) below) which is not cured, if possible to cure,
within 5 days of notice of such default sent by the Holder
(except with respect to breaches pursuant to Sections 4.1, 4.8
and 4.9 of the Purchase Agreement and Section 3(a) of the
Warrant);
3
(iii) the Company or any of its subsidiaries shall
commence, or there shall be commenced against the Company or
any such subsidiary a case under any applicable bankruptcy or
insolvency laws as now or hereafter in effect or any successor
thereto, or the Company commences any other proceeding under
any reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law
of any jurisdiction whether now or hereafter in effect
relating to the Company or any subsidiary thereof or there is
commenced against the Company or any subsidiary thereof any
such bankruptcy, insolvency or other proceeding which remains
undismissed for a period of 60 days; or the Company or any
subsidiary thereof is adjudicated insolvent or bankrupt; or
any order of relief or other order approving any such case or
proceeding is entered; or the Company or any subsidiary
thereof suffers any appointment of any custodian or the like
for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or the
Company or any subsidiary thereof makes a general assignment
for the benefit of creditors; or the Company shall fail to
pay, or shall state that it is unable to pay, or shall be
unable to pay, its debts generally as they become due; or the
Company or any subsidiary thereof shall call a meeting of its
creditors with a view to arranging a composition, adjustment
or restructuring of its debts; or the Company or any
subsidiary thereof shall by any act or failure to act
expressly indicate its consent to, approval of or acquiescence
in any of the foregoing; or any corporate or other action is
taken by the Company or any subsidiary thereof for the purpose
of effecting any of the foregoing;
(iv) the Company shall default in any of its
obligations under any other Debenture or any mortgage, credit
agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued,
or by which there may be secured or evidenced any indebtedness
for borrowed money or money due under any long term leasing or
factoring arrangement of the Company in an amount exceeding
$150,000, whether such indebtedness now exists or shall
hereafter be created and such default shall result in such
indebtedness becoming or being declared due and payable prior
to the date on which it would otherwise become due and
payable;
(v) the Common Stock shall not be eligible for
quotation on or quoted for trading on the Nasdaq SmallCap
Market, New York Stock Exchange, American Stock Exchange or
the Nasdaq National Market (each, a "Principal Market") and
shall not again be eligible for and quoted or listed for
trading thereon within five Trading Days;
(vi) the Company shall be a party to any Change of
Control Transaction , shall agree to sell or dispose of all or
in excess of 45% of its assets in one or more transactions
(whether or not such sale would constitute a Change of Control
Transaction) or shall redeem or repurchase more than a de
minimis number of its outstanding shares of Common Stock or
other equity securities of the Company (other than redemptions
of Underlying Shares);
(vii) an Underlying Shares Registration Statement
shall not have been declared effective by the Commission on or
prior to the 180th calendar day after the Original Issue Date;
4
(viii) if, during the Effectiveness Period (as
defined in the Registration Rights Agreement), the
effectiveness of the Underlying Shares Registration Statement
lapses for any reason or the Holder shall not be permitted to
resell Registrable Securities (as defined in the Registration
Rights Agreement) under the Underlying Shares Registration
Statement, in either case, for more than 10 consecutive
Trading Days or 20 non-consecutive Trading Days during any 12
month period;
(ix) an Event (as defined in the Registration Rights
Agreement) shall not have been cured to the reasonable
satisfaction of the Holder prior to the expiration of thirty
days from the Event Date (as defined in the Registration
Rights Agreement) relating thereto (other than an Event
resulting from a failure of an Underlying Shares Registration
Statement to be declared effective by the Commission on or
prior to the Effectiveness Date (as defined in the
Registration Rights Agreement), which shall be covered by
Section 3(a)(vii));
(x) the Company shall fail for any reason to deliver
certificates to a Holder prior to the fifth Trading Day after
a Conversion Date pursuant to and in accordance with Section
4(b) or the Company shall provide notice to the Holder,
including by way of public announcement, at any time, of its
intention not to comply with requests for conversions of any
Debentures in accordance with the terms hereof; or
(xi) the Company shall fail for any reason to deliver
the payment in cash pursuant to a Buy-In (as defined herein)
within five days after notice thereof is delivered hereunder.
(b) If any Event of Default occurs and is continuing, the full
principal amount of this Debenture, together with interest and other
amounts owing in respect thereof, to the date of acceleration shall
become at the Holder's election, immediately due and payable in cash.
The aggregate amount payable upon an Event of Default shall be equal to
the Mandatory Prepayment Amount. Interest shall continue to accrue on
the Mandatory Prepayment Amount hereunder from the 5th day after such
amount is due (being the date of an Event of Default) through the date
of prepayment in full thereof in an amount equal to the Late Fee, to
accrue daily from the date such payment is due hereunder through and
including the date of payment. All Debentures for which the full
prepayment price hereunder shall have been paid in accordance herewith
shall promptly be surrendered to or as directed by the Company. The
Holder need not provide and the Company hereby waives any presentment,
demand, protest or other notice of any kind, and the Holder may
immediately and without expiration of any grace period enforce any and
all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Such declaration may be rescinded
and annulled by Holder at any time prior to payment hereunder and the
Holder shall have all rights as a Debenture holder until such time, if
5
any, as the full payment under this Section shall have been received by
it. No such rescission or annulment shall affect any subsequent Event
of Default or impair any right consequent thereon.
SECTION 4. CONVERSION.
(a) (i) At any time after the Closing Date, this Debenture
shall be convertible into shares of Common Stock at the option
of the Holder, in whole or in part at any time and from time
to time (subject to the limitations on conversion set forth in
Section 4(a)(ii) hereof). The Holder shall effect conversions
by delivering to the Company the form of conversion notice
attached hereto as ANNEX A (a "CONVERSION NOTICE"), specifying
therein the principal amount of Debentures to be converted and
the date on which such conversion is to be effected (a
"CONVERSION DATE") and shall contain a completed schedule in
the form of SCHEDULE 1 to the Conversion Notice (as amended on
each Conversion Date, the "CONVERSION SCHEDULE") reflecting
the remaining principal amount of this Debenture and all
accrued and unpaid interest thereon subsequent to the
conversion at issue. If no Conversion Date is specified in a
Conversion Notice, the Conversion Date shall be the date that
such Conversion Notice is provided hereunder. To effect
conversions hereunder, the Holder shall not be required to
physically surrender Debentures to the Company unless the
entire principal amount of this Debenture has been so
converted. Conversions hereunder shall have the effect of
lowering the outstanding principal amount of this Debenture
plus all accrued and unpaid interest thereon in an amount
equal to the applicable conversion, which shall be evidenced
by entries set forth in the Conversion Schedule. The Holder
and the Company shall maintain records showing the principal
amount converted and the date of such conversions. The Company
shall deliver any objection to the figures represented in the
Conversion Schedules within 1 Business Day of receipt of such
notice. In the event of any dispute or discrepancy, the
records of the Holder shall be controlling and determinative
in the absence of manifest error. The Holder and any assignee,
by acceptance of this Debenture, acknowledge and agree that,
by reason of the provisions of this paragraph, following
conversion of a portion of this Debenture, the unpaid and
unconverted principal amount of this Debenture may be less
than the amount stated on the face hereof.
(ii) CERTAIN CONVERSION RESTRICTIONS.
(A) A Holder may not convert Debentures or
receive shares of Common Stock as payment of interest
hereunder to the extent such conversion or receipt of
such interest payment would result in the Holder,
together with its Affiliates, beneficially owning (as
determined in accordance with Section 13(d) of the
Exchange Act and the rules promulgated thereunder) in
excess of 4.999% of the then issued and outstanding
shares of Common Stock, including shares issuable
upon conversion of, and payment of interest on, the
6
Debentures held by such Holder after application of
this Section. The Holder shall be entitled to rely on
the Company's public filing with respect to the
number of shares of Common Stock which are then
issued and outstanding, and the Holder may inquire of
the Company's Chief Financial Officer to obtain a
more current number, which shall be provided within 2
Business Days of written request therefor. To ensure
compliance with this restriction, the Holder will be
deemed to represent to the Company each time it
delivers a Conversion Notice that such Conversion
Notice has not violated the restrictions set forth in
this paragraph. If the Holder has delivered a
Conversion Notice for a principal amount of
Debentures that, without regard to any other shares
that the Holder or its Affiliates may beneficially
own, would result in the issuance in excess of the
permitted amount hereunder, the Company shall notify
the Holder of this fact and shall honor the
conversion for the maximum principal amount permitted
to be converted on such Conversion Date in accordance
with the periods described in Section 4(b) and, at
the option of the Holder, either retain any principal
amount tendered for conversion in excess of the
permitted amount hereunder for future conversions or
return such excess principal amount to the Holder. In
the event of a merger or consolidation of the Company
with or into another Person, this paragraph shall not
apply with respect to a determination of the number
of shares of common stock issuable upon conversion in
full of the Debentures if such determination is
necessary to establish the Securities or other assets
which the holder of Common Stock shall be entitled to
receive upon the effectiveness of such merger or
consolidation. The provisions of this Section
4(a)(ii)(A) may be waived by the Holder at the
election of the Holder upon not less than 61 days'
prior notice to the Company, and the provisions of
this Section 4(a)(ii)(A) shall continue to apply
until such 61st day (or such later date, as
determined by the Holder, as may be specified in such
notice of waiver). No conversion of this Debenture in
violation of this Section 4(a)(ii)(A) but otherwise
in accordance with this Debenture shall affect the
status of the Underlying Shares as validly issued,
fully-paid and nonassessable.
(B) If the Company has not obtained
Shareholder Approval (as defined below), if required
by the applicable rules and regulations of the
Principal Market (or any successor entity), then the
Company may not issue upon conversion of the
Debentures, in the aggregate, in excess of (i)
19.999% of the number of shares of Common Stock
outstanding on the Trading Day immediately preceding
the Original Issue Date, (ii) less any shares of
Common Stock issued as payment of interest or to be
issued upon exercise of the Warrants issued to
Holders of the Debentures on the Original Issue Date
pursuant to the Purchase Agreement (such number of
7
shares, the "ISSUABLE MAXIMUM"). Each Holder shall be
entitled to a portion of the Issuable Maximum equal
to the quotient obtained by dividing (x) the
aggregate principal amount of the Debenture(s) issued
and sold to such Holder on the Original Issue Date by
(y) the aggregate principal amount of all Debentures
issued and sold by the Company on the Original Issue
Date. If any Holder shall no longer hold Debentures,
then such Holder's remaining portion of the Issuable
Maximum shall be allocated pro-rata among the
remaining Holders. If on any Conversion Date: (A) the
applicable Set Price then in effect is such that the
shares issuable under this Debenture on any
Conversion Date together with the aggregate number of
shares of Common Stock that would then be issuable
upon conversion in full of all then outstanding
Debentures would exceed the Issuable Maximum, and (B)
the Company shall not have obtained Shareholder
Approval, then the Company shall issue to the Holder
requesting a conversion a number of shares of Common
Stock equal to such Holder's pro-rata portion (which
shall be calculated pursuant to the terms hereof) of
the Issuable Maximum and, with respect to the
remainder of the aggregate principal amount of the
Debentures (including any accrued interest) then held
by such Holder for which a conversion in accordance
with the applicable conversion price would result in
an issuance of shares of Common Stock in excess of
such Holder's pro-rata portion (which shall be
calculated pursuant to the terms hereof) of the
Issuable Maximum (the "Excess Principal"), the
Company shall be prohibited from converting such
Excess Principal, and shall notify the Holder of the
reason therefor. This Debenture shall thereafter be
unconvertible until and unless Shareholder Approval
is subsequently obtained or is otherwise not
required, but this Debenture shall otherwise remain
in full force and effect. The Company and the Holder
understand and agree that shares of Common Stock
issued to and then held by the Holder as a result of
conversions of Debentures shall not be entitled to
cast votes on any resolution to obtain Shareholder
Approval pursuant hereto. For clarity, the failure of
the Company to actually obtain Shareholder Approval
shall not be a breach of covenant or Event of Default
under Section 3 of this Debenture, provided, that any
issuance of securities which results in an adjustment
to the Set Price (other than pursuant to Section
4(c)(ii)) without the Company having previously
sought and voted on Shareholder Approval as set forth
in the Purchase Agreement shall be a breach of
covenant in the Purchase Agreement and an Event of
Default under Section 3(a)(ii).
(iii) UNDERLYING SHARES ISSUABLE UPON CONVERSION AND
PURSUANT TO INTEREST.
(A) CONVERSION OF PRINCIPAL AMOUNT. The
number of shares of Common Stock issuable upon a
conversion shall be determined by the quotient
8
obtained by dividing (x) the outstanding principal
amount of this Debenture to be converted and (y) the
Set Price, and
(B) PAYMENT OF INTEREST IN UNDERLYING
SHARES. The number of shares of Common Stock issuable
upon payment of interest under this Debenture shall
be the number determined by (x) the product of (I)
the outstanding principal amount of this Debenture to
be converted and (II) the product of (aa) the
quotient obtained by dividing 9% by 360 and (bb) the
number of days for which such principal amount was
outstanding, divided by (y) the applicable Interest
Conversion Rate, PROVIDED, that if the Company shall
have elected to pay the interest due on an Interest
Payment Date in cash pursuant to the terms hereof,
this subsection (B) shall not be used in the
calculation of the number of shares of Common Stock
issuable upon a conversion hereunder.
(C) Notwithstanding anything to the contrary
contained herein, if on any Conversion Date:
(1) the number of shares of Common
Stock at the time authorized, unissued and
unreserved for all purposes, or held as
treasury stock, is insufficient to honor
such conversion;
(2) the Common Stock shall fail to
be listed or quoted for trading on a
Principal Market; or
(3) the Company has failed to timely
satisfy its conversion obligations
hereunder.
and, with respect to such delivery, no prior
demand has been made by the Holder pursuant to
Section 4(b)(ii) or Section 4(b)(iii), then, at the
option of the Holder, the Company, in lieu of
delivering shares of Common Stock pursuant to this
Section 4, shall deliver, within five Trading Days of
each applicable Conversion Date, an amount in cash
equal to the product of the number of shares of
Common Stock otherwise deliverable to the Holder in
connection with such Conversion Date and the highest
VWAP during the period commencing on the Conversion
Date and ending on the Trading Day prior to the date
such payment is made.
(b) (i) Not later than five Trading Days after any Conversion
Date, the Company will deliver to the Holder (A) a certificate
or certificates for the Shares of Common Stock which shall be
free of restrictive legends and trading restrictions (other
9
than those required by the Purchase Agreement) representing
the number of shares of Common Stock being acquired upon the
conversion of Debentures and (B) a bank check in the amount of
accrued and unpaid interest (if the Company has timely elected
or is required to pay accrued interest in cash). The Company
shall, upon request of the Holder, if available and if allowed
under applicable securities laws, use its best efforts to
deliver any certificate or certificates required to be
delivered by the Company under this Section electronically
through the Depository Trust Corporation or another
established clearing corporation performing similar functions.
If in the case of any Conversion Notice such certificate or
certificates are not delivered to or as directed by the
applicable Holder by the fifth Trading Day after a Conversion
Date, the Holder shall be entitled by written notice to the
Company at any time on or before its receipt of such
certificate or certificates thereafter, to rescind such
conversion, in which event the Company shall immediately
return the certificates representing the principal amount of
Debentures tendered for conversion.
(ii) If the Company fails for any reason to deliver to the
Holder such certificate or certificates pursuant to Section
4(b)(i) by the fifth Trading Day after the Conversion Date,
and, with respect to such delivery, no prior demand has been
made by the Holder pursuant to Section 4(a)(iii)(C) or Section
4(b)(iii) the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, for each $5,000 of
principal amount being converted, $50 per Trading Day
(increasing to $100 per Trading Day after 3 Trading Days and
increasing to $200 per Trading Day 6 Trading Days after such
damages begin to accrue) for each Trading Day after such fifth
Trading Day until such certificates are delivered. Nothing
herein shall limit a Holder's right to pursue actual damages
or declare an Event of Default pursuant to Section 3 herein
for the Company's failure to deliver certificates representing
shares of Common Stock upon conversion within the period
specified herein and such Holder shall have the right to
pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such
rights shall not prohibit the Holders from seeking to enforce
damages pursuant to any other Section hereof or under
applicable law.
(iii) In addition to any other rights available to the Holder,
if the Company fails for any reason to deliver to the Holder
such certificate or certificates pursuant to Section 4(b)(i)
by the fifth Trading Day after the Conversion Date, and with
respect to such delivery, no prior demand has been made by the
Holder pursuant to Section 4(a)(iii)(C) or Section 4(b)(ii),
if after such fifth Trading Day the Holder is required by its
brokerage firm to purchase (in an open market transaction or
otherwise) Common Stock to deliver in satisfaction of a sale
by such Holder of the Underlying Shares which the Holder
anticipated receiving upon such conversion (a "BUY-IN"), then
the Company shall (A) pay in cash to the Holder (in addition
to any remedies available to or elected by the Holder) the
amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the Common Stock
10
so purchased exceeds (y) the product of (1) the aggregate
number of shares of Common Stock that such Holder anticipated
receiving from the conversion at issue multiplied by (2) the
actual sale price of the Common Stock at the time of the sale
(including brokerage commissions, if any) giving rise to such
purchase obligation and (B) at the option of the Holder,
either reissue Debentures in principal amount equal to the
principal amount of the attempted conversion or deliver to the
Holder the number of shares of Common Stock that would have
been issued had the Company timely complied with its delivery
requirements under Section 4(b)(i). For example, if the Holder
purchases Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to an attempted
conversion of Debentures with respect to which the actual sale
price of the Underlying Shares at the time of the sale
(including brokerage commissions, if any) giving rise to such
purchase obligation was a total of $10,000 under clause (A) of
the immediately preceding sentence, the Company shall be
required to pay the Holder $1,000. The Holder shall provide
the Company written notice indicating the amounts payable to
the Holder in respect of the Buy-In. Notwithstanding anything
contained herein to the contrary, if a Holder requires the
Company to make payment in respect of a Buy-In for the failure
to timely deliver certificates hereunder and the Company
timely pays in full such payment, the Company shall not be
required to pay such Holder liquidated damages under Section
4(b)(ii) in respect of the certificates resulting in such
Buy-In.
(iv) Notwithstanding anything herein to the contrary, if after
the Effective Date the VWAP for any 15 consecutive Trading
Days exceeds then Set Price by more than 200%, the Company
may, within 2 Trading Days of any such period, deliver a
notice to the Holder (a "FORCED CONVERSION NOTICE" and the
date such notice is received by the Holder, the "FORCED
CONVERSION NOTICE DATE") to cause the Holder to immediately
convert all or part (and if part, pro-rata in proportion to
each Holders initial purchase of the Debentures) of the then
outstanding principal amount of Debentures pursuant to Section
4(a)(i). The Company may only effect a Forced Conversion
Notice if each of the following shall be true: (i) the Company
shall have duly honored all conversions occurring by virtue of
one or more Conversion Notices prior to the Forced Conversion
Date, (ii) there is an effective Underlying Shares
Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all
of the Underlying Shares issued to the Holder and all of the
Underlying Shares as are issuable to the Holder upon
conversion in full of this Debenture subject to the Forced
Conversion Notice (and the Company believes, in good faith,
that such effectiveness will continue uninterrupted for the
foreseeable future), (iii) the Common Stock is listed for
trading on a Principal Market (and the Company believes, in
good faith, that trading of the Common Stock on a Principal
Market will continue uninterrupted for the foreseeable
future), (iv) all liquidated damages and other amounts owing
in respect of the Debentures and Underlying Shares shall have
been paid or will, concurrently with the issuance of the
Underlying Shares, be paid in cash; (v) there is a sufficient
11
number of authorized but unissued and otherwise unreserved
shares of Common Stock for the issuance of all the Underlying
Shares as are issuable to the Holder upon conversion in full
of the Debentures subject to the Forced Conversion Notice;
(vi) no Event of Default nor any event that with the passage
of time would constitute an Event of Default has occurred and
is continuing; (vii) such issuance would be permitted in full
without violating the limitations set forth in clauses (A) or
(B) of Section 4(a)(ii) and (viii) no public announcement of a
pending or proposed Change of Control Transaction or
Fundamental Transaction has occurred that has not been
consummated.
(c) (i) The conversion price in effect on any Conversion Date
shall be equal to $____(1) (subject to adjustment herein)(the
"SET PRICE").
(ii) If the Company, at any time while the Debentures are
outstanding: (A) shall pay a stock dividend or otherwise make
a distribution or distributions on shares of its Common Stock
or any other equity or equity equivalent securities payable in
shares of Common Stock (which, for avoidance of doubt, shall
not include any shares of Common Stock issued by the Company
pursuant to this Debenture, including interest thereon), (B)
subdivide outstanding shares of Common Stock into a larger
number of shares, (C) combine (including by way of reverse
stock split) outstanding shares of Common Stock into a smaller
number of shares, or (D) issue by reclassification of shares
of the Common Stock any shares of capital stock of the
Company, then the Set Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding before
such event and of which the denominator shall be the number of
shares of Common Stock outstanding after such event. Any
adjustment made pursuant to this Section shall become
effective immediately after the record date for the
determination of stockholders entitled to receive such
dividend or distribution and shall become effective
immediately after the effective date in the case of a
subdivision, combination or re-classification.
(iii) If the Company, at any time while Debentures are
outstanding, shall issue rights, options or warrants to all
holders of Common Stock (and not to Holders) entitling them to
subscribe for or purchase shares of Common Stock or Common
Stock Equivalents at a price per share less than the VWAP at
the record date mentioned below, then the Set Price shall be
adjusted by multiplying the Set Price in effect immediately
prior to such record date by a fraction, of which the
denominator shall be the number of shares of the Common Stock
(excluding treasury shares, if any) outstanding on the date of
issuance of such rights or warrants plus the number of
--------
1 115% of the Closing Price on the applicable Closing Date.
12
additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of
shares of the Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants
plus the number of shares which the aggregate offering price
of the total number of shares so offered would purchase at the
VWAP on the record date. Such adjustment shall be made
whenever such rights, options or warrants are issued, and
shall become effective immediately after the record date for
the determination of stockholders entitled to receive such
rights, options or warrants.
(iv) If the Company or any subsidiary thereof, as applicable,
at any time while Debentures are outstanding, shall offer,
sell, grant any option to purchase or offer, sell or grant any
right to reprice its securities, or otherwise dispose of or
issue (or announce any offer, sale, grant or any option to
purchase or other disposition) any Common Stock or any equity
or equity equivalent securities (including any equity, debt or
other instrument that is at any time over the life thereof
convertible into or exchangeable for Common Stock)
(collectively, "COMMON STOCK EQUIVALENTS") entitling any
Person to acquire shares of Common Stock, at an effective
price per share less than 87% of the then Set Price ("DILUTIVE
ISSUANCE"), as adjusted hereunder (if the holder of the Common
Stock or Common Stock Equivalent so issued shall at any time,
whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices
or otherwise, or due to warrants, options or rights per share
which is issued in connection with such issuance, be entitled
to receive shares of Common Stock at an effective price per
share which is less than the Set Price, such issuance shall be
deemed to have occurred for less than the Set Price), then the
Set Price shall be reduced to equal 115% of the effective
conversion, exchange or purchase price for such Common Stock
or Common Stock Equivalents (including any reset provisions
thereof) at issue. Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued. The
Company shall notify the Holder in writing, no later than the
Business Day following the issuance of any Common Stock or
Common Stock Equivalent subject to this section, indicating
therein the applicable issuance price, or of applicable reset
price, exchange price, conversion price and other pricing
terms.
(v) If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of Common Stock
(and not to Holders) evidences of its indebtedness or assets
or rights or warrants to subscribe for or purchase any
security, then in each such case the Set Price shall be
determined by multiplying such price in effect immediately
prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the VWAP determined
as of the record date mentioned above, and of which the
numerator shall be such VWAP on such record date less the then
fair market value at such record date of the portion of such
assets or evidence of indebtedness so distributed applicable
to one outstanding share of the Common Stock as determined by
13
the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the
Holders of the portion of assets or evidences of indebtedness
so distributed or such subscription rights applicable to one
share of Common Stock. Such adjustment shall be made whenever
any such distribution is made and shall become effective
immediately after the record date mentioned above.
(vi) [RESERVED]
(vii) All calculations under this Section 4 shall be made to
the nearest cent or the nearest 1/100th of a share, as the
case may be. For purposes of this Section 4, the number of
shares of Common Stock deemed to be outstanding as of a given
date shall be the sum of the number of shares of Common Stock
(excluding treasury shares, if any) outstanding.
(viii) The Company agrees that it is prohibited from taking
any actions specified in Sections 4(c)(iii)-(v) which would
result in any adjustment to the Set Price prior to submitting
the transactions contemplated by the Purchase Agreement to a
vote for Shareholder Approval. Whenever the Set Price is
adjusted pursuant to any of Section 4(c)(ii) - (v), the
Company shall promptly mail to each Holder a notice setting
forth the Set Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment.
(ix) If (A) the Company shall declare a dividend (or any other
distribution) on the Common Stock; (B) the Company shall
declare a special nonrecurring cash dividend on or a
redemption of the Common Stock; (C) the Company shall
authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights; (D) the approval
of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any
sale or transfer of all or substantially all of the assets of
the Company, of any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or
property; (E) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the
affairs of the Company; then, in each case, the Company shall
cause to be filed at each office or agency maintained for the
purpose of conversion of the Debentures, and shall cause to be
mailed to the Holders at their last addresses as they shall
appear upon the stock books of the Company, at least 20
calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which
a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record
is not to be taken, the date as of which the holders of the
Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification,
14
consolidation, merger, sale, transfer or share exchange is
expected to become effective or close, and the date as of
which it is expected that holders of the Common Stock of
record shall be entitled to exchange their shares of the
Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; PROVIDED, that the failure
to mail such notice or any defect therein or in the mailing
thereof shall not affect the validity of the corporate action
required to be specified in such notice. Holders are entitled
to convert Debentures during the 20-day period commencing the
date of such notice to the effective date of the event
triggering such notice.
(x) If, at any time while this Debenture is outstanding, (A)
the Company effects any merger or consolidation of the Company
with or into another Person, (B) the Company effects any sale
of all or substantially all of its assets in one or a series
of related transactions, (C) any tender offer or exchange
offer (whether by the Company or another Person) is completed
pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, cash or
property, or (D) the Company effects any reclassification of
the Common Stock or any compulsory share exchange pursuant to
which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (in any such
case, a "FUNDAMENTAL TRANSACTION"), then upon any subsequent
conversion of this Debenture, the Holder shall have the right
to receive, for each Underlying Share that would have been
issuable upon such conversion absent such Fundamental
Transaction, the same kind and amount of securities, cash or
property as it would have been entitled to receive upon the
occurrence of such Fundamental Transaction if it had been,
immediately prior to such Fundamental Transaction, the holder
of one share of Common Stock (the "ALTERNATE CONSIDERATION").
For purposes of any such conversion, the determination of the
Set Price shall be appropriately adjusted to apply to such
Alternate Consideration based on the amount of Alternate
Consideration issuable in respect of one share of Common Stock
in such Fundamental Transaction, and the Company shall
apportion the Set Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any
different components of the Alternate Consideration. If
holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as
to the Alternate Consideration it receives upon any conversion
of this Debenture following such Fundamental Transaction. To
the extent necessary to effectuate the foregoing provisions,
any successor to the Company or surviving entity in such
Fundamental Transaction shall issue to the Holder a new
Debenture consistent with the foregoing provisions and
evidencing the Holder's right to convert such Debenture into
Alternate Consideration. The terms of any agreement pursuant
to which a Fundamental Transaction is effected shall include
terms requiring any such successor or surviving entity to
comply with the provisions of this paragraph (c) and insuring
that this Debenture (or any such replacement security) will be
15
similarly adjusted upon any subsequent transaction analogous
to a Fundamental Transaction. If any Fundamental Transaction
constitutes or results in a Change of Control Transaction,
then at the request of the Holder delivered before the 90th
day after such Fundamental Transaction, the Company (or any
such successor or surviving entity) will purchase the
Debenture from the Holder for a purchase price, payable in
cash within five Trading Days after such request (or, if
later, on the effective date of the Fundamental Transaction),
equal to the 100% of the remaining unconverted principal
amount of this Debenture on the date of such request, plus all
accrued and unpaid interest thereon, plus all other accrued
and unpaid amounts due hereunder.
(xi) Notwithstanding the foregoing, no adjustment will be made
under this paragraph (c) in respect of (A) the granting or
issuance of shares of capital stock or of options to
employees, officers, directors and consultants of the Company
pursuant to any stock option plan agreement or arrangement
duly adopted or approved by a majority of the non-employee
members of the Board of Directors of the Company or a majority
of the members of a committee of non-employee directors
established for such purpose, (B) upon the exercise of this
Debenture or any other Debenture of this series or of any
other series or security issued by the Company in connection
with the offer and sale of this Company's securities pursuant
to the Purchase Agreement, or (C) upon the exercise of or
conversion of any Convertible Securities, options or warrants
issued and outstanding on the Original Issue Date, provided
such securities have not been amended since the date of the
Purchase Agreement, or (D) issuance of securities in
connection with acquisitions, strategic investments, or
strategic partnering arrangements, the primary purpose of
which is not to raise capital.
(d) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued shares of Common
Stock solely for the purpose of issuance upon conversion of the
Debentures and payment of interest on the Debentures, each as herein
provided, free from preemptive rights or any other actual contingent
purchase rights of persons other than the Holders, not less than such
number of shares of the Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares
set forth in the Purchase Agreement) be issuable (taking into account
the adjustments and restrictions of Section 4(b)) upon the conversion
of the outstanding principal amount of the Debentures and payment of
interest hereunder. The Company covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and, if the Underlying
Shares Registration Statement has been declared effective under the
Securities Act, registered for public sale in accordance with such
Underlying Shares Registration Statement.
(e) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares
16
of the Common Stock, but may if otherwise permitted, make a cash
payment in respect of any final fraction of a share based on the VWAP
at such time. If the Company elects not, or is unable, to make such a
cash payment, the Holder shall be entitled to receive, in lieu of the
final fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for shares of the Common
Stock on conversion of the Debentures shall be made without charge to
the Holders thereof for any documentary stamp or similar taxes that may
be payable in respect of the issue or delivery of such certificate,
provided that the Company shall not be required to pay any tax that may
be payable in respect of any transfer involved in the issuance and
delivery of any such certificate upon conversion in a name other than
that of the Holder of such Debentures so converted and the Company
shall not be required to issue or deliver such certificates unless or
until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to
the satisfaction of the Company that such tax has been paid.
(g) Any and all notices or other communications or deliveries
to be provided by the Holders hereunder, including, without limitation,
any Conversion Notice, shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service or
sent by certified or registered mail, postage prepaid, addressed to the
Company, at the address set forth above, FACSIMILE NUMBER ___________,
ATTN: ____________ or such other address or facsimile number as the
Company may specify for such purposes by notice to the Holders
delivered in accordance with this Section. Any and all notices or other
communications or deliveries to be provided by the Company hereunder
shall be in writing and delivered personally, by facsimile, sent by a
nationally recognized overnight courier service or sent by certified or
registered mail, postage prepaid, addressed to each Holder at the
facsimile telephone number or address of such Holder appearing on the
books of the Company, or if no such facsimile telephone number or
address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed
given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 5:30 p.m.
(New York City time), (ii) the date after the date of transmission, if
such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section later than 5:30
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New
York City time) on such date, (iii) four days after deposit in the
United States mail, (iv) the Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or
(v) upon actual receipt by the party to whom such notice is required to
be given.
17
SECTION 5. REDEMPTION.
(a) OPTIONAL REDEMPTION. Subject to the provisions of this
Section 5, the Company may, at any time, deliver a notice to the
Holders (an "OPTIONAL REDEMPTION NOTICE" and the date such notice is
deemed delivered hereunder, the "OPTIONAL REDEMPTION NOTICE DATE") of
its irrevocable election to redeem all, but not less than all, of the
then outstanding Debentures, for an amount, in cash, equal to the
Optional Redemption Amount on the 30th Trading Day following the
Optional Redemption Notice Date (such date, the "OPTIONAL REDEMPTION
DATE" and such redemption, the "OPTIONAL REDEMPTION"). The Optional
Redemption Amount is due in full on the Optional Redemption Date. The
Company may only effect an Optional Redemption if from the Optional
Redemption Notice Date through to the Optional Redemption Date, each of
the following shall be true: (i) the Company shall have duly honored
all conversions and redemptions scheduled to occur or occurring by
virtue of one or more Conversion Notices prior to the Optional
Redemption Date, (ii) there is an effective Underlying Shares
Registration Statement pursuant to which the Holders are permitted to
utilize the prospectus thereunder to resell all of the Underlying
Shares issued to the Holders and all of the Underlying Shares as are
issuable to the Holders upon conversion in full of the Debentures
subject to the Optional Redemption (and the Company believes, in good
faith, that such effectiveness will continue uninterrupted for the
foreseeable future), (iii) the Common Stock is listed for trading on
the Principal Market (and the Company believes, in good faith, that
trading of the Common Stock on the Principal Market will continue
uninterrupted for the foreseeable future), (iv) all liquidated damages
and other amounts owing in respect of the Debentures shall have been
paid or will, concurrently with the issuance of the Underlying Shares,
be paid in cash; (v) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the
issuance of all the Underlying Shares as are issuable to the Holder
upon conversion in full of the Debentures subject to the Optional
Redemption; (vi) no Event of Default has occurred and is continuing;
(vii) an issuance of all of the Underlying Share upon conversion
hereunder would be permitted in full without violating the limitations
set forth in Section 4(a)(ii)(A) or (B); and (viii) no public
announcement of a pending or proposed Fundamental Transaction or
acquisition transaction has occurred that has not been consummated. If
any of the foregoing conditions shall cease to be satisfied at any time
during the required period, then the Holder may elect to nullify the
Optional Redemption Notice in which case the Option Redemption Notice
shall be null and void, ab initio. The Holders may convert, pursuant to
Section 4(a)(i) hereof, any shares of Debentures subject to an Optional
Redemption at any time prior to the date that the Optional Redemption
Amount and all amounts owing thereon are due and paid in full. The
Company covenants and agrees that it will honor all Conversion Notices
tendered from the time of delivery of the Optional Redemption Notice
through the date all amounts owing thereon are due and paid in full.
(b) MONTHLY REDEMPTION. On each Monthly Redemption Date, the
Company shall redeem each Holder's Pro Rata Portion of the Monthly
Redemption Amount plus accrued but unpaid interest, the sum of all
liquidated damages and any other amounts then owing to such Holder in
18
respect of the Debenture. For purposes of this subsection 5(b) only,
"PRO RATA PORTION" is the ration of (x) the principal amount of this
Debenture on the Original Issue Date and (y) the sum of the aggregate
original principal amounts of the Debentures issued to all Holders on
the First Closing, increasing on the Second Closing Date to include the
aggregate original principal amounts of the Debentures issued at the
Second Closing, if such Closing occurs. If any Holder shall no longer
holds Debentures, then the Pro Rata Portion shall be recalculated to
exclude such Holder's principal amount from clause (y) above. Monthly
Redemption Amount shall be allocated pro-rata among the remaining
Holders. The Monthly Redemption Amount due on each Monthly Redemption
Date shall, except as provided in this Section, be paid in cash. As to
any Monthly Redemption and upon 20 Trading Days' prior written
irrevocable notice, in lieu of a cash redemption payment the Company
may elect to pay 100% of a Monthly Redemption in Underlying Shares
based on a conversion price equal to the lesser of (i) 90% of the
average of the 20 VWAPs immediately prior to the applicable Monthly
Redemption Date (subject to adjustment for any stock dividend, stock
split, stock combination or other similar event affecting the Common
Stock during such 20 Trading Day period) and (ii) the Set Price (the
"MONTHLY CONVERSION PRICE"); PROVIDED, HOWEVER, that the Company may
not pay the Monthly Redemption Amount in Underlying Shares unless, on
the Monthly Redemption Date and during the 20 Trading Day period
immediately prior thereto, (i) there is an effective Registration
Statement pursuant to which the Holder is permitted to utilize the
prospectus thereunder to resell all of the Underlying Shares issued to
the Holder and all of the Underlying Shares as are issuable to the
Holder upon conversion in full of the Debenture subject to such Monthly
Redemption (and the Company believes, in good faith, that such
effectiveness will continue uninterrupted for the foreseeable future),
(ii) the Common Stock is listed for trading on a Principal Market (and
the Company believes, in good faith, that trading of the Common Stock
on the Principal Market will continue uninterrupted for the foreseeable
future), (iii) on or prior to the 20th Trading Day prior to such
Monthly Redemption Date, the Company irrevocably notifies the Holder
that it will issue Underlying Shares in lieu of cash; (iv) all
liquidated damages and other amounts owing in respect of the Debenture
shall have been paid or will, concurrently with the issuance of the
Underlying Shares, be paid in cash; (v) there is a sufficient number of
authorized but unissued and otherwise unreserved shares of Common Stock
for such issuance; (vi) such issuance would be permitted in full
without violating the limitations set forth in Section 4(a)(ii)(A) or
(B); (vii) no Event of Default nor any event that with the passage of
time would constitute an Event of Default has occurred and is
continuing; and (viii) no public announcement of a pending or proposed
Change of Control Transaction or Fundamental Transaction has occurred
that has not been consummated. The Holders may convert, pursuant to
Section 4(a)(i), any principal amount of the Debenture subject to a
Monthly Redemption at any time prior to the date that the Monthly
Redemption Amount and all amounts owing thereon are due and paid in
full. The Company covenants and agrees that it will honor all
Conversion Notices tendered up until such amounts are paid in full.
(c) REDEMPTION PROCEDURE. The payment of cash and/or issuance
of Common Stock, as the case may be, pursuant to a Monthly Redemption
19
shall be made on the Monthly Redemption Date and the payment of cash
pursuant to an Optional Redemption shall be made on the Optional
Redemption Date. If any portion of the cash payment for a Monthly
Redemption or Optional Redemption shall not be paid by the Company by
the respective due date, interest shall accrue thereon at the rate of
18% per annum (or the maximum rate permitted by applicable law,
whichever is less) until the payment of the Monthly Redemption Amount
or Optional Redemption Amount, as applicable, plus all amounts owing
thereon is paid in full. In addition, if any portion of the Monthly
Redemption Amount or Optional Redemption Amount, as applicable, remains
unpaid after such date, the Holders subject to such redemption may
elect, by written notice to the Company given at any time thereafter,
to invalidate AB INITIO such redemption, notwithstanding anything
herein contained to the contrary. Notwithstanding anything to the
contrary in this Section 6, the Company's determination to redeem in
cash or shares of Common Stock shall be applied ratably among the
Holders based upon the principal amount of Debentures initially
purchased by each Holder, adjusted upward ratably in the event all of
the shares of Debentures of any Holder are no longer outstanding.
SECTION 6. DEFINITIONS. For the purposes hereof, in addition to the
terms defined elsewhere in this Debenture: (a) capitalized terms not otherwise
defined herein have the meanings given to such terms in the Purchase Agreement,
and (b) the following terms shall have the following meanings:
"BUSINESS DAY" means any day except Saturday, Sunday and any
day which shall be a federal legal holiday in the United States or a
day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"CHANGE OF CONTROL TRANSACTION" means the occurrence after the
date hereof of any of (i) an acquisition after the date hereof by an
individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Company,
by contract or otherwise) of in excess of 45% of the voting securities
of the Company, or (ii) a replacement at one time or within a one year
period of more than one-half of the members of the Company's board of
directors which is not approved by a majority of those individuals who
are members of the board of directors on the date hereof (or by those
individuals who are serving as members of the board of directors on any
date whose nomination to the board of directors was approved by a
majority of the members of the board of directors who are members on
the date hereof), or (iii) the execution by the Company of an agreement
to which the Company is a party or by which it is bound, providing for
any of the events set forth above in (i) or (ii).
"COMMISSION" means the Securities and Exchange Commission.
20
"COMMON STOCK" means the common stock, $0.0001 par value per
share, of the Company and stock of any other class into which such
shares may hereafter have been reclassified or changed.
"CONVERSION DATE" shall have the meaning set forth in Section
4(a)(i) hereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"INTEREST CONVERSION RATE" means 90% of the lesser of (i) the
average of the 20 VWAPs immediately prior to the applicable Interest
Payment Date or (ii) the average of the 20 VWAPs immediately prior to
the date the applicable interest payment shares are issued and
delivered if after the Interest Payment Date.
"LATE FEES" shall have the meaning set forth in the second
paragraph to this Debenture.
"MANDATORY PREPAYMENT AMOUNT" for any Debentures shall equal
the sum of (i) the greater of: (A) 120% of the principal amount of
Debentures to be prepaid, plus all accrued and unpaid interest thereon,
plus all other accrued and unpaid amounts due hereunder, or (B) the
principal amount of Debentures to be prepaid, plus all accrued and
unpaid interest thereon, plus all other accrued and unpaid amounts due
hereunder, divided by the Set Price on (x) the date the Mandatory
Prepayment Amount is demanded or otherwise due or (y) the date the
Mandatory Prepayment Amount is paid in full, whichever is less,
multiplied by the VWAP on (x) the date the Mandatory Prepayment Amount
is demanded or otherwise due or (y) the date the Mandatory Prepayment
Amount is paid in full, whichever is greater, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of such
Debentures.
"MONTHLY CONVERSION PRICE" shall have the meaning set forth in
Section 5(a) hereof.
"MONTHLY REDEMPTION" shall mean the redemption of the
Debenture pursuant to Section 5(a) hereof.
"MONTHLY REDEMPTION AMOUNT" shall mean, as to a Monthly
Redemption, $218,750 in the aggregate among all Holders; except that,
if the Second Closing occurs, such amount shall increase to $300,000 in
the aggregate among all Holders commencing on the later of (a) February
1, 2004 and (b) the 1st Monthly Redemption Date following the 5th month
anniversary of the Second Closing.
"MONTHLY REDEMPTION DATE" means the 1st of each month,
commencing on February 1, 2004 and ending upon the full redemption of
this Debenture.
21
"OPTIONAL REDEMPTION AMOUNT" shall mean the sum of (i) 110% of
the principal amount of the Debenture then outstanding, (ii) accrued
but unpaid interest and (iii) all liquidated damages and other amounts
due in respect of the Debentures.
"OPTIONAL REDEMPTION DATE" shall have the meaning set forth in
Section 5(a).
"ORIGINAL ISSUE DATE" shall mean the date of the first
issuance of the Debentures regardless of the number of transfers of any
Debenture and regardless of the number of instruments which may be
issued to evidence such Debenture.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"PURCHASE AGREEMENT" means the Securities Purchase Agreement,
dated as of the Original Issue Date, to which the Company and the
original Holder are parties, as amended, modified or supplemented from
time to time in accordance with its terms.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the Original Issue Date, to which the Company
and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"SET PRICE" shall have the meaning set forth in Section
4(c)(i).
"SHAREHOLDER APPROVAL" means such approval as may be required
by the applicable rules and regulations of the Principal Market (or any
successor entity) from the shareholders of the Company with respect to
the transactions contemplated by the Transaction Documents, including
the issuance of all of the Underlying Shares and shares of Common Stock
issuable upon exercise of the Warrants.
"TRADING DAY" means (a) a day on which the shares of Common
Stock are traded on the Principal Market on which the shares of Common
Stock are then listed or quoted, or (b) if the shares of Common Stock
are not quoted on a Principal Market, a day on which the shares of
Common Stock are quoted in the over-the-counter market as reported by
the National Quotation Bureau Incorporated (or any similar organization
or agency succeeding its functions of reporting prices); PROVIDED, that
in the event that the shares of Common Stock are not listed or quoted
as set forth in (a), (b) and (c) hereof, then Trading Day shall mean a
Business Day.
22
"TRANSACTION DOCUMENTS" shall have the meaning set forth in
the Purchase Agreement.
"UNDERLYING SHARES" means the shares of Common Stock issuable
upon conversion of Debentures or as payment of interest in accordance
with the terms hereof.
"UNDERLYING SHARES REGISTRATION STATEMENT" means a
registration statement meeting the requirements set forth in the
Registration Rights Agreement, covering among other things the resale
of the Underlying Shares and naming the Holder as a "selling
stockholder" thereunder.
"VWAP" means, for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Principal Market or the OTC Bulletin Board, the
daily volume weighted average price of the Common Stock for such date
(or the nearest preceding date) on the Principal Market (or OTC
Bulletin Board) on which the Common Stock is then listed or quoted as
reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30
a.m. ET to 4:02 p.m. Eastern Time) using the VAP function; (b) if the
Common Stock is not then listed or quoted on a Principal Market or the
OTC Bulletin Board and if prices for the Common Stock are then reported
in the "pink sheets" published by the National Quotation Bureau
Incorporated (or a similar organization or agency succeeding to its
functions of reporting prices), the most recent bid price per share of
the Common Stock so reported; or (c) in all other cases, the fair
market value of a share of Common Stock as determined by a nationally
recognized independent appraiser selected in good faith by Purchasers
holding a majority of the outstanding principal amount of Debentures.
SECTION 7. Except as expressly provided herein, no provision of this
Debenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of, interest and liquidated damages (if
any) on, this Debenture at the time, place, and rate, and in the coin or
currency, herein prescribed. This Debenture is a direct debt obligation of the
Company. This Debenture ranks PARI PASSU with all other Debentures now or
hereafter issued under the terms set forth herein. As long as there are
Debentures outstanding, the Company shall not and shall cause it subsidiaries
not to, without the consent of the Holders, (a) amend its certificate of
incorporation, bylaws or other charter documents so as to adversely affect any
rights of the Holders; (b) repay, repurchase or offer to repay, repurchase or
otherwise acquire shares of its Common Stock or other equity securities other
than as to the Underlying Shares to the extent permitted or required under the
Transaction Documents; (c) enter into any agreement with respect to any of the
foregoing; or (d) issue any variable priced equity securities or variable priced
equity linked securities.
SECTION 8. If this Debenture shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
23
substitution for a lost, stolen or destroyed Debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
SECTION 9. The Company will not and will not permit any of its
subsidiaries to, directly or indirectly, enter into, create, incur, assume or
suffer to exist any indebtedness of any kind, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein or
any income or profits therefrom that is senior in any respect to the Company's
obligations under the Debentures.
SECTION 10. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of
California, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by any of the
Transaction Documents (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, employees or agents) shall be
commenced in the state and federal courts sitting in the City of San Diego,
California (the "CALIFORNIA COURTS"). Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the California Courts for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or such
California Courts are improper or inconvenient venue for such proceeding. Each
party hereby irrevocably waives personal service of process and consents to
process being served in any such suit, action or proceeding by mailing a copy
thereof via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Debenture and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
Each party hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Debenture or the transactions contemplated
hereby. If either party shall commence an action or proceeding to enforce any
provisions of this Debenture, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its attorneys fees and
other costs and expenses incurred with the investigation, preparation and
prosecution of such action or proceeding.
SECTION 11. Any waiver by the Company or the Holder of a breach of any
provision of this Debenture shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Debenture. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Debenture on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Debenture. Any waiver
must be in writing.
24
SECTION 12. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances. If it shall be found
that any interest or other amount deemed interest due hereunder violates
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.
The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on the Debentures as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may affect the
covenants or the performance of this indenture, and the Company (to the extent
it may lawfully do so) hereby expressly waives all benefits or advantage of any
such law, and covenants that it will not, by resort to any such law, hinder,
delay or impeded the execution of any power herein granted to the Holder, but
will suffer and permit the execution of every such as though no such law has
been enacted.
SECTION 13. Whenever any payment or other obligation hereunder shall be
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day.
*********************
25
IN WITNESS WHEREOF, the Company has caused this Convertible Debenture
to be duly executed by a duly authorized officer as of the date first above
indicated.
SVI SOLUTIONS, INC.
By:_____________________________________
Name:
Title:
26
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal and, if specified, interest
under the 9% Convertible Debenture of SVI Solutions, Inc., (the "Company") due
on ________ __, 200__, into shares of common stock, $0.0001 par value per share
(the "Common Stock"), of the Company according to the conditions hereof, as of
the date written below. If shares are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.
By the delivery of this Notice of Conversion the undersigned represents and
warrants to the Company that its ownership of the Company's Common Stock does
not exceed the amounts determined in accordance with Section 13(d) of the
Exchange Act, specified under Section 4 of this Debenture.
The undersigned agrees to comply with the prospectus delivery requirements under
the applicable securities laws in connection with any transfer of the aforesaid
shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debentures to be Converted
Payment of Interest in Common Stock |_| Yes |_| No
If yes, $ _______ of Interest Accrued on
Account of Conversion at Issue
Number of shares of Common Stock to be Issued:
Applicable Conversion Price:
Signature:
Name:
Address:
27
SCHEDULE 1
CONVERSION SCHEDULE
9% Convertible Debentures due on _______ ___, 200__, in the aggregate principal
amount of $____________ issued by SVI Solutions, Inc. This Conversion Schedule
reflects conversions made under Section 4 of the above referenced Debenture.
Dated:
------------------------------- ------------------------- ----------------------- ------------------------------
Aggregate Principal
Amount Remaining
Date of Conversion Subsequent to
(or for first entry, Original Conversion
Issue Date) Amount of Conversion (or original Company Attest
Principal Amount)
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
28
EXHIBIT B
[See Appendix II for Form of Registration Rights Agreement]
EXHIBIT C
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES
STOCK PURCHASE WARRANT
To Purchase __________ Shares of Common Stock of
SVI SOLUTIONS, INC.
THIS STOCK PURCHASE WARRANT CERTIFIES that, for value
received, _____________ (the "Holder"), is entitled, upon the terms and subject
to the limitations on exercise and the conditions hereinafter set forth, at any
time on or after _________ __, 200__ (the "INITIAL EXERCISE DATE") and on or
prior to the close of business on the fifth anniversary of the Initial Exercise
Date (the "TERMINATION DATE") but not thereafter, to subscribe for and purchase
from SVI Solutions, Inc., a corporation incorporated in the State of Delaware
(the "COMPANY"), up to ____________ shares (the "WARRANT SHARES") of Common
Stock, par value $0.0001 per share, of the Company (the "COMMON STOCK"). The
purchase price of one share of Common Stock (the "EXERCISE PRICE") under this
Warrant shall be $____1, subject to adjustment hereunder. The Exercise Price and
the number of Warrant Shares for which the Warrant is exercisable shall be
subject to adjustment as provided herein. CAPITALIZED TERMS USED AND NOT
OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THAT CERTAIN
SECURITIES PURCHASE AGREEMENT (THE "PURCHASE AGREEMENT"), DATED MARCH __, 2003,
BETWEEN THE COMPANY AND THE INVESTORS SIGNATORY THERETO.
--------
1 115% of the Closing Price on the applicable Closing Date.
1. TITLE TO WARRANT. Prior to the Termination Date and subject to
compliance with applicable laws and Section 7 of this Warrant, this Warrant and
all rights hereunder are transferable, in whole or in part to an Affiliate of
the Holder, at the office or agency of the Company by the Holder in person or by
duly authorized attorney, upon surrender of this Warrant together with the
Assignment Form annexed hereto properly endorsed. The transferee shall sign an
investment letter in form and substance reasonably satisfactory to the Company.
The Holder hereof, by acceptance of this Warrant, agrees to be bound by the
covenants made by the original Holder contained in the Purchase Agreement.
2. AUTHORIZATION OF SHARES. The Company covenants that all Warrant
Shares which may be issued upon the exercise of the purchase rights represented
by this Warrant will, upon exercise of the purchase rights represented by this
Warrant, be duly authorized, validly issued, fully paid and nonassessable and
free from all taxes, liens and charges in respect of the issue thereof (other
than taxes in respect of any transfer occurring contemporaneously with such
issue).
3. EXERCISE OF WARRANT.
(a) Except as provided in Section 4 herein, exercise
of the purchase rights represented by this Warrant may be made at any
time or times on or after the Initial Exercise Date and on or before
the Termination Date by the surrender of this Warrant and the Notice of
Exercise Form annexed hereto duly executed, at the office of the
Company (or such other office or agency of the Company as it may
designate by notice in writing to the registered Holder at the address
of such Holder appearing on the books of the Company) and upon payment
of the Exercise Price of the shares thereby purchased by wire transfer
or cashier's check drawn on a United States bank or by means of a
cashless exercise pursuant to Section 3(d), the Holder shall be
entitled to receive a certificate for the number of Warrant Shares so
purchased. Certificates for shares purchased hereunder shall be
delivered to the Holder within five (3) Trading Days after the date on
which this Warrant shall have been exercised as aforesaid. This Warrant
shall be deemed to have been exercised and such certificate or
certificates shall be deemed to have been issued, and Holder or any
other person so designated to be named therein shall be deemed to have
become a holder of record of such shares for all purposes, as of the
date the Warrant has been exercised by payment to the Company of the
Exercise Price and all taxes required to be paid by the Holder, if any,
pursuant to Section 5 prior to the issuance of such shares, have been
paid. If the Company fails to deliver to the Holder a certificate or
certificates representing the Warrant Shares pursuant to this Section
3(a) by the fifth Trading Day after the date of exercise, then the
Holder will have the right to rescind such exercise. In addition to any
other rights available to the Holder, if the Company fails to deliver
to the Holder a certificate or certificates representing the Warrant
Shares pursuant to an exercise by the fifth Trading Day after the date
of exercise, and if after such fifth Trading Day the Holder is required
by its broker to purchase (in an open market transaction or otherwise)
shares of Common Stock to deliver in satisfaction of a sale by the
Holder of the Warrant Shares which the Holder anticipated receiving
upon such exercise (a "Buy-In"), then the Company shall (1) pay in cash
to the Holder the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the shares of Common
Stock so purchased exceeds (y) the amount obtained by multiplying (A)
the number of Warrant Shares that the Company was required to deliver
to the Holder in connection with the exercise at issue times (B) the
2
price at which the sell order giving rise to such purchase obligation
was executed, and (2) at the option of the Holder, either reinstate the
portion of the Warrant and equivalent number of Warrant Shares for
which such exercise was not honored or deliver to the Holder the number
of shares of Common Stock that would have been issued had the Company
timely complied with its exercise and delivery obligations hereunder.
For example, if the Holder purchases Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an
attempted exercise of shares of Common Stock with an aggregate sale
price giving rise to such purchase obligation of $10,000, under clause
(1) of the immediately preceding sentence the Company shall be required
to pay the Holder $1,000. The Holder shall provide the Company written
notice indicating the amounts payable to the Holder in respect of the
Buy-In, together with applicable confirmations and other evidence
reasonably requested by the Company. Nothing herein shall limit a
Holder's right to pursue any other remedies available to it hereunder,
at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Company's
failure to timely deliver certificates representing shares of Common
Stock upon exercise of the Warrant as required pursuant to the terms
hereof.
(b) If this Warrant shall have been exercised in
part, the Company shall, at the time of delivery of the certificate or
certificates representing Warrant Shares, deliver to Holder a new
Warrant evidencing the rights of Holder to purchase the unpurchased
Warrant Shares called for by this Warrant, which new Warrant shall in
all other respects be identical with this Warrant.
(c) Notwithstanding anything herein to the contrary,
in no event shall the Holder be permitted to exercise this Warrant for
Warrant Shares to the extent that (i) the number of shares of Common
Stock beneficially owned by such Holder, together with any affiliate
thereof (other than Warrant Shares issuable upon exercise of this
Warrant) plus (ii) the number of Warrant Shares issuable upon exercise
of this Warrant, would be equal to or exceed 4.9999% of the number of
shares of Common Stock then issued and outstanding, including shares
issuable upon exercise of this Warrant held by such Holder after
application of this Section 3(c). As used herein, beneficial ownership
shall be determined in accordance with Section 13(d) of the Exchange
Act and the rules promulgated thereunder. To the extent that the
limitation contained in this Section 3(c) applies, the determination of
whether this Warrant is exercisable (in relation to other securities
owned by the Holder) and of which a portion of this Warrant is
exercisable shall be in the sole discretion of such Holder, and the
submission of a Notice of Exercise shall be deemed to be such Holder's
determination of whether this Warrant is exercisable (in relation to
other securities owned by such Holder) and of which portion of this
Warrant is exercisable, in each case subject to such aggregate
percentage limitation, and the Company shall have no obligation to
verify or confirm the accuracy of such determination. Nothing contained
herein shall be deemed to restrict the right of a Holder to exercise
this Warrant into Warrant Shares at such time as such exercise will not
violate the provisions of this Section 3(c). The provisions of this
3
Section 3(c) may be waived by the Holder upon, at the election of the
Holder, not less than 61 days' prior notice to the Company, and the
provisions of this Section 3(c) shall continue to apply until such 61st
day (or such later date, as determined by the Holder, as may be
specified in such notice of waiver). No exercise of this Warrant in
violation of this Section 3(c) but otherwise in accordance with this
Warrant shall affect the status of the Warrant Shares as validly
issued, fully-paid and nonassessable.
(d) If at any time after one year from the date of
issuance of this Warrant there is no effective Registration Statement
registering the resale of the Warrant Shares by the Holder, this
Warrant may also be exercised at such time by means of a "cashless
exercise" in which the Holder shall be entitled to receive a
certificate for the number of Warrant Shares equal to the quotient
obtained by dividing [(A-B) (X)] by (A), where:
(A) = the VWAP on the Trading Day preceding the date of
such election;
(B) = the Exercise Price of the Warrants, as adjusted; and
(X) = the number of Warrant Shares issuable upon exercise
of the Warrants in accordance with the terms of this
Warrant.
(e) Subject to the provisions of this Section 3, if
after the Effective Date the VWAP for twenty consecutive Trading Days
(the "MEASUREMENT PRICE") exceeds 300% of the then Exercise Price
(subject to adjustment herein) (the "THRESHOLD PRICE"), then the
Company may, on one occasion and within two Trading Days of such
period, call for cancellation of all or any portion of this Warrant for
which a Notice of Exercise has not yet been delivered (such right, a
"CALL"). To exercise this right, the Company must deliver to the Holder
an irrevocable written notice (a "CALL NOTICE"), indicating therein the
portion of unexercised portion of this Warrant to which such notice
applies. If the conditions set forth below for such Call are satisfied
from the period from the date of the Call Notice through and including
the Call Date (as defined below), then any portion of this Warrant
subject to such Call Notice for which a Notice of Exercise shall not
have been received from and after the date of the Call Notice will be
cancelled at 6:30 p.m. (New York City time) on the tenth Trading Day
after the date the Call Notice is received by the Holder (such date,
the "CALL DATE"). Any unexercised portion of this Warrant to which the
Call Notice does not pertain will be unaffected by such Call Notice. In
furtherance thereof, the Company covenants and agrees that it will
honor all Notices of Exercise with respect to Warrant Shares subject to
a Call Notice that are tendered from the time of delivery of the Call
Notice through 6:30 p.m. (New York City time) on the Call Date. The
parties agree that any Notice of Exercise delivered following a Call
Notice shall first reduce to zero the number of Warrant Shares subject
to such Call Notice prior to reducing the remaining Warrant Shares
available for purchase under this Warrant. For example, if (x) this
Warrant then permits the Holder to acquire 100 Warrant Shares, (y) a
Call Notice pertains to 75 Warrant Shares, and (z) prior to 6:30 p.m.
(New York City time) on the Call Date the Holder tenders a Notice of
Exercise in respect of 50 Warrant Shares, then (1) on the Call Date the
right under this Warrant to acquire 25 Warrant Shares will be
automatically cancelled, (2) the Company, in the time and manner
required under this Warrant, will have issued and delivered to the
Holder 50 Warrant Shares in respect of the exercises following receipt
of the Call Notice, and (3) the Holder may, until the Termination Date,
4
exercise this Warrant for 25 Warrant Shares (subject to adjustment as
herein provided and subject to subsequent Call Notices). Subject again
to the provisions of this Section 10, the Company may deliver
subsequent Call Notices for any portion of this Warrant for which the
Holder shall not have delivered a Notice of Exercise. Notwithstanding
anything to the contrary set forth in this Warrant, the Company may not
deliver a Call Notice or require the cancellation of this Warrant (and
any Call Notice will be void), unless, from the beginning of the 20
consecutive Trading Days used to determine whether the Common Stock has
achieved the Threshold Price through the Call Date, (i) the Measurement
Price equals or exceeds the Threshold Price, (ii) the Company shall
have honored in accordance with the terms of this Warrant all Notices
of Exercise delivered by 6:30 p.m. (New York City time) on the Call
Date, (iii) the Registration Statement shall be effective as to all
Warrant Shares and the prospectus thereunder available for use by the
Holder for the resale all such Warrant Shares and (iv) the Common Stock
shall be listed or quoted for trading on the Principal Market.
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to such fraction multiplied by
the Exercise Price.
5. CHARGES, TAXES AND EXPENSES. Issuance of certificates for Warrant
Shares shall be made without charge to the Holder for any issue or transfer tax
or other incidental expense in respect of the issuance of such certificate, all
of which taxes and expenses shall be paid by the Company, and such certificates
shall be issued in the name of the Holder or in such name or names as may be
directed by the Holder; PROVIDED, HOWEVER, that in the event certificates for
Warrant Shares are to be issued in a name other than the name of the Holder,
this Warrant when surrendered for exercise shall be accompanied by the
Assignment Form attached hereto duly executed by the Holder; and the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. CLOSING OF BOOKS. The Company will not close its stockholder books
or records in any manner which prevents the timely exercise of this Warrant,
pursuant to the terms hereof.
7. TRANSFER, DIVISION AND COMBINATION.
(a) Subject to compliance with any applicable
securities laws and the conditions set forth in Sections 1 and 7(f)
hereof and to the provisions of Section 4.1 of the Purchase Agreement,
this Warrant and all rights hereunder are transferable, in whole or in
part, upon surrender of this Warrant at the principal office of the
Company, together with a written assignment of this Warrant
substantially in the form attached hereto duly executed by the Holder
or its agent or attorney and funds sufficient to pay any transfer taxes
payable upon the making of such transfer. Upon such surrender and, if
5
required, such payment, the Company shall execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees and in the
denomination or denominations specified in such instrument of
assignment, and shall issue to the assignor a new Warrant evidencing
the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled. A Warrant, if properly assigned, may be
exercised by a new holder for the purchase of Warrant Shares without
having a new Warrant issued.
(b) This Warrant may be divided or combined with
other Warrants upon presentation hereof at the aforesaid office of the
Company, together with a written notice specifying the names and
denominations in which new Warrants are to be issued, signed by the
Holder or its agent or attorney. Subject to compliance with Section
7(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or
Warrants in exchange for the Warrant or Warrants to be divided or
combined in accordance with such notice.
(c) The Company shall prepare, issue and deliver at
its own expense (other than transfer taxes) the new Warrant or Warrants
under this Section 7.
(d) The Company agrees to maintain, at its aforesaid
office, books for the registration and the registration of transfer of
the Warrants.
(e) If, at the time of the surrender of this Warrant
in connection with any transfer of this Warrant, the transfer of this
Warrant shall not be registered pursuant to an effective registration
statement under the Securities Act and under applicable state
securities or blue sky laws, the Company may require, as a condition of
allowing such transfer (i) that the Holder or transferee of this
Warrant, as the case may be, furnish to the Company a written opinion
of counsel (which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions) to the
effect that such transfer may be made without registration under the
Securities Act and under applicable state securities or blue sky laws,
(ii) that the holder or transferee execute and deliver to the Company
an investment letter in form and substance acceptable to the Company
and (iii) that the transferee be an "accredited investor" as defined in
Rule 501(a) promulgated under the Securities Act.
8. NO RIGHTS AS SHAREHOLDER UNTIL EXERCISE. This Warrant does not
entitle the Holder to any voting rights or other rights as a shareholder of the
Company prior to the exercise hereof. Upon the surrender of this Warrant and the
payment of the aggregate Exercise Price (or by means of a cashless exercise),
the Warrant Shares so purchased shall be and be deemed to be issued to such
Holder as the record owner of such shares as of the close of business on the
later of the date of such surrender or payment.
9. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. The Company
covenants that upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant or any stock
certificate relating to the Warrant Shares, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it (which, in
the case of the Warrant, shall not include the posting of any bond), and upon
6
surrender and cancellation of such Warrant or stock certificate, if mutilated,
the Company will make and deliver a new Warrant or stock certificate of like
tenor and dated as of such cancellation, in lieu of such Warrant or stock
certificate.
10. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a Saturday,
Sunday or legal holiday.
11. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.
(a) STOCK SPLITS, ETC. The number and kind of
securities purchasable upon the exercise of this Warrant and the
Exercise Price shall be subject to adjustment from time to time upon
the happening of any of the following. In case the Company shall (i)
pay a dividend in shares of Common Stock or make a distribution in
shares of Common Stock to holders of its outstanding Common Stock, (ii)
subdivide its outstanding shares of Common Stock into a greater number
of shares, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock, or (iv) issue any shares of
its capital stock in a reclassification of the Common Stock, then the
number of Warrant Shares purchasable upon exercise of this Warrant
immediately prior thereto shall be adjusted so that the Holder shall be
entitled to receive the kind and number of Warrant Shares or other
securities of the Company which it would have owned or have been
entitled to receive had such Warrant been exercised in advance thereof.
Upon each such adjustment of the kind and number of Warrant Shares or
other securities of the Company which are purchasable hereunder, the
Holder shall thereafter be entitled to purchase the number of Warrant
Shares or other securities resulting from such adjustment at an
Exercise Price per Warrant Share or other security obtained by
multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares purchasable pursuant hereto
immediately prior to such adjustment and dividing by the number of
Warrant Shares or other securities of the Company resulting from such
adjustment. An adjustment made pursuant to this paragraph shall become
effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
(b) ANTI-DILUTION PROVISIONS. During the Exercise
Period, the Exercise Price and the number of Warrant Shares issuable
hereunder and for which this Warrant is then exercisable pursuant to
Section 1 hereof shall be subject to adjustment from time to time as
provided in this Section 11(b). In the event that any adjustment of the
Exercise Price as required herein results in a fraction of a cent, such
Exercise Price shall be rounded up or down to the nearest cent.
(i) ADJUSTMENT OF EXERCISE PRICE. Except as set forth
in Section 11(b)(ii)(E), if and whenever the Company issues or
sells, or in accordance with Section 11(b) hereof is deemed to
have issued or sold, any shares of Common Stock for an
effective consideration per share of less than the then
Exercise Price or for no consideration (such lower price, the
"BASE SHARE PRICE" and such issuances collectively, a
7
"DILUTIVE ISSUANCE"), then, the Exercise Price shall be
reduced to equal the Base Share Price, PROVIDED, that for
purposes hereof, all shares of Common Stock that are issuable
upon conversion, exercise or exchange of Capital Share
Equivalents shall be deemed outstanding immediately after the
issuance of such Common Stock. Such adjustment shall be made
whenever such shares of Common Stock or Capital Share
Equivalents are issued.
(ii) EFFECT ON EXERCISE PRICE OF CERTAIN EVENTS. For
purposes of determining the adjusted Exercise Price under
Section 11(b) hereof, the following will be applicable:
(A) ISSUANCE OF RIGHTS OR OPTIONS.
If the Company in any manner issues or grants any
warrants, rights or options, whether or not
immediately exercisable, to subscribe for or to
purchase Common Stock or other securities
exercisable, convertible into or exchangeable for
Common Stock ("CONVERTIBLE SECURITIES") (such
warrants, rights and options to purchase Common Stock
or Convertible Securities are hereinafter referred to
as "OPTIONS") and the effective price per share for
which Common Stock is issuable upon the exercise of
such Options is less than the Exercise Price ("BELOW
BASE PRICE OPTIONS"), then the maximum total number
of shares of Common Stock issuable upon the exercise
of all such Below Base Price Options (assuming full
exercise, conversion or exchange of Convertible
Securities, if applicable) will, as of the date of
the issuance or grant of such Below Base Price
Options, be deemed to be outstanding and to have been
issued and sold by the Company for such price per
share and the maximum consideration payable to the
Company upon such exercise (assuming full exercise,
conversion or exchange of Convertible Securities, if
applicable) will be deemed to have been received by
the Company. For purposes of the preceding sentence,
the "effective price per share for which Common Stock
is issuable upon the exercise of such Below Base
Price Options" is determined by dividing (i) the
total amount, if any, received or receivable by the
Company as consideration for the issuance or granting
of all such Below Base Price Options, plus the
minimum aggregate amount of additional consideration,
if any, payable to the Company upon the exercise of
all such Below Base Price Options, plus, in the case
of Convertible Securities issuable upon the exercise
of such Below Base Price Options, the minimum
aggregate amount of additional consideration payable
upon the exercise, conversion or exchange thereof at
the time such Convertible Securities first become
exercisable, convertible or exchangeable, by (ii) the
maximum total number of shares of Common Stock
issuable upon the exercise of all such Below Base
Price Options (assuming full conversion of
Convertible Securities, if applicable). No further
adjustment to the Exercise Price will be made upon
the actual issuance of such Common Stock upon the
exercise of such Below Base Price Options or upon the
exercise, conversion or exchange of Convertible
Securities issuable upon exercise of such Below Base
Price Options.
8
(B) ISSUANCE OF CONVERTIBLE
SECURITIES. If the Company in any manner issues or
sells any Convertible Securities, whether or not
immediately convertible (other than where the same
are issuable upon the exercise of Options) and the
effective price per share for which Common Stock is
issuable upon such exercise, conversion or exchange
is less than the Exercise Price, then the maximum
total number of shares of Common Stock issuable upon
the exercise, conversion or exchange of all such
Convertible Securities will, as of the date of the
issuance of such Convertible Securities, be deemed to
be outstanding and to have been issued and sold by
the Company for such price per share and the maximum
consideration payable to the Company upon such
exercise (assuming full exercise, conversion or
exchange of Convertible Securities, if applicable)
will be deemed to have been received by the Company.
For the purposes of the preceding sentence, the
"effective price per share for which Common Stock is
issuable upon such exercise, conversion or exchange"
is determined by dividing (i) the total amount, if
any, received or receivable by the Company as
consideration for the issuance or sale of all such
Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable
to the Company upon the exercise, conversion or
exchange thereof at the time such Convertible
Securities first become exercisable, convertible or
exchangeable, by (ii) the maximum total number of
shares of Common Stock issuable upon the exercise,
conversion or exchange of all such Convertible
Securities. No further adjustment to the Exercise
Price will be made upon the actual issuance of such
Common Stock upon exercise, conversion or exchange of
such Convertible Securities.
(C) CHANGE IN OPTION PRICE OR
CONVERSION RATE. If there is a change at any time in
(i) the amount of additional consideration payable to
the Company upon the exercise of any Options; (ii)
the amount of additional consideration, if any,
payable to the Company upon the exercise, conversion
or exchange of any Convertible Securities; or (iii)
the rate at which any Convertible Securities are
convertible into or exchangeable for Common Stock (in
each such case, other than under or by reason of
provisions designed to protect against dilution), the
Exercise Price in effect at the time of such change
will be readjusted to the Exercise Price which would
have been in effect at such time had such Options or
Convertible Securities still outstanding provided for
such changed additional consideration or changed
conversion rate, as the case may be, at the time
initially granted, issued or sold.
(D) CALCULATION OF CONSIDERATION
RECEIVED. If any Common Stock, Options or Convertible
Securities are issued, granted or sold for cash, the
consideration received therefor for purposes of this
Warrant will be the amount received by the Company
9
therefor, before deduction of reasonable commissions,
underwriting discounts or allowances or other
reasonable expenses paid or incurred by the Company
in connection with such issuance, grant or sale. In
case any Common Stock, Options or Convertible
Securities are issued or sold for a consideration
part or all of which shall be other than cash, the
amount of the consideration other than cash received
by the Company will be the fair market value of such
consideration, except where such consideration
consists of securities, in which case the amount of
consideration received by the Company will be the
fair market value (average of the closing bid and ask
price, if traded on any market) thereof as of the
date of receipt. In case any Common Stock, Options or
Convertible Securities are issued in connection with
any merger or consolidation in which the Company is
the surviving corporation, the amount of
consideration therefor will be deemed to be the fair
market value of such portion of the net assets and
business of the non-surviving corporation as is
attributable to such Common Stock, Options or
Convertible Securities, as the case may be. The fair
market value of any consideration other than cash or
securities will be determined in good faith by the
Board of Directors of the Company, or if the Holder
reasonably objects to such valuation, by an
investment banker or other appropriate expert of
national reputation selected by the Company and
reasonably acceptable to the holder hereof, with the
costs of such appraisal to be borne by the Company.
(E) EXCEPTIONS TO ADJUSTMENT OF
EXERCISE PRICE. Notwithstanding the foregoing, no
adjustment will be made under this Section 11(b) in
respect of (1) the granting or issuance of shares of
capital stock or of options to employees,
consultants, officers and directors of the Company
pursuant to any stock option plan, agreement or
arrangement duly adopted or approved by a majority of
the non-employee members of the Board of Directors of
the Company or a majority of the members of a
committee of non-employee directors established for
such purpose, (2) upon the exercise of the Debentures
or any Debentures of this series or of any other
series or security issued by the Company in
connection with the offer and sale of this Company's
securities pursuant to the Purchase Agreement, or (3)
upon the exercise of or conversion of any convertible
securities, options or warrants issued and
outstanding on the Original Issue Date, provided that
the securities have not been amended since the date
of the Purchase Agreement, or (4) issuance of
securities in connection with acquisitions, strategic
investments, or strategic partnering arrangements,
the primary purpose of which is not to raise capital.
(iii) MINIMUM ADJUSTMENT OF EXERCISE PRICE. No
adjustment of the Exercise Price shall be made in an amount of
less than 1% of the Exercise Price in effect at the time such
adjustment is otherwise required to be made, but any such
10
lesser adjustment shall be carried forward and shall be made
at the time and together with the next subsequent adjustment
which, together with any adjustments so carried forward, shall
amount to not less than 1% of such Exercise Price.
12. REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION OR
DISPOSITION OF ASSETS. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("OTHER
PROPERTY"), are to be received by or distributed to the holders of Common Stock
of the Company, then the Holder shall have the right thereafter to receive, at
the option of the Holder, (a) upon exercise of this Warrant, the number of
shares of Common Stock of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and Other Property receivable upon
or as a result of such reorganization, reclassification, merger, consolidation
or disposition of assets by a Holder of the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to such event, or (b) cash
equal to the value of this Warrant as determined in accordance with the
Black-Sholes option pricing formula. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined in good faith by resolution of the Board of
Directors of the Company) in order to provide for adjustments of Warrant Shares
for which this Warrant is exercisable which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 12. For purposes of
this Section 12, "common stock of the successor or acquiring corporation" shall
include stock of such corporation of any class which is not preferred as to
dividends or assets over any other class of stock of such corporation and which
is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 12 shall similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of assets.
13. VOLUNTARY ADJUSTMENT BY THE COMPANY. The Company may at any time
during the term of this Warrant reduce the then current Exercise Price to any
amount and for any period of time deemed appropriate by the Board of Directors
of the Company.
14. Notice of Adjustment. Whenever the number of Warrant Shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall give notice thereof to the Holder, which notice shall state the number of
11
Warrant Shares (and other securities or property) purchasable upon the exercise
of this Warrant and the Exercise Price of such Warrant Shares (and other
securities or property) after such adjustment, setting forth a brief statement
of the facts requiring such adjustment and setting forth the computation by
which such adjustment was made.
15. NOTICE OF CORPORATE ACTION. If at any time:
(a) the Company shall take a record of the holders of
its Common Stock for the purpose of entitling them to receive a
dividend or other distribution, or any right to subscribe for or
purchase any evidences of its indebtedness, any shares of stock of any
class or any other securities or property, or to receive any other
right, or
(b) there shall be any capital reorganization of the
Company, any reclassification or recapitalization of the capital stock
of the Company or any consolidation or merger of the Company with, or
any sale, transfer or other disposition of all or substantially all the
property, assets or business of the Company to, another corporation or,
(c) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 20 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, liquidation or winding up, and (ii)
in the case of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, dissolution, liquidation or winding up, at least 20
days' prior written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clause also shall specify (i) the date
on which any such record is to be taken for the purpose of such dividend,
distribution or right, the date on which the holders of Common Stock shall be
entitled to any such dividend, distribution or right, and the amount and
character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their Warrant Shares for securities or other property
deliverable upon such disposition, dissolution, liquidation or winding up. Each
such written notice shall be sufficiently given if addressed to Holder at the
last address of Holder appearing on the books of the Company and delivered in
accordance with Section 17(d).
16. AUTHORIZED SHARES. The Company covenants that during the period the
Warrant is outstanding, it will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of the Warrant
Shares upon the exercise of any purchase rights under this Warrant. The Company
further covenants that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the Warrant
Shares upon the exercise of the purchase rights under this Warrant. The Company
will take all such reasonable action as may be necessary to assure that such
Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the Principal Market
upon which the Common Stock may be listed.
12
Except and to the extent as waived or consented to by the Holder, the
Company shall not by any action, including, without limitation, amending its
certificate of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, 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 actions as may be
necessary or appropriate to protect the rights of Holder as set forth in this
Warrant against impairment. Without limiting the generality of the foregoing,
the Company will (a) not increase the par value of any Warrant Shares above the
amount payable therefor upon such exercise immediately prior to such increase in
par value, (b) take all such action as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and nonassessable
Warrant Shares upon the exercise of this Warrant, and (c) use commercially
reasonable efforts to obtain all such authorizations, exemptions or consents
from any public regulatory body having jurisdiction thereof as may be necessary
to enable the Company to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment in the
number of Warrant Shares for which this Warrant is exercisable or in the
Exercise Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.
17. MISCELLANEOUS.
(a) JURISDICTION. This Warrant shall constitute a
contract under the laws of California, without regard to its conflict
of law, principles or rules.
(b) RESTRICTIONS. The Holder acknowledges that the
Warrant Shares acquired upon the exercise of this Warrant, if not
registered, will have restrictions upon resale imposed by state and
federal securities laws.
(c) NONWAIVER AND EXPENSES. No course of dealing or
any delay or failure to exercise any right hereunder on the part of
Holder shall operate as a waiver of such right or otherwise prejudice
Holder's rights, powers or remedies, notwithstanding all rights
hereunder terminate on the Termination Date. If the Company willfully
and knowingly fails to comply with any provision of this Warrant, which
results in any material damages to the Holder, the Company shall pay to
Holder such amounts as shall be sufficient to cover any costs and
expenses including, but not limited to, reasonable attorneys' fees,
including those of appellate proceedings, incurred by Holder in
collecting any amounts due pursuant hereto or in otherwise enforcing
any of its rights, powers or remedies hereunder.
(d) NOTICES. Any notice, request or other document
required or permitted to be given or delivered to the Holder by the
Company shall be delivered in accordance with the notice provisions of
the Purchase Agreement.
(e) LIMITATION OF LIABILITY. No provision hereof, in
the absence of any affirmative action by Holder to exercise this
Warrant or purchase Warrant Shares, and no enumeration herein of the
13
rights or privileges of Holder, shall give rise to any liability of
Holder for the purchase price of any Common Stock or as a stockholder
of the Company, whether such liability is asserted by the Company or by
creditors of the Company.
(f) REMEDIES. Holder, in addition to being entitled
to exercise all rights granted by law, including recovery of damages,
will be entitled to specific performance of its rights under this
Warrant. The Company agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the
provisions of this Warrant and hereby agrees to waive the defense in
any action for specific performance that a remedy at law would be
adequate.
(g) SUCCESSORS AND ASSIGNS. Subject to applicable
securities laws, this Warrant and the rights and obligations evidenced
hereby shall inure to the benefit of and be binding upon the successors
of the Company and the successors and permitted assigns of Holder. The
provisions of this Warrant are intended to be for the benefit of all
Holders from time to time of this Warrant and shall be enforceable by
any such Holder or holder of Warrant Shares.
(h) AMENDMENT. This Warrant may be modified or
amended or the provisions hereof waived with the written consent of the
Company and the Holder.
(i) SEVERABILITY. Wherever possible, each provision
of this Warrant shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Warrant
shall be prohibited by or invalid under applicable law, such provision
shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provisions or the remaining
provisions of this Warrant.
(j) HEADINGS. The headings used in this Warrant are
for the convenience of reference only and shall not, for any purpose,
be deemed a part of this Warrant.
********************
14
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officer thereunto duly authorized.
Dated: March __, 2003
SVI SOLUTIONS, INC.
By:_________________________________
Name:
Title:
15
NOTICE OF EXERCISE
To: SVI Solutions, Inc.
(1) The undersigned hereby elects to purchase ________ Warrant Shares
of SVI Solutions, Inc. pursuant to the terms of the attached Warrant (only if
exercised in full), and tenders herewith payment of the exercise price in full,
together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
[ ] in lawful money of the United States; or
[ ] the cancellation of such number of Warrant Shares
as is necessary, in accordance with the formula set
forth in subsection 3(d), to exercise this Warrant
with respect to the maximum number of Warrant Shares
purchasable pursuant to the cashless exercise
procedure set forth in subsection 3(d).
(3) Please issue a certificate or certificates representing said
Warrant Shares in the name of the undersigned or in such other name as is
specified below:
________________________________________
The Warrant Shares shall be delivered to the following:
________________________________________
________________________________________
________________________________________
(4) ACCREDITED INVESTOR. The undersigned is an "accredited investor" as
defined in Regulation D promulgated under the Securities Act of 1933, as
amended.
[PURCHASER]
By: ______________________________
Name:
Title:
Dated: ________________________
16
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________, _______
Holder's Signature: __________________________
Holder's Address:_____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
17
APPENDIX II
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of March __, 2003, among SVI Solutions, Inc., a Delaware
corporation (the "Company"), and the purchasers signatory hereto (each such
purchaser is a "Purchaser" and all such purchasers are, collectively, the
"Purchasers").
This Agreement is made pursuant to the Securities Purchase Agreement,
dated as of the date hereof among the Company and the Purchasers (the "Purchase
Agreement").
The Company and the Purchasers hereby agree as follows:
1. Definitions
CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN THAT ARE
DEFINED IN THE PURCHASE AGREEMENT SHALL HAVE THE MEANINGS GIVEN SUCH TERMS IN
THE PURCHASE AGREEMENT. As used in this Agreement, the following terms shall
have the following meanings:
"Effectiveness Date" means, with respect to the Registration
Statement registering for resale the Registrable Securities relating to
the First Closing, the 90th calendar day (120th calendar day in the
event of a "full review" by the Commission) following the First Closing
Date, with respect to the Registration Statement registering for resale
the Registrable Securities relating to the Second Closing, the 90th
calendar day (120th calendar day in the event of a "full review" by the
Commission) following the Second Closing Date and, with respect to any
additional Registration Statements which may be required pursuant to
Section 3(c), the 60th calendar day following the date on which the
Company first knows, or reasonably should have known, that such
additional Registration Statement is required hereunder; provided,
however, in the event the Company is notified by the Commission that
one of the above Registration Statements will not be reviewed or is no
longer subject to further review and comments, the Effectiveness Date
as to such Registration Statement shall be the fifth Trading Day
following the date on which the Company is so notified if such date
precedes the dates required above.
"Effectiveness Period" shall have the meaning set forth in
Section 2(a).
"Filing Date" means, with respect to the Registration
Statement registering for resale the Registrable Securities relating to
First Closing, the 30th day following the First Closing Date, with
respect to the Registration Statement registering for resale the
Registrable Securities relating to Second Closing, the 30th day
following the Second Closing Date and, with respect to any additional
1
Registration Statements which may be required pursuant to Section 3(c),
the 15th day following the date on which the Company first knows, or
reasonably should have known that such additional Registration
Statement is required hereunder
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in
Section 5(c) hereof.
"Indemnifying Party" shall have the meaning set forth in
Section 5(c) hereof.
"Prospectus" means the prospectus included in a Registration
Statement (including, without limitation, a prospectus that includes
any information previously omitted from a prospectus filed as part of
an effective registration statement in reliance upon Rule 430A
promulgated under the Securities Act), as amended or supplemented by
any prospectus supplement, with respect to the terms of the offering of
any portion of the Registrable Securities covered by a Registration
Statement, and all other amendments and supplements to the Prospectus,
including post-effective amendments, and all material incorporated by
reference or deemed to be incorporated by reference in such Prospectus.
"Registrable Securities" means all of the shares of Common
Stock issuable upon conversion in full of the Debentures, assuming for
such purposes that all of the Debentures from the First Closing are
held until the 26th month anniversary of their date of issuance and all
of the Debentures from the Second Closing are held until the 30th month
anniversary of their date of issuance, and the lowest possible
conversion price in effect during the period between the applicable
Closing and the filing date of the Registration Statement (assuming the
Monthly Conversion Price is then applicable), exercise in full of the
Warrants, shares of Common Stock issuable as payment of interest on the
Debentures, shares issuable in lieu of the payment of liquidated
damages, together with any securities issued or issuable upon any stock
split, dividend or other distribution recapitalization or similar event
with respect to the foregoing or in connection with any anti-dilution
provisions in the Debentures and Warrants.
"Registration Statement" means the registration statements
required to be filed hereunder and any additional registration
statements contemplated by Section 3(c), including (in each case) the
Prospectus, amendments and supplements to such registration statement
or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed
to be incorporated by reference in such registration statement.
2
"Rule 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time
to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same purpose and effect as such
Rule.
"Rule 424" means Rule 424 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time
to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same purpose and effect as such
Rule.
"Warrants" shall mean the Common Stock purchase warrants
issued to the Purchasers pursuant to the Purchase Agreement.
2. Shelf Registration
(a) On or prior to each Filing Date, the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering the
resale of 130% of the Registrable Securities on such Filing Date for an offering
to be made on a continuous basis pursuant to Rule 415. The Registration
Statement shall be on Form S-3 (unless the Company is not then eligible to
register for resale the Registrable Securities on Form S-3, in which case such
registration shall be on another appropriate form in accordance herewith) and
shall contain (unless otherwise directed by the Holders and except to the extent
the Company determines that modifications thereto are required under applicable
law) substantially the "Plan of Distribution" attached hereto as Annex A.
Subject to the terms of this Agreement, the Company shall use its best efforts
to cause the Registration Statement to be declared effective under the
Securities Act as promptly as possible after the filing thereof, but in any
event prior to the applicable Effectiveness Date, and shall use its best efforts
to keep such Registration Statement continuously effective under the Securities
Act until the date which is two years after the date that such Registration
Statement is declared effective by the Commission or such earlier date when all
Registrable Securities covered by such Registration Statement have been sold or
may be sold without volume restrictions pursuant to Rule 144(k) as determined by
the counsel to the Company pursuant to a written opinion letter to such effect,
addressed and acceptable to the Company's transfer agent and the affected
Holders (the "Effectiveness Period").
(b) If: (i) a Registration Statement is not filed on or prior to
its Filing Date (if the Company files a Registration Statement without affording
the Holders the opportunity to review and comment on the same as required by
Section 3(a), the Company shall not be deemed to have satisfied clause (i)), or
(ii) the Company fails to file with the Commission a request for acceleration in
accordance with Rule 461 promulgated under the Securities Act, within five
Trading Days of the date that the Company is notified (orally or in writing,
whichever is earlier) by the Commission that a Registration Statement will not
be "reviewed," or not subject to further review, or (iii) prior to its
Effectiveness Date, the Company fails to file a pre-effective amendment and
otherwise respond in writing to comments made by the Commission in respect of
such Registration Statement within 15 Trading Days after the receipt of comments
by or notice from the Commission that such amendment is required in order for a
Registration Statement to be declared effective, or (iv) a Registration
Statement filed or required to be filed hereunder is not declared effective by
the Commission by its Effectiveness Date, or (v) after the Effectiveness Date, a
Registration Statement ceases for any reason to remain continuously effective as
to all Registrable Securities for which it is required to be effective, or the
3
Holders are not permitted to utilize the Prospectus therein to resell such
Registrable Securities for 5 consecutive Trading Days or in any individual case
an aggregate of 15 Trading Days during any 12 month period (which need not be
consecutive Trading Days) (any such failure or breach being referred to as an
"Event", and for purposes of clause (i) or (iv) the date on which such Event
occurs, or for purposes of clause (ii) the date on which such five Trading Day
period is exceeded, or for purposes of clause (iii) the date which such 15
Trading Day period is exceeded, or for purposes of clause (v) the date on which
such 5 or 15 Trading Day period, as applicable, is exceeded being referred to as
"Event Date"), then, on each such Event Date and every monthly anniversary
thereof until the applicable Event is cured, the Company shall pay to each
Holder an amount in cash, as liquidated damages and not as a penalty, equal to
2.0% per month of (i) the Subscription Amount paid by such Holder pursuant to
the Purchase Agreement for Securities then held by such Holder, and (ii) if the
Warrants are "in the money" and then held by the Holder, the value of any
outstanding Warrants (valued at the difference between the average VWAP during
the applicable month and the Exercise Price multiplied by the number of shares
of Common Stock the Warrants are exercisable into). If the Company fails to pay
any liquidated damages pursuant to this Section in full within seven days after
the date payable, the Company will pay interest thereon at a rate of 15% per
annum (or such lesser maximum amount that is permitted to be paid by applicable
law) to the Holder, accruing daily from the date such liquidated damages are due
until such amounts, plus all such interest thereon, are paid in full. The
liquidated damages pursuant to the terms hereof shall apply on a pro-rata basis
for any portion of a month prior to the cure of an Event and shall be in lieu of
any and all of the penalties or liquidated damages that might otherwise arise by
reason of such Event unless such Event constitutes an Event of Default under the
Debentures.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Not less than five Trading Days prior to the filing of each
Registration Statement or any related Prospectus or any amendment or supplement
thereto (excluding any document that would be incorporated or deemed
incorporated therein by reference), the Company shall, (i) furnish to each
Holder copies of all such documents proposed to be filed, which documents (other
than those incorporated or deemed to be incorporated by reference) will be
subject to the review of such Holders, and (ii) cause its officers and
directors, counsel and independent certified public accountants to respond to
such inquiries as shall be necessary, in the reasonable opinion of respective
counsel to conduct a reasonable investigation within the meaning of the
Securities Act. The Company shall not file the Registration Statement or any
such Prospectus or any amendments or supplements thereto to which the Holders of
a majority of the Registrable Securities shall reasonably and in good faith
object, provided, the Company is notified of such objection in writing no later
than 5 Trading Days after the Holders have been so furnished copies of such
documents.
4
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to a Registration Statement and the
Prospectus used in connection therewith as may be necessary to keep a
Registration Statement continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and prepare and file with the Commission
such additional Registration Statements in order to register for resale under
the Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement
(subject to the terms of this Agreement), and as so supplemented or amended to
be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible,
and in any event within 15 Trading Days, to any comments received from the
Commission with respect to a Registration Statement or any amendment thereto and
as promptly as reasonably possible provide the Holders true and complete copies
of all correspondence from and to the Commission relating to a Registration
Statement; and (iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by a Registration Statement during the applicable
period in accordance (subject to the terms of this Agreement) with the intended
methods of disposition by the Holders thereof set forth in such Registration
Statement as so amended or in such Prospectus as so supplemented.
(c) If during the Effectiveness Period, the number of Registrable
Securities at any time exceeds 85% of the number of shares of Common Stock then
registered in a Registration Statement, then the Company shall file as soon as
reasonably practicable but in any case prior to the applicable Filing Date, an
additional Registration Statement covering the resale of by the Holders of not
less than 130% of the number of such Registrable Securities.
(d) Notify the Holders of Registrable Securities to be sold
(which notice shall, pursuant to clauses (ii) through (vi) hereof, be
accompanied by an instruction to suspend the use of the Prospectus until the
requisite changes have been made) as promptly as reasonably possible (and, in
the case of (i)(A) below, not less than five Trading Days prior to such filing)
and (if requested by any such Person) confirm such notice in writing no later
than one Trading Day following the day (i)(A) when a Prospectus or any
Prospectus supplement or post-effective amendment to a Registration Statement is
proposed to be filed; (B) when the Commission notifies the Company whether there
will be a "review" of such Registration Statement and whenever the Commission
comments in writing on such Registration Statement (the Company shall provide
true and complete copies thereof and all written responses thereto to each of
the Holders); and (C) with respect to a Registration Statement or any
post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to a Registration Statement or Prospectus or for
5
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of a Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) of the receipt by the Company of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction, or the initiation or
threatening of any Proceeding for such purpose; (v) of the occurrence of any
event or passage of time that makes the financial statements included in a
Registration Statement ineligible for inclusion therein or any statement made in
a Registration Statement or Prospectus or any document incorporated or deemed to
be incorporated therein by reference untrue in any material respect or that
requires any revisions to a Registration Statement, Prospectus or other
documents so that, in the case of a Registration Statement or the Prospectus, as
the case may be, it will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; and (vi) the occurrence or existence of any pending
corporate development with respect to the Company that the Company believes may
be material and that, in the determination of the Company, makes it not in the
best interests of the Company to allow continued availability or the
Registration Statement or Prospectus.
(e) Promptly deliver to each Holder, without charge, as many
copies of the Prospectus or Prospectuses (including each form of prospectus) and
each amendment or supplement thereto as such Persons may reasonably request.
Subject to the terms of this Agreement, the Company hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders in connection with the offering and sale of the Registrable
Securities covered by such Prospectus and any amendment or supplement thereto.
(f) Use commercially reasonable efforts to register or qualify
the resale of such Registrable Securities as required under applicable
securities or Blue Sky laws of each State within the United States as any Holder
requests in writing, to keep each such registration or qualification (or
exemption therefrom) effective during the Effectiveness Period; provided, that
the Company shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.
(g) Cooperate with the Holders to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be delivered to a transferee pursuant to a Registration Statement, which
certificates shall be free, to the extent permitted by the Purchase Agreement,
of all restrictive legends, and to enable such Registrable Securities to be in
such denominations and registered in such names as any such Holders may request.
(h) Upon the occurrence of any event contemplated this Section 3,
as promptly as reasonably possible, prepare a supplement or amendment, including
a post-effective amendment, to a Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither a Registration Statement nor such Prospectus will
6
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. If the
Company notifies the Holders in accordance with clauses (ii) through (vi) of
Section 3(d) above to suspend the use of the use of any Prospectus until the
requisite changes to such Prospectus have been made, or the Company otherwise
notifies the Holders of its election to suspend the availability of a
Registration Statement and Prospectus pursuant to clause (vi) of Section 3(d),
then the Holders shall suspend use of such Prospectus. The Company will use its
best efforts to ensure that the use of the Prospectus may be resumed as promptly
as is practicable, except that in the case of suspension of the availability of
a Registration Statement and Prospectus pursuant to clause (vi) of Section 3(d),
the Company shall not be required to take such action until such time as it
shall determine that the continued availability of the Registration Statement
and Prospectus is no longer not in the best interests of the Company. The
Company shall be entitled to exercise its right under this Section 3(h) to
suspend the availability of a Registration Statement and Prospectus, subject to
the payment of liquidated damages pursuant to Section 2(b), for a period not to
exceed 45 consecutive days or for multiple periods not to exceed 60 days in any
12 month period.
(i) Comply with all applicable rules and regulations of the
Commission.
(j) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of a
Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(k) The Company may require, at any time prior to the third
Trading Day prior to the Filing Date, each Holder to furnish to the Company a
statement as to the number of shares of Common Stock beneficially owned by such
Holder and, if requested by the Commission, the controlling person thereof,
within three Trading days of the Company's request. During any periods that the
Company is unable to meet its obligations hereunder with respect to the
registration of the Registrable Securities solely because any Holder fails to
furnish such information within three Trading Days of the Company's request, any
liquidated damages that are accruing at such time shall be tolled and any Event
of Default that may otherwise occur solely because of such delay shall be
suspended, until such information is delivered to the Company.
4. Registration Expenses. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to
the Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with the Principal Market on which the Common Stock is then
listed for trading, and (B) in compliance with applicable state securities or
Blue Sky laws reasonably agreed to by the Company in writing (including, without
limitation, fees and disbursements of counsel for the Company in connection with
7
Blue Sky qualifications or exemptions of the Registrable Securities and
determination of the eligibility of the Registrable Securities for investment
under the laws of such jurisdictions as requested by the Holders )), (ii)
printing expenses (including, without limitation, expenses of printing
certificates for Registrable Securities and of printing prospectuses requested
by the Holders), (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Company, and (v) fees and expenses of all other
Persons retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement. In addition, the Company shall be
responsible for all of its internal expenses incurred in connection with the
consummation of the transactions contemplated by this Agreement (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit and the
fees and expenses incurred in connection with the listing of the Registrable
Securities on any securities exchange as required hereunder. In no event shall
the Company be responsible for any broker or similar commissions or, except to
the extent provided for in the Transaction Documents, any legal fees or other
costs of the Holders.
5. Indemnification
(a) INDEMNIFICATION BY THE COMPANY. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, investment advisors and employees
of each of them, each Person who controls any such Holder (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) and the
officers, directors, agents and employees of each such controlling Person, to
the fullest extent permitted by applicable law, from and against any and all
losses, claims, damages, liabilities, costs (including, without limitation,
costs of preparation and reasonable attorneys' fees) and expenses (collectively,
"Losses"), as incurred, arising out of or relating to any untrue or alleged
untrue statement of a material fact contained in a Registration Statement, any
Prospectus or any form of prospectus or in any amendment or supplement thereto
or in any preliminary prospectus, or arising out of or relating to any omission
or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein (in the case of any Prospectus or form
of prospectus or supplement thereto, in light of the circumstances under which
they were made) not misleading, except to the extent, but only to the extent,
that (1) such untrue statements or omissions or alleged untrue statements or
omissions are based upon information regarding such Holder furnished in writing
to the Company by such Holder expressly for use therein, or to the extent that
such information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in a Registration Statement, such
Prospectus or such form of Prospectus or in any amendment or supplement thereto
or (2) in the case of an occurrence of an event of the type specified in Section
3(d)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus
after the Company has notified such Holder in writing that the Prospectus is
outdated or defective and prior to the receipt by such Holder of the Advice
contemplated in Section 6(e). The Company shall notify the Holders promptly of
the institution, threat or assertion of any Proceeding arising from or in
connection with the transactions contemplated by this Agreement of which the
Company is aware.
8
(b) INDEMNIFICATION BY HOLDERS. Each Holder shall, severally and
not jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising out of or based upon any untrue statement of a
material fact contained in any Registration Statement, any Prospectus, or any
form of prospectus, or in any amendment or supplement thereto, or arising out of
or based upon: (i) such Holder's failure to comply with the prospectus delivery
requirements of the Securities Act or (ii) any omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading to the extent, but only to the extent, such untrue statement or
omission is contained in any information so furnished in writing by such Holder
to the Company specifically for inclusion in such Registration Statement or such
Prospectus or to the extent that (1) such untrue statements or omissions are
based upon information regarding such Holder furnished in writing to the Company
by such Holder expressly for use therein, or to the extent such information
relates to such Holder or such Holder's proposed method of distribution of
Registrable Securities and was reviewed and expressly approved in writing by
such Holder expressly for use in the Registration Statement, such Prospectus or
such form of Prospectus or in any amendment or supplement thereto or (2) in the
case of an occurrence of an event of the type specified in Section
3(d)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus
after the Company has notified such Holder in writing that the Prospectus is
outdated or defective and prior to the receipt by such Holder of the Advice
contemplated in Section 6(e). In no event shall the liability of any selling
Holder hereunder be greater in amount than the dollar amount of the net proceeds
received by such Holder upon the sale of the Registrable Securities giving rise
to such indemnification obligation.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party shall promptly notify the
Person from whom indemnity is sought (the "Indemnifying Party") in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that such failure shall have
prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to employ counsel
9
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a material conflict of
interest is likely to exist if the same counsel were to represent such
Indemnified Party and the Indemnifying Party (in which case, if such Indemnified
Party notifies the Indemnifying Party in writing that it elects to employ
separate counsel at the expense of the Indemnifying Party, the Indemnifying
Party shall not have the right to assume the defense thereof and the expense of
one such counsel for each Holder shall be at the expense of the Indemnifying
Party). The Indemnifying Party shall not be liable for any settlement of any
such Proceeding effected without its written consent, which consent shall not be
unreasonably withheld. No Indemnifying Party shall, without the prior written
consent of the Indemnified Party, effect any settlement of any pending
Proceeding in respect of which any Indemnified Party is a party, unless such
settlement includes an unconditional release of such Indemnified Party from all
liability on claims that are the subject matter of such Proceeding.
Subject to the terms of this Agreement, all fees and expenses of
the Indemnified Party (including reasonable fees and expenses to the extent
incurred in connection with investigating or preparing to defend such Proceeding
in a manner not inconsistent with this Section) shall be paid to the Indemnified
Party, as incurred, within ten Trading Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that an
Indemnified Party is not entitled to indemnification hereunder; provided, that
the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder).
(d) CONTRIBUTION. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy
or otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.
10
The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no Holder shall be required
to contribute, in the aggregate, any amount in excess of the amount by which the
proceeds actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages that such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties.
6. Miscellaneous
(a) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and all of the Holders of the then outstanding Registrable Securities.
Notwithstanding the foregoing, a waiver or consent to depart from the provisions
hereof with respect to a matter that relates exclusively to the rights of
Holders and that does not directly or indirectly affect the rights of other
Holders may be given by Holders of all of the Registrable Securities to which
such waiver or consent relates; provided, however, that the provisions of this
sentence may not be amended, modified, or supplemented except in accordance with
the provisions of the immediately preceding sentence.
(b) NO INCONSISTENT AGREEMENTS. Neither the Company nor any of
its subsidiaries has entered, as of the date hereof, nor shall the Company or
any of its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities, that would have the effect of
impairing the rights granted to the Holders in this Agreement or otherwise
conflicts with the provisions hereof. Except as and to the extent specified in
Schedule 6(b) hereto, neither the Company nor any of its subsidiaries has
previously entered into any agreement granting any registration rights with
respect to any of its securities to any Person that have not been satisfied in
full.
(c) NO PIGGYBACK ON REGISTRATIONS. Except as and to the extent
specified in Schedule 6(c) hereto, neither the Company nor any of its security
holders (other than the Holders in such capacity pursuant hereto) may include
securities of the Company in the Registration Statement other than the
Registrable Securities, and the Company shall not after the date hereof enter
into any agreement providing any such right to any of its security holders to
include securities of the Company in the Registration Statement without the
prior written consent of the Holders, which consent shall not be unreasonably
withheld.
11
(d) COMPLIANCE. Each Holder covenants and agrees that it will
comply with the prospectus delivery requirements of the Securities Act as
applicable to it in connection with sales of Registrable Securities pursuant to
the Registration Statement.
(e) DISCONTINUED DISPOSITION. Each Holder agrees by its
acquisition of such Registrable Securities that, upon receipt of a notice from
the Company of the occurrence of any event of the kind described in Sections
3(d)(ii), (iii) or (vi), such Holder will forthwith discontinue disposition of
such Registrable Securities under a Registration Statement until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended Registration
Statement contemplated by Section 3(h), or until it is advised in writing (the
"Advice") by the Company that the use of the applicable Prospectus may be
resumed, and, in either case, has received copies of any additional or
supplemental filings that are incorporated or deemed to be incorporated by
reference in such Prospectus or Registration Statement. The Company may provide
appropriate stop orders to enforce the provisions of this paragraph. The Company
agrees and acknowledges that any periods during which the Holder is required to
discontinue the disposition of the Registrable Securities hereunder shall be
subject to the provisions of Section 2(c).
(f) PIGGY-BACK REGISTRATIONS. If at any time during the
Effectiveness Period there is not an effective Registration Statement covering
all of the Registrable Securities and the Company shall determine to prepare and
file with the Commission a registration statement relating to an offering for
its own account or the account of others under the Securities Act of any of its
equity securities, other than on Form S-4 or Form S-8 (each as promulgated under
the Securities Act) or their then equivalents relating to equity securities to
be issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each Holder written notice of such
determination and, if within fifteen days after receipt of such notice, any such
Holder shall so request in writing, the Company shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered; provided, that, the Company shall not be
required to register any Registrable Securities pursuant to this Section 6(f)
that are eligible for resale pursuant to Rule 144(k) promulgated under the
Securities Act.
(g) NOTICES. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be delivered as
set forth in the Purchase Agreement.
(h) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
all of the Holders of the then-outstanding Registrable Securities. Each Holder
may assign their respective rights hereunder in the manner and to the Persons as
permitted under the Purchase Agreement.
12
(i) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(j) GOVERNING LAW. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
California, without regard to the principles of conflicts of law thereof. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of San Diego, California, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to
this Agreement or the transactions contemplated hereby. If either party shall
commence a Proceeding to enforce any provisions of this Agreement, then the
prevailing party in such Proceeding shall be reimbursed by the other party for
its attorneys fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such Proceeding.
(k) CUMULATIVE REMEDIES. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(l) SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(m) HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
13
(n) INDEPENDENT NATURE OF PURCHASERS' OBLIGATIONS AND RIGHTS. The
obligations of each Purchaser hereunder is several and not joint with the
obligations of any other Purchaser hereunder, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose.
********************
14
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
SVI SOLUTIONS, INC.
By: ____________________________________
Name:
Title:
[SIGNATURE PAGE OF HOLDERS FOLLOWS]
15
[SIGNATURE PAGE OF HOLDERS TO RRA]
OMICRON MASTER TRUST
By: Omicron Capital L.P., as subadvisor
By: Omicron Capital Inc., its general partner
By: ____________________________________
Bruce Bernstein, President
MIDSUMMER INVESTMENT, LTD.
By: MIDSUMMER CAPITAL, LLC,
As investment advisor
By:______________________________________
Scott Kaufman, Managing Director
ISLANDIA, L.P.
By: _____________________________________
Name:
Title:
16
PLAN OF DISTRIBUTION
--------------------
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The selling stockholder may from time to time pledge or grant a
security interest in some or all of the Shares or common stock or Warrant owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock
from time to time under this prospectus, or under an amendment to this
prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933 amending the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
prospectus.
17
The selling stockholders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling stockholders have
informed the Company that none of them have any agreement or understanding,
directly or indirectly, with any person to distribute the common stock.
The Company is required to pay all fees and expenses incurred by the
Company incident to the registration of the shares. The Company has agreed to
indemnify the selling stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
18
APPENDIX III
MBSJ SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "AGREEMENT") is dated as of
April 1, 2003, among SVI Solutions, Inc., a Delaware corporation (the
"COMPANY"), and the purchasers identified on the signature pages hereto (each,
including its successors and assigns, a "PURCHASER" and collectively the
"PURCHASERS").
WHEREAS, subject to the terms and conditions set forth in this
Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "SECURITIES ACT") and Rule 506 promulgated thereunder, the Company desires
to issue and sell to the Purchasers, and each Purchaser, severally and not
jointly, desires to purchase from the Company, securities of the Company as more
fully described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and the Purchasers agree
as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Debenture (as defined herein), and (b) the
following terms have the meanings indicated in this Section 1.1:
"ACTUAL MINIMUM" means, as of any date, the maximum aggregate
number of shares of Common Stock then issued or potentially issuable in
the future pursuant to the Transaction Documents, including any
Underlying Shares issuable upon exercise or conversion in full of all
Warrants and Debentures, ignoring any conversion or exercise limits set
forth therein, and assuming any previously unconverted Debentures from
the Closing are held until the 30th month anniversary of their date of
issuance or, if earlier, until maturity, and all interest thereon is
paid in shares of Common Stock.
"AFFILIATE" means any Person that, directly or indirectly
through one or more intermediaries, controls or is controlled by or is
under common control with a Person, as such terms are used in and
construed under Rule 144 under the Securities Act.
"CAPITAL SHARES" means the Common Stock and any shares of any
other class of common stock whether now or hereafter authorized, having
the right to participate in the distribution of earnings and assets of
the Company.
"CAPITAL SHARES EQUIVALENTS" means any securities, rights or
obligations that are convertible into or exchangeable for or give any
1
right to subscribe for or purchase, directly or indirectly, any Capital
Shares of the Company or any warrants, options or other rights to
subscribe for or purchase, directly or indirectly, Capital Shares or
any such convertible or exchangeable securities.
"CLOSING" means the closing of the purchase and sale of the
Securities pursuant to Section 2.1.
"CLOSING PRICE" means the average of the 10 VWAPs immediately
prior to the date in question.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock of the Company, par
value $0.0001 per share, and any securities into which such common
stock shall hereinafter have been reclassified into.
"COMPANY COUNSEL" means Solomon, Ward, Seidenwurm & Smith,
LLP.
"DEBENTURE" means, the 9% Convertible Debenture due 30 months
from its date of issuance unless otherwise set forth therein, issued by
the Company to the Purchasers hereunder, in the form of EXHIBIT A.
"DISCLOSURE SCHEDULES" shall have the meaning ascribed to such
term in Section 3.1 hereof.
"EFFECTIVE DATE" means the date a Registration Statement is
first declared effective by the Commission.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"GAAP" shall have the meaning ascribed to such term in Section
3.1(h) hereof.
"LIENS" shall have the meaning ascribed to such term in
Section 3.1(a) hereof.
"LOSSES" means any and all losses, claims, damages,
liabilities, settlement costs and expenses, including without
limitation costs of preparation and reasonable attorneys' fees.
"MATERIAL ADVERSE EFFECT" shall have the meaning assigned to
such term in Section 3.1(b) hereof.
"PERSON" means an individual or corporation, partnership,
trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an
agency or subdivision thereof) or other entity of any kind.
2
"PRINCIPAL MARKET" means initially the American Stock Exchange
and shall also include the New York Stock Exchange, the NASDAQ
Small-Cap Market or the NASDAQ National Market, whichever is at the
time the principal trading exchange or market for the Common Stock,
based upon share volume.
"PROCEEDING" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated the Closing Date, among the Company and the
Purchasers, in the form of EXHIBIT B.
"REQUIRED APPROVALS" shall have the meaning ascribed to such
term in Section 3.1(e) hereof.
"REQUIRED MINIMUM" means, as of any date, the maximum
aggregate number of shares of Common Stock then issued or potentially
issuable in the future pursuant to the Transaction Documents, including
any Underlying Shares issuable upon exercise or conversion in full of
all Warrants and Debentures, ignoring any conversion or exercise limits
set forth therein, and assuming that (a) any previously unconverted
Debenture from the Closing is held until the 30th month anniversary of
its date of issuance or, if earlier, until maturity, and all interest
is paid in shares of Common Stock and (b) the VWAP at all times on and
after the date of determination equals 50% of the actual VWAP on the
Trading Day immediately prior to the date of determination.
"RULE 144" means Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time
to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same effect as such Rule.
"SEC REPORTS" shall have the meaning ascribed to such term in
Section 3.1(h) hereof.
"SECURITIES" means the Debentures, Warrants and the Underlying
Shares.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SET PRICE" shall have the meaning ascribed to such term in
the Debentures.
"SHAREHOLDER APPROVAL" shall have the meaning ascribed to such
term in Section 4(a)(ii)(B) of the Debenture.
"SUBSCRIPTION AMOUNT" means, (i) as to each Purchaser and the
Closing, the amount set forth below such Purchaser's signature block on
the signature pages hereto and next to the heading "Closing
3
Subscription" in United States dollars and in immediately available
funds, and (ii) as to each Purchaser "SUBSIDIARY" means any subsidiary
of the Company that is required to be listed in SCHEDULE 3.1(a).
"TRADING DAY" means any day during which the Principal Market
shall be open for business.
"TRANSACTION DOCUMENTS" means this Agreement, the Debentures,
the Warrants, the Registration Rights Agreement and any other documents
or agreements executed in connection with the transactions contemplated
hereunder.
"UNDERLYING SHARES" means the shares of Common Stock issuable
upon conversion of the Debentures and upon exercise of the Warrants and
issued and issuable in lieu of the cash payment of interest on the
Debentures.
"UNDERLYING SHARES REGISTRATION STATEMENT" OR "REGISTRATION
STATEMENT" means a registration statement meeting the requirements set
forth in the Registration Rights Agreement and covering the resale of
the Underlying Shares by each Purchaser as provided for in the
Registration Rights Agreement.
"VWAP" means, for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Principal Market, the daily volume weighted
average price of the Common Stock for such date (or the nearest
preceding date) on the Principal Market on which the Common Stock is
then listed or quoted as reported by Bloomberg Financial L.P. (based on
a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time);
(b) if the Common Stock is not then listed or quoted on a Principal
Market and if prices for the Common Stock are then quoted on the OTC
Bulletin Board, the volume weighted average price of the Common Stock
for such date (or the nearest preceding date) on the OTC Bulletin
Board; (c) if the Common Stock is not then listed or quoted on the OTC
Bulletin Board and if prices for the Common Stock are then reported in
the "Pink Sheets" published by the National Quotation Bureau
Incorporated (or a similar organization or agency succeeding to its
functions of reporting prices), the average of the most recent bid and
ask price per share of the Common Stock so reported; or (d) in all
other cases, the fair market value of a share of Common Stock as
determined by a nationally recognized-independent appraiser selected in
good faith by Purchasers holding a majority of the principal amount of
Debentures then outstanding.
"WARRANTS" means collectively the Common Stock purchase
warrants, in the form of EXHIBIT C delivered to the Purchasers at the
Closing in accordance with Section 2.2 hereof.
ARTICLE II
PURCHASE AND SALE
4
2.1 Upon the terms and subject to the conditions set forth herein, the
Company agrees to sell, and each Purchaser agrees to purchase the Debentures as
set forth next to the respective Purchaser's name on the signature pages hereto
for a purchase price of $400,000.00 ("PURCHASE PRICE") as follows:
(a) CLOSING. On the Closing Date, the Purchaser shall purchase
the principal amount of Debentures equal to $400,000 principal amount
of Debentures and the Company shall sell such principal amount of
Debentures to Purchaser.
2.2 CLOSING CONDITIONS. Upon satisfaction or waiver by the party sought
to be benefited thereby of the conditions set forth in this Section 2.2, Closing
shall occur.
(a) At or prior to Closing (unless otherwise specified below),
the Company shall deliver or cause to be delivered to each Purchaser
the following:
(i) a Debenture with a principal amount equal to such
Purchaser's Subscription Amount as to such Closing, registered
in the name of such Purchaser;
(ii) a Warrant to purchase up to a number of shares
of Common Stock equal to 40% of such Purchaser's Subscription
Amount divided by the Closing Price as to the Debentures
purchased by such Purchaser at such Closing with a term of 5
years and an exercise price per Warrant Share equal to 115% of
the Closing Price on such Closing Date, subject to adjustment
therein;
(iii) as to the Closing, a legal opinion of Company
Counsel, in the form of Exhibit D attached hereto, addressed
to the Purchasers;
(iv) as to the Closing, written consents of a
majority of the voting shareholders of the Company approving
Shareholder Approval;
(v) as to the Closing, the Registration Rights
Agreement duly executed by the Company;
(vi) as to the Closing, instructions to the
Purchasers to mail $400,000 of the proceeds raised hereunder
to SVI Solutions, Inc
(vii) as to the Closing, lock-up agreements from each
of Softline Limited and Steven Beck & Associates in form and
substance reasonably acceptable to each Purchaser.
(b) At or prior to Closing, the Purchaser shall deliver or
cause to be delivered to the Company the following:
(i) Purchaser's Subscription Amount.
5
(ii) Registration Rights Agreement duly executed by
Purchaser.
(c) All representations and warranties of the other party
contained herein shall remain true and correct as of such Closing Date
and all covenants of the other party shall have been performed;
(d) There shall have been no Material Adverse Effect (as
defined in Section 3.1(b) hereof) with respect to the Company since the
date hereof;
(e) From the date hereof to Closing Date, trading in the
Common Stock shall not have been suspended by the Commission (except
for any suspension of trading of limited duration agreed to by the
Company, which suspension shall be terminated prior to such Closing),
and, at any time prior to such Closing Date, trading in securities
generally as reported by Bloomberg Financial Markets shall not have
been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by such service, or
on the Principal Market, nor shall a banking moratorium have been
declared either by the United States or New York State authorities.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth
in the disclosure schedules delivered to the Purchasers concurrently herewith
(the "DISCLOSURE SCHEDULES") which Disclosure Schedules shall be deemed a part
hereof, or, other than with respect to Sections 3.1(g), 3.1(u), 3.1(v), 3.1(w),
3.1(z) and 3.1(dd), except as set forth in the SEC Reports, the Company hereby
makes the representations and warranties set forth below to the Purchasers.
(a) SUBSIDIARIES. The Company has no direct or indirect
subsidiaries. The Company owns, directly or indirectly, all of the
capital stock or other equity interests of each Subsidiary free and
clear of any lien, charge, security interest, encumbrance, right of
first refusal or other restriction (collectively, "LIENS"), and all the
issued and outstanding shares of capital stock of each Subsidiary are
validly issued and are fully paid, non-assessable and free of
preemptive and similar rights. If the Company has no subsidiaries, then
references in the Transaction Documents to the Subsidiaries will be
disregarded.
(b) ORGANIZATION AND QUALIFICATION. Each of the Company and
the Subsidiaries is an entity duly incorporated or otherwise organized,
validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization (as applicable), with
the requisite power and authority to own and use its properties and
assets and to carry on its business as currently conducted. Neither the
Company nor any Subsidiary is in violation of any of the provisions of
its respective certificate or articles of incorporation, bylaws or
other organizational or charter documents. Each of the Company and the
6
Subsidiaries is duly qualified to do business and is in good standing
as a foreign corporation or other entity in each jurisdiction in which
the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or
in good standing, as the case may be, could not, individually or in the
aggregate: (i) adversely affect the legality, validity or
enforceability of any Transaction Document, (ii) have or result in or
be reasonably likely to have or result in a material adverse effect on
the results of operations, assets, prospects, business or condition
(financial or otherwise) of the Company and the Subsidiaries, taken as
a whole, or (iii) adversely impair the Company's ability to perform
fully on a timely basis its obligations under any of the Transaction
Documents (any of (i), (ii) or (iii), a "MATERIAL ADVERSE EFFECT").
(c) AUTHORIZATION; ENFORCEMENT. The Company has the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by each of the Transaction Documents and
otherwise to carry out its obligations hereunder or thereunder. The
execution and delivery of each of the Transaction Documents by the
Company and the consummation by it of the transactions contemplated
hereby or thereby have been duly authorized by all necessary action on
the part of the Company and no further consent or action is required by
the Company other than Required Approvals. Each of the Transaction
Documents has been (or upon delivery will be) duly executed by the
Company and, when delivered in accordance with the terms hereof, will
constitute the valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies
generally and general principles of equity. Neither the Company nor any
Subsidiary is in violation of any of the provisions of its respective
certificate or articles of incorporation, by-laws or other
organizational or charter documents.
(d) NO CONFLICTS. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated thereby do not and will not:
(i) conflict with or violate any provision of the Company's or any
Subsidiary's certificate or articles of incorporation, bylaws or other
organizational or charter documents, or (ii) subject to obtaining the
Required Approvals, conflict with, or constitute a default (or an event
that with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or
both) of, any agreement, credit facility, debt or other instrument
(evidencing a Company or Subsidiary debt or otherwise) or other
understanding to which the Company or any Subsidiary is a party or by
which any property or asset of the Company or any Subsidiary is bound
or affected, or (iii) result, in a violation of any law, rule,
regulation, order, judgment, injunction, decree or other restriction of
any court or governmental authority to which the Company or a
Subsidiary is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company or a
Subsidiary is bound or affected; except in the case of each of clauses
(ii) and (iii), such as could not, individually or in the aggregate,
have or result in a Material Adverse Effect.
7
(e) FILINGS, CONSENTS AND APPROVALS. Neither the Company nor
any Subsidiary is required to obtain any consent, waiver, authorization
or order of, give any notice to, or make any filing or registration
with, any court or other federal, state, local or other governmental
authority or other Person in connection with the execution, delivery
and performance by the Company of the Transaction Documents, other than
(i) the filings required under SECTION 4.8, (ii) the filing with the
Commission of the Underlying Shares Registration Statement, (iii) the
notice and/or application(s) to each applicable Principal Market for
the issuance and sale of the Debentures and Warrants and the listing of
the Underlying Shares for trading thereon in the time and manner
required thereby, and (iv) the filing of Form D with the Commission and
applicable Blue Sky filings (collectively, the "REQUIRED APPROVALS").
(f) ISSUANCE OF THE SECURITIES. The Securities are duly
authorized and, when issued and paid for in accordance with the
applicable Transaction Documents, will be duly and validly issued,
fully paid and non-assessable, free and clear of all Liens. The Company
has reserved from its duly authorized capital stock a number of shares
of Common Stock for issuance of the Underlying Shares at least equal to
the Required Minimum on the date hereof. The Company has not, and to
the knowledge of the Company, no Affiliate of the Company has sold,
offered for sale or solicited offers to buy or otherwise negotiate in
respect of any security (as defined in Section 2 of the Securities Act)
that would be integrated with the offer or sale of the Securities in a
manner that would require the registration under the Securities Act of
the sale of the Securities to the Purchasers, or that would be
integrated with the offer or sale of the Securities for purposes of the
rules and regulations of any Principal Market.
(g) CAPITALIZATION. The number of shares and type of all
authorized, issued and outstanding capital stock of the Company is set
forth in the Disclosure Schedules attached hereto. No securities of the
Company are entitled to preemptive or similar rights, and no Person has
any right of first refusal, preemptive right, right of participation,
or any similar right to participate in the transactions contemplated by
the Transaction Documents. Except as a result of the purchase and sale
of the Securities, there are no outstanding options, warrants, script
rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities, rights or obligations
convertible into or exchangeable for, or giving any Person any right to
subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common
Stock, or securities or rights convertible or exchangeable into shares
of Common Stock. The issuance and sale of the Securities will not
obligate the Company to issue shares of Common Stock or other
securities to any Person (other than the Purchasers) and will not
result in a right of any holder of Company securities to adjust the
exercise, conversion, exchange or reset price under such securities.
(h) SEC REPORTS; FINANCIAL STATEMENTS. The Company has filed
all reports required to be filed by it under the Securities Act and the
8
Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for
the two years preceding the date hereof (or such shorter period as the
Company was required by law to file such material) (the foregoing
materials being collectively referred to herein as the "SEC REPORTS"
and, together with the Schedules to this Agreement, the "DISCLOSURE
MATERIALS") on a timely basis or has received a valid extension of such
time of filing and has filed any such SEC Reports prior to the
expiration of any such extension. The Company has identified and made
available to the Purchasers a copy of all SEC Reports filed within the
10 days preceding the date hereof. As of their respective dates, the
SEC Reports complied in all material respects with the requirements of
the Securities Act and the Exchange Act and the rules and regulations
of the Commission promulgated thereunder, and none of the SEC Reports,
when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Reports comply in all
material respects with applicable accounting requirements and the rules
and regulations of the Commission with respect thereto as in effect at
the time of filing. Such financial statements have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved ("GAAP"), except as may be
otherwise specified in such financial statements or the notes thereto,
and fairly present in all material respects the financial position of
the Company and its consolidated subsidiaries as of and for the dates
thereof and the results of operations and cash flows for the periods
then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments.
(i) MATERIAL CHANGES. Since the date of the latest audited
financial statements included within the SEC Reports, except as
specifically disclosed in the SEC Reports: (i) there has been no event,
occurrence or development that has had or that could result in a
Material Adverse Effect, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and
accrued expenses incurred in the ordinary course of business consistent
with past practice and (B) liabilities not required to be reflected in
the Company's financial statements pursuant to GAAP or required to be
disclosed in filings made with the Commission, (iii) the Company has
not altered its method of accounting or the identity of its auditors,
(iv) the Company has not declared or made any dividend or distribution
of cash or other property to its stockholders or purchased, redeemed or
made any agreements to purchase or redeem any shares of its capital
stock, and (v) the Company has not issued any equity securities to any
officer, director or Affiliate, except pursuant to existing Company
stock option or similar plans.
(j) LITIGATION. There is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of
the Company, threatened against or affecting the Company, any
Subsidiary or any of their respective properties before or by any
court, arbitrator, governmental or administrative agency or regulatory
authority (federal, state, county, local or foreign) (collectively, an
"ACTION") which: (i) adversely affects or challenges the legality,
validity or enforceability of any of the Transaction Documents or the
9
Securities or (ii) could, if there were an unfavorable decision,
individually or in the aggregate, have or reasonably be expected to
result in a Material Adverse Effect. Neither the Company nor any
Subsidiary, nor any director or officer thereof, is or has been the
subject of any Action involving a claim of violation of or liability
under federal or state securities laws or a claim of breach of
fiduciary duty. The Company does not have pending before the Commission
any request for confidential treatment of information. There has not
been, and to the knowledge of the Company, there is not pending or
contemplated, any investigation by the Commission involving the Company
or any current or former director or officer of the Company. The
Commission has not issued any stop order or other order suspending the
effectiveness of any registration statement filed by the Company or any
Subsidiary under the Exchange Act or the Securities Act.
(k) COMPLIANCE. Neither the Company nor any Subsidiary: (i) is
in default under or in violation of (and no event has occurred that has
not been waived that, with notice or lapse of time or both, would
result in a default by the Company or any Subsidiary under), nor has
the Company or any Subsidiary received notice of a claim that it is in
default under or that it is in violation of, any indenture, loan or
credit agreement or any other agreement or instrument to which it is a
party or by which it or any of its properties is bound (whether or not
such default or violation has been waived), (ii) is in violation of any
order of any court, arbitrator or governmental body, or (iii) is or has
been in violation of any statute, rule or regulation of any
governmental authority, except in each case as could not, individually
or in the aggregate, have or result in a Material Adverse Effect.
(l) LABOR RELATIONS. No material labor dispute exists or, to
the knowledge of the Company, is imminent with respect to any of the
employees of the Company.
(m) REGULATORY PERMITS. The Company and the Subsidiaries
possess all certificates, authorizations and permits issued by the
appropriate federal, state, local or foreign regulatory authorities
necessary to conduct their respective businesses as described in the
SEC Reports, except where the failure to possess such permits could
not, individually or in the aggregate, have or reasonably be expected
to result in a Material Adverse Effect ("MATERIAL PERMITS"), and
neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material
Permit.
(n) TITLE TO ASSETS. The Company and the Subsidiaries have
good and marketable title in fee simple to all real property owned by
them that is material to the business of the Company and the
Subsidiaries and good and marketable title in all personal property
owned by them that is material to the business of the Company and the
Subsidiaries, in each case free and clear of all Liens, except for
Liens as do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such
property by the Company and the Subsidiaries. And to the Company's
knowledge, any real property and facilities held under lease by the
10
Company and the Subsidiaries are held under valid, subsisting and
enforceable leases of which the Company and the Subsidiaries are in
compliance.
(o) PATENTS AND TRADEMARKS. The Company and the Subsidiaries
have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names,
copyrights, licenses and other similar rights necessary or material for
use in connection with their respective businesses as described in the
SEC Reports and which the failure to so have could have a Material
Adverse Effect (collectively, the "INTELLECTUAL PROPERTY RIGHTS").
Neither the Company nor any Subsidiary has received a written notice
that the Intellectual Property Rights used by the Company or any
Subsidiary violates or infringes upon the rights of any Person. To the
knowledge of the Company, all such Intellectual Property Rights are
enforceable and there is no existing infringement by another Person of
any of the Intellectual Property Rights.
(p) INSURANCE. The Company and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are reasonably prudent and customary in
the businesses in which the Company and the Subsidiaries are engaged. A
list of the Company's insurance contracts and policies are set forth on
the Disclosure Schedules. To the best of Company's knowledge, such
insurance contracts and policies are accurate and complete. Neither the
Company nor any Subsidiary has any reason to believe it will not be
able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business without a significant increase in
cost.
(q) TRANSACTIONS WITH AFFILIATES AND EMPLOYEES. Except as set
forth in SEC Reports, none of the officers or directors of the Company
and, to the knowledge of the Company, none of the employees of the
Company is presently a party to any transaction with the Company or any
Subsidiary (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental
of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the
knowledge of the Company, any entity in which any officer, director, or
any such employee has a substantial interest or is an officer,
director, trustee or partner.
(r) INTERNAL ACCOUNTING CONTROLS. The Company and the
Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only
in accordance with management's general or specific authorization, and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences. The Company has established disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
11
15d-14) for the Company and designed such disclosures controls and
procedures to ensure that material information relating to the Company,
including its subsidiaries, is made known to the certifying officers by
others within those entities, particularly during the period in which
the Company's Form 10-K or 10-Q, as the case may be, is being prepared.
The Company's certifying officers have evaluated the effectiveness of
the Company's controls and procedures as of a date within 90 days prior
to the filing date of the Form 10-Q for the quarter ended September 30,
2002 (such date, the "EVALUATION DATE"). The Company presented in the
Form 10-Q for the quarter ended September 30, 2002 the conclusions of
the certifying officers about the effectiveness of the disclosure
controls and procedures based on their evaluations as of the Evaluation
Date. Since the Evaluation Date, there have been no significant changes
in the Company's internal controls (as such term is defined in Item
307(b) of Regulation S-K under the Exchange Act) or, the Company's
knowledge, in other factors that could significantly affect the
Company's internal controls.
(s) SOLVENCY/INDEBTEDNESS. Based on the financial condition of
the Company as of Closing Date: (i) the fair saleable value of the
Company's assets exceeds the amount that will be required to be paid on
or in respect of the Company's existing debts and other liabilities
(including known contingent liabilities) as they mature; (ii) the
Company's assets do not constitute unreasonably small capital to carry
on its business for the current fiscal year as now conducted and as
proposed to be conducted including its capital needs taking into
account the particular capital requirements of the business conducted
by the Company, and projected capital requirements and capital
availability thereof; and (iii) the current cash flow of the Company,
together with the proceeds the Company would receive, were it to
liquidate all of its assets, after taking into account all anticipated
uses of the cash, would be sufficient to pay all amounts on or in
respect of its debt when such amounts are required to be paid. The
Company does not intend to incur debts beyond its ability to pay such
debts as they mature (taking into account the timing and amounts of
cash to be payable on or in respect of its debt). The Company has no
knowledge of any facts or circumstances which lead it to believe that
it will file for reorganization or liquidation under the bankruptcy or
reorganization laws of any jurisdiction within one year from the
Closing Date. The SEC Reports set forth as of the dates thereof all
outstanding secured and unsecured Indebtedness of the Company or any
Subsidiary, or for which the Company or any Subsidiary has commitments.
For the purposes of this Agreement, "INDEBTEDNESS" shall mean (a) any
liabilities for borrowed money or amounts owed in excess of $50,000
(other than trade accounts payable incurred in the ordinary course of
business), (b) all guaranties, endorsements and other contingent
obligations, whether or not the same are or should be reflected in the
Company's balance sheet or the notes thereto, except guaranties by
endorsement of negotiable instruments for deposit or collection in the
ordinary course of business, and (c) the present value of any lease
payments in excess of $50,000 due under leases required to be
capitalized in accordance with GAAP. Neither the Company nor any
Subsidiary is in default with respect to any Indebtedness.
12
(t) CERTAIN FEES. No brokerage or finder's fees or commissions
are or will be payable by the Company to any broker, financial advisor
or consultant, finder, placement agent, investment banker, bank or
other Person with respect to the transactions contemplated by this
Agreement. The Company agrees that the Purchasers shall have no
obligation with respect to any fees or with respect to any claims made
by or on behalf of any Person for fees of the type contemplated by this
Section with the transactions contemplated by this Agreement.
(u) PRIVATE PLACEMENT. Assuming the accuracy of the
representations and warranties of the Purchasers set forth in Sections
3.2(b)-(f), the offer, issuance and sale of the Securities to the
Purchasers as contemplated hereby are exempt from the registration
requirements of the Securities Act. The issuance and sale of the
Securities hereunder does not contravene the rules and regulations of
the Principal Market and no shareholder approval is required for the
Company to fulfill its obligations under the Transaction Documents.
(v) LISTING AND MAINTENANCE REQUIREMENTS. The Company has not,
in the 12 months preceding the date hereof, received notice from any
Principal Market on which the Common Stock is or has been listed or
quoted to the effect that the Company is not in compliance with the
listing or maintenance requirements of such Principal Market. The
Company is, and has no reason to believe it will not in the foreseeable
future continue to be, in compliance with all such listing and
maintenance requirements.
(w) REGISTRATION RIGHTS. The Company has not granted or agreed
to grant to any Person any rights (including "piggy-back" registration
rights) to have any securities of the Company registered with the
Commission or any other governmental authority that have not been
satisfied.
(x) APPLICATION OF TAKEOVER PROTECTIONS. The Company and its
Board of Directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Company's
Certificate of Incorporation (or similar charter documents) or the laws
of its state of incorporation that is or could become applicable to the
Purchasers as a result of the Purchasers and the Company fulfilling
their obligations or exercising their rights under the Transaction
Documents, including without limitation as a result of the Company's
issuance of the Securities and the Purchasers' ownership of the
Securities.
(y) SENIORITY. As of the Closing Date, no indebtedness of the
Company is senior to the Debentures in right of payment, whether with
respect to interest or upon liquidation or dissolution, or otherwise,
other than indebtedness secured by purchase money security interests
(which is senior only as to underlying assets covered thereby) and
capital lease obligations (which is senior only as to the property
covered thereby).
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(z) DISCLOSURE. The Company confirms that neither it nor any
other Person acting on its behalf has provided any of the Purchasers or
their agents or counsel with any information that constitutes or might
constitute material, nonpublic information. The Company understands and
confirms that the Purchasers will rely on the foregoing representations
in effecting transactions in securities of the Company. All disclosure
provided to the Purchasers regarding the Company, its business and the
transactions contemplated hereby, including the Schedules to this
Agreement, furnished by or on behalf of the Company with respect to the
representations and warranties made herein are true and correct with
respect to such representations and warranties and do not contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. The Company
acknowledges and agrees that no Purchaser makes or has made any
representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in Section
3.2 hereof.
(aa) TAX STATUS. The Company and each of its Subsidiaries has
made or filed all federal, state and foreign income and all other tax
returns, reports and declarations required by any jurisdiction to which
it is subject (unless and only to the extent that the Company and each
of its Subsidiaries has set aside on its books provisions reasonably
adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are
material in amount, shown or determined to be due on such returns,
reports and declarations, except those being contested in good faith
and has set aside on its books provisions reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which
such returns, reports or declarations apply. There are no unpaid taxes
in any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any
such claim. The Company has not executed a waiver with respect to the
statute of limitations relating to the assessment or collection of any
foreign, federal, statue or local tax. None of the Company's tax
returns is presently being audited by any taxing authority.
(bb) ACKNOWLEDGMENT REGARDING PURCHASERS' PURCHASE OF
SECURITIES. The Company acknowledges and agrees that the Purchasers are
acting solely in the capacity of arm's length purchasers with respect
to this Agreement and the transactions contemplated hereby. The Company
further acknowledges that no Purchaser is acting as a financial advisor
or fiduciary of the Company (or in any similar capacity) with respect
to this Agreement and the transactions contemplated hereby and any
statement made by any Purchaser or any of their respective
representatives or agents in connection with this Agreement and the
transactions contemplated hereby is not advice or a recommendation and
is merely incidental to the Purchasers' purchase of the Securities. The
Company further represents to each Purchaser that the Company's
decision to enter into this Agreement has been based solely on the
independent evaluation of the Company and its representatives.
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(cc) NO GENERAL SOLICITATION OR ADVERTISING IN REGARD TO THIS
TRANSACTION. Neither the Company nor, to the knowledge of the Company,
any of its directors or officers (i) has conducted or will conduct any
general solicitation (as that term is used in Rule 502(c) of Regulation
D) or general advertising with respect to the sale of the Debentures or
the Warrants, or (ii) made any offers or sales of any security or
solicited any offers to buy any security under any circumstances that
would require registration of the Debentures, the Underlying Shares or
the Warrants under the Securities Act or made any "directed selling
efforts" as defined in Rule 902 of Regulation S.
(dd) NO DISAGREEMENTS WITH ACCOUNTANTS AND LAWYERS. There are
no disagreements of any kind presently existing, or reasonably
anticipated by the Company to arise, between the accountants and
lawyers formerly or presently employed by the Company and the Company
is current with respect to any fees owed to its accountants and
lawyers.
3.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants to the
Company as follows:
(a) ORGANIZATION; AUTHORITY. Such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite corporate or
partnership power and authority to enter into and to consummate the
transactions contemplated by the Transaction Documents and otherwise to
carry out its obligations thereunder. The purchase by such Purchaser of
the Securities hereunder has been duly authorized by all necessary
action on the part of such Purchaser. Each of this Agreement and the
Registration Rights Agreement have been duly executed by such
Purchaser, and when delivered by such Purchaser in accordance with the
terms hereof, will constitute the valid and legally binding obligation
of such Purchaser, enforceable against it in accordance with its terms.
(b) INVESTMENT INTENT. Such Purchaser is acquiring the
Securities as principal for its own account for investment purposes
only and not with a view to or for distributing or reselling such
Securities or any part thereof, without prejudice, however, to such
Purchaser's right, subject to the provisions of this Agreement, at all
times to sell or otherwise dispose of all or any part of such
Securities pursuant to an effective registration statement under the
Securities Act or under an exemption from such registration and in
compliance with applicable federal and state securities laws. Nothing
contained herein shall be deemed a representation or warranty by such
Purchaser to hold Securities for any period of time. Such Purchaser is
acquiring the Securities hereunder in the ordinary course of its
business. Such Purchaser does not have any agreement or understanding,
directly or indirectly, with any Person to distribute any of the
Securities.
(c) PURCHASER STATUS. At the time such Purchaser was offered
the Securities, it was, and at the date hereof it is, and on each date
on which it exercises any Warrants or converts any Debentures it will
be, an "accredited investor" as defined in Rule 501(a) under the
Securities Act. Such Purchaser has not been formed solely for the
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purpose of acquiring the Securities. Such Purchaser is not a registered
broker-dealer under Section 15 of the Exchange Act.
(d) EXPERIENCE OF SUCH PURCHASER. Such Purchaser, either alone
or together with its representatives, has such knowledge,
sophistication and experience in business and financial matters so as
to be capable of evaluating the merits and risks of the prospective
investment in the Securities, and has so evaluated the merits and risks
of such investment. Such Purchaser is able to bear the economic risk of
an investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.
(e) GENERAL SOLICITATION. Such Purchaser is not purchasing the
Securities as a result of any advertisement, article, notice or other
communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or
presented at any seminar or any other general solicitation or general
advertisement.
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES
4.1 TRANSFER RESTRICTIONS.
(a) The Securities may only be disposed of in compliance with
state and federal securities laws. In connection with any transfer of
Securities other than pursuant to an effective registration statement,
to the Company or to an Affiliate of a Purchaser, the Company may
require the transferor thereof to provide to the Company an opinion of
counsel selected by the transferor and reasonably acceptable to the
Company, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer does not
require registration of such transferred Securities under the
Securities Act. As a condition of transfer, any such transferee shall
agree in writing to be bound by the terms of this Agreement and shall
have the rights of a Purchaser under this Agreement and the
Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is
required by this SECTION 4.1(b), of the following legend on any
certificate evidencing Securities:
[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
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APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF
COUNSEL TO THE TRANSFEROR REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH
EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF
THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
The Company acknowledges and agrees that a Purchaser may from
time to time pledge pursuant to a bona fide margin agreement or grant a
security interest in some or all of the Securities and, if required
under the terms of such arrangement, such Purchaser may transfer
pledged or secured Securities to the pledgees or secured parties, so
long as any such grant, pledge or transfer does not individually or in
the aggregate violate the Securities Act or any rule or regulation
promulgated thereunder. If required by the Company's transfer agent in
order to effect a pledge, the Company shall cause its counsel, at no
cost to the Purchasers, to issue an opinion of counsel to the Company's
transfer agent. At the appropriate Purchaser's expense, the Company
will execute and deliver such reasonable documentation as a pledgee or
secured party of Securities may reasonably request in connection with a
pledge or transfer of the Securities, including the preparation and
filing of any required prospectus supplement under Rule 424(b)(3) of
the Securities Act or other applicable provision of the Securities Act
to appropriately amend the list of Selling Stockholders thereunder.
(c) Certificates evidencing Underlying Shares shall not
contain any legend (including the legend set forth in Section 4.1(b)
hereof): (i) while a registration statement (including the Underlying
Shares Registration Statement) covering the resale of such security is
effective under the Securities Act, or (ii) following any sale of such
Underlying Shares pursuant to Rule 144, or (iii) if such Underlying
Shares are eligible for sale under Rule 144(k), or (iv) if such legend
is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the
staff of the Commission); PROVIDED, HOWEVER, in connection with the
issuance of the Underlying Shares, each Purchaser, severally and not
jointly with the other Purchasers, hereby agrees to adhere to and abide
by all prospectus delivery requirements under the Securities Act and
Commission Regulations. If all or any portion of a Debenture or Warrant
is converted or exercised (as applicable) at a time when there is an
effective registration statement to cover the resale of the Underlying
Shares, or if such Underlying Shares may be sold under Rule 144(k) or
if such legend is not otherwise required under applicable requirements
of the Securities Act (including judicial interpretations thereof) then
such Underlying Shares shall be issued free of all legends. The Company
agrees that following the Effective Date or at such time as such legend
is no longer required under this Section 4.1(c), it will, no later than
five Trading Days following the delivery by a Purchaser to the Company
or the Company's transfer agent of a certificate representing
Underlying Securities issued with a restrictive legend, deliver or
17
cause to be delivered to such Purchaser a certificate representing such
shares that is free from all restrictive and other legends. The Company
may not make any notation on its records or give instructions to any
transfer agent of the Company that enlarge the restrictions on transfer
set forth in this Section.
(d) In addition to such Purchaser's other available remedies,
the Company shall pay to a Purchaser, in cash, as liquidated damages
and not as a penalty, for each $1,000 of Underlying Shares (based on
the VWAP of the Common Stock on the date such Securities are submitted
to the Company's transfer agent) delivered for removal of the
restrictive legend and subject to this Section 4.1(c), $10 per Trading
Day (increasing to $20 per Trading Day 3 Trading Days after such
damages have begun to accrue) for each Trading Day after such fifth
Trading Day until such certificate is delivered without a legend.
4.2 ACKNOWLEDGMENT OF DILUTION. The Company acknowledges that the
issuance of the Securities may result in dilution of the outstanding shares of
Common Stock, which dilution may be substantial under certain market conditions.
The Company further acknowledges that its obligations under the Transaction
Documents, including without limitation its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not subject to any right of set off, counterclaim, delay or reduction,
regardless of the effect of any such dilution or any claim the Company may have
against any Purchaser and regardless of the dilutive effect that such issuance
may have on the ownership of the other stockholders of the Company.
4.3 FURNISHING OF INFORMATION. As long as any Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. Upon the request of any Purchaser, the Company shall deliver to
such Purchaser a written certification of a duly authorized officer as to
whether it has complied with the preceding sentence. As long as any Purchaser
owns Securities, if the Company is not required to file reports pursuant to such
laws, it will prepare and furnish to the Purchasers and make publicly available
in accordance with Rule 144(c) such information as is required for the
Purchasers to sell the Securities under Rule 144. The Company further covenants
that it will take such further action as any holder of Securities may reasonably
request, all to the extent required from time to time to enable such Person to
sell such Securities without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144.
4.4 INTEGRATION. The Company shall not, and shall use its best efforts
to ensure that no Affiliate of the Company shall, sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with the
offer or sale of the Securities in a manner that would require the registration
under the Securities Act of the sale of the Securities to the Purchasers, or
that would be integrated with the offer or sale of the Securities for purposes
of the rules and regulations of any Principal Market.
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4.5 RESERVATION AND LISTING OF SECURITIES.
(a) The Company shall maintain a reserve from its duly
authorized shares of Common Stock for issuance pursuant to the
Transaction Documents in such amount as may be required to fulfill its
obligations in full under the Transaction Documents.
(b) If, on any date, the number of authorized but unissued
(and otherwise unreserved) shares of Common Stock is less than 200% of
(i) the Actual Minimum on such date, minus (ii) the number of shares of
Common Stock previously issued pursuant to the Transaction Documents,
then the Board of Directors of the Company shall use commercially
reasonable efforts to amend the Company's certificate or articles of
incorporation to increase the number of authorized but unissued shares
of Common Stock to at least the Required Minimum at such time (minus
the number of shares of Common Stock previously issued pursuant to the
Transaction Documents), as soon as possible and in any event not later
than the 75th day after such date; provided that the Company will not
be required at any time to authorize a number of shares of Common Stock
greater than the maximum remaining number of shares of Common Stock
that could possibly be issued after such time pursuant to the
Transaction Documents.
(c) The Company shall: (i) in the time and manner required by
the Principal Market, prepare and file with such Principal Market an
additional shares listing application covering a number of shares of
Common Stock at least equal to the Required Minimum on the date of such
application, (ii) take all steps reasonably necessary to cause such
shares of Common Stock to be approved for listing on the Principal
Market as soon as possible thereafter, (iii) provide to the Purchasers
evidence of such listing, and (iv) use its commercially reasonably best
efforts to maintain the listing of such Common Stock on such Principal
Market or another Principal Market. In addition, within 30 days of the
First Closing Date, the Company shall have filed an information
statement with the Commission relating to the Shareholder Approval and
shall use reasonable best efforts to cause the Shareholder Approval to
be deemed effective as promptly as possible thereafter.
4.6 CONVERSION AND EXERCISE PROCEDURES. The form of Election to
Purchase included in the Warrants and the form of Conversion Notice included in
the Debentures set forth the totality of the procedures required of the
Purchasers in order to exercise the Warrants or convert the Debentures. No
additional legal opinion or other information or instructions shall be required
of the Purchasers to exercise their Warrants or convert their Debentures. The
Company shall honor exercises of the Warrants and conversions of the Debentures
and shall deliver Underlying Shares in accordance with the terms, conditions and
time periods set forth in the Transaction Documents.
4.7 [RESERVED]
4.8 SECURITIES LAWS DISCLOSURE; PUBLICITY. The Company shall, by 8:30
a.m. Eastern time on the Trading Day following the date of this Agreement, issue
a press release or file a Current Report on Form 8-K reasonably acceptable to
each Purchaser disclosing all material terms of the transactions contemplated
19
hereby. The Company and the Purchasers shall consult with each other in issuing
any press releases with respect to the transactions contemplated hereby.
Notwithstanding the foregoing, other than in any registration statement filed
pursuant to the Registration Rights Agreement and filings related thereto, the
Company shall not publicly disclose the name of any Purchaser, or include the
name of any Purchaser in any filing with the Commission or any regulatory agency
or Principal Market, without the prior written consent of such Purchaser, except
to the extent such disclosure is required by law or Principal Market
regulations, in which case the Company shall provide the Purchasers with prior
notice of such disclosure.
4.9 NON-PUBLIC INFORMATION. The Company covenants and agrees that it
will not and will instruct any other Person acting on its behalf to not provide
any Purchaser or its agents or counsel with any information that the Company
believes constitutes material non-public information, unless prior thereto such
Purchaser shall have executed a written agreement regarding the confidentiality
and use of such information. The Company understands and confirms that each
Purchaser shall be relying on the foregoing representations in effecting
transactions in securities of the Company.
4.10 USE OF PROCEEDS. The Company shall use the net proceeds from the
sale of the Securities hereunder for working capital purposes and not for the
satisfaction of any portion of the Company's debt (other than payment of trade
payables, capital lease obligations, and accrued expenses in the ordinary course
of the Company's business and prior practices), to redeem any Company equity or
equity-equivalent securities or to settle any outstanding litigation. Prior to
the receipt of Shareholder Approval, the Company shall not declare or pay any
cash dividend on its shares of Common Stock while any Debentures remains
outstanding.
4.11 REIMBURSEMENT. If any Purchaser becomes involved in any capacity
in any Proceeding by or against any Person who is a stockholder of the Company,
solely as a result of such Purchaser's acquisition of the Securities under this
Agreement and without causation by any other activity, obligation, condition or
liability on the part of, or pertaining to such Purchaser and not to the
purchase of Securities pursuant to this Agreement, the Company will reimburse
such Purchaser, to the extent such reimbursement is not provided for in Section
4.12, for its reasonable legal and other expenses (including the cost of any
investigation, preparation and travel in connection therewith) incurred in
connection therewith, as such expenses are incurred. The reimbursement
obligations (and limitations thereon) of the Company under this paragraph shall
be in addition to any liability which the Company may otherwise have, shall
extend upon the same terms and conditions to any Affiliates of the Purchasers
who are actually named in such action, proceeding or investigation, and
partners, directors, agents, employees and controlling persons (if any), as the
case may be, of the Purchasers and any such Affiliate, and shall be binding upon
and inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither the Purchasers nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company solely as a result of acquiring the Securities under
this Agreement except to the extent any covenant or warranty owing to the
Company is breached.
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4.12 INDEMNIFICATION OF PURCHASERS. Subject to the provisions of this
Section 4.12, each party (the "INDEMNIFYING PARTY") will indemnify and hold the
other parties and their directors, officers, shareholders, partners, employees
and agents (each, an "INDEMNIFIED PARTY") harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including all judgments, amounts paid in settlements, court costs and reasonable
attorneys' fees and costs of investigation that any such Indemnified Party may
suffer or incur as a result of or relating to any breach of any of the
representations, warranties, covenants or agreements made by the Indemnifying
Party in this Agreement or in the other Transaction Documents. If any action
shall be brought against any Indemnified Party in respect of which indemnity may
be sought pursuant to this Agreement, such Indemnified Party shall promptly
notify the Indemnifying Party in writing, and the Indemnifying Party shall have
the right to assume the defense thereof with counsel of its own choosing. Any
Indemnified Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Indemnified Party except to the extent
that (i) the employment thereof has been specifically authorized by the
Indemnifying Party in writing, (ii) the Indemnifying Party has failed after a
reasonable period of time to assume such defense and to employ counsel or (iii)
in such action there is, in the reasonable opinion of such separate counsel, a
material conflict on any material issue between the position of the Indemnifying
Party and the position of such Indemnified Party. The Indemnifying Party will
not be liable to any Indemnified Party under this Agreement (i) for any
settlement by an Indemnified Party effected without the Indemnifying Party's
prior written consent, which shall not be unreasonably withheld or delayed; or
(ii) to the extent, but only to the extent that a loss, claim, damage or
liability is attributable to any Indemnified Party's breach of any of the
representations, warranties, covenants or agreements made by the Purchasers in
this Agreement or in the other Transaction Documents. In no event shall the
liability of any Purchaser hereunder be greater in amount than the dollar amount
of the net proceeds received by such Purchaser upon the sale of the Securities;
provided that this provision shall not limit the Company's rights and remedies
under any other provision pursuant to this Agreement, including but not limited
to, the Company's rights under Section 5.15.
4.13 SHAREHOLDERS RIGHTS PLAN. In the event that a shareholders rights
plan is adopted by the Company, no claim will be made or enforced by the Company
or any other Person that any Purchaser is an "Acquiring Person" under the plan
or in any way could be deemed to trigger the provisions of such plan by virtue
of receiving Securities under the Transaction Documents.
4.14. [RESERVED]
4.15 LIMITATIONS ON SHORT SALES. Each Purchaser agrees, severally and
not jointly, that it will not enter into any Short Sales (as hereinafter
defined) from the period commencing on the First Closing Date and ending on the
date that all of the Debentures have been converted and all of the Warrants have
been exercised. For purposes of this Section 3.2(h), a "SHORT SALE" by any
21
Purchaser shall mean a sale of Common Stock by such Purchaser that is marked as
a short sale and that is made at a time when there is no equivalent offsetting
long position in Common Stock held by such Purchaser. For purposes of
determining whether there is an equivalent offsetting long position in Common
Stock held by a Purchasers, in addition to shares of Common Stock held by such
Purchaser, Underlying Shares that have not yet been converted pursuant to such
Purchaser's Debenture and that have not yet been issued upon exercise of such
Purchaser's Warrant shall be deemed to be held long by such Purchaser.
ARTICLE V
MISCELLANEOUS
5.1 TERMINATION. This Agreement may be terminated by any Purchaser, by
written notice to the other parties, if the First Closing has not been
consummated on or before April 4, 2003; provided that no such termination will
affect the right of any party to sue for any breach by the other party (or
parties).
5.2 FEES AND EXPENSES. The Company shall pay all transfer agent fees,
stamp taxes and other taxes and duties levied in connection with the issuance of
any Securities.
5.3 ENTIRE AGREEMENT. The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.
5.4 NOTICES. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
specified in this Section prior to 5:30 p.m. (New York City time) on a Trading
Day, (b) the next Trading Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section on a day that is not a Trading Day or later than 5:30 p.m. (New
York City time) on any Trading Day, or (c) the Trading Day following the date of
mailing, if sent by U.S. nationally recognized overnight courier service. The
addresses for such notices and communications are those set forth on the
signature pages hereof, or such other address as may be designated in writing
hereafter, in the same manner, by such Person.
5.5 AMENDMENTS; WAIVERS. No provision of this Agreement may be waived
or amended except in a written instrument signed, in the case of an amendment,
by the Company and each of the Purchasers or, in the case of a waiver, by the
party against whom enforcement of any such waiver is sought. No waiver of any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.
22
5.6 CONSTRUCTION. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
5.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Purchasers. Any Purchaser may assign
its rights under this Agreement and the Registration Rights Agreement to any
Person to whom such Purchaser assigns or transfers any Securities.
5.8 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Sections 4.12.
5.9 GOVERNING LAW; VENUE; WAIVER OF JURY TRIAL. All questions
concerning the construction, validity, enforcement and interpretation of this
Agreement shall be governed by and construed and enforced in accordance with the
internal laws of the State of California, without regard to the principles of
conflicts of law thereof. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of San Diego,
California for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of any of the Transaction Documents),
and hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such suit, action or proceeding is improper or inconvenient
venue for such proceeding. Each party hereby irrevocably waives personal service
of process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in
effect for notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. The parties hereby waive all rights to a trial
by jury. If either party shall commence an action or proceeding to enforce any
provisions of this Agreement, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its attorneys fees and
other costs and expenses incurred with the investigation, preparation and
prosecution of such action or proceeding.
5.10 SURVIVAL. The representations and warranties contained herein
shall survive the earlier of (a) 18 months after the Closing Date and (b) the
date on which the Debentures and Warrants are no longer outstanding. The
agreements and covenants of the Company contained herein shall survive, as to a
Purchaser and unless otherwise set forth in the Transaction Documents, until
such Purchaser no longer holds any Securities.
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5.11 EXECUTION. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.
5.12 SEVERABILITY. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.
5.13 RESCISSION AND WITHDRAWAL RIGHT. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice, demand or election in whole
or in part without prejudice to its future actions and rights, provided,
however, in the case of a rescission of a conversion of a Debenture or exercise
of a Warrant, the Purchaser shall be required to return any shares of Common
Stock subject to any such conversion or exercise notice.
5.14 REPLACEMENT OF SECURITIES. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Securities.
5.15 REMEDIES. Notwithstanding any provision to the contrary in Section
4.12, in addition to being entitled to exercise all rights provided herein or
granted by law, including recovery of damages, each of the Purchasers and the
Company will be entitled to specific performance under the Transaction
Documents. The parties agree that monetary damages may not be adequate
compensation for any loss incurred by reason of any breach of obligations
described in the foregoing sentence and hereby agrees to waive in any action for
specific performance of any such obligation the defense that a remedy at law
would be adequate. Without limiting the generality of the foregoing, the Company
expressly agrees that its breach of the next-to-last last sentence of Section
4.7 would cause each Purchaser irreparable harm, and consents to the granting of
injunctive relief by any court having jurisdiction to preclude any such issuance
of securities.
24
5.16 PAYMENT SET ASIDE. To the extent that the Company makes a payment
or payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
5.17 USURY. To the extent it may lawfully do so, the Company hereby
agrees not to insist upon or plead or in any manner whatsoever claim, and will
resist any and all efforts to be compelled to take the benefit or advantage of,
usury laws wherever enacted, now or at any time hereafter in force, in
connection with any claim, action or proceeding that may be brought by any
Purchaser in order to enforce any right or remedy under any Transaction
Document. Notwithstanding any provision to the contrary contained in any
Transaction Document, it is expressly agreed and provided that the total
liability of the Company under the Transaction Documents for payments in the
nature of interest shall not exceed the maximum lawful rate authorized under
applicable law (the "MAXIMUM RATE"), and, without limiting the foregoing, in no
event shall any rate of interest or default interest, or both of them, when
aggregated with any other sums in the nature of interest that the Company may be
obligated to pay under the Transaction Documents exceed such Maximum Rate. It is
agreed that if the maximum contract rate of interest allowed by law and
applicable to the Transaction Documents is increased or decreased by statute or
any official governmental action subsequent to the date hereof, the new maximum
contract rate of interest allowed by law will be the Maximum Rate applicable to
the Transaction Documents from the effective date forward, unless such
application is precluded by applicable law. If under any circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to any
Purchaser with respect to indebtedness evidenced by the Transaction Documents,
such excess shall be applied by such Purchaser to the unpaid principal balance
of any such indebtedness or be refunded to the Company, the manner of handling
such excess to be at such Purchaser's election.
5.18 INDEPENDENT NATURE OF PURCHASERS' OBLIGATIONS AND RIGHTS. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Document. Each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose. Each Purchaser was introduced to the Company by Century Capital, which
25
has acted solely as agent for the Company and not for any Purchaser. Each
Purchaser has been represented by its own separate legal counsel in their review
and negotiation of the Transaction Documents. For reasons of administrative
convenience only, Purchasers and their respective counsel have chosen to
communicate with the Company through FW. FW does not represent all of the
Purchasers but only Midsummer. The Company has elected to provide all Purchasers
with the same terms and Transaction Documents for the convenience of the Company
and not because it was required or requested to do so by the Purchasers.
5.19 LIQUIDATED DAMAGES. The Company's obligations to pay any
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
liquidated damages and other amounts have been paid notwithstanding the fact
that the instrument or security pursuant to which such liquidated damages or
other amounts are due and payable shall have been canceled.
***********************
26
IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
SVI SOLUTIONS, INC.
By:_________________________
Name: Barry Schechter
Title: Chairman
Address for Notice:
-------------------
5607 Palmer Way
Carlsbad, CA 92008
Attn: Barry Schechter
Tel: (858) 481-4405
Fax:
27
PURCHASERS SIGNATURE PAGE
IN WITNESS WHEREOF, the undersigned have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
Address for Notice:
-------------------
By: MBSJ Investors LLC C/o Randy Siller
60 Butler Lane
New Canaan, Connecticut 06480
By:____________________________ Tel: (203) 966 5503
Jeff Cohen Fax: (914) 333 7614
Attn: Jeff Cohen
First Closing Subscription:
28
Exhibit A
---------
(Form of Debenture)
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
Date of Issuance: April 1, 2003
$ 400,000.00
9% CONVERTIBLE DEBENTURE
DUE OCTOBER 1, 2005
THIS DEBENTURE is one of a series of duly authorized and issued
Debentures of SVI Solutions, Inc., a Delaware corporation, having a principal
place of business at 5607 Palmer Way, Carlsbad, CA 92008 (the "COMPANY"),
designated as its 9% Convertible Debenture, due, with respect to the aggregate
principal amount of $400,000 issued at the Closing, October 1, 2005.
FOR VALUE RECEIVED, the Company promises to pay to MBSJ Investors LLC
or its registered assigns (the "HOLDER"), the principal sum of $400,000 on
October 1, 2005 or such earlier date as the Debentures are required or permitted
to be repaid as provided hereunder (the "MATURITY DATE") and to pay interest to
the Holder on the aggregate unconverted and then outstanding principal amount of
this Debenture at the rate of 9% per annum, payable quarterly on March 1, June
1, September 1 and December 1, beginning on the first such date after the
Original Issue Date and on each Conversion Date (as to that principal amount
then being converted), on each Monthly Redemption Date (as to that principal
amount then being redeemed) and on the Maturity Date (except that, if any such
date is not a Business Day, then such payment shall be due on the next
succeeding Business Day) (each such date, an "INTEREST PAYMENT DATE"), in cash
29
or shares of Common Stock at the Interest Conversion Rate, or a combination
thereof; provided, however, payment in shares of Common Stock may only occur if:
(i) there is an effective Underlying Shares Registration Statement pursuant to
which the Holder is permitted to utilize the prospectus thereunder to resell all
of the shares of Common Stock to be issued in lieu of cash (and the Company
believes, in good faith, that such effectiveness will continue uninterrupted for
the foreseeable future), (ii) the Common Stock is listed for trading on a
Principal Market (and the Company believes, in good faith, that trading of the
Common Stock on a Principal Market will continue uninterrupted for the
foreseeable future), (iii) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the issuance of all
of the shares issuable pursuant to the Transaction Documents, including the
shares to be issued for interest in lieu of cash and (iv) such issuance would be
permitted to the extent it would not violate the limitations set forth in
clauses (A) or (B) of Section 4(a)(ii). Subject to the terms and conditions
herein, the decision whether to pay interest hereunder in shares of Common Stock
or cash shall be at the discretion of the Company. Not less than 20 Trading Days
prior to each Interest Payment Date, the Company shall provide the Holder with
written notice of its election to pay interest hereunder either in cash or
shares of Common Stock (the Company may indicate in such notice that the
election contained in such notice shall continue for later periods until
revised). Subject to the aforementioned conditions, failure to timely provide
such written notice shall be deemed an election by the Company to pay the
interest on such Interest Payment Date in cash. Interest shall be calculated on
the basis of a 360-day year and shall accrue daily commencing on the Original
Issue Date until payment in full of the principal sum, together with all accrued
and unpaid interest and other amounts which may become due hereunder, has been
made. Payment of interest in shares of Common Stock shall otherwise occur
pursuant to Section 4(b) and for purposes of the payment of interest in shares
only, the Interest Payment Date shall be deemed the Conversion Date. Interest
shall cease to accrue with respect to any principal amount converted, provided
that the Company in fact delivers the Underlying Shares within the time period
required by Section 4(b)(i). Interest hereunder will be paid to the Person in
whose name this Debenture is registered on the records of the Company regarding
registration and transfers of Debentures (the "DEBENTURE REGISTER"). Except as
otherwise provided herein, if at anytime the Company pays interest partially in
cash and partially in shares of Common Stock, then such payment shall be
distributed ratably among the Holders based upon the principal amount of
Debentures held by each Holder. All overdue accrued and unpaid interest to be
paid hereunder shall entail a late fee at the rate of 12% per annum (or such
lower maximum amount of interest permitted to be charged under applicable law)
("LATE FEE") which will accrue daily, from the date such interest is due
hereunder through and including the date of payment. EXCEPT AS SET FORTH IN
SECTION 5(a) OF THIS DEBENTURE, THE COMPANY MAY NOT PREPAY ANY PORTION OF THE
PRINCIPAL AMOUNT ON THIS DEBENTURE WITHOUT THE PRIOR WRITTEN CONSENT OF THE
HOLDER.
This Debenture is subject to the following additional provisions:
SECTION 1) This Debenture is exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be made
for such registration of transfer or exchange.
30
SECTION 2) This Debenture has been issued subject to certain investment
representations of the original Holder set forth in the Purchase Agreement and
may be transferred or exchanged only in compliance with the Purchase Agreement
and applicable federal and state securities laws and regulations. The Holder
hereof, by acceptance of this Debenture, agrees to be bound by the covenants
made by the original Holder contained in the Purchase Agreement. Prior to due
presentment to the Company for transfer of this Debenture, the Company and any
agent of the Company may treat the Person in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.
SECTION 3) EVENTS OF DEFAULT.
a) "EVENT OF DEFAULT", wherever used herein, means any one of
the following events (whatever the reason and whether it shall be
voluntary or involuntary or effected by operation of law or pursuant to
any judgment, decree or order of any court, or any order, rule or
regulation of any administrative or governmental body):
i) any default in the payment of the principal of,
interest on or liquidated damages in respect of, any
Debentures, free of any claim of subordination, as and when
the same shall become due and payable (whether on a Conversion
Date or the Maturity Date or by acceleration or otherwise)
which default is not cured, if possible to cure, within 3 days
of notice of such default sent by the Holder;
ii) the Company shall fail to observe or perform any
other covenant, agreement or warranty contained in, or
otherwise commit any breach of any of the Transaction
Documents (other than a breach by the Company of its
obligations to deliver shares of Common Stock to the Holder
upon conversion or interest payment which breach is addressed
in clause (x) below) which is not cured, if possible to cure,
within 5 days of notice of such default sent by the Holder
(except with respect to breaches pursuant to Sections 4.1, 4.8
and 4.9 of the Purchase Agreement and Section 3(a) of the
Warrant);
iii) the Company or any of its subsidiaries shall
commence, or there shall be commenced against the Company or
any such subsidiary a case under any applicable bankruptcy or
insolvency laws as now or hereafter in effect or any successor
thereto, or the Company commences any other proceeding under
any reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law
of any jurisdiction whether now or hereafter in effect
relating to the Company or any subsidiary thereof or there is
31
commenced against the Company or any subsidiary thereof any
such bankruptcy, insolvency or other proceeding which remains
undismissed for a period of 60 days; or the Company or any
subsidiary thereof is adjudicated insolvent or bankrupt; or
any order of relief or other order approving any such case or
proceeding is entered; or the Company or any subsidiary
thereof suffers any appointment of any custodian or the like
for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or the
Company or any subsidiary thereof makes a general assignment
for the benefit of creditors; or the Company shall fail to
pay, or shall state that it is unable to pay, or shall be
unable to pay, its debts generally as they become due; or the
Company or any subsidiary thereof shall call a meeting of its
creditors with a view to arranging a composition, adjustment
or restructuring of its debts; or the Company or any
subsidiary thereof shall by any act or failure to act
expressly indicate its consent to, approval of or acquiescence
in any of the foregoing; or any corporate or other action is
taken by the Company or any subsidiary thereof for the purpose
of effecting any of the foregoing;
iv) the Company shall default in any of its
obligations under any other Debenture or any mortgage, credit
agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued,
or by which there may be secured or evidenced any indebtedness
for borrowed money or money due under any long term leasing or
factoring arrangement of the Company in an amount exceeding
$150,000, whether such indebtedness now exists or shall
hereafter be created and such default shall result in such
indebtedness becoming or being declared due and payable prior
to the date on which it would otherwise become due and
payable;
v) the Common Stock shall not be eligible for
quotation on or quoted for trading on the Nasdaq SmallCap
Market, New York Stock Exchange, American Stock Exchange or
the Nasdaq National Market (each, a "Principal Market") and
shall not again be eligible for and quoted or listed for
trading thereon within five Trading Days;
vi) the Company shall be a party to any Change of
Control Transaction , shall agree to sell or dispose of all or
in excess of 45% of its assets in one or more transactions
(whether or not such sale would constitute a Change of Control
Transaction) or shall redeem or repurchase more than a de
minimis number of its outstanding shares of Common Stock or
other equity securities of the Company (other than redemptions
of Underlying Shares);
vii) an Underlying Shares Registration Statement
shall not have been declared effective by the Commission on or
prior to the 180th calendar day after the Original Issue Date;
32
viii) if, during the Effectiveness Period (as defined
in the Registration Rights Agreement), the effectiveness of
the Underlying Shares Registration Statement lapses for any
reason or the Holder shall not be permitted to resell
Registrable Securities (as defined in the Registration Rights
Agreement) under the Underlying Shares Registration Statement,
in either case, for more than 10 consecutive Trading Days or
20 non-consecutive Trading Days during any 12 month period;
ix) an Event (as defined in the Registration Rights
Agreement) shall not have been cured to the reasonable
satisfaction of the Holder prior to the expiration of thirty
days from the Event Date (as defined in the Registration
Rights Agreement) relating thereto (other than an Event
resulting from a failure of an Underlying Shares Registration
Statement to be declared effective by the Commission on or
prior to the Effectiveness Date (as defined in the
Registration Rights Agreement), which shall be covered by
Section 3(a)(vii));
x) the Company shall fail for any reason to deliver
certificates to a Holder prior to the fifth Trading Day after
a Conversion Date pursuant to and in accordance with Section
4(b) or the Company shall provide notice to the Holder,
including by way of public announcement, at any time, of its
intention not to comply with requests for conversions of any
Debentures in accordance with the terms hereof; or
(xi) the Company shall fail for any reason to deliver
the payment in cash pursuant to a Buy-In (as defined herein)
within five days after notice thereof is delivered hereunder.
b) If any Event of Default occurs and is continuing, the full
principal amount of this Debenture, together with interest and other amounts
owing in respect thereof, to the date of acceleration shall become at the
Holder's election, immediately due and payable in cash. The aggregate amount
payable upon an Event of Default shall be equal to the Mandatory Prepayment
Amount. Interest shall continue to accrue on the Mandatory Prepayment Amount
hereunder from the 5th day after such amount is due (being the date of an Event
of Default) through the date of prepayment in full thereof in an amount equal to
the Late Fee, to accrue daily from the date such payment is due hereunder
through and including the date of payment. All Debentures for which the full
prepayment price hereunder shall have been paid in accordance herewith shall
promptly be surrendered to or as directed by the Company. The Holder need not
provide and the Company hereby waives any presentment, demand, protest or other
notice of any kind, and the Holder may immediately and without expiration of any
grace period enforce any and all of its rights and remedies hereunder and all
other remedies available to it under applicable law. Such declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder and the
Holder shall have all rights as a Debenture holder until such time, if any, as
the full payment under this Section shall have been received by it. No such
33
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.
SECTION 4) CONVERSION.
a) i) At any time after the Closing Date, this Debenture shall
be convertible into shares of Common Stock at the option of
the Holder, in whole or in part at any time and from time to
time (subject to the limitations on conversion set forth in
Section 4(a)(ii) hereof). The Holder shall effect conversions
by delivering to the Company the form of conversion notice
attached hereto as Annex A (a "CONVERSION NOTICE"), specifying
therein the principal amount of Debentures to be converted and
the date on which such conversion is to be effected (a
"CONVERSION DATE") and shall contain a completed schedule in
the form of SCHEDULE 1 to the Conversion Notice (as amended on
each Conversion Date, the "CONVERSION SCHEDULE") reflecting
the remaining principal amount of this Debenture and all
accrued and unpaid interest thereon subsequent to the
conversion at issue. If no Conversion Date is specified in a
Conversion Notice, the Conversion Date shall be the date that
such Conversion Notice is provided hereunder. To effect
conversions hereunder, the Holder shall not be required to
physically surrender Debentures to the Company unless the
entire principal amount of this Debenture has been so
converted. Conversions hereunder shall have the effect of
lowering the outstanding principal amount of this Debenture
plus all accrued and unpaid interest thereon in an amount
equal to the applicable conversion, which shall be evidenced
by entries set forth in the Conversion Schedule. The Holder
and the Company shall maintain records showing the principal
amount converted and the date of such conversions. The Company
shall deliver any objection to the figures represented in the
Conversion Schedules within 1 Business Day of receipt of such
notice. In the event of any dispute or discrepancy, the
records of the Holder shall be controlling and determinative
in the absence of manifest error. The Holder and any assignee,
by acceptance of this Debenture, acknowledge and agree that,
by reason of the provisions of this paragraph, following
conversion of a portion of this Debenture, the unpaid and
unconverted principal amount of this Debenture may be less
than the amount stated on the face hereof.
ii) CERTAIN CONVERSION RESTRICTIONS.
(A) A Holder may not convert Debentures or
receive shares of Common Stock as payment of interest
hereunder to the extent such conversion or receipt of
such interest payment would result in the Holder,
together with its Affiliates, beneficially owning (as
determined in accordance with Section 13(d) of the
Exchange Act and the rules promulgated thereunder) in
34
excess of 4.999% of the then issued and outstanding
shares of Common Stock, including shares issuable
upon conversion of, and payment of interest on, the
Debentures held by such Holder after application of
this Section. The Holder shall be entitled to rely on
the Company's public filing with respect to the
number of shares of Common Stock which are then
issued and outstanding, and the Holder may inquire of
the Company's Chief Financial Officer to obtain a
more current number, which shall be provided within 2
Business Days of written request therefor. To ensure
compliance with this restriction, the Holder will be
deemed to represent to the Company each time it
delivers a Conversion Notice that such Conversion
Notice has not violated the restrictions set forth in
this paragraph. If the Holder has delivered a
Conversion Notice for a principal amount of
Debentures that, without regard to any other shares
that the Holder or its Affiliates may beneficially
own, would result in the issuance in excess of the
permitted amount hereunder, the Company shall notify
the Holder of this fact and shall honor the
conversion for the maximum principal amount permitted
to be converted on such Conversion Date in accordance
with the periods described in Section 4(b) and, at
the option of the Holder, either retain any principal
amount tendered for conversion in excess of the
permitted amount hereunder for future conversions or
return such excess principal amount to the Holder. In
the event of a merger or consolidation of the Company
with or into another Person, this paragraph shall not
apply with respect to a determination of the number
of shares of common stock issuable upon conversion in
full of the Debentures if such determination is
necessary to establish the Securities or other assets
which the holder of Common Stock shall be entitled to
receive upon the effectiveness of such merger or
consolidation. The provisions of this Section
4(a)(ii)(A) may be waived by the Holder at the
election of the Holder upon not less than 61 days'
prior notice to the Company, and the provisions of
this Section 4(a)(ii)(A) shall continue to apply
until such 61st day (or such later date, as
determined by the Holder, as may be specified in such
notice of waiver). No conversion of this Debenture in
violation of this Section 4(a)(ii)(A) but otherwise
in accordance with this Debenture shall affect the
status of the Underlying Shares as validly issued,
fully-paid and nonassessable.
(B) If the Company has not obtained
Shareholder Approval (as defined below), if required
by the applicable rules and regulations of the
Principal Market (or any successor entity), then the
Company may not issue upon conversion of the
Debentures, in the aggregate, in excess of (i)
19.999% of the number of shares of Common Stock
outstanding on the Trading Day immediately preceding
the Original Issue Date, (ii) less any shares of
Common Stock issued as payment of interest or to be
issued upon exercise of the Warrants issued to
Holders of the Debentures on the Original Issue Date
35
pursuant to the Purchase Agreement (such number of
shares, the "ISSUABLE MAXIMUM"). Each Holder shall be
entitled to a portion of the Issuable Maximum equal
to the quotient obtained by dividing (x) the
aggregate principal amount of the Debenture(s) issued
and sold to such Holder on the Original Issue Date by
(y) the aggregate principal amount of all Debentures
issued and sold by the Company on the Original Issue
Date. If any Holder shall no longer hold Debentures,
then such Holder's remaining portion of the Issuable
Maximum shall be allocated pro-rata among the
remaining Holders. If on any Conversion Date: (A) the
applicable Set Price then in effect is such that the
shares issuable under this Debenture on any
Conversion Date together with the aggregate number of
shares of Common Stock that would then be issuable
upon conversion in full of all then outstanding
Debentures would exceed the Issuable Maximum, and (B)
the Company shall not have obtained Shareholder
Approval, then the Company shall issue to the Holder
requesting a conversion a number of shares of Common
Stock equal to such Holder's pro-rata portion (which
shall be calculated pursuant to the terms hereof) of
the Issuable Maximum and, with respect to the
remainder of the aggregate principal amount of the
Debentures (including any accrued interest) then held
by such Holder for which a conversion in accordance
with the applicable conversion price would result in
an issuance of shares of Common Stock in excess of
such Holder's pro-rata portion (which shall be
calculated pursuant to the terms hereof) of the
Issuable Maximum (the "EXCESS PRINCIPAL"), the
Company shall be prohibited from converting such
Excess Principal, and shall notify the Holder of the
reason therefor. This Debenture shall thereafter be
unconvertible until and unless Shareholder Approval
is subsequently obtained or is otherwise not
required, but this Debenture shall otherwise remain
in full force and effect. The Company and the Holder
understand and agree that shares of Common Stock
issued to and then held by the Holder as a result of
conversions of Debentures shall not be entitled to
cast votes on any resolution to obtain Shareholder
Approval pursuant hereto. For clarity, the failure of
the Company to actually obtain Shareholder Approval
shall not be a breach of covenant or Event of Default
under Section 3 of this Debenture, provided, that any
issuance of securities which results in an adjustment
to the Set Price (other than pursuant to Section
4(c)(ii)) without the Company having previously
sought and voted on Shareholder Approval as set forth
in the Purchase Agreement shall be a breach of
covenant in the Purchase Agreement and an Event of
Default under Section 3(a)(ii).
iii) UNDERLYING SHARES ISSUABLE UPON CONVERSION AND
PURSUANT TO INTEREST.
36
(A) CONVERSION OF PRINCIPAL AMOUNT. The
number of shares of Common Stock issuable upon a
conversion shall be determined by the quotient
obtained by dividing (x) the outstanding principal
amount of this Debenture to be converted and (y) the
Set Price, and
(B) PAYMENT OF INTEREST IN UNDERLYING
SHARES. The number of shares of Common Stock issuable
upon payment of interest under this Debenture shall
be the number determined by (x) the product of (I)
the outstanding principal amount of this Debenture to
be converted and (II) the product of (aa) the
quotient obtained by dividing 9% by 360 and (bb) the
number of days for which such principal amount was
outstanding, divided by (y) the applicable Interest
Conversion Rate, provided, that if the Company shall
have elected to pay the interest due on an Interest
Payment Date in cash pursuant to the terms hereof,
this subsection (B) shall not be used in the
calculation of the number of shares of Common Stock
issuable upon a conversion hereunder.
(C) Notwithstanding anything to the contrary
contained herein, if on any Conversion Date:
(1) the number of shares of Common
Stock at the time authorized, unissued and
unreserved for all purposes, or held as
treasury stock, is insufficient to honor
such conversion;
(2) the Common Stock shall fail to
be listed or quoted for trading on a
Principal Market; or
(3) the Company has failed to timely
satisfy its conversion obligations
hereunder.
and, with respect to such delivery, no prior
demand has been made by the Holder pursuant to
Section 4(b)(ii) or Section 4(b)(iii), then, at the
option of the Holder, the Company, in lieu of
delivering shares of Common Stock pursuant to this
Section 4, shall deliver, within five Trading Days of
each applicable Conversion Date, an amount in cash
equal to the product of the number of shares of
Common Stock otherwise deliverable to the Holder in
connection with such Conversion Date and the highest
VWAP during the period commencing on the Conversion
Date and ending on the Trading Day prior to the date
such payment is made.
37
b) i) Not later than five Trading Days after any Conversion
Date, the Company will deliver to the Holder (A) a certificate
or certificates for the Shares of Common Stock which shall be
free of restrictive legends and trading restrictions (other
than those required by the Purchase Agreement) representing
the number of shares of Common Stock being acquired upon the
conversion of Debentures and (B) a bank check in the amount of
accrued and unpaid interest (if the Company has timely elected
or is required to pay accrued interest in cash). The Company
shall, upon request of the Holder, if available and if allowed
under applicable securities laws, use its best efforts to
deliver any certificate or certificates required to be
delivered by the Company under this Section electronically
through the Depository Trust Corporation or another
established clearing corporation performing similar functions.
If in the case of any Conversion Notice such certificate or
certificates are not delivered to or as directed by the
applicable Holder by the fifth Trading Day after a Conversion
Date, the Holder shall be entitled by written notice to the
Company at any time on or before its receipt of such
certificate or certificates thereafter, to rescind such
conversion, in which event the Company shall immediately
return the certificates representing the principal amount of
Debentures tendered for conversion.
ii) If the Company fails for any reason to deliver to the
Holder such certificate or certificates pursuant to Section
4(b)(i) by the fifth Trading Day after the Conversion Date,
and, with respect to such delivery, no prior demand has been
made by the Holder pursuant to Section 4(a)iii)(C) or Section
4(b)(iii) the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, for each $5,000 of
principal amount being converted, $50 per Trading Day
(increasing to $100 per Trading Day after 3 Trading Days and
increasing to $200 per Trading Day 6 Trading Days after such
damages begin to accrue) for each Trading Day after such fifth
Trading Day until such certificates are delivered. Nothing
herein shall limit a Holder's right to pursue actual damages
or declare an Event of Default pursuant to Section 3 herein
for the Company's failure to deliver certificates representing
shares of Common Stock upon conversion within the period
specified herein and such Holder shall have the right to
pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such
rights shall not prohibit the Holders from seeking to enforce
damages pursuant to any other Section hereof or under
applicable law.
(iii) In addition to any other rights available to the Holder,
if the Company fails for any reason to deliver to the Holder
such certificate or certificates pursuant to Section 4(b)(i)
by the fifth Trading Day after the Conversion Date, and with
respect to such delivery, no prior demand has been made by the
Holder pursuant to Section 4(a)(iii)(C) or Section 4(b)(ii),
if after such fifth Trading Day the Holder is required by its
38
brokerage firm to purchase (in an open market transaction or
otherwise) Common Stock to deliver in satisfaction of a sale
by such Holder of the Underlying Shares which the Holder
anticipated receiving upon such conversion (a "Buy-In"), then
the Company shall (A) pay in cash to the Holder (in addition
to any remedies available to or elected by the Holder) the
amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the Common Stock
so purchased exceeds (y) the product of (1) the aggregate
number of shares of Common Stock that such Holder anticipated
receiving from the conversion at issue multiplied by (2) the
actual sale price of the Common Stock at the time of the sale
(including brokerage commissions, if any) giving rise to such
purchase obligation and (B) at the option of the Holder,
either reissue Debentures in principal amount equal to the
principal amount of the attempted conversion or deliver to the
Holder the number of shares of Common Stock that would have
been issued had the Company timely complied with its delivery
requirements under Section 4(b)(i). For example, if the Holder
purchases Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to an attempted
conversion of Debentures with respect to which the actual sale
price of the Underlying Shares at the time of the sale
(including brokerage commissions, if any) giving rise to such
purchase obligation was a total of $10,000 under clause (A) of
the immediately preceding sentence, the Company shall be
required to pay the Holder $1,000. The Holder shall provide
the Company written notice indicating the amounts payable to
the Holder in respect of the Buy-In. Notwithstanding anything
contained herein to the contrary, if a Holder requires the
Company to make payment in respect of a Buy-In for the failure
to timely deliver certificates hereunder and the Company
timely pays in full such payment, the Company shall not be
required to pay such Holder liquidated damages under Section
4(b)(ii) in respect of the certificates resulting in such
Buy-In.
(iv) Notwithstanding anything herein to the contrary, if after
the Effective Date the VWAP for any 15 consecutive Trading
Days exceeds then Set Price by more than 200%, the Company
may, within 2 Trading Days of any such period, deliver a
notice to the Holder (a "FORCED CONVERSION NOTICE" and the
date such notice is received by the Holder, the "FORCED
CONVERSION NOTICE DATE") to cause the Holder to immediately
convert all or part (and if part, pro-rata in proportion to
each Holders initial purchase of the Debentures) of the then
outstanding principal amount of Debentures pursuant to Section
4(a)(i). The Company may only effect a Forced Conversion
Notice if each of the following shall be true: (i) the Company
shall have duly honored all conversions occurring by virtue of
one or more Conversion Notices prior to the Forced Conversion
Date, (ii) there is an effective Underlying Shares
Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all
of the Underlying Shares issued to the Holder and all of the
Underlying Shares as are issuable to the Holder upon
conversion in full of this Debenture subject to the Forced
Conversion Notice (and the Company believes, in good faith,
39
that such effectiveness will continue uninterrupted for the
foreseeable future), (iii) the Common Stock is listed for
trading on a Principal Market (and the Company believes, in
good faith, that trading of the Common Stock on a Principal
Market will continue uninterrupted for the foreseeable
future), (iv) all liquidated damages and other amounts owing
in respect of the Debentures and Underlying Shares shall have
been paid or will, concurrently with the issuance of the
Underlying Shares, be paid in cash; (v) there is a sufficient
number of authorized but unissued and otherwise unreserved
shares of Common Stock for the issuance of all the Underlying
Shares as are issuable to the Holder upon conversion in full
of the Debentures subject to the Forced Conversion Notice;
(vi) no Event of Default nor any event that with the passage
of time would constitute an Event of Default has occurred and
is continuing; (vii) such issuance would be permitted in full
without violating the limitations set forth in clauses (A) or
(B) of Section 4(a)(ii) and (viii) no public announcement of a
pending or proposed Change of Control Transaction or
Fundamental Transaction has occurred that has not been
consummated.
(c) i) The conversion price in effect on any Conversion Date
shall be equal to $1.0236 (subject to adjustment herein)(the
"SET PRICE").
ii) If the Company, at any time while the Debentures are
outstanding: (A) shall pay a stock dividend or otherwise make
a distribution or distributions on shares of its Common Stock
or any other equity or equity equivalent securities payable in
shares of Common Stock (which, for avoidance of doubt, shall
not include any shares of Common Stock issued by the Company
pursuant to this Debenture, including interest thereon), (B)
subdivide outstanding shares of Common Stock into a larger
number of shares, (C) combine (including by way of reverse
stock split) outstanding shares of Common Stock into a smaller
number of shares, or (D) issue by reclassification of shares
of the Common Stock any shares of capital stock of the
Company, then the Set Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding before
such event and of which the denominator shall be the number of
shares of Common Stock outstanding after such event. Any
adjustment made pursuant to this Section shall become
effective immediately after the record date for the
determination of stockholders entitled to receive such
dividend or distribution and shall become effective
immediately after the effective date in the case of a
subdivision, combination or re-classification.
iii) If the Company, at any time while Debentures are
outstanding, shall issue rights, options or warrants to all
holders of Common Stock (and not to Holders) entitling them to
subscribe for or purchase shares of Common Stock or Common
Stock Equivalents at a price per share less than the VWAP at
the record date mentioned below, then the Set Price shall be
40
adjusted by multiplying the Set Price in effect immediately
prior to such record date by a fraction, of which the
denominator shall be the number of shares of the Common Stock
(excluding treasury shares, if any) outstanding on the date of
issuance of such rights or warrants plus the number of
additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of
shares of the Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants
plus the number of shares which the aggregate offering price
of the total number of shares so offered would purchase at the
VWAP on the record date. Such adjustment shall be made
whenever such rights, options or warrants are issued, and
shall become effective immediately after the record date for
the determination of stockholders entitled to receive such
rights, options or warrants.
iv) If the Company or any subsidiary thereof, as applicable,
at any time while Debentures are outstanding, shall offer,
sell, grant any option to purchase or offer, sell or grant any
right to reprice its securities, or otherwise dispose of or
issue (or announce any offer, sale, grant or any option to
purchase or other disposition) any Common Stock or any equity
or equity equivalent securities (including any equity, debt or
other instrument that is at any time over the life thereof
convertible into or exchangeable for Common Stock)
(collectively, "COMMON STOCK EQUIVALENTS") entitling any
Person to acquire shares of Common Stock, at an effective
price per share less than 87% of the then Set Price ("DILUTIVE
ISSUANCE"), as adjusted hereunder (if the holder of the Common
Stock or Common Stock Equivalent so issued shall at any time,
whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices
or otherwise, or due to warrants, options or rights per share
which is issued in connection with such issuance, be entitled
to receive shares of Common Stock at an effective price per
share which is less than the Set Price, such issuance shall be
deemed to have occurred for less than the Set Price), then the
Set Price shall be reduced to equal 115% of the effective
conversion, exchange or purchase price for such Common Stock
or Common Stock Equivalents (including any reset provisions
thereof) at issue. Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued. The
Company shall notify the Holder in writing, no later than the
Business Day following the issuance of any Common Stock or
Common Stock Equivalent subject to this section, indicating
therein the applicable issuance price, or of applicable reset
price, exchange price, conversion price and other pricing
terms.
v) If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of Common Stock
(and not to Holders) evidences of its indebtedness or assets
or rights or warrants to subscribe for or purchase any
security, then in each such case the Set Price shall be
41
determined by multiplying such price in effect immediately
prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the VWAP determined
as of the record date mentioned above, and of which the
numerator shall be such VWAP on such record date less the then
fair market value at such record date of the portion of such
assets or evidence of indebtedness so distributed applicable
to one outstanding share of the Common Stock as determined by
the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the
Holders of the portion of assets or evidences of indebtedness
so distributed or such subscription rights applicable to one
share of Common Stock. Such adjustment shall be made whenever
any such distribution is made and shall become effective
immediately after the record date mentioned above.
vi) [RESERVED]
vii) All calculations under this Section 4 shall be made to
the nearest cent or the nearest 1/100th of a share, as the
case may be. For purposes of this Section 4, the number of
shares of Common Stock deemed to be outstanding as of a given
date shall be the sum of the number of shares of Common Stock
(excluding treasury shares, if any) outstanding.
viii) The Company agrees that it is prohibited from taking any
actions specified in Sections 4(c)(iii)-(v) which would result
in any adjustment to the Set Price prior to submitting the
transactions contemplated by the Purchase Agreement to a vote
for Shareholder Approval. Whenever the Set Price is adjusted
pursuant to any of Section 4(c)(ii) - (v), the Company shall
promptly mail to each Holder a notice setting forth the Set
Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
ix) If (A) the Company shall declare a dividend (or any other
distribution) on the Common Stock; (B) the Company shall
declare a special nonrecurring cash dividend on or a
redemption of the Common Stock; (C) the Company shall
authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights; (D) the approval
of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any
sale or transfer of all or substantially all of the assets of
the Company, of any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or
property; (E) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the
affairs of the Company; then, in each case, the Company shall
cause to be filed at each office or agency maintained for the
purpose of conversion of the Debentures, and shall cause to be
mailed to the Holders at their last addresses as they shall
appear upon the stock books of the Company, at least 20
42
calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which
a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record
is not to be taken, the date as of which the holders of the
Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is
expected to become effective or close, and the date as of
which it is expected that holders of the Common Stock of
record shall be entitled to exchange their shares of the
Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; provided, that the failure
to mail such notice or any defect therein or in the mailing
thereof shall not affect the validity of the corporate action
required to be specified in such notice. Holders are entitled
to convert Debentures during the 20-day period commencing the
date of such notice to the effective date of the event
triggering such notice.
x) If, at any time while this Debenture is outstanding, (A)
the Company effects any merger or consolidation of the Company
with or into another Person, (B) the Company effects any sale
of all or substantially all of its assets in one or a series
of related transactions, (C) any tender offer or exchange
offer (whether by the Company or another Person) is completed
pursuant to which holders of Common Stock are permitted to
tender or exchange their shares for other securities, cash or
property, or (D) the Company effects any reclassification of
the Common Stock or any compulsory share exchange pursuant to
which the Common Stock is effectively converted into or
exchanged for other securities, cash or property (in any such
case, a "FUNDAMENTAL TRANSACTION"), then upon any subsequent
conversion of this Debenture, the Holder shall have the right
to receive, for each Underlying Share that would have been
issuable upon such conversion absent such Fundamental
Transaction, the same kind and amount of securities, cash or
property as it would have been entitled to receive upon the
occurrence of such Fundamental Transaction if it had been,
immediately prior to such Fundamental Transaction, the holder
of one share of Common Stock (the "ALTERNATE CONSIDERATION").
For purposes of any such conversion, the determination of the
Set Price shall be appropriately adjusted to apply to such
Alternate Consideration based on the amount of Alternate
Consideration issuable in respect of one share of Common Stock
in such Fundamental Transaction, and the Company shall
apportion the Set Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any
different components of the Alternate Consideration. If
holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as
to the Alternate Consideration it receives upon any conversion
of this Debenture following such Fundamental Transaction. To
the extent necessary to effectuate the foregoing provisions,
any successor to the Company or surviving entity in such
43
Fundamental Transaction shall issue to the Holder a new
Debenture consistent with the foregoing provisions and
evidencing the Holder's right to convert such Debenture into
Alternate Consideration. The terms of any agreement pursuant
to which a Fundamental Transaction is effected shall include
terms requiring any such successor or surviving entity to
comply with the provisions of this paragraph (c) and insuring
that this Debenture (or any such replacement security) will be
similarly adjusted upon any subsequent transaction analogous
to a Fundamental Transaction. If any Fundamental Transaction
constitutes or results in a Change of Control Transaction,
then at the request of the Holder delivered before the 90th
day after such Fundamental Transaction, the Company (or any
such successor or surviving entity) will purchase the
Debenture from the Holder for a purchase price, payable in
cash within five Trading Days after such request (or, if
later, on the effective date of the Fundamental Transaction),
equal to the 100% of the remaining unconverted principal
amount of this Debenture on the date of such request, plus all
accrued and unpaid interest thereon, plus all other accrued
and unpaid amounts due hereunder.
(xi) Notwithstanding the foregoing, no adjustment will be made
under this paragraph (c) in respect of (A) the granting or
issuance of shares of capital stock or of options to
employees, officers, directors and consultants of the Company
pursuant to any stock option plan agreement or arrangement
duly adopted or approved by a majority of the non-employee
members of the Board of Directors of the Company or a majority
of the members of a committee of non-employee directors
established for such purpose, (B) upon the exercise of this
Debenture or any other Debenture of this series or of any
other series or security issued by the Company in connection
with the offer and sale of this Company's securities pursuant
to the Purchase Agreement, or (C) upon the exercise of or
conversion of any Convertible Securities, options or warrants
issued and outstanding on the Original Issue Date, provided
such securities have not been amended since the date of the
Purchase Agreement, or (D) issuance of securities in
connection with acquisitions, strategic investments, or
strategic partnering arrangements, the primary purpose of
which is not to raise capital.
(d) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued shares of Common
Stock solely for the purpose of issuance upon conversion of the
Debentures and payment of interest on the Debentures, each as herein
provided, free from preemptive rights or any other actual contingent
purchase rights of persons other than the Holders, not less than such
number of shares of the Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares
set forth in the Purchase Agreement) be issuable (taking into account
the adjustments and restrictions of Section 4(b)) upon the conversion
of the outstanding principal amount of the Debentures and payment of
44
interest hereunder. The Company covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and, if the Underlying
Shares Registration Statement has been declared effective under the
Securities Act, registered for public sale in accordance with such
Underlying Shares Registration Statement.
(e) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares
of the Common Stock, but may if otherwise permitted, make a cash
payment in respect of any final fraction of a share based on the VWAP
at such time. If the Company elects not, or is unable, to make such a
cash payment, the Holder shall be entitled to receive, in lieu of the
final fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for shares of the Common
Stock on conversion of the Debentures shall be made without charge to
the Holders thereof for any documentary stamp or similar taxes that may
be payable in respect of the issue or delivery of such certificate,
provided that the Company shall not be required to pay any tax that may
be payable in respect of any transfer involved in the issuance and
delivery of any such certificate upon conversion in a name other than
that of the Holder of such Debentures so converted and the Company
shall not be required to issue or deliver such certificates unless or
until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to
the satisfaction of the Company that such tax has been paid.
(g) Any and all notices or other communications or deliveries
to be provided by the Holders hereunder, including, without limitation,
any Conversion Notice, shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service or
sent by certified or registered mail, postage prepaid, addressed to the
Company, at the address set forth above, FACSIMILE NUMBER (760)
496-0285, ATTN: BARRY SCHECHTER or such other address or facsimile
number as the Company may specify for such purposes by notice to the
Holders delivered in accordance with this Section. Any and all notices
or other communications or deliveries to be provided by the Company
hereunder shall be in writing and delivered personally, by facsimile,
sent by a nationally recognized overnight courier service or sent by
certified or registered mail, postage prepaid, addressed to each Holder
at the facsimile telephone number or address of such Holder appearing
on the books of the Company, or if no such facsimile telephone number
or address appears, at the principal place of business of the Holder.
Any notice or other communication or deliveries hereunder shall be
deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section
prior to 5:30 p.m. (New York City time), (ii) the date after the date
45
of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section
later than 5:30 p.m. (New York City time) on any date and earlier than
11:59 p.m. (New York City time) on such date, (iii) four days after
deposit in the United States mail, (iv) the Business Day following the
date of mailing, if sent by nationally recognized overnight courier
service, or (v) upon actual receipt by the party to whom such notice is
required to be given.
SECTION 5. REDEMPTION.
(a) OPTIONAL REDEMPTION. Subject to the provisions of this
Section 5, the Company may, at any time, deliver a notice to the
Holders (an "Optional Redemption Notice" and the date such notice is
deemed delivered hereunder, the "Optional Redemption Notice Date") of
its irrevocable election to redeem all, but not less than all, of the
then outstanding Debentures, for an amount, in cash, equal to the
Optional Redemption Amount on the 30th Trading Day following the
Optional Redemption Notice Date (such date, the "Optional Redemption
Date" and such redemption, the "Optional Redemption"). The Optional
Redemption Amount is due in full on the Optional Redemption Date. The
Company may only effect an Optional Redemption if from the Optional
Redemption Notice Date through to the Optional Redemption Date, each of
the following shall be true: (i) the Company shall have duly honored
all conversions and redemptions scheduled to occur or occurring by
virtue of one or more Conversion Notices prior to the Optional
Redemption Date, (ii) there is an effective Underlying Shares
Registration Statement pursuant to which the Holders are permitted to
utilize the prospectus thereunder to resell all of the Underlying
Shares issued to the Holders and all of the Underlying Shares as are
issuable to the Holders upon conversion in full of the Debentures
subject to the Optional Redemption (and the Company believes, in good
faith, that such effectiveness will continue uninterrupted for the
foreseeable future), (iii) the Common Stock is listed for trading on
the Principal Market (and the Company believes, in good faith, that
trading of the Common Stock on the Principal Market will continue
uninterrupted for the foreseeable future), (iv) all liquidated damages
and other amounts owing in respect of the Debentures shall have been
paid or will, concurrently with the issuance of the Underlying Shares,
be paid in cash; (v) there is a sufficient number of authorized but
unissued and otherwise unreserved shares of Common Stock for the
issuance of all the Underlying Shares as are issuable to the Holder
upon conversion in full of the Debentures subject to the Optional
Redemption; (vi) no Event of Default has occurred and is continuing;
(vii) an issuance of all of the Underlying Share upon conversion
hereunder would be permitted in full without violating the limitations
set forth in Section 4(a)(ii)(A) or (B); and (viii) no public
announcement of a pending or proposed Fundamental Transaction or
acquisition transaction has occurred that has not been consummated. If
any of the foregoing conditions shall cease to be satisfied at any time
during the required period, then the Holder may elect to nullify the
Optional Redemption Notice in which case the Option Redemption Notice
shall be null and void, ab initio. The Holders may convert, pursuant to
Section 4(a)(i) hereof, any shares of Debentures subject to an Optional
Redemption at any time prior to the date that the Optional Redemption
Amount and all amounts owing thereon are due and paid in full. The
Company covenants and agrees that it will honor all Conversion Notices
tendered from the time of delivery of the Optional Redemption Notice
through the date all amounts owing thereon are due and paid in full.
46
(b) MONTHLY REDEMPTION. On each Monthly Redemption Date, the
Company shall redeem each Holder's Pro Rata Portion of the Monthly
Redemption Amount plus accrued but unpaid interest, the sum of all
liquidated damages and any other amounts then owing to such Holder in
respect of the Debenture. For purposes of this subsection 5(b) only,
"PRO RATA PORTION" is the ration of (x) the principal amount of this
Debenture on the Original Issue Date and (y) the sum of the aggregate
original principal amounts of the Debentures issued to all Holders on
the Closing. If any Holder shall no longer holds Debentures, then the
Pro Rata Portion shall be recalculated to exclude such Holder's
principal amount from clause (y) above. Monthly Redemption Amount shall
be allocated pro-rata among the remaining Holders. The Monthly
Redemption Amount due on each Monthly Redemption Date shall, except as
provided in this Section, be paid in cash. As to any Monthly Redemption
and upon 20 Trading Days' prior written irrevocable notice, in lieu of
a cash redemption payment the Company may elect to pay 100% of a
Monthly Redemption in Underlying Shares based on a conversion price
equal to the lesser of (i) 90% of the average of the 20 VWAPs
immediately prior to the applicable Monthly Redemption Date (subject to
adjustment for any stock dividend, stock split, stock combination or
other similar event affecting the Common Stock during such 20 Trading
Day period) and (ii) the Set Price (the "MONTHLY CONVERSION PRICE");
PROVIDED, HOWEVER, that the Company may not pay the Monthly Redemption
Amount in Underlying Shares unless, on the Monthly Redemption Date and
during the 20 Trading Day period immediately prior thereto, (i) there
is an effective Registration Statement pursuant to which the Holder is
permitted to utilize the prospectus thereunder to resell all of the
Underlying Shares issued to the Holder and all of the Underlying Shares
as are issuable to the Holder upon conversion in full of the Debenture
subject to such Monthly Redemption (and the Company believes, in good
faith, that such effectiveness will continue uninterrupted for the
foreseeable future), (ii) the Common Stock is listed for trading on a
Principal Market (and the Company believes, in good faith, that trading
of the Common Stock on the Principal Market will continue uninterrupted
for the foreseeable future), (iii) on or prior to the 20th Trading Day
prior to such Monthly Redemption Date, the Company irrevocably notifies
the Holder that it will issue Underlying Shares in lieu of cash; (iv)
all liquidated damages and other amounts owing in respect of the
Debenture shall have been paid or will, concurrently with the issuance
of the Underlying Shares, be paid in cash; (v) there is a sufficient
number of authorized but unissued and otherwise unreserved shares of
Common Stock for such issuance; (vi) such issuance would be permitted
in full without violating the limitations set forth in Section
4(a)(ii)(A) or (B); (vii) no Event of Default nor any event that with
the passage of time would constitute an Event of Default has occurred
and is continuing; and (viii) no public announcement of a pending or
proposed Change of Control Transaction or Fundamental Transaction has
occurred that has not been consummated. The Holders may convert,
pursuant to Section 4(a)(i), any principal amount of the Debenture
47
subject to a Monthly Redemption at any time prior to the date that the
Monthly Redemption Amount and all amounts owing thereon are due and
paid in full. The Company covenants and agrees that it will honor all
Conversion Notices tendered up until such amounts are paid in full.
(c) REDEMPTION PROCEDURE. The payment of cash and/or issuance
of Common Stock, as the case may be, pursuant to a Monthly Redemption
shall be made on the Monthly Redemption Date and the payment of cash
pursuant to an Optional Redemption shall be made on the Optional
Redemption Date. If any portion of the cash payment for a Monthly
Redemption or Optional Redemption shall not be paid by the Company by
the respective due date, interest shall accrue thereon at the rate of
18% per annum (or the maximum rate permitted by applicable law,
whichever is less) until the payment of the Monthly Redemption Amount
or Optional Redemption Amount, as applicable, plus all amounts owing
thereon is paid in full. In addition, if any portion of the Monthly
Redemption Amount or Optional Redemption Amount, as applicable, remains
unpaid after such date, the Holders subject to such redemption may
elect, by written notice to the Company given at any time thereafter,
to invalidate AB INITIO such redemption, notwithstanding anything
herein contained to the contrary. Notwithstanding anything to the
contrary in this Section 6, the Company's determination to redeem in
cash or shares of Common Stock shall be applied ratably among the
Holders based upon the principal amount of Debentures initially
purchased by each Holder, adjusted upward ratably in the event all of
the shares of Debentures of any Holder are no longer outstanding.
SECTION 6. DEFINITIONS. For the purposes hereof, in addition to the
terms defined elsewhere in this Debenture: (a) capitalized terms not otherwise
defined herein have the meanings given to such terms in the Purchase Agreement,
and (b) the following terms shall have the following meanings:
"BUSINESS DAY" means any day except Saturday, Sunday and any
day which shall be a federal legal holiday in the United States or a
day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"CHANGE OF CONTROL TRANSACTION" means the occurrence after the
date hereof of any of (i) an acquisition after the date hereof by an
individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Company,
by contract or otherwise) of in excess of 45% of the voting securities
of the Company, or (ii) a replacement at one time or within a one year
period of more than one-half of the members of the Company's board of
directors which is not approved by a majority of those individuals who
are members of the board of directors on the date hereof (or by those
individuals who are serving as members of the board of directors on any
48
date whose nomination to the board of directors was approved by a
majority of the members of the board of directors who are members on
the date hereof), or (iii) the execution by the Company of an agreement
to which the Company is a party or by which it is bound, providing for
any of the events set forth above in (i) or (ii).
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock, $0.0001 par value per
share, of the Company and stock of any other class into which such
shares may hereafter have been reclassified or changed.
"CONVERSION DATE" shall have the meaning set forth in Section
4(a)(i) hereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"INTEREST CONVERSION RATE" means 90% of the lesser of (i) the
average of the 20 VWAPs immediately prior to the applicable Interest
Payment Date or (ii) the average of the 20 VWAPs immediately prior to
the date the applicable interest payment shares are issued and
delivered if after the Interest Payment Date.
"LATE FEES" shall have the meaning set forth in the second
paragraph to this Debenture.
"MANDATORY PREPAYMENT AMOUNT" for any Debentures shall equal
the sum of (i) the greater of: (A) 120% of the principal amount of
Debentures to be prepaid, plus all accrued and unpaid interest thereon,
plus all other accrued and unpaid amounts due hereunder, or (B) the
principal amount of Debentures to be prepaid, plus all accrued and
unpaid interest thereon, plus all other accrued and unpaid amounts due
hereunder, divided by the Set Price on (x) the date the Mandatory
Prepayment Amount is demanded or otherwise due or (y) the date the
Mandatory Prepayment Amount is paid in full, whichever is less,
multiplied by the VWAP on (x) the date the Mandatory Prepayment Amount
is demanded or otherwise due or (y) the date the Mandatory Prepayment
Amount is paid in full, whichever is greater, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of such
Debentures.
"MONTHLY CONVERSION PRICE" shall have the meaning set forth in
Section 5(a) hereof.
"MONTHLY REDEMPTION" shall mean the redemption of the
Debenture pursuant to Section 5(a) hereof.
"MONTHLY REDEMPTION AMOUNT" shall mean, as to a Monthly
Redemption, $20,000 in the aggregate among all Holders commencing on
February 1, 2004.
49
"MONTHLY REDEMPTION DATE" means the 1st of each month,
commencing on February 1, 2004 and ending upon the full redemption of
this Debenture.
"OPTIONAL REDEMPTION AMOUNT" shall mean the sum of (i) 110% of
the principal amount of the Debenture then outstanding, (ii) accrued
but unpaid interest and (iii) all liquidated damages and other amounts
due in respect of the Debentures.
"OPTIONAL REDEMPTION DATE" shall have the meaning set forth in
Section 5(a).
"ORIGINAL ISSUE DATE" shall mean the date of the first
issuance of the Debentures regardless of the number of transfers of any
Debenture and regardless of the number of instruments which may be
issued to evidence such Debenture.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"PURCHASE AGREEMENT" means the Securities Purchase Agreement,
dated as of the Original Issue Date, to which the Company and the
original Holder are parties, as amended, modified or supplemented from
time to time in accordance with its terms.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the Original Issue Date, to which the Company
and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"SET PRICE" shall have the meaning set forth in Section
4(c)(i).
"SHAREHOLDER APPROVAL" means such approval as may be required
by the applicable rules and regulations of the Principal Market (or any
successor entity) from the shareholders of the Company with respect to
the transactions contemplated by the Transaction Documents, including
the issuance of all of the Underlying Shares and shares of Common Stock
issuable upon exercise of the Warrants.
"TRADING DAY" means (a) a day on which the shares of Common
Stock are traded on the Principal Market on which the shares of Common
Stock are then listed or quoted, or (b) if the shares of Common Stock
are not quoted on a Principal Market, a day on which the shares of
Common Stock are quoted in the over-the-counter market as reported by
the National Quotation Bureau Incorporated (or any similar organization
or agency succeeding its functions of reporting prices); PROVIDED, that
in the event that the shares of Common Stock are not listed or quoted
as set forth in (a), (b) and (c) hereof, then Trading Day shall mean a
Business Day.
50
"TRANSACTION DOCUMENTS" shall have the meaning set forth in
the Purchase Agreement.
"UNDERLYING SHARES" means the shares of Common Stock issuable
upon conversion of Debentures or as payment of interest in accordance
with the terms hereof.
"UNDERLYING SHARES REGISTRATION STATEMENT" means a
registration statement meeting the requirements set forth in the
Registration Rights Agreement, covering among other things the resale
of the Underlying Shares and naming the Holder as a "selling
stockholder" thereunder.
"VWAP" means, for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Principal Market or the OTC Bulletin Board, the
daily volume weighted average price of the Common Stock for such date
(or the nearest preceding date) on the Principal Market (or OTC
Bulletin Board) on which the Common Stock is then listed or quoted as
reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30
a.m. ET to 4:02 p.m. Eastern Time) using the VAP function; (b) if the
Common Stock is not then listed or quoted on a Principal Market or the
OTC Bulletin Board and if prices for the Common Stock are then reported
in the "pink sheets" published by the National Quotation Bureau
Incorporated (or a similar organization or agency succeeding to its
functions of reporting prices), the most recent bid price per share of
the Common Stock so reported; or (c) in all other cases, the fair
market value of a share of Common Stock as determined by a nationally
recognized independent appraiser selected in good faith by Purchasers
holding a majority of the outstanding principal amount of Debentures.
SECTION 7. Except as expressly provided herein, no provision of this
Debenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of, interest and liquidated damages (if
any) on, this Debenture at the time, place, and rate, and in the coin or
currency, herein prescribed. This Debenture is a direct debt obligation of the
Company. This Debenture ranks PARI PASSU with all other Debentures now or
hereafter issued under the terms set forth herein. As long as there are
Debentures outstanding, the Company shall not and shall cause it subsidiaries
not to, without the consent of the Holders, (a) amend its certificate of
incorporation, bylaws or other charter documents so as to adversely affect any
rights of the Holders; (b) repay, repurchase or offer to repay, repurchase or
otherwise acquire shares of its Common Stock or other equity securities other
than as to the Underlying Shares to the extent permitted or required under the
Transaction Documents; (c) enter into any agreement with respect to any of the
foregoing; or (d) issue any variable priced equity securities or variable priced
equity linked securities.
51
SECTION 8. If this Debenture shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed Debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
SECTION 9. The Company will not and will not permit any of its
subsidiaries to, directly or indirectly, enter into, create, incur, assume or
suffer to exist any indebtedness of any kind, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein or
any income or profits therefrom that is senior in any respect to the Company's
obligations under the Debentures.
SECTION 10. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of
California, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by any of the
Transaction Documents (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, employees or agents) shall be
commenced in the state and federal courts sitting in the City of San Diego,
California (the "CALIFORNIA COURTS"). Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the California Courts for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or such
California Courts are improper or inconvenient venue for such proceeding. Each
party hereby irrevocably waives personal service of process and consents to
process being served in any such suit, action or proceeding by mailing a copy
thereof via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Debenture and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
Each party hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Debenture or the transactions contemplated
hereby. If either party shall commence an action or proceeding to enforce any
provisions of this Debenture, then the prevailing party in such action or
proceeding shall be reimbursed by the other party for its attorneys fees and
other costs and expenses incurred with the investigation, preparation and
prosecution of such action or proceeding.
SECTION 11. Any waiver by the Company or the Holder of a breach of any
provision of this Debenture shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Debenture. The failure of the Company or the Holder to insist upon strict
52
adherence to any term of this Debenture on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Debenture. Any waiver
must be in writing.
SECTION 12. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances. If it shall be found
that any interest or other amount deemed interest due hereunder violates
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.
The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on the Debentures as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may affect the
covenants or the performance of this indenture, and the Company (to the extent
it may lawfully do so) hereby expressly waives all benefits or advantage of any
such law, and covenants that it will not, by resort to any such law, hinder,
delay or impeded the execution of any power herein granted to the Holder, but
will suffer and permit the execution of every such as though no such law has
been enacted.
SECTION 13. Whenever any payment or other obligation hereunder shall be
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day.
*********************
53
IN WITNESS WHEREOF, the Company has caused this Convertible Debenture
to be duly executed by a duly authorized officer as of the date first above
indicated.
SVI SOLUTIONS, INC.
By:__________________________
Name: Barry M. Schechter
Title: Chairman
54
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal and, if specified, interest
under the 9% Convertible Debenture of SVI Solutions, Inc., (the "Company") due
on ________ __, 200__, into shares of common stock, $0.0001 par value per share
(the "Common Stock"), of the Company according to the conditions hereof, as of
the date written below. If shares are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.
By the delivery of this Notice of Conversion the undersigned represents and
warrants to the Company that its ownership of the Company's Common Stock does
not exceed the amounts determined in accordance with Section 13(d) of the
Exchange Act, specified under Section 4 of this Debenture.
The undersigned agrees to comply with the prospectus delivery requirements under
the applicable securities laws in connection with any transfer of the aforesaid
shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debentures to be Converted
Payment of Interest in Common Stock |_| Yes |_| No
If yes, $ _______ of Interest Accrued on
Account of Conversion at Issue
Number of shares of Common Stock to be Issued:
Applicable Conversion Price:
Signature:
Name:
Address:
55
EXHIBIT B
---------
[See Appendix IV for Form of MBSJ Registration Rights Agreement]
PLAN OF DISTRIBUTION
--------------------
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The selling stockholder may from time to time pledge or grant a
security interest in some or all of the Shares or common stock or Warrant owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock
from time to time under this prospectus, or under an amendment to this
prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933 amending the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
prospectus.
70
The selling stockholders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling stockholders have
informed the Company that none of them have any agreement or understanding,
directly or indirectly, with any person to distribute the common stock.
The Company is required to pay all fees and expenses incurred by the
Company incident to the registration of the shares. The Company has agreed to
indemnify the selling stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
71
EXHIBIT C
---------
(Form of Warrant)
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES STOCK PURCHASE WARRANT
To Purchase 156,311 Shares of Common Stock of
SVI Solutions, Inc.
THIS STOCK PURCHASE WARRANT CERTIFIES that, for value received, MBSJ
Investors LLC (the "Holder"), is entitled, upon the terms and subject to the
limitations on exercise and the conditions hereinafter set forth, at any time on
or after April 1, 2003 (the "Initial Exercise Date") and on or prior to the
close of business on the fifth anniversary of the Initial Exercise Date (the
"Termination Date") but not thereafter, to subscribe for and purchase from SVI
Solutions, Inc., a corporation incorporated in the State of Delaware (the
"Company"), up to 156,311 shares (the "Warrant Shares") of Common Stock, par
value $0.0001 per share, of the Company (the "Common Stock"). The purchase price
of one share of Common Stock (the "Exercise Price") under this Warrant shall be
$1.0236, subject to adjustment hereunder. The Exercise Price and the number of
Warrant Shares for which the Warrant is exercisable shall be subject to
adjustment as provided herein. Capitalized terms used and not otherwise defined
herein shall have the meanings set forth in that certain Securities Purchase
Agreement (the "Purchase Agreement"), dated April 1, 2003, between the Company
and the investors signatory thereto.
1. Title to Warrant. Prior to the Termination Date and subject to
compliance with applicable laws and Section 7 of this Warrant, this Warrant and
all rights hereunder are transferable, in whole or in part to an Affiliate of
the Holder, at the office or agency of the Company by the Holder in person or by
duly authorized attorney, upon surrender of this Warrant together with the
Assignment Form annexed hereto properly endorsed. The transferee shall sign an
investment letter in form and substance reasonably satisfactory to the Company.
72
The Holder hereof, by acceptance of this Warrant, agrees to be bound by the
covenants made by the original Holder contained in the Purchase Agreement.
2. Authorization of Shares. The Company covenants that all Warrant
Shares which may be issued upon the exercise of the purchase rights represented
by this Warrant will, upon exercise of the purchase rights represented by this
Warrant, be duly authorized, validly issued, fully paid and nonassessable and
free from all taxes, liens and charges in respect of the issue thereof (other
than taxes in respect of any transfer occurring contemporaneously with such
issue).
3. Exercise of Warrant.
(a) Except as provided in Section 4 herein, exercise of the
purchase rights represented by this Warrant may be made at any time or
times on or after the Initial Exercise Date and on or before the
Termination Date by the surrender of this Warrant and the Notice of
Exercise Form annexed hereto duly executed, at the office of the
Company (or such other office or agency of the Company as it may
designate by notice in writing to the registered Holder at the address
of such Holder appearing on the books of the Company) and upon payment
of the Exercise Price of the shares thereby purchased by wire transfer
or cashier's check drawn on a United States bank or by means of a
cashless exercise pursuant to Section 3(d), the Holder shall be
entitled to receive a certificate for the number of Warrant Shares so
purchased. Certificates for shares purchased hereunder shall be
delivered to the Holder within five (3) Trading Days after the date on
which this Warrant shall have been exercised as aforesaid. This Warrant
shall be deemed to have been exercised and such certificate or
certificates shall be deemed to have been issued, and Holder or any
other person so designated to be named therein shall be deemed to have
become a holder of record of such shares for all purposes, as of the
date the Warrant has been exercised by payment to the Company of the
Exercise Price and all taxes required to be paid by the Holder, if any,
pursuant to Section 5 prior to the issuance of such shares, have been
paid. If the Company fails to deliver to the Holder a certificate or
certificates representing the Warrant Shares pursuant to this Section
3(a) by the fifth Trading Day after the date of exercise, then the
Holder will have the right to rescind such exercise. In addition to any
other rights available to the Holder, if the Company fails to deliver
to the Holder a certificate or certificates representing the Warrant
Shares pursuant to an exercise by the fifth Trading Day after the date
of exercise, and if after such fifth Trading Day the Holder is required
by its broker to purchase (in an open market transaction or otherwise)
shares of Common Stock to deliver in satisfaction of a sale by the
Holder of the Warrant Shares which the Holder anticipated receiving
upon such exercise (a "Buy-In"), then the Company shall (1) pay in cash
to the Holder the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the shares of Common
Stock so purchased exceeds (y) the amount obtained by multiplying (A)
the number of Warrant Shares that the Company was required to deliver
to the Holder in connection with the exercise at issue times (B) the
price at which the sell order giving rise to such purchase obligation
was executed, and (2) at the option of the Holder, either reinstate the
portion of the Warrant and equivalent number of Warrant Shares for
which such exercise was not honored or deliver to the Holder the number
73
of shares of Common Stock that would have been issued had the Company
timely complied with its exercise and delivery obligations hereunder.
For example, if the Holder purchases Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an
attempted exercise of shares of Common Stock with an aggregate sale
price giving rise to such purchase obligation of $10,000, under clause
(1) of the immediately preceding sentence the Company shall be required
to pay the Holder $1,000. The Holder shall provide the Company written
notice indicating the amounts payable to the Holder in respect of the
Buy-In, together with applicable confirmations and other evidence
reasonably requested by the Company. Nothing herein shall limit a
Holder's right to pursue any other remedies available to it hereunder,
at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Company's
failure to timely deliver certificates representing shares of Common
Stock upon exercise of the Warrant as required pursuant to the terms
hereof.
(b) If this Warrant shall have been exercised in part, the
Company shall, at the time of delivery of the certificate or
certificates representing Warrant Shares, deliver to Holder a new
Warrant evidencing the rights of Holder to purchase the unpurchased
Warrant Shares called for by this Warrant, which new Warrant shall in
all other respects be identical with this Warrant.
(c) Notwithstanding anything herein to the contrary, in no
event shall the Holder be permitted to exercise this Warrant for
Warrant Shares to the extent that (i) the number of shares of Common
Stock beneficially owned by such Holder, together with any affiliate
thereof (other than Warrant Shares issuable upon exercise of this
Warrant) plus (ii) the number of Warrant Shares issuable upon exercise
of this Warrant, would be equal to or exceed 4.9999% of the number of
shares of Common Stock then issued and outstanding, including shares
issuable upon exercise of this Warrant held by such Holder after
application of this Section 3(c). As used herein, beneficial ownership
shall be determined in accordance with Section 13(d) of the Exchange
Act and the rules promulgated thereunder. To the extent that the
limitation contained in this Section 3(c) applies, the determination of
whether this Warrant is exercisable (in relation to other securities
owned by the Holder) and of which a portion of this Warrant is
exercisable shall be in the sole discretion of such Holder, and the
submission of a Notice of Exercise shall be deemed to be such Holder's
determination of whether this Warrant is exercisable (in relation to
other securities owned by such Holder) and of which portion of this
Warrant is exercisable, in each case subject to such aggregate
percentage limitation, and the Company shall have no obligation to
verify or confirm the accuracy of such determination. Nothing contained
herein shall be deemed to restrict the right of a Holder to exercise
this Warrant into Warrant Shares at such time as such exercise will not
violate the provisions of this Section 3(c). The provisions of this
Section 3(c) may be waived by the Holder upon, at the election of the
Holder, not less than 61 days' prior notice to the Company, and the
provisions of this Section 3(c) shall continue to apply until such 61st
day (or such later date, as determined by the Holder, as may be
specified in such notice of waiver). No exercise of this Warrant in
violation of this Section 3(c) but otherwise in accordance with this
Warrant shall affect the status of the Warrant Shares as validly
issued, fully-paid and nonassessable.
74
(d) If at any time after one year from the date of issuance of
this Warrant there is no effective Registration Statement registering
the resale of the Warrant Shares by the Holder, this Warrant may also
be exercised at such time by means of a "cashless exercise" in which
the Holder shall be entitled to receive a certificate for the number of
Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)]
by (A), where:
(A) = the VWAP on the Trading Day preceding the date of such election;
(B) = the Exercise Price of the Warrants, as adjusted; and
(X) = the number of Warrant Shares issuable upon exercise of the Warrants in
accordance with the terms of this Warrant.
(e) Subject to the provisions of this Section 3, if after the
Effective Date the VWAP for twenty consecutive Trading Days (the
"Measurement Price") exceeds 300% of the then Exercise Price (subject
to adjustment herein) (the "Threshold Price"), then the Company may, on
one occasion and within two Trading Days of such period, call for
cancellation of all or any portion of this Warrant for which a Notice
of Exercise has not yet been delivered (such right, a "Call"). To
exercise this right, the Company must deliver to the Holder an
irrevocable written notice (a "Call Notice"), indicating therein the
portion of unexercised portion of this Warrant to which such notice
applies. If the conditions set forth below for such Call are satisfied
from the period from the date of the Call Notice through and including
the Call Date (as defined below), then any portion of this Warrant
subject to such Call Notice for which a Notice of Exercise shall not
have been received from and after the date of the Call Notice will be
cancelled at 6:30 p.m. (New York City time) on the tenth Trading Day
after the date the Call Notice is received by the Holder (such date,
the "Call Date"). Any unexercised portion of this Warrant to which the
Call Notice does not pertain will be unaffected by such Call Notice. In
furtherance thereof, the Company covenants and agrees that it will
honor all Notices of Exercise with respect to Warrant Shares subject to
a Call Notice that are tendered from the time of delivery of the Call
Notice through 6:30 p.m. (New York City time) on the Call Date. The
parties agree that any Notice of Exercise delivered following a Call
Notice shall first reduce to zero the number of Warrant Shares subject
to such Call Notice prior to reducing the remaining Warrant Shares
available for purchase under this Warrant. For example, if (x) this
Warrant then permits the Holder to acquire 100 Warrant Shares, (y) a
Call Notice pertains to 75 Warrant Shares, and (z) prior to 6:30 p.m.
(New York City time) on the Call Date the Holder tenders a Notice of
Exercise in respect of 50 Warrant Shares, then (1) on the Call Date the
right under this Warrant to acquire 25 Warrant Shares will be
automatically cancelled, (2) the Company, in the time and manner
required under this Warrant, will have issued and delivered to the
Holder 50 Warrant Shares in respect of the exercises following receipt
of the Call Notice, and (3) the Holder may, until the Termination Date,
exercise this Warrant for 25 Warrant Shares (subject to adjustment as
herein provided and subject to subsequent Call Notices). Subject again
to the provisions of this Section 10, the Company may deliver
subsequent Call Notices for any portion of this Warrant for which the
Holder shall not have delivered a Notice of Exercise. Notwithstanding
anything to the contrary set forth in this Warrant, the Company may not
75
deliver a Call Notice or require the cancellation of this Warrant (and
any Call Notice will be void), unless, from the beginning of the 20
consecutive Trading Days used to determine whether the Common Stock has
achieved the Threshold Price through the Call Date, (i) the Measurement
Price equals or exceeds the Threshold Price, (ii) the Company shall
have honored in accordance with the terms of this Warrant all Notices
of Exercise delivered by 6:30 p.m. (New York City time) on the Call
Date, (iii) the Registration Statement shall be effective as to all
Warrant Shares and the prospectus thereunder available for use by the
Holder for the resale all such Warrant Shares and (iv) the Common Stock
shall be listed or quoted for trading on the Principal Market.
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to such fraction multiplied by
the Exercise Price.
5. Charges, Taxes and Expenses. Issuance of certificates for Warrant
Shares shall be made without charge to the Holder for any issue or transfer tax
or other incidental expense in respect of the issuance of such certificate, all
of which taxes and expenses shall be paid by the Company, and such certificates
shall be issued in the name of the Holder or in such name or names as may be
directed by the Holder; provided, however, that in the event certificates for
Warrant Shares are to be issued in a name other than the name of the Holder,
this Warrant when surrendered for exercise shall be accompanied by the
Assignment Form attached hereto duly executed by the Holder; and the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. Closing of Books. The Company will not close its stockholder books
or records in any manner which prevents the timely exercise of this Warrant,
pursuant to the terms hereof.
7. Transfer, Division and Combination.
(a) Subject to compliance with any applicable securities laws
and the conditions set forth in Sections 1 and 7(f) hereof and to the
provisions of Section 4.1 of the Purchase Agreement, this Warrant and
all rights hereunder are transferable, in whole or in part, upon
surrender of this Warrant at the principal office of the Company,
together with a written assignment of this Warrant substantially in the
form attached hereto duly executed by the Holder or its agent or
attorney and funds sufficient to pay any transfer taxes payable upon
the making of such transfer. Upon such surrender and, if required, such
payment, the Company shall execute and deliver a new Warrant or
Warrants in the name of the assignee or assignees and in the
denomination or denominations specified in such instrument of
assignment, and shall issue to the assignor a new Warrant evidencing
the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled. A Warrant, if properly assigned, may be
exercised by a new holder for the purchase of Warrant Shares without
having a new Warrant issued.
76
(b) This Warrant may be divided or combined with other
Warrants upon presentation hereof at the aforesaid office of the
Company, together with a written notice specifying the names and
denominations in which new Warrants are to be issued, signed by the
Holder or its agent or attorney. Subject to compliance with Section
7(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or
Warrants in exchange for the Warrant or Warrants to be divided or
combined in accordance with such notice.
(c) The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrant or Warrants under
this Section 7.
(d) The Company agrees to maintain, at its aforesaid office,
books for the registration and the registration of transfer of the
Warrants.
(e) If, at the time of the surrender of this Warrant in
connection with any transfer of this Warrant, the transfer of this
Warrant shall not be registered pursuant to an effective registration
statement under the Securities Act and under applicable state
securities or blue sky laws, the Company may require, as a condition of
allowing such transfer (i) that the Holder or transferee of this
Warrant, as the case may be, furnish to the Company a written opinion
of counsel (which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions) to the
effect that such transfer may be made without registration under the
Securities Act and under applicable state securities or blue sky laws,
(ii) that the holder or transferee execute and deliver to the Company
an investment letter in form and substance acceptable to the Company
and (iii) that the transferee be an "accredited investor" as defined in
Rule 501(a) promulgated under the Securities Act.
8. No Rights as Shareholder until Exercise. This Warrant does not
entitle the Holder to any voting rights or other rights as a shareholder of the
Company prior to the exercise hereof. Upon the surrender of this Warrant and the
payment of the aggregate Exercise Price (or by means of a cashless exercise),
the Warrant Shares so purchased shall be and be deemed to be issued to such
Holder as the record owner of such shares as of the close of business on the
later of the date of such surrender or payment.
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
covenants that upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant or any stock
certificate relating to the Warrant Shares, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it (which, in
the case of the Warrant, shall not include the posting of any bond), and upon
surrender and cancellation of such Warrant or stock certificate, if mutilated,
the Company will make and deliver a new Warrant or stock certificate of like
tenor and dated as of such cancellation, in lieu of such Warrant or stock
certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a Saturday,
Sunday or legal holiday.
77
11. Adjustments of Exercise Price and Number of Warrant Shares.
(a) Stock Splits, etc. The number and kind of securities
purchasable upon the exercise of this Warrant and the Exercise Price
shall be subject to adjustment from time to time upon the happening of
any of the following. In case the Company shall (i) pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock
to holders of its outstanding Common Stock, (ii) subdivide its
outstanding shares of Common Stock into a greater number of shares,
(iii) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock, or (iv) issue any shares of its
capital stock in a reclassification of the Common Stock, then the
number of Warrant Shares purchasable upon exercise of this Warrant
immediately prior thereto shall be adjusted so that the Holder shall be
entitled to receive the kind and number of Warrant Shares or other
securities of the Company which it would have owned or have been
entitled to receive had such Warrant been exercised in advance thereof.
Upon each such adjustment of the kind and number of Warrant Shares or
other securities of the Company which are purchasable hereunder, the
Holder shall thereafter be entitled to purchase the number of Warrant
Shares or other securities resulting from such adjustment at an
Exercise Price per Warrant Share or other security obtained by
multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares purchasable pursuant hereto
immediately prior to such adjustment and dividing by the number of
Warrant Shares or other securities of the Company resulting from such
adjustment. An adjustment made pursuant to this paragraph shall become
effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
(b) Anti Dilution Provisions. During the Exercise Period, the
Exercise Price and the number of Warrant Shares issuable hereunder and
for which this Warrant is then exercisable pursuant to Section 1 hereof
shall be subject to adjustment from time to time as provided in this
Section 11(b). In the event that any adjustment of the Exercise Price
as required herein results in a fraction of a cent, such Exercise Price
shall be rounded up or down to the nearest cent.
(i) Adjustment of Exercise Price. Except as set forth
in Section 11(b)(ii)(E), if and whenever the Company issues or sells,
or in accordance with Section 11(b) hereof is deemed to have issued or
sold, any shares of Common Stock for an effective consideration per
share of less than the then Exercise Price or for no consideration
(such lower price, the "Base Share Price" and such issuances
collectively, a "Dilutive Issuance"), then, the Exercise Price shall be
reduced to equal the Base Share Price, provided, that for purposes
hereof, all shares of Common Stock that are issuable upon conversion,
exercise or exchange of Capital Share Equivalents shall be deemed
outstanding immediately after the issuance of such Common Stock. Such
adjustment shall be made whenever such shares of Common Stock or
Capital Share Equivalents are issued.
78
(ii) Effect on Exercise Price of Certain Events. For
purposes of determining the adjusted Exercise Price under Section 11(b)
hereof, the following will be applicable:
(A) Issuance of Rights or Options. If the
Company in any manner issues or grants any warrants, rights or
options, whether or not immediately exercisable, to subscribe
for or to purchase Common Stock or other securities
exercisable, convertible into or exchangeable for Common Stock
("Convertible Securities") (such warrants, rights and options
to purchase Common Stock or Convertible Securities are
hereinafter referred to as "Options") and the effective price
per share for which Common Stock is issuable upon the exercise
of such Options is less than the Exercise Price ("Below Base
Price Options"), then the maximum total number of shares of
Common Stock issuable upon the exercise of all such Below Base
Price Options (assuming full exercise, conversion or exchange
of Convertible Securities, if applicable) will, as of the date
of the issuance or grant of such Below Base Price Options, be
deemed to be outstanding and to have been issued and sold by
the Company for such price per share and the maximum
consideration payable to the Company upon such exercise
(assuming full exercise, conversion or exchange of Convertible
Securities, if applicable) will be deemed to have been
received by the Company. For purposes of the preceding
sentence, the "effective price per share for which Common
Stock is issuable upon the exercise of such Below Base Price
Options" is determined by dividing (i) the total amount, if
any, received or receivable by the Company as consideration
for the issuance or granting of all such Below Base Price
Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the
exercise of all such Below Base Price Options, plus, in the
case of Convertible Securities issuable upon the exercise of
such Below Base Price Options, the minimum aggregate amount of
additional consideration payable upon the exercise, conversion
or exchange thereof at the time such Convertible Securities
first become exercisable, convertible or exchangeable, by (ii)
the maximum total number of shares of Common Stock issuable
upon the exercise of all such Below Base Price Options
(assuming full conversion of Convertible Securities, if
applicable). No further adjustment to the Exercise Price will
be made upon the actual issuance of such Common Stock upon the
exercise of such Below Base Price Options or upon the
exercise, conversion or exchange of Convertible Securities
issuable upon exercise of such Below Base Price Options.
(B) Issuance of Convertible Securities. If
the Company in any manner issues or sells any Convertible
Securities, whether or not immediately convertible (other than
where the same are issuable upon the exercise of Options) and
the effective price per share for which Common Stock is
issuable upon such exercise, conversion or exchange is less
than the Exercise Price, then the maximum total number of
shares of Common Stock issuable upon the exercise, conversion
79
or exchange of all such Convertible Securities will, as of the
date of the issuance of such Convertible Securities, be deemed
to be outstanding and to have been issued and sold by the
Company for such price per share and the maximum consideration
payable to the Company upon such exercise (assuming full
exercise, conversion or exchange of Convertible Securities, if
applicable) will be deemed to have been received by the
Company. For the purposes of the preceding sentence, the
"effective price per share for which Common Stock is issuable
upon such exercise, conversion or exchange" is determined by
dividing (i) the total amount, if any, received or receivable
by the Company as consideration for the issuance or sale of
all such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the
Company upon the exercise, conversion or exchange thereof at
the time such Convertible Securities first become exercisable,
convertible or exchangeable, by (ii) the maximum total number
of shares of Common Stock issuable upon the exercise,
conversion or exchange of all such Convertible Securities. No
further adjustment to the Exercise Price will be made upon the
actual issuance of such Common Stock upon exercise, conversion
or exchange of such Convertible Securities.
(C) Change in Option Price or Conversion
Rate. If there is a change at any time in (i) the amount of
additional consideration payable to the Company upon the
exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the
exercise, conversion or exchange of any Convertible
Securities; or (iii) the rate at which any Convertible
Securities are convertible into or exchangeable for Common
Stock (in each such case, other than under or by reason of
provisions designed to protect against dilution), the Exercise
Price in effect at the time of such change will be readjusted
to the Exercise Price which would have been in effect at such
time had such Options or Convertible Securities still
outstanding provided for such changed additional consideration
or changed conversion rate, as the case may be, at the time
initially granted, issued or sold.
(D) Calculation of Consideration Received.
If any Common Stock, Options or Convertible Securities are
issued, granted or sold for cash, the consideration received
therefor for purposes of this Warrant will be the amount
received by the Company therefor, before deduction of
reasonable commissions, underwriting discounts or allowances
or other reasonable expenses paid or incurred by the Company
in connection with such issuance, grant or sale. In case any
Common Stock, Options or Convertible Securities are issued or
sold for a consideration part or all of which shall be other
than cash, the amount of the consideration other than cash
received by the Company will be the fair market value of such
consideration, except where such consideration consists of
securities, in which case the amount of consideration received
by the Company will be the fair market value (average of the
closing bid and ask price, if traded on any market) thereof as
of the date of receipt. In case any Common Stock, Options or
Convertible Securities are issued in connection with any
merger or consolidation in which the Company is the surviving
corporation, the amount of consideration therefor will be
deemed to be the fair market value of such portion of the net
80
assets and business of the non-surviving corporation as is
attributable to such Common Stock, Options or Convertible
Securities, as the case may be. The fair market value of any
consideration other than cash or securities will be determined
in good faith by the Board of Directors of the Company, or if
the Holder reasonably objects to such valuation, by an
investment banker or other appropriate expert of national
reputation selected by the Company and reasonably acceptable
to the holder hereof, with the costs of such appraisal to be
borne by the Company.
(E) Exceptions to Adjustment of Exercise
Price. Notwithstanding the foregoing, no adjustment will be
made under this Section 11(b) in respect of (1) the granting
or issuance of shares of capital stock or of options to
employees, consultants, officers and directors of the Company
pursuant to any stock option plan, agreement or arrangement
duly adopted or approved by a majority of the non-employee
members of the Board of Directors of the Company or a majority
of the members of a committee of non-employee directors
established for such purpose, (2) upon the exercise of the
Debentures or any Debentures of this series or of any other
series or security issued by the Company in connection with
the offer and sale of this Company's securities pursuant to
the Purchase Agreement, or (3) upon the exercise of or
conversion of any convertible securities, options or warrants
issued and outstanding on the Original Issue Date, provided
that the securities have not been amended since the date of
the Purchase Agreement, or (4) issuance of securities in
connection with acquisitions, strategic investments, or
strategic partnering arrangements, the primary purpose of
which is not to raise capital.
(iii) Minimum Adjustment of Exercise Price. No
adjustment of the Exercise Price shall be made in an amount of less
than 1% of the Exercise Price in effect at the time such adjustment is
otherwise required to be made, but any such lesser adjustment shall be
carried forward and shall be made at the time and together with the
next subsequent adjustment which, together with any adjustments so
carried forward, shall amount to not less than 1% of such Exercise
Price.
12. Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then the Holder shall have the right thereafter to receive, at
the option of the Holder, (a) upon exercise of this Warrant, the number of
shares of Common Stock of the successor or acquiring corporation or of the
81
Company, if it is the surviving corporation, and Other Property receivable upon
or as a result of such reorganization, reclassification, merger, consolidation
or disposition of assets by a Holder of the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to such event, or (b) cash
equal to the value of this Warrant as determined in accordance with the
Black-Sholes option pricing formula. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined in good faith by resolution of the Board of
Directors of the Company) in order to provide for adjustments of Warrant Shares
for which this Warrant is exercisable which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 12. For purposes of
this Section 12, "common stock of the successor or acquiring corporation" shall
include stock of such corporation of any class which is not preferred as to
dividends or assets over any other class of stock of such corporation and which
is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 12 shall similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of assets.
13. Voluntary Adjustment by the Company. The Company may at any time
during the term of this Warrant reduce the then current Exercise Price to any
amount and for any period of time deemed appropriate by the Board of Directors
of the Company.
14. Notice of Adjustment. Whenever the number of Warrant Shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall give notice thereof to the Holder, which notice shall state the number of
Warrant Shares (and other securities or property) purchasable upon the exercise
of this Warrant and the Exercise Price of such Warrant Shares (and other
securities or property) after such adjustment, setting forth a brief statement
of the facts requiring such adjustment and setting forth the computation by
which such adjustment was made.
15. Notice of Corporate Action. If at any time:
(a) the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend or
other distribution, or any right to subscribe for or purchase any
evidences of its indebtedness, any shares of stock of any class or any
other securities or property, or to receive any other right, or
(b) there shall be any capital reorganization of the Company,
any reclassification or recapitalization of the capital stock of the
Company or any consolidation or merger of the Company with, or any
sale, transfer or other disposition of all or substantially all the
property, assets or business of the Company to, another corporation or,
82
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give
to Holder (i) at least 20 days' prior written notice of the date on
which a record date shall be selected for such dividend, distribution
or right or for determining rights to vote in respect of any such
reorganization, reclassification, merger, consolidation, sale,
transfer, disposition, liquidation or winding up, and (ii) in the case
of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, dissolution, liquidation or winding up, at
least 20 days' prior written notice of the date when the same shall
take place. Such notice in accordance with the foregoing clause also
shall specify (i) the date on which any such record is to be taken for
the purpose of such dividend, distribution or right, the date on which
the holders of Common Stock shall be entitled to any such dividend,
distribution or right, and the amount and character thereof, and (ii)
the date on which any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or
winding up is to take place and the time, if any such time is to be
fixed, as of which the holders of Common Stock shall be entitled to
exchange their Warrant Shares for securities or other property
deliverable upon such disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed
to Holder at the last address of Holder appearing on the books of the
Company and delivered in accordance with Section 17(d).
16. Authorized Shares. The Company covenants that during the period the
Warrant is outstanding, it will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of the Warrant
Shares upon the exercise of any purchase rights under this Warrant. The Company
further covenants that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the Warrant
Shares upon the exercise of the purchase rights under this Warrant. The Company
will take all such reasonable action as may be necessary to assure that such
Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the Principal Market
upon which the Common Stock may be listed.
Except and to the extent as waived or consented to by the Holder, the
Company shall not by any action, including, without limitation, amending its
certificate of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, 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 actions as may be
necessary or appropriate to protect the rights of Holder as set forth in this
Warrant against impairment. Without limiting the generality of the foregoing,
the Company will (a) not increase the par value of any Warrant Shares above the
amount payable therefor upon such exercise immediately prior to such increase in
par value, (b) take all such action as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and nonassessable
Warrant Shares upon the exercise of this Warrant, and (c) use commercially
reasonable efforts to obtain all such authorizations, exemptions or consents
83
from any public regulatory body having jurisdiction thereof as may be necessary
to enable the Company to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment in the
number of Warrant Shares for which this Warrant is exercisable or in the
Exercise Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.
17. Miscellaneous.
(a) Jurisdiction. This Warrant shall constitute a contract
under the laws of California, without regard to its conflict of law,
principles or rules.
(b) Restrictions. The Holder acknowledges that the Warrant
Shares acquired upon the exercise of this Warrant, if not registered,
will have restrictions upon resale imposed by state and federal
securities laws.
(c) Nonwaiver and Expenses. No course of dealing or any delay
or failure to exercise any right hereunder on the part of Holder shall
operate as a waiver of such right or otherwise prejudice Holder's
rights, powers or remedies, notwithstanding all rights hereunder
terminate on the Termination Date. If the Company willfully and
knowingly fails to comply with any provision of this Warrant, which
results in any material damages to the Holder, the Company shall pay to
Holder such amounts as shall be sufficient to cover any costs and
expenses including, but not limited to, reasonable attorneys' fees,
including those of appellate proceedings, incurred by Holder in
collecting any amounts due pursuant hereto or in otherwise enforcing
any of its rights, powers or remedies hereunder.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the Holder by the Company shall
be delivered in accordance with the notice provisions of the Purchase
Agreement.
(e) Limitation of Liability. No provision hereof, in the
absence of any affirmative action by Holder to exercise this Warrant or
purchase Warrant Shares, and no enumeration herein of the rights or
privileges of Holder, shall give rise to any liability of Holder for
the purchase price of any Common Stock or as a stockholder of the
Company, whether such liability is asserted by the Company or by
creditors of the Company.
(f) Remedies. Holder, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, will
be entitled to specific performance of its rights under this Warrant.
The Company agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the
provisions of this Warrant and hereby agrees to waive the defense in
any action for specific performance that a remedy at law would be
adequate.
(g) Successors and Assigns. Subject to applicable securities
laws, this Warrant and the rights and obligations evidenced hereby
84
shall inure to the benefit of and be binding upon the successors of the
Company and the successors and permitted assigns of Holder. The
provisions of this Warrant are intended to be for the benefit of all
Holders from time to time of this Warrant and shall be enforceable by
any such Holder or holder of Warrant Shares.
(h) Amendment. This Warrant may be modified or amended or the
provisions hereof waived with the written consent of the Company and
the Holder.
(i) Severability. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Warrant shall
be prohibited by or invalid under applicable law, such provision shall
be ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provisions or the remaining
provisions of this Warrant.
(j) Headings. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed
a part of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its officer thereunto duly authorized.
Dated: April 1, 2003
SVI SOLUTIONS, INC.
By:_____________________
Name: Barry Schechter
Title: Chairman
85
NOTICE OF EXERCISE
To: SVI Solutions, Inc.
(1) The undersigned hereby elects to purchase ________ Warrant Shares of SVI
Solutions, Inc. pursuant to the terms of the attached Warrant (only if exercised
in full), and tenders herewith payment of the exercise price in full, together
with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
[ ] in lawful money of the United States; or
[ ] the cancellation of such number of Warrant Shares as is necessary, in
accordance with the formula set forth in subsection 3(d), to exercise this
Warrant with respect to the maximum number of Warrant Shares purchasable
pursuant to the cashless exercise procedure set forth in subsection 3(d).
(3) Please issue a certificate or certificates representing said Warrant Shares
in the name of the undersigned or in such other name as is specified below:
_______________________________
The Warrant Shares shall be delivered to the following:
_______________________________
_______________________________
_______________________________
(4) Accredited Investor. The undersigned is an "accredited investor" as defined
in Regulation D promulgated under the Securities Act of 1933, as amended.
[PURCHASER]
By: ______________________________
Name:
Title:
Dated: __________________________
86
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are
hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________, _______
Holder's Signature:_____________________________
Holder's Address:_______________________________
_______________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
87
SCHEDULE 1
CONVERSION SCHEDULE
9% Convertible Debentures due on _______ ___, 200__, in the aggregate principal
amount of $____________ issued by SVI Solutions, Inc. This Conversion Schedule
reflects conversions made under Section 4 of the above referenced Debenture.
Dated:
------------------------------- ------------------------- ----------------------- ------------------------------
Aggregate Principal
Amount Remaining
Date of Conversion Subsequent to
(or for first entry, Original Conversion
Issue Date) Amount of Conversion (or original Company Attest
Principal Amount)
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
------------------------------- ------------------------- ----------------------- ------------------------------
88
ANNEX A
Company Mailing Address
5607 Palmer Way
Carlsbad, Ca 92008
89
APPENDIX IV
MBSJ REGISTRATION RIGHTS
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "AGREEMENT") is made and
entered into as of April 1, 2003, among SVI Solutions, Inc., a Delaware
corporation (the "COMPANY"), and the purchasers signatory hereto (each such
purchaser is a "PURCHASER" and all such purchasers are, collectively, the
"PURCHASERS").
This Agreement is made pursuant to the Securities Purchase
Agreement, dated as of the date hereof among the Company and the Purchasers (the
"PURCHASE AGREEMENT").
The Company and the Purchasers hereby agree as follows:
1. DEFINITIONS
CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN THAT ARE
DEFINED IN THE PURCHASE AGREEMENT SHALL HAVE THE MEANINGS GIVEN SUCH TERMS IN
THE PURCHASE AGREEMENT. As used in this Agreement, the following terms shall
have the following meanings:
"EFFECTIVENESS DATE" means, with respect to the
Registration Statement registering for resale the Registrable
Securities relating to the Closing, the 90th calendar day (120th
calendar day in the event of a "full review" by the Commission)
following the Closing Date and with respect to any additional
Registration Statements which may be required pursuant to Section 3(c),
the 60th calendar day following the date on which the Company first
knows, or reasonably should have known, that such additional
Registration Statement is required hereunder; PROVIDED, HOWEVER, in the
event the Company is notified by the Commission that one of the above
Registration Statements will not be reviewed or is no longer subject to
further review and comments, the Effectiveness Date as to such
Registration Statement shall be the fifth Trading Day following the
date on which the Company is so notified if such date precedes the
dates required above.
"EFFECTIVENESS PERIOD" shall have the meaning set forth
in Section 2(a).
"FILING DATE" means, with respect to the Registration
Statement registering for resale the Registrable Securities relating to
Closing, the 30th day following the Closing Date and with respect to
any additional Registration Statements which may be required pursuant
to Section 3(c), the 15th day following the date on which the Company
first knows, or reasonably should have known that such additional
Registration Statement is required hereunder
"HOLDER" or "HOLDERS" means the holder or holders, as
the case may be, from time to time of Registrable Securities.
1
"INDEMNIFIED PARTY" shall have the meaning set forth in
Section 5(c) hereof.
"INDEMNIFYING PARTY" shall have the meaning set forth in
Section 5(c) hereof.
"PROSPECTUS" means the prospectus included in a
Registration Statement (including, without limitation, a prospectus
that includes any information previously omitted from a prospectus
filed as part of an effective registration statement in reliance upon
Rule 430A promulgated under the Securities Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of
the offering of any portion of the Registrable Securities covered by a
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"REGISTRABLE SECURITIES" means all of the shares of
Common Stock issuable upon conversion in full of the Debentures,
assuming for such purposes that all of the Debentures from the Closing
are held until the 30th month anniversary of their date of issuance and
the lowest possible conversion price in effect during the period
between the applicable Closing and the filing date of the Registration
Statement (assuming the Monthly Conversion Price is then applicable),
exercise in full of the Warrants, shares of Common Stock issuable as
payment of interest on the Debentures, shares issuable in lieu of the
payment of liquidated damages, together with any securities issued or
issuable upon any stock split, dividend or other distribution
recapitalization or similar event with respect to the foregoing or in
connection with any anti-dilution provisions in the Debentures and
Warrants.
"REGISTRATION STATEMENT" means the registration
statements required to be filed hereunder and any additional
registration statements contemplated by Section 3(c), including (in
each case) the Prospectus, amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by
reference or deemed to be incorporated by reference in such
registration statement.
"RULE 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time
to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same purpose and effect as such
Rule.
"RULE 424" means Rule 424 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time
to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same purpose and effect as such
Rule.
2
"WARRANTS" shall mean the Common Stock purchase warrants
issued to the Purchasers pursuant to the Purchase Agreement.
2. SHELF REGISTRATION
(a) On or prior to each Filing Date, the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering the
resale of 130% of the Registrable Securities on such Filing Date for an offering
to be made on a continuous basis pursuant to Rule 415. The Registration
Statement shall be on Form S-3 (unless the Company is not then eligible to
register for resale the Registrable Securities on Form S-3, in which case such
registration shall be on another appropriate form in accordance herewith) and
shall contain (unless otherwise directed by the Holders and except to the extent
the Company determines that modifications thereto are required under applicable
law) substantially the "Plan of Distribution" attached hereto as ANNEX A.
Subject to the terms of this Agreement, the Company shall use its best efforts
to cause the Registration Statement to be declared effective under the
Securities Act as promptly as possible after the filing thereof, but in any
event prior to the applicable Effectiveness Date, and shall use its best efforts
to keep such Registration Statement continuously effective under the Securities
Act until the date which is two years after the date that such Registration
Statement is declared effective by the Commission or such earlier date when all
Registrable Securities covered by such Registration Statement have been sold or
may be sold without volume restrictions pursuant to Rule 144(k) as determined by
the counsel to the Company pursuant to a written opinion letter to such effect,
addressed and acceptable to the Company's transfer agent and the affected
Holders (the "EFFECTIVENESS PERIOD").
(b) If: (i) a Registration Statement is not filed on or prior to
its Filing Date (if the Company files a Registration Statement without affording
the Holders the opportunity to review and comment on the same as required by
Section 3(a), the Company shall not be deemed to have satisfied clause (i)), or
(ii) the Company fails to file with the Commission a request for acceleration in
accordance with Rule 461 promulgated under the Securities Act, within five
Trading Days of the date that the Company is notified (orally or in writing,
whichever is earlier) by the Commission that a Registration Statement will not
be "reviewed," or not subject to further review, or (iii) prior to its
Effectiveness Date, the Company fails to file a pre-effective amendment and
otherwise respond in writing to comments made by the Commission in respect of
such Registration Statement within 15 Trading Days after the receipt of comments
by or notice from the Commission that such amendment is required in order for a
Registration Statement to be declared effective, or (iv) a Registration
Statement filed or required to be filed hereunder is not declared effective by
the Commission by its Effectiveness Date, or (v) after the Effectiveness Date, a
Registration Statement ceases for any reason to remain continuously effective as
to all Registrable Securities for which it is required to be effective, or the
Holders are not permitted to utilize the Prospectus therein to resell such
Registrable Securities for 5 consecutive Trading Days or in any individual case
an aggregate of 15 Trading Days during any 12 month period (which need not be
3
consecutive Trading Days) (any such failure or breach being referred to as an
"EVENT", and for purposes of clause (i) or (iv) the date on which such Event
occurs, or for purposes of clause (ii) the date on which such five Trading Day
period is exceeded, or for purposes of clause (iii) the date which such 15
Trading Day period is exceeded, or for purposes of clause (v) the date on which
such 5 or 15 Trading Day period, as applicable, is exceeded being referred to as
"EVENT DATE"), then, on each such Event Date and every monthly anniversary
thereof until the applicable Event is cured, the Company shall pay to each
Holder an amount in cash, as liquidated damages and not as a penalty, equal to
2.0% per month of (i) the Subscription Amount paid by such Holder pursuant to
the Purchase Agreement for Securities then held by such Holder, and (ii) if the
Warrants are "in the money" and then held by the Holder, the value of any
outstanding Warrants (valued at the difference between the average VWAP during
the applicable month and the Exercise Price multiplied by the number of shares
of Common Stock the Warrants are exercisable into). If the Company fails to pay
any liquidated damages pursuant to this Section in full within seven days after
the date payable, the Company will pay interest thereon at a rate of 15% per
annum (or such lesser maximum amount that is permitted to be paid by applicable
law) to the Holder, accruing daily from the date such liquidated damages are due
until such amounts, plus all such interest thereon, are paid in full. The
liquidated damages pursuant to the terms hereof shall apply on a pro-rata basis
for any portion of a month prior to the cure of an Event and shall be in lieu of
any and all of the penalties or liquidated damages that might otherwise arise by
reason of such Event unless such Event constitutes an Event of Default under the
Debentures.
3. REGISTRATION PROCEDURES
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Not less than five Trading Days prior to the filing of each
Registration Statement or any related Prospectus or any amendment or supplement
thereto (excluding any document that would be incorporated or deemed
incorporated therein by reference), the Company shall, (i) furnish to each
Holder copies of all such documents proposed to be filed, which documents (other
than those incorporated or deemed to be incorporated by reference) will be
subject to the review of such Holders, and (ii) cause its officers and
directors, counsel and independent certified public accountants to respond to
such inquiries as shall be necessary, in the reasonable opinion of respective
counsel to conduct a reasonable investigation within the meaning of the
Securities Act. The Company shall not file the Registration Statement or any
such Prospectus or any amendments or supplements thereto to which the Holders of
a majority of the Registrable Securities shall reasonably and in good faith
object, provided, the Company is notified of such objection in writing no later
than 5 Trading Days after the Holders have been so furnished copies of such
documents.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to a Registration Statement and the
Prospectus used in connection therewith as may be necessary to keep a
4
Registration Statement continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and prepare and file with the Commission
such additional Registration Statements in order to register for resale under
the Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement
(subject to the terms of this Agreement), and as so supplemented or amended to
be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible,
and in any event within 15 Trading Days, to any comments received from the
Commission with respect to a Registration Statement or any amendment thereto and
as promptly as reasonably possible provide the Holders true and complete copies
of all correspondence from and to the Commission relating to a Registration
Statement; and (iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by a Registration Statement during the applicable
period in accordance (subject to the terms of this Agreement) with the intended
methods of disposition by the Holders thereof set forth in such Registration
Statement as so amended or in such Prospectus as so supplemented.
(c) If during the Effectiveness Period, the number of Registrable
Securities at any time exceeds 85% of the number of shares of Common Stock then
registered in a Registration Statement, then the Company shall file as soon as
reasonably practicable but in any case prior to the applicable Filing Date, an
additional Registration Statement covering the resale of by the Holders of not
less than 130% of the number of such Registrable Securities.
(d) Notify the Holders of Registrable Securities to be sold
(which notice shall, pursuant to clauses (ii) through (vi) hereof, be
accompanied by an instruction to suspend the use of the Prospectus until the
requisite changes have been made) as promptly as reasonably possible (and, in
the case of (i)(A) below, not less than five Trading Days prior to such filing)
and (if requested by any such Person) confirm such notice in writing no later
than one Trading Day following the day (i)(A) when a Prospectus or any
Prospectus supplement or post-effective amendment to a Registration Statement is
proposed to be filed; (B) when the Commission notifies the Company whether there
will be a "review" of such Registration Statement and whenever the Commission
comments in writing on such Registration Statement (the Company shall provide
true and complete copies thereof and all written responses thereto to each of
the Holders); and (C) with respect to a Registration Statement or any
post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to a Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of a Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) of the receipt by the Company of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction, or the initiation or
threatening of any Proceeding for such purpose; (v) of the occurrence of any
event or passage of time that makes the financial statements included in a
Registration Statement ineligible for inclusion therein or any statement made in
5
a Registration Statement or Prospectus or any document incorporated or deemed to
be incorporated therein by reference untrue in any material respect or that
requires any revisions to a Registration Statement, Prospectus or other
documents so that, in the case of a Registration Statement or the Prospectus, as
the case may be, it will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; and (vi) the occurrence or existence of any pending
corporate development with respect to the Company that the Company believes may
be material and that, in the determination of the Company, makes it not in the
best interests of the Company to allow continued availability or the
Registration Statement or Prospectus.
(e) Promptly deliver to each Holder, without charge, as many
copies of the Prospectus or Prospectuses (including each form of prospectus) and
each amendment or supplement thereto as such Persons may reasonably request.
Subject to the terms of this Agreement, the Company hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders in connection with the offering and sale of the Registrable
Securities covered by such Prospectus and any amendment or supplement thereto.
(f) Use commercially reasonable efforts to register or qualify
the resale of such Registrable Securities as required under applicable
securities or Blue Sky laws of each State within the United States as any Holder
requests in writing, to keep each such registration or qualification (or
exemption therefrom) effective during the Effectiveness Period; provided, that
the Company shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.
(g) Cooperate with the Holders to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be delivered to a transferee pursuant to a Registration Statement, which
certificates shall be free, to the extent permitted by the Purchase Agreement,
of all restrictive legends, and to enable such Registrable Securities to be in
such denominations and registered in such names as any such Holders may request.
(h) Upon the occurrence of any event contemplated this Section 3,
as promptly as reasonably possible, prepare a supplement or amendment, including
a post-effective amendment, to a Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither a Registration Statement nor such Prospectus will
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. If the
Company notifies the Holders in accordance with clauses (ii) through (vi) of
Section 3(d) above to suspend the use of the use of any Prospectus until the
requisite changes to such Prospectus have been made, or the Company otherwise
notifies the Holders of its election to suspend the availability of a
6
Registration Statement and Prospectus pursuant to clause (vi) of Section 3(d),
then the Holders shall suspend use of such Prospectus. The Company will use its
best efforts to ensure that the use of the Prospectus may be resumed as promptly
as is practicable, except that in the case of suspension of the availability of
a Registration Statement and Prospectus pursuant to clause (vi) of Section 3(d),
the Company shall not be required to take such action until such time as it
shall determine that the continued availability of the Registration Statement
and Prospectus is no longer not in the best interests of the Company. The
Company shall be entitled to exercise its right under this Section 3(h) to
suspend the availability of a Registration Statement and Prospectus, subject to
the payment of liquidated damages pursuant to Section 2(b), for a period not to
exceed 45 consecutive days or for multiple periods not to exceed 60 days in any
12 month period.
(i) Comply with all applicable rules and regulations of the
Commission.
(j) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of a
Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(k) The Company may require, at any time prior to the third Trading
Day prior to the Filing Date, each Holder to furnish to the Company a statement
as to the number of shares of Common Stock beneficially owned by such Holder
and, if requested by the Commission, the controlling person thereof, within
three Trading days of the Company's request. During any periods that the Company
is unable to meet its obligations hereunder with respect to the registration of
the Registrable Securities solely because any Holder fails to furnish such
information within three Trading Days of the Company's request, any liquidated
damages that are accruing at such time shall be tolled and any Event of Default
that may otherwise occur solely because of such delay shall be suspended, until
such information is delivered to the Company.
4. REGISTRATION EXPENSES. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to
the Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with the Principal Market on which the Common Stock is then
listed for trading, and (B) in compliance with applicable state securities or
Blue Sky laws reasonably agreed to by the Company in writing (including, without
limitation, fees and disbursements of counsel for the Company in connection with
Blue Sky qualifications or exemptions of the Registrable Securities and
determination of the eligibility of the Registrable Securities for investment
under the laws of such jurisdictions as requested by the Holders )), (ii)
printing expenses (including, without limitation, expenses of printing
certificates for Registrable Securities and of printing prospectuses requested
by the Holders), (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Company, and (v) fees and expenses of all other
7
Persons retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement. In addition, the Company shall be
responsible for all of its internal expenses incurred in connection with the
consummation of the transactions contemplated by this Agreement (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit and the
fees and expenses incurred in connection with the listing of the Registrable
Securities on any securities exchange as required hereunder. In no event shall
the Company be responsible for any broker or similar commissions or, except to
the extent provided for in the Transaction Documents, any legal fees or other
costs of the Holders.
5. INDEMNIFICATION
(a) INDEMNIFICATION BY THE COMPANY. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, investment advisors and employees
of each of them, each Person who controls any such Holder (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) and the
officers, directors, agents and employees of each such controlling Person, to
the fullest extent permitted by applicable law, from and against any and all
losses, claims, damages, liabilities, costs (including, without limitation,
costs of preparation and reasonable attorneys' fees) and expenses (collectively,
"Losses"), as incurred, arising out of or relating to any untrue or alleged
untrue statement of a material fact contained in a Registration Statement, any
Prospectus or any form of prospectus or in any amendment or supplement thereto
or in any preliminary prospectus, or arising out of or relating to any omission
or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein (in the case of any Prospectus or form
of prospectus or supplement thereto, in light of the circumstances under which
they were made) not misleading, except to the extent, but only to the extent,
that (1) such untrue statements or omissions or alleged untrue statements or
omissions are based upon information regarding such Holder furnished in writing
to the Company by such Holder expressly for use therein, or to the extent that
such information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in a Registration Statement, such
Prospectus or such form of Prospectus or in any amendment or supplement thereto
or (2) in the case of an occurrence of an event of the type specified in Section
3(d)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus
after the Company has notified such Holder in writing that the Prospectus is
outdated or defective and prior to the receipt by such Holder of the Advice
contemplated in Section 6(e). The Company shall notify the Holders promptly of
the institution, threat or assertion of any Proceeding arising from or in
connection with the transactions contemplated by this Agreement of which the
Company is aware.
(b) INDEMNIFICATION BY HOLDERS. Each Holder shall, severally and
not jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
8
fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising out of or based upon any untrue statement of a
material fact contained in any Registration Statement, any Prospectus, or any
form of prospectus, or in any amendment or supplement thereto, or arising out of
or based upon: (i) such Holder's failure to comply with the prospectus delivery
requirements of the Securities Act or (ii) any omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading to the extent, but only to the extent, such untrue statement or
omission is contained in any information so furnished in writing by such Holder
to the Company specifically for inclusion in such Registration Statement or such
Prospectus or to the extent that (1) such untrue statements or omissions are
based upon information regarding such Holder furnished in writing to the Company
by such Holder expressly for use therein, or to the extent such information
relates to such Holder or such Holder's proposed method of distribution of
Registrable Securities and was reviewed and expressly approved in writing by
such Holder expressly for use in the Registration Statement, such Prospectus or
such form of Prospectus or in any amendment or supplement thereto or (2) in the
case of an occurrence of an event of the type specified in Section
3(d)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus
after the Company has notified such Holder in writing that the Prospectus is
outdated or defective and prior to the receipt by such Holder of the Advice
contemplated in Section 6(e). In no event shall the liability of any selling
Holder hereunder be greater in amount than the dollar amount of the net proceeds
received by such Holder upon the sale of the Registrable Securities giving rise
to such indemnification obligation.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "INDEMNIFIED PArty"), such Indemnified Party shall promptly notify the
Person from whom indemnity is sought (the "Indemnifying Party") in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided, that the failure of any Indemnified Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this Agreement, except (and only) to the extent that such failure shall have
prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a material conflict of
interest is likely to exist if the same counsel were to represent such
Indemnified Party and the Indemnifying Party (in which case, if such Indemnified
Party notifies the Indemnifying Party in writing that it elects to employ
9
separate counsel at the expense of the Indemnifying Party, the Indemnifying
Party shall not have the right to assume the defense thereof and the expense of
one such counsel for each Holder shall be at the expense of the Indemnifying
Party). The Indemnifying Party shall not be liable for any settlement of any
such Proceeding effected without its written consent, which consent shall not be
unreasonably withheld. No Indemnifying Party shall, without the prior written
consent of the Indemnified Party, effect any settlement of any pending
Proceeding in respect of which any Indemnified Party is a party, unless such
settlement includes an unconditional release of such Indemnified Party from all
liability on claims that are the subject matter of such Proceeding.
Subject to the terms of this Agreement, all fees and expenses of
the Indemnified Party (including reasonable fees and expenses to the extent
incurred in connection with investigating or preparing to defend such Proceeding
in a manner not inconsistent with this Section) shall be paid to the Indemnified
Party, as incurred, within ten Trading Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that an
Indemnified Party is not entitled to indemnification hereunder; provided, that
the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder).
(d) CONTRIBUTION. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy
or otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no Holder shall be required
to contribute, in the aggregate, any amount in excess of the amount by which the
proceeds actually received by such Holder from the sale of the Registrable
10
Securities subject to the Proceeding exceeds the amount of any damages that such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may have
to the Indemnified Parties.
6. MISCELLANEOUS
(a) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and all of the Holders of the then outstanding Registrable Securities.
Notwithstanding the foregoing, a waiver or consent to depart from the provisions
hereof with respect to a matter that relates exclusively to the rights of
Holders and that does not directly or indirectly affect the rights of other
Holders may be given by Holders of all of the Registrable Securities to which
such waiver or consent relates; PROVIDED, HOWEVER, that the provisions of this
sentence may not be amended, modified, or supplemented except in accordance with
the provisions of the immediately preceding sentence.
(b) NO INCONSISTENT AGREEMENTS. Neither the Company nor any of
its subsidiaries has entered, as of the date hereof, nor shall the Company or
any of its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities, that would have the effect of
impairing the rights granted to the Holders in this Agreement or otherwise
conflicts with the provisions hereof. Except as and to the extent specified in
Schedule 6(b) hereto, neither the Company nor any of its subsidiaries has
previously entered into any agreement granting any registration rights with
respect to any of its securities to any Person that have not been satisfied in
full.
(c) NO PIGGYBACK ON REGISTRATIONS. Except as and to the extent
specified in Schedule 6(c) hereto, neither the Company nor any of its security
holders (other than the Holders in such capacity pursuant hereto) may include
securities of the Company in the Registration Statement other than the
Registrable Securities, and the Company shall not after the date hereof enter
into any agreement providing any such right to any of its security holders to
include securities of the Company in the Registration Statement without the
prior written consent of the Holders, which consent shall not be unreasonably
withheld.
(d) COMPLIANCE. Each Holder covenants and agrees that it will
comply with the prospectus delivery requirements of the Securities Act as
applicable to it in connection with sales of Registrable Securities pursuant to
the Registration Statement.
(e) DISCONTINUED DISPOSITION. Each Holder agrees by its
acquisition of such Registrable Securities that, upon receipt of a notice from
the Company of the occurrence of any event of the kind described in Sections
11
3(d)(ii), (iii) or (vi), such Holder will forthwith discontinue disposition of
such Registrable Securities under a Registration Statement until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended Registration
Statement contemplated by Section 3(h), or until it is advised in writing (the
"Advice") by the Company that the use of the applicable Prospectus may be
resumed, and, in either case, has received copies of any additional or
supplemental filings that are incorporated or deemed to be incorporated by
reference in such Prospectus or Registration Statement. The Company may provide
appropriate stop orders to enforce the provisions of this paragraph. The Company
agrees and acknowledges that any periods during which the Holder is required to
discontinue the disposition of the Registrable Securities hereunder shall be
subject to the provisions of Section 2(c).
(f) PIGGY-BACK REGISTRATIONS. If at any time during the
Effectiveness Period there is not an effective Registration Statement covering
all of the Registrable Securities and the Company shall determine to prepare and
file with the Commission a registration statement relating to an offering for
its own account or the account of others under the Securities Act of any of its
equity securities, other than on Form S-4 or Form S-8 (each as promulgated under
the Securities Act) or their then equivalents relating to equity securities to
be issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each Holder written notice of such
determination and, if within fifteen days after receipt of such notice, any such
Holder shall so request in writing, the Company shall include in such
registration statement all or any part of such Registrable Securities such
holder requests to be registered; provided, that, the Company shall not be
required to register any Registrable Securities pursuant to this Section 6(f)
that are eligible for resale pursuant to Rule 144(k) promulgated under the
Securities Act.
(g) NOTICES. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be delivered as
set forth in the Purchase Agreement.
(h) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
all of the Holders of the then-outstanding Registrable Securities. Each Holder
may assign their respective rights hereunder in the manner and to the Persons as
permitted under the Purchase Agreement.
(i) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
12
(j) GOVERNING LAW. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
California, without regard to the principles of conflicts of law thereof. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of San Diego, California, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to
this Agreement or the transactions contemplated hereby. If either party shall
commence a Proceeding to enforce any provisions of this Agreement, then the
prevailing party in such Proceeding shall be reimbursed by the other party for
its attorneys fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such Proceeding.
(k) CUMULATIVE REMEDIES. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(l) SEVERABILITY. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
(m) HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
(n) INDEPENDENT NATURE OF PURCHASERS' OBLIGATIONS AND RIGHTS. The
obligations of each Purchaser hereunder is several and not joint with the
obligations of any other Purchaser hereunder, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
13
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose.
********************
14
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
SVI SOLUTIONS, INC.
By: _________________________________
Name: Barry M. Schechter
Title: Chairman
[SIGNATURE PAGE OF HOLDERS FOLLOWS]
15
[SIGNATURE PAGE OF HOLDERS TO RRA]
MBSJ INVESTORS LLC
By: Jeff Cohen, its general partner
By: _______________________________
Jeff Cohen
PLAN OF DISTRIBUTION
--------------------
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
16
The selling stockholder may from time to time pledge or grant a
security interest in some or all of the Shares or common stock or Warrant owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock
from time to time under this prospectus, or under an amendment to this
prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933 amending the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
prospectus.
The selling stockholders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling stockholders have
informed the Company that none of them have any agreement or understanding,
directly or indirectly, with any person to distribute the common stock.
The Company is required to pay all fees and expenses incurred by the
Company incident to the registration of the shares. The Company has agreed to
indemnify the selling stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
17
APPENDIX V
CRESTVIEW AGREEMENT
This Agreement (this "AGREEMENT") is dated as of May 5, 2003, among SVI
Solutions, Inc., a Delaware corporation (the "COMPANY"), Crestview Capital Fund
I, LP ("One"), Crestview Capital Fund II, LP ("Two") and Crestview Capital
Offshore Fund, Inc. ("Offshore") (One, Two and Offshore are collectively
referred to as the "Purchasers").
WHEREAS, the Company and the purchasers signatory thereto
(collectively, the "Original Purchasers") are parties to that certain Securities
Purchase Agreement dated as of March 31, 2003 (the "Purchase Agreement");
WHEREAS, defined terms not otherwise defined herein shall have the
meanings ascribed to such terms in the Purchase Agreement;
WHEREAS, subject to the terms and conditions set forth in this
Agreement and the Purchase Agreement, the Company desires to issue and sell to
the Purchasers, and the Purchasers, severally and not jointly, desire to
purchase from the Company, securities of the Company as more fully described in
this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and the Purchasers hereto
agree as follows:
1. INVESTMENT. (i) Within two (2) Trading Days from the date hereof,
each of One, Two and Offshore shall deliver to the Company via wire transfer
their respective amounts of the Purchase Price as set forth on the signature
pages hereto and labeled as the subscription amount, and the Company shall
deliver to the Purchasers the Debentures evidencing said principal amount and
the Warrants issuable at the Closing, except that the Purchaser shall receive
30% Warrant coverage rather than 40% Warrant coverage under Section 2.2(a)(ii)
of the Purchase Agreement.
(ii) Upon satisfaction or waiver of the conditions set forth in Section
2.2 of the Purchase Agreement and receipt of the written consent of the Original
Purchasers to the transactions contemplated by this Agreement, except the
conditions set forth in subsections 2.2(iii)[legal opinion of Company Counsel],
2.2(a)(iv)[Shareholder Approval], 2.2(a)(vii)[lock-up agreements], the First and
Second Closings shall occur at the offices of the Company, or such other
location as the parties shall mutually agree.
2. DOCUMENTS. The form of the Debentures and the Warrants to be issued
pursuant to this Agreement shall be identical in all respects to the form of the
Debentures and Warrants issued to the purchasers pursuant to the Purchase
Agreement, except as follows: (a) interest on the Debentures being issued to the
Purchasers shall only accrue from Tuesday, May 6, 2003, notwithstanding any
different provision in the Debentures; (b) any references to the Original Issue
Date in the Debentures and the Initial Exercise Date in the Warrants for
purposes of purchase, and the Closing Date for determining "Filing Date" and
"Effectiveness Date" under the Registration Rights Agreement for purposes of
accruing liquidated damages, shall be deemed to mean May 6, 2003, but all
maturity, interest payment or warrant termination dates set forth in such
respective instruments shall remain as written in such instruments in order that
the Debentures and Warrants issued for the First Closing under this Agreement
shall be treated as if they were issued on March 31, 2003 except with respect
the accrual of interest and the Filing Date and Effectiveness Date under the
Registration Rights Agreement; (c) with respect to the Purchasers, the Monthly
Redemption Amount (as defined in the Debenture) shall be $18,750 for the initial
amount and the increased amount on the occurrence of the Second Closing shall be
$32,727 (in the aggregate as to the amounts in the First and Second Closings).
1
With respect to the Registration Statement for the initial issuance of
debentures and warrants to each Purchaser for the First Closing, each Purchaser
waives Sections 2(b) and 3(a) of the Registration Rights Agreement with respect
to the right to review and comment thereon. Notwithstanding anything herein to
the contrary, nothing in this Agreement shall be construed to modify the rights
of the Original Purchasers under the Purchase Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth
under the corresponding section of the disclosure schedules attached to the
Purchase Agreement, if any, all representations and warranties of the Company
contained in Section 3.1 of the Purchase Agreement were true and correct as of
March 31, 2003, and remain true and correct as of the date hereof, as though
made at and as of the date hereof, except the Company has filed a proxy
statement with the Securities & Exchange Commission to, among other things,
solicit the approval of the shareholders of the transactions contemplated under
the Purchase Agreement and this Agreement. The Company has performed all of the
covenants of the Company contained in the Purchase Agreement to be performed by
the Company through the date hereof, except as follows: (i) the Company filed a
proxy statement with the Securities & Exchange Commission on May 2, 2003 in lieu
of the information statement required under Section 4.5(c) of the Agreement; and
(ii) the Company issued a press release on April 2, 2003 under Section 4.8
announcing the transactions consummated under the Purchase Agreement.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser
hereby represents and warrants to the Company, severally and not jointly, that
the representations and warranties of the Purchasers listed in Section 3.2 of
the Purchase Agreement are true and correct with respect to such Purchaser as of
the date hereof.
5. INCORPORATION BY REFERENCE. Except as set forth in this Agreement,
each of the Purchase Agreement and the Registration Rights Agreement (with all
exhibits attached thereto) are hereby incorporated by reference and made a part
hereof. Execution of the signature page to this Agreement shall constitute the
execution of each of the Purchase Agreement and the Registration Rights
Agreement, and each Purchaser shall be bound to their terms and conditions as
set forth in this Agreement.
6. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
7. AMENDMENT AND WAIVER. Neither this Agreement nor any term hereof may
be amended, waived, discharged or terminated, except by a written instrument
signed by all the parties hereto.
8. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together,
shall constitute one instrument.
2
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized signatories as of the date first
indicated above.
WIRE INSTRUCTIONS: SVI SOLUTIONS, INC.
By: /s/ Barry Schechter
-------------------------------------------
Name: Barry Schechter
Title: Chairman and Chief Executive Officer
CRESTVIEW CAPITAL FUND I, LP
By: /s/ Richard Levy
-------------------------------------------
Name: Richard Levy
Title: Managing Partner
First Closing Subscription: $100,000
Second Closing Subscription: $100,000
CRESTVIEW CAPITAL FUND II, LP
By: /s/ Richard Levy
-------------------------------------------
Name: Richard Levy
Title: Managing Partner
First Closing Subscription: $175,000
Second Closing Subscription: $175,000
CRESTVIEW CAPITAL OFFSHORE FUND, INC.
By: /s/ Richard Levy
-------------------------------------------
Name: Richard Levy
Title: Secretary
First Closing Subscription: $25,000
Second Closing Subscription: $25,000
Address for all notices:
Richard Levy
Crestview Capital Funds
95 Revere Drive, Suite F
Northbrook, IL 60062
Fax: 847-559-5807
3
APPENDIX VI
AMENDED CERTIFICATE
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SVI SOLUTIONS, INC.
ARTICLE I
The name of this corporation is SVI Solutions, Inc. (the
"Corporation").
ARTICLE II
The address of this Corporation's registered office in the State of
Delaware is 1209 orange Street, City of Wilmington, County of New Castle. The
name of its registered agent at such address is The Corporation Trust Company.
ARTICLE III
The purpose of this Corporation is to engage in any lawful act or
activity for which a corporation may now or hereafter be organized under the
Delaware General Corporation Law (the "Law").
ARTICLE IV
(A) CLASSES OF STOCK. This Corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The Corporation is authorized to issue One Hundred Million (100,000,000)
shares of Common Stock, par value $.0001 and Five Million (5,000,000) shares of
Preferred Stock, par value $.0001.
(B) RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The Board
of Directors ("Board") is authorized, subject to limitations prescribed by the
Law, and by the provisions of this Article, to provide for the issuance of
shares of Preferred Stock in series, to establish from time to time the number
of shares to be included in each series and to determine the designations,
relative rights, preferences and limitations of the shares of each series. The
rights, preferences, privileges, and restrictions granted to and imposed on the
Series A Preferred Stock, which series shall consist of One Hundred Forty One
Thousand (141,000) shares are as set forth below in this Article IV(C). The
authority of the Board with respect to each series includes determination of the
following:
(1) The number of shares in and the distinguishing designation
of that series;
(2) Whether shares of that series shall have full, special,
conditional, limited or no voting rights, except to the extent otherwise
provided by the Law;
1
(3) Whether shares of that series shall be convertible and the
terms and conditions of the conversion, including provision for adjustment of
the conversion rate in circumstances determined by the Board;
(4) Whether shares of that series shall be redeemable and the
terms and conditions of redemption, including the date or dates upon or after
which they shall be redeemable and the amount per share payable in case of
redemption, which amount may vary under different conditions or at different
redemption dates;
(5) The dividend rate, if any, on shares of that series, the
manner of calculating any dividends and the preferences of any dividends;
(6) The rights of shares of that series in the event of
voluntary or involuntary dissolution of the Corporation and the rights of
priority of that series relative to the Common Stock and any other series of
Preferred Stock on the distribution of assets on dissolution; and
(7) Any other rights, preferences and limitations of that
series that are permitted by law.
(C) SERIES A PREFERRED STOCK. The powers, rights, preferences,
restrictions, and other matters relating to the Series A Preferred Stock are as
follows:
(1) DIVIDENDS.
(a) PRIORITY OF DIVIDENDS. No dividends shall be
declared or set aside for the Corporation's common stock or any other junior
capital stock (collectively, "Junior Stock"), unless at the same time or prior
thereto all accrued and unpaid dividends on the Series A Preferred Stock shall
be declared, set aside and paid on all of the then outstanding shares of Series
A Preferred Stock.
(b) DIVIDEND RATE; DIVIDEND PAYMENT DATES. The holder
of the Series A Preferred Stock shall be entitled to receive when, as and if
declared by the Board of Directors of the Corporation (the "Board"), out of
funds legally available therefor, cumulative cash dividends, in preference and
priority to dividends on any Junior Stock, that shall accrue on the original
issue price of $100 (the "Original Price") of each share of the Series A
Preferred Stock at the rate per annum of seven and 1/5 percent (7.20%) from and
including January 1, 2002 (regardless of the date on which the shares of Series
A Preferred Stock were first issued) ("Original Issue Date") to and including
the earlier of the Maturity Date (as defined in Section 5) or date on which the
Liquidation Price or Redemption Price of such share is paid in full to the
holders of such shares pursuant to Sections 2 or 6, respectively. The accrued
dividends will be adjusted for stock splits, stock dividends, recapitalizations,
reclassifications, reorganizations and similar events (together referred to as
"Recapitalization Events") which affect the number of outstanding shares.
Accrued dividends on the Series A Preferred Stock shall be payable out of funds
legally available therefor commencing on June 30, 2002 and thereafter
semi-annually on December 31 and June 30 of each year (each a "Dividend Payment
Date"), to the holder of record of the Series A Preferred Stock as of the close
of business on the applicable record date. Dividends shall be fully cumulative
and shall accrue on a semi-annual basis, whether or not such dividends have been
declared and whether or not there are any unrestricted funds of the Corporation
legally available for the payment of dividends. The amount of dividends accrued
2
with respect to any share of Series A Preferred Stock as of the first Dividend
Payment Date after January 1, 2002 shall be calculated on the basis of the
actual number of days elapsed from and including January 1, 2002, and the amount
of dividends accrued with respect to any share of Series A Preferred Stock as of
any other Dividend Payment Date after the first Dividend Payment Date shall be
calculated on the basis of holding such share for the entire six month period
immediately preceding such Dividend Payment Date (each such period immediate
preceding a Dividend Payment Date is referred to as the "Dividend Period"), and
no dividends shall be accrued or paid for any partial six month period. Whenever
the Board declares any dividend pursuant to this Section 1, notice of the
applicable record date and related Dividend Payment Date shall be given in
accordance with Section 4(m).
(c) COMPOUNDING OF DIVIDENDS; ADDITION TO CONVERSION
VALUE AND TO LIQUIDATION PRICE. On each Dividend Payment Date, all dividends
that have accrued on each share of Series A Preferred Stock during the
immediately preceding Dividend Period shall, to the extent not paid on such
Dividend Payment Date for any reason (whether or not such unpaid dividends have
been declared or there are any unrestricted funds of the Corporation legally
available for the payment of dividends), be added to the Conversion Value (as
defined in Section 4(b)) of such share effective as of such Dividend Payment
Date and shall remain a part thereof. All dividends that have accrued on each
share of Series A Preferred Stock during any Dividend Period shall, to the
extent not paid in full on the first Dividend Payment Date after the end of such
Dividend Period for any reason (whether or not such unpaid dividends have been
declared or there are any unrestricted funds of the Corporation legally
available for the payment of dividends), be added to the Liquidation Price of
such share effective as of the first Dividend Payment Date after the last day of
such Dividend Period and shall remain a part thereof to and including the
earlier of the Maturity Date or the date on which the Liquidation Price or
Redemption Price of such share is paid in full to the holder of such share
pursuant to Sections 2 or 6, respectively. No accrued dividends which have been
added to the Liquidation Price or Conversion Value of any Series A Preferred
Stock may be subsequently declared or paid by the Corporation.
(d) PRO RATA DECLARATION AND PAYMENT OF DIVIDENDS.
All dividends paid with respect to shares of the Series A Preferred Stock
pursuant to this Section 1 shall be declared and paid pro rata to all the
holders of the shares of Series A Preferred Stock outstanding as of the
applicable record date.
(2) LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, or the sale of
substantially all of its assets (each such event, a "Liquidation"), except as
provided in Section 2(b) below, the holders of shares of Series A Preferred
Stock then outstanding shall be entitled to be paid out of the assets of the
Corporation available for distribution to its stockholders before payment to the
holders of Junior Stock by reason of their ownership thereof, an amount equal to
(i) the Original Price per share (subject to appropriate adjustment for any
Recapitalization Events), plus (ii) an amount equal to all dividends accrued on
such share of Series A Preferred Stock since the Original Issue Date thereof but
not yet paid (the "Liquidation Price").
3
(b) After the payment of all preferential amounts
required to be paid to the holders of Series A Preferred Stock, upon the
Liquidation of the Corporation, the holders of shares of Junior Stock then
outstanding shall be entitled to receive the remaining assets and funds of the
Corporation available for distribution to the holders of Junior Stock.
(3) VOTING RIGHTS.
(a) Except as otherwise provided in this Section 3 or
as may be required under Delaware General Corporation Law, the holders of shares
of Series A Preferred Stock shall not have any voting rights.
(b) The Corporation shall not amend, alter or repeal
the preferences, special rights or other powers of the Series A Preferred Stock
so as to affect adversely the Series A Preferred Stock, without the written
consent or affirmative vote of the holders of a majority of the then outstanding
shares of Series A Preferred Stock, given in writing or by vote at a meeting,
consenting or voting (as the case may be) separately as a class. Except as
otherwise required by the Delaware General Corporation Law, any class vote
pursuant to this Section 3 shall be determined by the holders of a majority of
the Series A Preferred Stock as of the applicable record date.
(4) CONVERSION. The holders of the Series A Preferred Stock
shall have conversion rights (the "Conversion Rights"), or shall be subject to
conversion, as follows:
(a) CONVERSION RIGHTS. Each share of Series A
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time and from time to time, into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing (i) the Conversion Value (as
defined below) of such share determined as of such time by (ii) the Conversion
Price (as defined below) determined as of such time. In the event of a notice of
redemption of any shares of Series A Preferred Stock pursuant to Section 6(a)
below, the Conversion Rights of the shares designated for redemption shall
terminate five (5) days after the holders' receipt of a written notice of
redemption pursuant to that Section, unless the Redemption Price is not paid in
full when due, in which case the Conversion Rights for such shares shall
continue until the Redemption Price is paid in full. In the event of a
Liquidation, the Conversion Rights shall terminate at the close of business on
the last full day preceding the date fixed for the payment of any amounts
distributable on Liquidation to the holders of Series A Preferred Stock.
(b) CONVERSION. The "Conversion Value" measured per
share of the Series A Preferred Stock shall be:
(i) as of any time before the first Dividend
Payment Date, the sum of (A) the Original Price (subject to appropriate
adjustment in the event of any Recapitalization Events) plus (B) an amount equal
to all dividends accrued on such share of Series A Preferred Stock since January
1, 2002 through and including such time, whether or not such unpaid dividends
have been declared or there are any unrestricted funds of the Corporation
legally available for the payment of dividends.
(ii) as of any time on or after the first
Dividend Payment Date, the sum of (a) the Original Price (subject to appropriate
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adjustment in the event of any Recapitalization Events) plus (B) an amount equal
to all dividends accrued on such share of Series A Preferred Stock since January
1, 2002 but not yet paid (including those which, pursuant to Section 1(c), have
been added to and remain part of the Conversion Value at such time), whether or
not such unpaid dividends have been declared or there are any unrestricted funds
of the Corporation legally available for the payment of dividends.
(c) CONVERSION PRICE. The initial conversion price at
which a share of Common Stock shall be deliverable upon conversion of a share of
Series A Preferred Stock without the payment of additional consideration by the
holder thereof shall initially be Eighty Cents ($.80) (the "Conversion Price").
Commencing on January 2, 2003 and on each subsequent July 1 and January 1 of
each year (the "Adjustment Dates"), the Conversion Price then in effect shall be
increased at the annual rate of 3.5%, calculated on a semi-annual basis. The
Conversion Price, and the rate at which shares of Series A Preferred Stock may
be converted into shares of Common Stock, shall be subject to further adjustment
as provided in this Section 4.
(d) FRACTIONAL SHARES. No fractional shares of Common
Stock shall be issued upon conversion of the Series A Preferred Stock. In lieu
of any fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price.
(e) MECHANICS OF CONVERSION.
(i) In order for a holder of Series A
Preferred Stock to convert shares of Series A Preferred Stock into shares of
Common Stock, such holder shall surrender the certificate or certificates for
such shares of Series A Preferred Stock, at the principal office of the Company
or the office of the transfer agent for the Series A Preferred Stock, together
with written notice that such holder elects to convert all or any number of the
shares of Series A Preferred Stock represented by such certificate or
certificates. If required by the Corporation, certificates surrendered for
conversion shall be endorsed or accompanied by a written instrument or
instruments of transfer, in form satisfactory to the Corporation, duly executed
by the registered holder or his or its attorney duly authorized in writing. The
date of receipt of such certificates and notice by the Company or its transfer
agent shall be the conversion date ("Conversion Date"). The Corporation shall,
as soon as practicable after the Conversion Date, issue and deliver at such
office to such holder of Series A Preferred Stock a certificate or certificates
for the number of shares of Common Stock to which such holder shall be entitled,
together with cash in lieu of any fraction of a share. As of the Conversion
Date, the person entitled to receive certificates of Common Stock shall be
regarded for all corporate purposes as the holder of the number of shares of
Common Stock to which he or it is entitled upon the conversion.
(ii) The Corporation shall at all times when
the Series A Preferred Stock shall be outstanding, reserve and keep available
out of its authorized but unissued stock, for the purpose of effecting the
conversion of the Series A Preferred Stock, such number of its duly authorized
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding Series A Preferred Stock.
(iii) All shares of Series A Preferred Stock
which shall have been surrendered for conversion as herein provided shall no
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longer be deemed to be outstanding and all rights with respect to such shares,
shall immediately cease and terminate on the Conversion Date, except only the
right of the holders thereof to receive shares of Common Stock in exchange
therefor, which shares of Common Stock shall be deemed to be outstanding as of
the Conversion Date. Any shares of Series A Preferred Stock so converted shall
be not be reissued as Series A Preferred Stock.
(f) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If
the Corporation shall at any time or from time to time after the Original Issue
Date for the Series A Preferred Stock effect a subdivision of the outstanding
Common Stock, the Conversion Price then in effect immediately before that
subdivision shall be proportionately decreased. If the Corporation shall at any
time or from time to time after the Original Issue Date for the Series A
Preferred Stock combine the outstanding shares of Common Stock, the Conversion
Price then in effect immediately before the combination shall be proportionately
increased. Any adjustment under this paragraph shall become effective at the
close of business on the date the subdivision or combination becomes effective.
(g) ADJUSTMENT FOR CERTAIN DIVIDENDS AND
DISTRIBUTIONS. In the event the Corporation at any time, or from time after the
Original Issue Date for the Series A Preferred Stock, shall make or issue, or
fix a record date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in additional shares of Common
Stock, then and in each such event the Conversion Price for the Series A
Preferred Stock then in effect shall be decreased as of the time of such
issuance or, in the event such a record date shall have been fixed, as of the
close of business on such record date, by multiplying the Conversion Price for
the Series A Preferred Stock then in effect by a fraction:
(i) the numerator of which shall be the
total number of shares of Common Stock issued and outstanding immediately prior
to the time of such issuance or the close of business on such record date, and
(ii) the denominator of which shall be the
total number of shares of Common Stock issued and outstanding immediately prior
to the time of such issuance or the close of business on such record date plus
the number of shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, if such record date shall have been fixed and
such dividend is not fully paid or if such distribution is not fully made on the
date fixed therefor, the Conversion Price for the Series A Preferred Stock shall
be recomputed accordingly as of the close of business on such record date and
thereafter the Conversion Price for the Series A Preferred Stock shall be
adjusted pursuant to this paragraph as of the time of actual payment of such
dividends or distributions.
(h) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE, OR
SUBSTITUTION. If the Common Stock issuable upon the conversion of the Series A
Preferred Stock shall be changed into the same or a different number of shares
of any class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares
of stock dividend provided for above, or a reorganization, merger,
consolidation, or sale of assets provided for below), then and in each such
event the holder of each such share of Series A Preferred Stock shall have the
right thereafter to convert such share into the kind and amount of shares of
stock and other securities and property receivable upon such reorganization,
reclassification, or other change, by holders of the number of shares of Common
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Stock into which such shares of Series A Preferred Stock might have been
converted immediately prior to such reorganization, reclassification, or change,
all subject to further adjustment as provided herein.
(i) ADJUSTMENT FOR MERGER OR REORGANIZATION. In case
of any consolidation or merger of the Corporation with or into another
corporation, each share of Series A Preferred Stock shall thereafter be
convertible into the kind and amount of shares of stock or other securities or
property to which a holder of the number of shares of Common Stock of the
Corporation deliverable upon conversion of such Series A Preferred Stock would
have been entitled upon such consolidation or merger; and, in such case,
appropriate adjustment (as determined in good faith by the Board of Directors)
shall be made in the application of the provisions in this Section 4 set forth
with respect to the rights and interest thereafter of the holders of the Series
A Preferred Stock, to the end that the provisions set forth in this Section 4
(including provisions with respect to changes in and other adjustments of the
Conversion Price) shall thereafter be applicable, as nearly as reasonably may
be, in relation to any shares of stock or other property thereafter deliverable
upon the conversion of the Series A Preferred Stock.
(j) NO IMPAIRMENT. The Corporation will not, by
amendment of its Restated Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred Stock against
impairment.
(k) CERTIFICATE AS TO ADJUSTMENTS. Upon the
occurrence of each adjustment or readjustment of the Conversion Price pursuant
to this Section 4, the Corporation at its expense shall compute such adjustment
or readjustment in accordance with the terms hereof and furnish to each holder
of Series A Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a similar certificate setting forth (i) such adjustments and
readjustments; (ii) the Conversion Price then in effect; and (iii) the number of
shares of Common Stock and the amount, if any, of other property which then
would be received upon the conversion of Series A Preferred Stock.
(l) NOTICE OF RECORD DATE. In the event:
(i) that the Corporation declares a dividend
(or any other distribution) on its Common Stock payable in Common Stock or other
securities of the Corporation;
(ii) that the Corporation subdivides or
combines its outstanding shares of Common Stock;
(iii) of any reclassification of the Common
Stock of the Corporation (other than a subdivision or combination of its
outstanding shares of Common Stock or a stock dividend or stock distribution
7
thereon), or of any consolidation or merger of the Corporation into or with
another corporation; or
(iv) of the Liquidation of the Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Series A Preferred Stock, and shall cause to
be mailed to the holders of the Series A Preferred Stock at their last addresses
as shown on the records of the Corporation or such transfer agent, at least ten
(10) days prior to the record date specified in (A) below or twenty (20) days
before the date specified in (B) below, a notice stating:
(A) the record date of such
dividend, distribution, subdivision or combination, or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to be entitled
to such dividend, distribution, subdivision or combination are to be determined,
or
(B) the date on which such
reclassification, consolidation, merger, or Liquidation is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such reclassification,
consolidation, merger, or Liquidation.
(5) EVENT TRIGGERING CONVERSION. If on December 31, 2006 (the
"Maturity Date") any shares of Series A Preferred Stock are still outstanding
for which: (i) a holder has not exercised his or her Conversion Right(s) or (ii)
the Corporation has not exercised its Redemption Right (as defined in Section 6
below), such outstanding shares of Series A Preferred shall be automatically
converted into shares of Common Stock in accordance with this Section 5.
(a) PRICE. On the Maturity Date, each share of Series
A Preferred Stock still outstanding shall be converted into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing (x)
the Conversion Value of such share on the Maturity Date by (y) ninety five
percent (95%) of the average closing price of the Common Stock for the last ten
(10) business days as reflected on the stock exchange in which the Common Stock
is listed.
(b) MECHANICS OF CONVERSION. On or promptly after the
Maturity Date, the holders of any outstanding shares of Series A Preferred Stock
shall surrender the certificate or certificates for such shares of Series A
Preferred Stock, at the principal office of the Company or the office of the
transfer agent for the Series A Preferred Stock, together with written notice
that such shares are to be converted into shares of Common Stock pursuant this
Section. If required by the Corporation, certificates surrendered for conversion
shall be endorsed or accompanied by a written instrument or instruments of
transfer, in form satisfactory to the Corporation, duly executed by the
registered holder or his or its attorney duly authorized in writing. As soon as
practicable thereafter, the Corporation shall issue and deliver at such office
to such former holder of Series A Preferred Stock a certificate or certificates
for the number of shares of Common Stock to which such holder shall be entitled,
together with cash in lieu of any fraction of a share. Notwithstanding the
foregoing, as of the Maturity Date, the person entitled to receive certificates
of Common Stock under this Section 5 shall be regarded for all corporate
8
purposes as the holder of the number of shares of Common Stock to which he or it
is entitled upon the conversion of shares of Series A Preferred Stock held by
that person.
(6) OPTIONAL REDEMPTION OF SERIES A PREFERRED STOCK. At any
time prior to the Maturity Date, the Company may redeem the Series A Preferred
Stock out of funds legally available therefor (the "Redemption Right"), in
whole, or from time to time in part so long as the aggregate consideration to be
paid by the Company for a partial redemption amount shall not be less than One
Million Dollars ($1,000,000). The redemption amount with respect to each share
of Series A Preferred Stock shall be equal to One Hundred and Seven Percent
(107%) multiplied by the sum of (i) One Hundred Dollars ($100) per share
(subject to appropriate adjustment in the event of any Recapitalization Events),
and (ii) an amount equal to all dividends accrued on such share of Series A
Preferred Stock since the Original Issue Date thereof but not yet paid
(including those which, pursuant to Section 1(c), have been added to and remain
part of the Liquidation Price as of such time of determination), whether or not
such unpaid dividends have been declared or there are any unrestricted funds of
the Corporation legally available for the payment of dividends (the "Redemption
Price"). If only a part of the Series A Preferred Stock is to be redeemed, the
redemption shall be carried out pro rata according to the number of shares of
Series A Preferred Stock held by each holder subject to the redemption.
(a) The Corporation shall provide each holder of
Series A Preferred Stock, with a written notice of redemption (addressed to the
holder at its address as it appears on the books of the Corporation, with a
courtesy copy sent by facsimile), not later than five (5) business days before
the date fixed for redemption. The notice of redemption shall specify (i) the
date fixed for redemption; (iii ) the Redemption Price; and (iv) the place the
holders of Series A Preferred Stock may obtain payment of the Redemption Price,
upon surrender of their certificates. If funds of the Corporation are legally
available on the date fixed for redemption, then whether or not shares are
surrendered for payment of the Redemption Price, the shares shall no longer be
outstanding and the holders thereof shall cease to be shareholders of the
Corporation with respect to the shares redeemed on and after the date fixed for
redemption and shall be entitled to receive the Redemption Price without
interest upon the surrender of the share certificate. If less than all the
shares represented by a share certificate are to be redeemed, the Corporation
shall issue a new share certificate for the shares not redeemed.
(b) The Redemption Price shall be paid by the
Corporation in cash to the holders of Series A Preferred Stock subject to
redemption. If on the Redemption Date, funds of the Corporation legally
available therefor shall be insufficient to redeem all the shares of Series A
Preferred Stock required to be redeemed as provided herein, funds to the extent
legally available shall be used for such purpose and the Corporation shall
effect such redemption pro rata according to the number of shares of Series A
Preferred Stock held by each holder and the Corporation shall make additional
partial redemptions out of funds legally available for such purpose beginning
thirty (30) days after the date fixed for redemption and each thirty (30) days
thereafter until all shares of the Series A Preferred Stock subject to
redemption have been redeemed; provided that the right to convert any such
unredeemed shares of Series A Preferred Stock shall continue to be available to
the holders of Series A Preferred Stock until the last full business day
preceding any such subsequent redemption as set forth herein.
(c) The Redemption Right may not be exercised by the
Company more than once during any thirty (30) day period.
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ARTICLE V
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for conduct as a director,
provided that this Article shall not eliminate the liability of a director for
any act or omission for which such elimination of liability is not permitted
under the Law. No amendment to the Law that further limits the acts or omissions
for which elimination of liability is permitted shall affect the liability of a
director for any act or omission which occurs prior to the effective date of the
amendment. Any repeal or modification of this Article V shall be prospective and
shall not adversely affect any right or protection of a director, officer, agent
or other person existing at the time of, or increase the liability of any
director of the Corporation with respect to any acts or omissions of such
director occurring prior to, such repeal or modification.
ARTICLE VI
The Corporation shall indemnify any current or former director or
officer and may indemnify any current or former employee or agent of the
Corporation to the fullest extent not prohibited by law, who is made, or
threatened to be made, a party to an action, suit or proceeding, whether civil,
criminal, administrative, investigative or other (including an action, suit or
proceeding by or in the right of the Corporation), by reason of the fact that
such person is or was a director, officer, employee or agent of the Corporation
or a fiduciary within the meaning of the Employee Retirement Income Security Act
of 1974 with respect to any employee benefit plan of the Corporation, or serves
or served at the request of the Corporation as a director, officer, employee or
agent, or as a fiduciary of an employee benefit plan, of another corporation,
partnership, joint venture, trust or other enterprise, if he acted in good faith
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. The Corporation shall pay for or reimburse
the reasonable expenses incurred by any such current or former director or
officer and may pay for or reimburse the reasonable expenses incurred by any
such current or former employee or agent, in any such proceeding in advance of
the final disposition of the proceeding upon receipt of an undertaking by the
person to repay all amounts advanced if it should ultimately be determined that
the person is not entitled to be indemnified under this Article VI or otherwise.
No amendment to this Article that limits the Corporation's obligation to
indemnify any person shall have any effect on such obligation for any act or
omission that occurs prior to the later of the effective date of the amendment
or the date notice of the amendment is given to the person. This Article shall
not be deemed exclusive of any other provisions for indemnification or
advancement of expenses of directors, officers, employees, agents and
fiduciaries that may be included in any statute, bylaw, agreement, general or
specific action of the Board, vote of shareholders or other document or
arrangement.
ARTICLE VII
Elections of directors need not be by written ballot except and to the
extent provided in the Bylaws of the Corporation.
ARTICLE VIII
The Corporation is to have a perpetual existence.
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ARTICLE IX
The Corporation reserves the right to repeal, alter, amend or rescind
any provision contained in this Certificate of Incorporation and/or any
provision contained in any amendment to or restatement of this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred on stockholders herein are granted subject to this reservation.
ARTICLE X
No holder of shares of stock of the Corporation shall have any
preemptive or other right, except as such rights are expressly provided by
contract, to purchase or subscribe for or receive any shares of any class, or
series thereof, of stock of the Corporation, whether now or hereafter
authorized, or any warrants, options, bonds, debentures or other securities
convertible into, exchangeable for or carrying any right to purchase any share
of any class, or series thereof, of stock; but such additional shares of stock
and such warrants, options, bonds, debentures or other securities convertible
into, exchangeable for or carrying any right to purchase any shares of any
class, or series thereof, of stock may be issued or disposed of by the Board to
such persons, and on such terms and for such lawful consideration as in its
discretion it shall deem advisable or as the Corporation shall have by contract
agreed.
ARTICLE XI
The Board may from time to time make, amend, supplement or repeal the
Bylaws by the requisite affirmative vote of directors as set forth in the
Bylaws; provided, however, that the stockholders may change or repeal any bylaw
adopted by the Board by the requisite affirmative vote of stockholders as set
forth in the Bylaws; and, provided further, that no amendment or supplement to
the Bylaws adopted by the Board shall vary or conflict with any amendment or
supplement thus adopted by the stockholders.
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been signed this ___ day of [Month], 2003 by the undersigned
who affirms that the statements made herein are true and correct.
____________________________________
Name:_______________________________
Title:______________________________
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