-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jiofcz+4IRLO7ylc6kkI8YaSuHAKuHyb+oq9ac+/oXGAo5bUQbnGNrshd4XirMH2 6sLYomjIexa9FVpCpamfxA== 0000950135-99-004300.txt : 19990906 0000950135-99-004300.hdr.sgml : 19990906 ACCESSION NUMBER: 0000950135-99-004300 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990901 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990903 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYRK INC CENTRAL INDEX KEY: 0000864264 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 043081657 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-21878 FILM NUMBER: 99706044 BUSINESS ADDRESS: STREET 1: 3 POND RD CITY: GLOUCESTER STATE: MA ZIP: 01930 BUSINESS PHONE: 5082835800 MAIL ADDRESS: STREET 1: 3 POND RD CITY: GLOCESTER STATE: MA ZIP: 01930 FORMER COMPANY: FORMER CONFORMED NAME: CYRK INTERNATIONAL INC DATE OF NAME CHANGE: 19930521 8-K 1 CYRK INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K Current Report Pursuant to Section 13 or 15(d) of The Securities and Exchange Act of 1934 Date of Report: SEPTEMBER 1, 1999 (Date of Earliest Event Reported) CYRK, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE (State or Other Jurisdiction of Incorporation) 0-21878 04-3081657 (Commission File Number) (I.R.S. Employer Identification No.) 3 POND ROAD, GLOUCESTER, MA 01930 (Address of Principal Executive Offices) (Zip Code) (978) 283-5800 (Registrant's Telephone Number, Including Area Code) 2 ITEM 5. OTHER EVENTS. On September 1, 1999, the registrant announced that, pursuant to a Securities Purchase Agreement entered into as of September 1, 1999, The Yucaipa Companies ("YUCAIPA"), a Los Angeles-based investment firm, will invest $25 million in the Company in exchange for convertible preferred stock of Cyrk, Inc. and a warrant to purchase an addition $15 million of convertible preferred stock. The proceeds from the investment will be used for general corporate purposes and to fund the Company's growth and acquisition efforts. As part of the agreement, which will require Cyrk shareholder approval, Ronald W. Burkle, managing partner of Yucaipa, will be appointed chairman of Cyrk's Board of Directors. Patrick D. Brady and Allan Brown will be named co-chief executive officers of Cyrk, and Mr. Brown will be named to Cyrk's Board of Directors. Commenting on the investment, Patrick Brady said, "We are very pleased to enter into this relationship with The Yucaipa Companies. Their investment in Cyrk is a clear indication of the value they place on the skills and strong relationships that Cyrk and our subsidiary, Simon Marketing, have built over the years. This investment strengthens our competitive position in the marketplace, enhances our capital base and aligns us with a very capable and reputable company with a strong history of delivering shareholder value. Furthermore, Yucaipa's expanding presence in Web-based businesses is a tremendous asset to Cyrk's rapidly growing Internet initiatives." 3 Allan Brown added, "Simon Marketing values its decades-long relationship with the McDonald's system as well as our newer clients such as Chevron, Blockbuster and Toys "R" Us. Our reputation is based upon developing unique and innovative promotional programs that help grow our clients' businesses. This new arrangement will allow us to bring even greater innovation and resources to these trusted relationships and to expand our business in the future." Ronald Burkle of Yucaipa said, "We are pleased to be part of another company that serves the McDonald's system with the highest degree of quality standards and service. Cyrk and Simon Marketing are clear leaders in delivering high-impact promotional programs for companies including Phillip Morris, Ty, Inc. and The Coca-Cola Company. They have consistently proven their ability to create competitive advantages for clients seeking increased brand equity and customer loyalty. We are hopeful that, through an association with Yucaipa, Cyrk and Simon Marketing can provide additional value-added services to McDonald's and their other clients." Under the terms of the agreement, Yucaipa will purchase 25,000 newly-issued convertible preferred shares of Cyrk which shall pay an annual dividend of 4% and shall initially be convertible into Cyrk common stock at $8.25 a share. Yucaipa shall also receive a warrant to purchase an additional 15,000 convertible preferred shares, initially convertible at $9.00 per share. Upon the close of the transaction and the exercising of the warrant, Yucaipa's 23% stake, on an as-converted basis, will make it Cyrk's largest shareholder. Under the agreement, Cyrk would nominate three Yucaipa designees, including Mr. Burkle, to a seven-person Cyrk Board of Directors, which would include Mr. Brady and Mr. Brown. 4 This Form 8-K contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995). These statements include statements regarding intent, belief or current expectations of the Company and its management. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause the Company's actual results to differ materially from the Company's expectations. Factors that could cause actual results to differ materially are discussed in Exhibit 99.1 to the Company's First Quarter 1999 Report on Form 10-Q. Reference to this Cautionary Statement or Exhibit 99.1 in the context of a forward-looking statement or statements shall be deemed to be a statement that any one or more of these factors may cause actual results to differ materially from those anticipated in such forward-looking statement or statements. ITEM 7. EXHIBITS: EXHIBIT 2.1 Securities Purchase Agreement between Cyrk, Inc. and Overseas Toys, L.P., dated September 1, 1999. EXHIBIT 3.1 Form of Certificate of Designation regarding the Series A Senior Cumulative Participating Convertible Preferred Stock to be issued to Overseas Toys, L.P. EXHIBIT 4.1 Form of Warrant. EXHIBIT 4.2 Form of Registration Rights Agreement between Cyrk, Inc. and Overseas Toys, L.P. EXHIBIT 10.1 Form of Management Agreement between Cyrk, Inc. and The Yucaipa Companies. EXHIBIT 10.2 Employment Agreement between Cyrk, Inc. and Allan Brown. EXHIBIT 10.3 Employment Agreement between Cyrk, Inc. and Patrick Brady. EXHIBIT 99.1 Termination Agreement among Cyrk, Inc., Patrick Brady, Allan Brown, Gregory Shlopak, Eric Stanton, and Eric Stanton Self-Declaration of Revocable Trust. 5 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned and hereunto duly authorized. CYRK, INC. Date: September 3, 1999 By: /s/ Dominic F. Mammola ----------------------------- Dominic F. Mammola, Chief Financial Officer EX-2.1 2 SECURITIES PURCHASE AGREEMENT WITH OVERSEAS TOYS 1 - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT Dated as of September 1, 1999 By and Between OVERSEAS TOYS, L.P. And CYRK, INC. - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS PAGE RECITALS 1 ARTICLE 1 DEFINITIONS 2 1.1 Certain Defined Terms 2 ARTICLE 2 SALE AND TRANSFER OF SECURITIES; CLOSING 2 2.1 Sale and Purchase of Securities 2 2.2 Purchase Price; Payment 2 2.3 Closing 2 ARTICLE 3 REPRESENTATIONS AND WARRANTIES 3 3.1 Disclosure Schedule 3 3.2 Representations and Warranties of the Company 3 (a) Organization, Standing and Corporate Power 3 (b) Subsidiaries 4 (c) Capitalization; Valid Issuance of Shares 4 (d) Authority; Noncontravention 5 (e) SEC Documents; Undisclosed Liabilities 6 (f) Information Supplied 7 (g) Absence of Certain Changes or Events 7 (h) Litigation; Labor Matters; Compliance with Laws 7 (i) Employee Matters 8 (j) Tax Returns and Tax Payments 9 (k) State Antitakeover Laws Not Applicable; No Other Restrictions 10 (l) Environmental Matters 10 (m) Properties 11 (n) Intellectual Property 11 (o) Brokers 12 (p) Opinion of Financial Advisor 12 (q) Board and Special Committee Recommendations 12 (r) Common Shares Listing 12 (s) Required Vote 12 (t) Termination of Shareholders Agreement 12 (u) Year 2000 Compliance 13 3.3 Representations and Warranties of the Investor 13 (a) Organization, Standing and Power 13 (b) Authority; Noncontravention 13 (c) Information Supplied 14 (d) Litigation 14 3 TABLE OF CONTENTS (continued) Page (e) Brokers 14 (f) Investor Status 14 (g) Accredited Investor 14 (h) Financial Ability 15 (i) No Other Agreements 15 ARTICLE 4 COVENANTS OF THE COMPANY 15 4.1 Affirmative Covenants 15 4.2 Restrictions 16 4.3 No Solicitation 17 4.4 Certain Agreements 18 4.5 Continuing Covenants 18 ARTICLE 5 ADDITIONAL AGREEMENTS 20 5.1 Preparation of the Proxy Statement; Stockholder Meeting 20 5.2 Best Efforts 21 5.3 Public Announcements 21 5.4 Takeover Statutes 21 5.5 Restriction on Investor 22 5.6 Restrictive Legend 22 5.7 Standstill 22 5.8 Resignation of Investor Directors 24 ARTICLE 6 CONDITIONS PRECEDENT 24 6.1 Conditions to Each Party's Obligation To Effect the Closing 24 (a) HSR Act 24 (b) No Injunctions or Restraints 24 (c) Company Stockholder Approval 24 6.2 Conditions to Obligation of the Investor 24 (a) Representations and Warranties 25 (b) Performance of Obligations of the Company 25 (c) Consents, etc. 25 (d) No Material Adverse Change 25 (e) Delivery of Certain Documents 25 6.3 Conditions to Obligation of the Company 26 (a) Representations and Warranties 26 (b) Performance of Obligations of the Investor 26 (c) Delivery of Certain Documents 26 4 TABLE OF CONTENTS (continued) Page ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER 27 7.1 Termination 27 7.2 Effect of Termination 27 7.3 Amendment 28 7.4 Extension; Waiver 28 ARTICLE 8 INDEMNIFICATION; REMEDIES 29 8.1 Survival; Right To Indemnification Not Affected By Knowledge 29 8.2 Indemnification and Payment of Damages By the Company 29 8.3 Indemnification and Payment of Damages By the Investor 30 8.4 Limitation on Amount 30 8.5 Procedure for Indemnification -- Third Party Claims 30 8.6 Procedure for Indemnification -- Other Claims 31 8.7 Remedies Exclusive 32 ARTICLE 9 GENERAL PROVISIONS 32 9.1 Notices 32 9.2 Interpretation 33 9.3 Counterparts 33 9.4 Entire Agreement; No Third-Party Beneficiaries 33 9.5 Costs and Expenses 33 9.6 Governing Law 34 9.7 Assignment 34 9.8 Enforcement 34 9.9 Severability 34 9.10 Further Assurances 35 9.11 Construction 35 EXHIBITS EXHIBIT A Definitions EXHIBIT B Certificate of Designation EXHIBIT C Form of Warrant EXHIBIT D Registration Rights Agreement EXHIBIT E Management Agreement EXHIBIT F Form of Opinion of Company Counsel 5 SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is entered into as of September 1, 1999 by and between OVERSEAS TOYS, L.P., a Delaware limited partnership (the "Investor"), and CYRK, INC., a Delaware corporation (the "Company"). RECITALS WHEREAS, the Company desires to sell to the Investor, and the Investor desires to purchase from the Company, (i) a total of 25,000 shares of Series A Senior Cumulative Participating Convertible Preferred Stock of the Company, the Certificate of Designation of which is attached hereto as Exhibit B (the "Series A Preferred Stock"), and (ii) a warrant, in the form attached hereto as Exhibit C, to purchase an additional 15,000 shares of Series A Preferred Stock (the "Warrant"), pursuant to the terms and conditions set forth in this Agreement; WHEREAS, the Board of Directors of the Company has approved, and deemed it advisable, that the Company (i) execute and deliver this Agreement and consummate the Contemplated Transactions, and (ii) issue and sell to the Investor such shares of Series A Preferred Stock and the Warrant on the terms and conditions set forth herein; WHEREAS, concurrently with the closing of the transactions contemplated by this Agreement, the Company will enter into a registration rights agreement with the Investor with respect to the shares of Series A Preferred Stock and the Warrant being acquired by the Investor herein (the "Registration Rights Agreement"), in the form attached hereto as Exhibit D; WHEREAS, concurrently with the closing of the transactions contemplated by this Agreement, the Company will enter into a management agreement with The Yucaipa Companies, in the form attached hereto as Exhibit E (the "Management Agreement"), to provide management and consulting services to the Company; WHEREAS, concurrently with the execution of this Agreement, certain shareholders of the Company are entering into a voting agreement with the Investor (the "Voting Agreement") whereby such shareholders have agreed to vote their shares in favor (a) of the Company Stockholder Approval (as defined in Section 3.2(s)) and any other vote, consent or action as required of the stockholders of the Company to approve the Contemplated Transactions and (b) the election of certain nominees selected by Investor to the Board of Directors of the Company; and WHEREAS, concurrently with the execution of this Agreement and in order to 6 induce the Investor to agree to the transactions contemplated hereby, the Company has entered into Employment Agreements with each of Patrick Brady and Allan Brown to serve as Co-Chief Executive Officers and Co-Presidents of the Company (collectively, the "Employment Agreements"), such Employment Agreements to be effective only as of the Closing. NOW, THEREFORE, in consideration of the representations, warranties, covenants, restrictions and agreements contained in this Agreement, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 CERTAIN DEFINED TERMS. Capitalized words and phrases used in this Agreement and not otherwise defined herein have the meanings ascribed to them in Exhibit A hereto. ARTICLE 2 SALE AND TRANSFER OF SECURITIES; CLOSING 2.1 SALE AND PURCHASE OF SECURITIES. At the Closing provided for in Section 2.3, and on the terms and subject to the conditions herein set forth, the Company shall sell, transfer, assign, convey, and deliver to the Investor, and the Investor shall purchase, accept, and acquire from the Company, a total of 25,000 shares of Series A Preferred Stock (the "Series A Preferred Shares") and the Warrant (together with the Series A Preferred Shares, the "Purchased Securities"). 2.2 PURCHASE PRICE; PAYMENT. In consideration of the sale, transfer, assignment, conveyance and delivery to the Investor of the Purchased Securities, the Investor agrees to pay to the Company on the Closing Date, by wire transfer of immediately available funds to an account specified by the Company, an aggregate purchase price of Twenty-Five Million Dollars ($25,000,000) (the "Purchase Price"). 2.3 CLOSING. (a) The closing of the transactions contemplated by Sections 2.1 and 2.2 shall take place at the offices of Munger, Tolles & Olson LLP, 355 South Grand Avenue, Suite 3500, Los Angeles, California at 10:00 a.m., Pacific Time, or at such other time and place as the Company and the Investor may mutually agree in writing, as soon as practicable and in any event within two (2) Business Days following, and subject to, the prior fulfillment or waiver of all conditions (other than conditions to be satisfied at the Closing, but subject to those conditions) set forth in Article 6 hereof (such event being called the "Closing" and such date, 7 the "Closing Date"). All transactions required to occur at the Closing shall be deemed to have occurred simultaneously, and no such transaction shall be deemed to have occurred until all have occurred. (b) At the Closing, the Company will deliver the following to the Investor: (i) A duly executed stock certificate evidencing the Series A Preferred Shares registered in the name of the Investor; (ii) The duly executed Warrant registered in the name of the Investor; (iii) The Registration Rights Agreement and the Management Agreement, each duly executed and delivered by the Company; and (iv) The documents, instruments and writings contemplated or required to be delivered by the Company at the Closing pursuant to Section 6.2 or otherwise contemplated or required under this Agreement. (c) At the Closing, the Investor will deliver to the Company: (i) The Purchase Price; (ii) The Registration Rights Agreement duly executed and delivered by the Investor, and the Management Agreement duly executed and delivered by The Yucaipa Companies; and (iii) The documents, instruments and writings contemplated or required to be delivered by the Investor at the Closing pursuant to Section 6.3 or otherwise contemplated or required under this Agreement. ARTICLE 3 REPRESENTATIONS AND WARRANTIES 3.1 DISCLOSURE SCHEDULE. On the date hereof, the Company has delivered to the Investor a schedule (the "Disclosure Schedule") setting forth, among other things, items the disclosure of which is necessary or appropriate either in response to an express disclosure requirement contained in a provision hereof or as an exception to one or more representations or warranties contained in Section 3.2, or to one or more of its covenants contained herein. 3.2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Investor, except as set forth in the Disclosure Schedule, as follows: 8 (a) ORGANIZATION, STANDING AND CORPORATE POWER. The Company and each of its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated and has the requisite corporate power and authority to carry on its business as now being conducted. The Company and each of its Subsidiaries is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed (individually or in the aggregate) would not have a Material Adverse Effect. Section 3.2(a) of the Disclosure Schedule contains complete and correct copies of the Certificate of Incorporation and Bylaws of the Company and the comparable Organizational Documents of each of its Subsidiaries. (b) SUBSIDIARIES. The only direct or indirect Subsidiaries of the Company and other ownership interests held by the Company in any other Person are those listed in Section 3.2(b) of the Disclosure Schedule or in Exhibit 21.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and other than such listed Subsidiaries and Persons, the Company does not own (directly or indirectly) any stock, securities or equity interests in any Person. All the outstanding shares of capital stock or other ownership interests of each such listed Subsidiary and Person have been validly issued and are fully paid and nonassessable and are owned (of record and beneficially) by the Company, by another Subsidiary (wholly owned) of the Company or by the Company and another such Subsidiary (wholly owned), free and clear of all pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever (collectively, "Liens"). (c) CAPITALIZATION; VALID ISSUANCE OF SHARES. The authorized capital stock of the Company consists of 50,000,000 shares of common stock, $0.01 par value per share (the "Common Shares"), and 1,000,000 shares of "blank-check" preferred stock, $0.01 par value per share (the "Preferred Shares"). As of the date of this Agreement, there are (i) 15,740,857 Common Shares issued and outstanding, (ii) no Common Shares held in the treasury of the Company or held by any Subsidiary of the Company; (iii) 1,319,276 Common Shares reserved for issuance upon exercise of authorized but unissued Company Stock Options pursuant to the Option Plans; (iv) 2,313,155 Common Shares issuable upon exercise of outstanding Company Stock Options; (v) 300,000 Common Shares issuable upon exercise of the warrants listed in Section 3.2(c) of the Disclosure Schedule, and (vi) no Preferred Shares issued or outstanding. Section 3.2(c) of the Disclosure Schedule contains a complete and accurate list of all Company Stock Options outstanding pursuant to the Option Plans including the date of grant, name of option holder, exercise price and expiration date. Except as set forth in this Section 3.2(c), no shares of capital stock or other equity securities of the Company are issued, reserved for issuance or outstanding. All outstanding shares of capital stock of the Company are, and all shares which may be issued pursuant to the Stock Plans will be when issued, duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. The Series A Preferred Shares and the Warrant, when issued, paid for and delivered in accordance with the terms of this Agreement, and the Series A Preferred Shares to be issued pursuant to the Warrant, will be duly authorized, validly issued, fully paid and nonassessable and not subject 9 to preemptive rights. Except as set forth in Section 3.2(c) of the Disclosure Schedule, there are no outstanding bonds, debentures, notes or other indebtedness or other securities of the Company or any of its Subsidiaries having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which stockholders of the Company or such Subsidiary may vote. Except as set forth in Section 3.2(c) of the Disclosure Schedule, there are no outstanding securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which the Company or any of its Subsidiaries is a party or by which any of them is bound obligating the Company or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other equity or voting securities of the Company or of any of its Subsidiaries or obligating the Company or any of its Subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking. Other than the Company Stock Options or the warrants set forth in Section 3.2(c) of the Disclosure Schedule or as otherwise set forth in Section 3.2(c) of the Disclosure Schedule, (x) there are no outstanding contractual obligations, commitments, understandings or arrangements of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire or make any payment in respect of or measured or determined based on the value or market price of any shares of capital stock of the Company or any of its Subsidiaries and (y) to the Knowledge of the Company, there are no irrevocable proxies with respect to shares of capital stock of the Company or any Subsidiary of the Company. Except as set forth in Section 3.2(c) of the Disclosure Schedule, there are no agreements or arrangements pursuant to which the Company or any of its Subsidiaries is or would be required to register Common Shares, Preferred Shares or other securities under the Securities Act of 1933, as amended. (d) AUTHORITY; NONCONTRAVENTION. The Company has the requisite corporate power and authority to enter into this Agreement and to consummate the Contemplated Transactions. The execution and delivery of this Agreement, the Management Agreement and the Registration Rights Agreement by the Company and the consummation by the Company of the Contemplated Transactions have been duly authorized by all necessary corporate action on the part of the Company, subject to the approval of the Company's stockholders of the issuance and sale of the Purchased Securities to the Investor and the election to the Board of Directors of the Company of the Investor's nominees pursuant to Section 5.1(b). This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. When duly executed and delivered by the Company at Closing, each of the Management Agreement, the Registration Rights Agreement and the Warrant shall constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. Except as disclosed in Section 3.2(d) of the Disclosure Schedule, the execution and delivery of this Agreement does not, and the consummation of the Contemplated Transactions and compliance with the provisions hereof will not, conflict with, or result in any breach or violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation, payment or acceleration of or "put" right with respect to any obligation or to loss of a material benefit under, or result in the creation of any Lien upon 10 any of the properties or assets of the Company or any of its Subsidiaries under, (i) the Certificate of Incorporation or Bylaws of the Company or the comparable Organizational Documents of any of its Subsidiaries, (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease, contract or other agreement, instrument, permit, concession, franchise or license applicable to the Company or any of its Subsidiaries or their respective properties or assets which is material to the Company and its Subsidiaries taken as a whole ("Material Contracts") or (iii) subject to the governmental filings and other matters referred to in the following sentence, any judgment, order, decree, statute, law, ordinance, rule, regulation or arbitration award applicable to the Company or any of its Subsidiaries or their respective properties or assets, other than, in the case of clauses (ii) and (iii), any such conflicts, breaches, violations, defaults, rights, losses or Liens that individually or in the aggregate would not have a Material Adverse Effect or would not prevent or materially hinder or delay the ability of the Company to consummate the Contemplated Transactions. No consent, approval, order or authorization of, or registration, declaration or filing with, or notice to, any federal, state or local government or any court, administrative agency or commission or other governmental authority or agency, domestic or foreign, (each a "Governmental Entity" and collectively, "Governmental Entities") or any other Person, is required by or with respect to the Company or any of its Subsidiaries in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the Contemplated Transactions, except for (i) the filing of a premerger notification and report form by the Company under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) the filing with the Securities and Exchange Commission (the "SEC") of (x) the Proxy Statement, and (y) such reports or schedules under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as may be required in connection with this Agreement and the Contemplated Transactions, (iii) the Company Stockholder Approval, and (iv) such other consents, approvals, orders, authorizations, registrations, declarations, filings or notices for which the absence of such would not, individually or in the aggregate, have a Material Adverse Effect or as are set forth in Section 3.2(d) of the Disclosure Schedule. (e) SEC DOCUMENTS; UNDISCLOSED LIABILITIES. The Company has filed all required reports, schedules, forms, statements and other documents with the SEC since January 1, 1996 (collectively, and in each case including all exhibits and schedules thereto and documents incorporated by reference therein, the "Company SEC Documents"). As of their respective dates (or, if amended, at the time of such amended filing or, in the case of Securities Act registration statements, on their respective effective dates), the Company SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Company SEC Documents, and none of the Company SEC Documents (including any and all financial statements included therein) as of such dates and as of the date hereof (except as set forth in subsequent filings with the SEC prior to the date hereof and, only with respect to Company SEC Documents filed after the date hereof, except as set forth in subsequent filings with the SEC prior to the Closing Date) contained or contain 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 11 they were made, not misleading. The consolidated financial statements of the Company included in the Company SEC Documents (the "Company SEC Financial Statements") comply as to form in all material respects with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP (except, in the case of unaudited consolidated quarterly statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited quarterly statements, to normal year-end audit adjustments). Since December 31, 1998, neither the Company nor any of its Subsidiaries has incurred any liabilities or obligations required to be reflected in its balance sheet (whether accrued, absolute, contingent or otherwise) except (i) as and to the extent set forth on the audited balance sheet of the Company and its Subsidiaries as of December 31, 1998 (including the notes thereto), (ii) as incurred in connection with the Contemplated Transactions, (iii) as set forth in Section 3.2(e) of the Disclosure Schedule, (iv) as described in the Company SEC Documents filed since December 31, 1998, but prior to the date of this Agreement (the "Recent Company SEC Documents") or (v) as incurred in the ordinary course of business consistent with past practice in amounts that are not material to the Company and its Subsidiaries taken as a whole. Neither the Company, nor any of its Subsidiaries is, or has received any notice or has any Knowledge that any other party is, in default or breach under or is unable to perform in any material respect under any Material Contracts, nor has there occurred any event that with the lapse of time or the giving of notice or both would constitute such a default or breach, except for those defaults, breaches or inability to perform which would not reasonably be expected, either individually or in the aggregate, to have a Material Adverse Effect. (f) INFORMATION SUPPLIED. None of the information supplied or to be supplied by the Company for inclusion or incorporation by reference in the Proxy Statement will, at the date it is first mailed to the Company's stockholders or at the time of the Company Stockholders Meeting contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Proxy Statement will comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations promulgated thereunder, except that no representation is made by the Company with respect to statements made or incorporated by reference therein based on information supplied in writing by the Investor for inclusion or incorporation by reference therein. (g) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the Recent Company SEC Documents or in Section 3.2(g) of the Disclosure Schedule, since December 31, 1998, the Company has conducted its business only in the ordinary course consistent with past practice, and there is not and has not been: (i) any Material Adverse Change; (ii) any condition, event or occurrence which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect or give rise to a Material Adverse 12 Change; (iii) any event which, if it had taken place following the execution of this Agreement, would not have been permitted by Sections 4.2 or 4.4 without the prior written consent of the Investor; or (iv) any condition, event or occurrence which would prevent or materially hinder or delay the ability of the Company to consummate the Contemplated Transactions. (h) LITIGATION; LABOR MATTERS; COMPLIANCE WITH LAWS. (i) Except as disclosed in the Company SEC Documents, there is no suit, action, proceeding, investigation or inquiry pending or, to the Knowledge of the Company, Threatened against or affecting the Company or any of its Subsidiaries or, to the Knowledge of the Company, any basis for any such suit, action, proceeding, investigation or inquiry that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect or prevent or materially hinder or delay the ability of the Company or the Investor to consummate the Contemplated Transactions, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against the Company or any of its Subsidiaries having, or which, in the future would reasonably be expected to have, any such effect. (ii) Neither the Company nor any of its Subsidiaries is a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor is it or any of its Subsidiaries the subject of any proceeding asserting that it or any Subsidiary has committed an unfair labor practice or seeking to compel it to bargain with any labor organization as to wages or conditions of employment nor is there any strike, work stoppage or other labor dispute involving it or any of its Subsidiaries pending or, to its Knowledge, Threatened, any of which would reasonably be expected to have a Material Adverse Effect. (iii) The conduct of the business of each of the Company and each of its Subsidiaries complies with all statutes, laws, regulations, ordinances, rules, judgments, orders, decrees or arbitration awards applicable thereto, except for violations or failures so to comply, if any, that, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. (i) EMPLOYEE MATTERS. Section 3.2(i) of the Disclosure Schedule contains a complete and accurate list of all employment, severance, bonus, profit sharing, compensation, termination, stock option, stock appreciation right, restricted stock, phantom stock, performance unit, pension, retirement, deferred compensation, welfare or employee benefit plan, agreement, trust fund or other arrangement and any union, guild or collective bargaining agreement maintained or contributed to or required to be contributed to by the Company or any of its ERISA Affiliates, for the benefit or welfare of any current or former director, officer, employee, consultant of the Company or any of its ERISA Affiliates (such plans, agreements, trust funds and arrangements being collectively the "Employee Agreements and Plans"), other than employment agreements which provide for compensation to an individual that is not in 13 excess of $60,000 per year (including any payments available upon acceleration, termination, or change of control). Each of the Employee Agreements and Plans is in compliance with all applicable laws including ERISA and the Code except where noncompliance would not reasonably be expected to have a Material Adverse Effect. The IRS has issued a determination letter stating that each Employee Agreement and Plan that is intended to be a qualified plan under Section 401(a) of the Code is so qualified and the Company is aware of no event occurring after the date of such determination that would adversely affect such determination. The liabilities accrued under each such Employee Agreement and Plan are reflected on the latest balance sheet of the Company included in the Recent SEC Reports to the extent required in accordance with GAAP. No condition exists that is reasonably likely to subject the Company or any of its Subsidiaries to any direct or indirect liability under Title IV of ERISA or to a civil penalty under Section 502(j) of ERISA or liability under Section 4069 of ERISA or 4975, 4976, or 4980B of the Code or the loss of a federal tax deduction under Section 280G of the Code or other liability with respect to the Employee Agreements and Plan that would have a Material Adverse Effect and that is not reflected on such balance sheet. No Employee Agreement and Plan (other than any one that is a "multiemployer plan" as such term is defined in Section 4001(a)(3) of ERISA, all of which are indicated in Section 3.2(i) of the Disclosure Schedule) is subject to Title IV of ERISA. There are no pending or, to the Knowledge of the Company, anticipated or Threatened claims (other than routine claims for benefits or immaterial claims) by, on behalf of or against any of the Employee Agreements and Plans or any trusts related thereto. "ERISA Affiliate" means, with respect to any Person, any trade or business, whether or not incorporated, that together with such Person would be deemed a "single employer" within the meaning of Section 4001(a)(15) of ERISA. (j) TAX RETURNS AND TAX PAYMENTS. (i) The Company and each of its Subsidiaries has filed or caused to be filed, on a timely basis, all Tax Returns that are or were required to be filed by or with respect to any of them, either separately or as a member of a group, pursuant to applicable law. Each of the Company and its Subsidiaries has paid, or made provision for the payment of, all Taxes that have or may have become due pursuant to those Tax Returns or otherwise, or pursuant to any assessment received by the Company or its Subsidiaries, except such Taxes, if any, as are listed in Section 3.2(j)(i)(B) of the Disclosure Schedule and are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided in the Company SEC Financial Statements; (ii) The Company and its Subsidiaries have not granted the IRS or relevant state tax authorities any extension or waiver of or the applicable statute of limitations for their respective United States federal and state income Tax Returns for any period. All deficiencies proposed as a result of any audits of any Tax Returns have been paid, reserved against, settled, or, as listed on Section 3.2(j)(ii) of the Disclosure Schedule, are being contested in good faith by appropriate proceedings. No issues have been raised (and are currently pending) by any taxing authority in connection with any 14 Tax Return of the Company or any of its Subsidiaries, and neither the Company nor any of its Subsidiaries has given or been requested to give waivers or extensions (or is or would be subject to a waiver or extension given by any other Person) of any statute of limitations relating to the payment of Taxes of the Company or its Subsidiaries for which any of them may be liable; (iii) The charges, accruals, and reserves with respect to Taxes on the respective books of each of the Company and its Subsidiaries are adequate (determined in accordance with GAAP) and are at least equal to that company's liability for Taxes. All Taxes that the Company or any of its Subsidiaries is or was required by applicable law to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper governmental entity or other Person; (iv) All Tax Returns filed by (or that include on a consolidated basis) the Company and/or its Subsidiaries are true, correct, and complete. There is no tax sharing agreement that will require any payment by the Company or any of its Subsidiaries after the date of this Agreement. Except as set forth in Section 3.2(j)(iv) of the Disclosure Schedule, neither the Company nor any of its Subsidiaries is or has been a member of any consolidated, combined, unitary or aggregate group for Tax purposes except such a group consisting only of the Company and its Subsidiaries; and (v) Neither the Company nor any of its Subsidiaries has filed a consent pursuant to the collapsible corporation provisions of Section 341(f) of the Code (or any corresponding provision of state, local or foreign income tax law). (k) STATE ANTITAKEOVER LAWS NOT APPLICABLE; NO OTHER RESTRICTIONS. The Board of Directors of the Company has approved this Agreement and the Contemplated Transactions and such approval constitutes approval of the Investor's acquisition of the Series A Preferred Shares and the Warrant and the other Contemplated Transactions by the Board of Directors of the Company under the provisions of Section 203 of the DGCL and Chapter 110C of the Massachusetts General Laws such that such provisions do not apply to this Agreement or the Contemplated Transactions. No other state takeover statute or similar statute or regulation of the State of Delaware or The Commonwealth of Massachusetts (or, to the Knowledge of the Company, of any other state or jurisdiction) applies to this Agreement or the Contemplated Transactions. No provision of the Certificate of Incorporation, Bylaws or other governing instruments of the Company or any of its Subsidiaries or the terms of any plan or agreement of the Company would, directly or indirectly, restrict or impair (i) the ability of the Investor to vote, or otherwise to exercise the rights of a stockholder with respect to, securities of the Company and its Subsidiaries that may be acquired or controlled by the Investor by virtue of this Agreement or the Contemplated Transactions or (ii) the rights granted hereunder, or permit any stockholder to acquire securities of the Company or the Investor, or any of their respective Subsidiaries, on a basis not available to the Investor in the event that the Investor were to acquire securities of the Company. 15 (l) ENVIRONMENTAL MATTERS. There are no legal, administrative, arbitral or other proceedings, claims, actions, causes of action or, to the Knowledge of the Company, private environmental investigations or remediation activities or governmental investigations of any nature seeking to impose, or that would reasonably be expected to result in the imposition, on the Company or any of its Subsidiaries of any liability or obligations arising under common law standards relating to environmental protection, human health or safety, or under any local, state, federal, national or supernational environmental statute, regulation or ordinance, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (collectively, "Environmental Laws"), pending or, to the Knowledge of the Company, Threatened, against the Company or any of its Subsidiaries, which liability or obligation would have or would reasonably be expected to have a Material Adverse Effect. To the Knowledge of the Company or any of its Subsidiaries, there is no reasonable basis for any such proceeding, claim, action or governmental investigation that would impose any liability or obligation that would have or would reasonably be expected to have a Material Adverse Effect. To the Knowledge of the Company, during or prior to the period of (i) its or any of its Subsidiaries' ownership or operation of any of their respective current properties, or (ii) its or any of its Subsidiaries' holding of a security interest or other interest in any property, there was no release or Threatened release of hazardous, toxic, radioactive or dangerous materials or other materials regulated under Environmental Laws in, on, under or affecting any such property which would reasonably be expected to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is subject to any agreement, order, judgment, decree, letter or memorandum by or with any court, regulatory agency, other Governmental Entity or third party imposing any material liability or obligations pursuant to or under any Environmental Law that would have or would reasonably be expected to have a Material Adverse Effect. (m) PROPERTIES. Except as disclosed in the Company SEC Documents, each of the Company and its Subsidiaries (i) has good and marketable title to all the properties and assets reflected in the latest audited balance sheet included in such Recent Company SEC Documents as being owned by the Company or one of its Subsidiaries or acquired after the date thereof which are, individually or in the aggregate, material to the Company's business on a consolidated basis (except properties and assets sold or otherwise disposed of since the date thereof in the ordinary course of business), free and clear of all Liens except Permitted Liens and (ii) is the lessee of all leasehold estates reflected in the latest audited financial statements included in such Recent Company SEC Documents or acquired after the date thereof which are material to its business on a consolidated basis and is in possession of the properties purported to be leased thereunder, and each such lease is valid without material default thereunder by the lessee or, to the Company's Knowledge, the lessor. (n) INTELLECTUAL PROPERTY. Section 3.2(n) of the Disclosure Schedule contains a list of all copyrights, patents, trademarks, service marks and tradenames (including applications, continuations, reissues and similar rights) ("Intellectual Property") and software (other than standard, off-the-shelf software subject to "shrink wrap" licenses) ("Software") owned by or licensed to the Company and its Subsidiaries which are material to the conduct of 16 business of the Company or any of its Subsidiaries. The Company or the Subsidiary using such Intellectual Property or Software either (i) owns the entire right, title and interest in and to the Intellectual Property and Software free and clear of any Liens (other than Permitted Liens) or (ii) has the right and license to use the same in its business, except where the failure to so own or have such right or license would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. No proceedings are pending or, to the Knowledge of the Company, Threatened, which challenge the validity, use or ownership of any of the Intellectual Property or Software listed in Section 3.2(n) of the Disclosure Schedule. To the Knowledge of the Company, no infringement by the Company or any of its Subsidiaries of any Intellectual Property of any other Person has occurred and the Company and its Subsidiaries have not received notice of a claim that the Company or its Subsidiaries are infringing any Intellectual Property of any other Person. To the Knowledge of the Company, no Person is engaged in any unauthorized use of the Intellectual Property of the Company. (o) BROKERS. No broker, investment banker, financial advisor or other Person, other than Bear, Stearns & Co., the fees and expenses of which will be paid by the Company, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the Contemplated Transactions based upon arrangements made by or on behalf of the Company. The Company has provided to the Investor a true and correct copy of any agreement with Bear, Stearns & Co. providing for payment of any such fee or commission. (p) OPINION OF FINANCIAL ADVISOR. The Company has received, prior to the execution of this Agreement, the oral opinion of Bear, Stearns & Co. to the effect that the purchase price to be received by the Company for the Purchased Securities is fair, from a financial point of view, to the Company, a signed written copy of which opinion, dated as of the date of this Agreement (the "Bear Stearns Opinion"), will be delivered to the Investor within five (5) Business Days of the date hereof. (q) BOARD AND SPECIAL COMMITTEE RECOMMENDATIONS. The Board of Directors of the Company, at a meeting duly called and held, has by unanimous vote of those directors present (who constituted 100% of the directors then in office) (i) determined that this Agreement and the Contemplated Transactions are fair to and in the best interests of the stockholders of the Company, (ii) approved the Certificate of Designation in the form attached hereto as Exhibit B and resolved that it be filed in accordance with applicable law as soon as practicable following the Company Stockholder Approval and prior to the Closing Date, and (iii) resolved to recommend that the holders of the Common Shares approve this Agreement and the Contemplated Transactions. The special committee of independent directors of the Board of Directors of the Company (the "Special Committee") has, by unanimous vote, recommended that the Board of Directors approve this Agreement, the Certificate of Designation and the Contemplated Transactions. (r) COMMON SHARES LISTING. The Common Shares are registered pursuant to Section 12(g) of the Exchange Act and are listed on the Nasdaq National Market ("Nasdaq"). 17 The Company has taken no action designed to cause, or likely to result in, the termination of the registration of the Common Shares under the Exchange Act or the delisting of the Common Shares from Nasdaq, nor has the Company received any notification that the SEC or the National Association of Securities Dealers, Inc. ("NASD") is contemplating the termination of such registration or listing. (s) REQUIRED VOTE. The Company Stockholder Approval, required pursuant to NASD Rule 4310(c)(25)(H)(i)d.2. prior to the purchase by the Investor of the Purchased Securities and the consummation of the Contemplated Transactions in order to avoid the possible delisting of the Common Shares from Nasdaq, is the only vote of the holders of any class or series of the Company's securities necessary to approve any of the Contemplated Transactions or this Agreement. (t) TERMINATION OF SHAREHOLDERS AGREEMENT. The Shareholders Agreement, dated as of June 9, 1997, and as amended as of July 21, 1997, by and among the Company, Allan Brown, The Eric Stanton Self-Declaration of Revocable Trust, Gregory Shlopak, and Patrick Brady, will be terminated as of the Closing by way of a termination agreement duly executed by all of the parties to such Shareholders Agreement, an executed copy of which termination agreement has been delivered by the Company to the Investor. Pursuant to such termination agreement, Eric Stanton has relinquished any right he may have had to be nominated to and/or to serve on the Board of Directors of the Company, including pursuant to such Shareholders Agreement, his Consulting Agreement, dated as of May 7, 1997, by and among Eric Stanton, the Company and SMI Merger, Inc., or otherwise. (u) YEAR 2000 COMPLIANCE. The Company's disclosure in the Recent Company SEC Documents concerning the "Year 2000" Issue is true and correct in all material respects. 3.3 REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor represents and warrants to the Company as follows: (a) ORGANIZATION, STANDING AND POWER. The Investor is duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite power and authority to carry on its business as now being conducted. The Investor is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed (individually or in the aggregate) would not have a material adverse effect on the Investor. (b) AUTHORITY; NONCONTRAVENTION. The Investor has all requisite partnership power and authority to enter into this Agreement and to consummate the Contemplated Transactions. The execution and delivery of this Agreement by the Investor and the consummation by the Investor of the Contemplated Transactions have been duly authorized by 18 all necessary action on the part of the Investor. This Agreement has been duly executed and delivered by, and constitutes the valid and binding obligation of, the Investor, enforceable against the Investor in accordance with its terms. The execution and delivery of this Agreement does not, and the consummation of the Contemplated Transactions and compliance with the provisions hereof will not, conflict with, or result in any breach or violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of or "put" right with respect to any obligation or to loss of a benefit under, or result in the creation of any Lien upon its or its Subsidiaries' properties or assets under, (i) the Investor's Certificate of Limited Partnership or the comparable Organizational Documents of any of its Subsidiaries, (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease, contract or other agreement, instrument, permit, concession, franchise or license applicable to the Investor or any of its Subsidiaries, properties or assets which is material to the Investor or (iii) subject to the governmental filings and other matters referred to in the following sentence, any judgment, order, decree, statute, law, ordinance, rule, regulation or arbitration award applicable to the Investor or its Subsidiaries, properties or assets, other than, in the case of clauses (ii) and (iii), any such conflicts, breaches, violations, defaults, rights, losses or Liens that individually or in the aggregate would not have a material adverse effect with respect to the Investor or would not prevent or materially hinder or delay the ability of the Investor to consummate the Contemplated Transactions. No consent, approval, order or authorization of, or registration, declaration or filing with, or notice to, any Governmental Entity or any other Person is required by or with respect to the Investor or any Subsidiary of Investor in connection with the execution and delivery of this Agreement or the consummation by the Investor of any of the Contemplated Transactions, except for (i) the filing of a premerger notification and report form under the HSR Act, (ii) the filing with the SEC of such reports or schedules under the Exchange Act as may be required in connection with this Agreement and the Contemplated Transactions, and (iii) such other consents, approvals, orders, authorizations, registrations, declarations, filings or notices as may be required under the "takeover" or "blue sky" laws of various states. (c) INFORMATION SUPPLIED. None of the information supplied or to be supplied by the Investor for inclusion or incorporation by reference in the Proxy Statement will, at the date the Proxy Statement is first mailed to the Company's stockholders or at the time of the Company Stockholders Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. (d) LITIGATION. There is no suit, action, proceeding, investigation or inquiry pending or, to the Knowledge of the Investor, Threatened against or affecting the Investor or any of its Subsidiaries or any basis for any such suit, action, proceeding, investigation or inquiry that, individually or in the aggregate, would reasonably be expected to have a material adverse effect with respect to the Investor or prevent or materially hinder or delay the ability of the Company or the Investor to consummate the Contemplated Transactions, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator 19 outstanding against the Investor or any of its Subsidiaries or Affiliates having, or which, in the future would have, any such effect. (e) BROKERS. No broker, investment banker, financial advisor or other Person, other than Donaldson, Lufkin & Jenrette Securities Corporation, the fees and expenses of which will be paid by the Company, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the Contemplated Transactions based upon arrangements made by or on behalf of the Investor. The Investor has provided to the Company a true and correct copy of any agreement with Donaldson, Lufkin & Jenrette Securities Corporation providing for payment of any such fee or commission. (f) INVESTOR STATUS. The Investor has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment in the Series A Preferred Shares and the Warrant and is able to bear the economic risks of such investment. (g) ACCREDITED INVESTOR. The Investor is an "accredited investor" as defined in Rule 501(a) under the 1933 Act. The Investor is acquiring the Series A Preferred Shares and the Warrant for its own account and not with a view to any resale, distribution or other disposition of the Series A Preferred Shares or the Warrant in violation of the United States securities laws. (h) FINANCIAL ABILITY. The Investor has the financial capability to consummate the Contemplated Transactions, and the Investor understands that under the terms of this Agreement the Investor's obligations hereunder are not in any way contingent or otherwise subject to (i) the Investor's consummation of any financing arrangements or the Investor's obtaining any financing or (ii) the availability of any financing to the Investor. (i) NO OTHER AGREEMENTS. Except for the Employment Agreements and the Voting Agreement, the Investor has made no other agreements, arrangements or understandings concerning the Contemplated Transactions or the Company or any of its Subsidiaries with (a) any director, officer, employee or consultant of the Company or any of its Subsidiaries, or (b) any stockholder beneficially owning at least 5% of the outstanding Common Shares. ARTICLE 4 COVENANTS OF THE COMPANY 4.1 AFFIRMATIVE COVENANTS. The Company covenants and agrees with the Investor that it will do or cause to be done the following, until the earlier of the Closing or the termination of this Agreement pursuant to Section 7.1: (a) use its Best Efforts to obtain all consents, approvals and authorizations 20 set forth and marked with an asterisk in Section 3.2(d) of the Disclosure Schedule, or otherwise required to consummate the Contemplated Transactions, and to consult with the Investor and keep the Investor appraised of the progress with respect to such consents, approvals and authorizations; (b) permit a Representative of the Investor to attend all meetings of the Board of Directors, provided, that the Representative of the Investor shall excuse himself or herself from the meeting if so requested by the Board of Directors; (c) promptly provide the Investor with written notification of any event, occurrence or other information of any kind whatsoever which in any way would cause any representation or warranty made by the Company in this Agreement to be untrue, incorrect or incomplete or would cause any of the conditions to any party's obligations to consummate the Contemplated Transactions not to be fulfilled ("UPDATES"). All such written notifications shall specifically identify any and all of the representations or warranties affected by the event, occurrence or information that necessitated the giving of such notice. Notwithstanding the foregoing, the Updates shall not be given effect for the purposes of (i) determining the accuracy of the representations and warranties contained in this Agreement, (ii) determining the satisfaction of the conditions precedent to the obligations of the Investor contained in Section 6.2 of this Agreement, or (iii) limiting the Investor's ability to seek indemnification from the Company pursuant to the terms of this Agreement; and (d) subject to the provisions of the Confidentiality Agreement, will, and will cause its Subsidiaries and each of their Representatives to, give the Investor and its respective Representatives reasonable access, upon reasonable notice and during normal business hours, to the offices and other facilities and to the books and records of the Company and its Subsidiaries and will cause the Representatives of the Company and the Company's Subsidiaries to furnish the Investor and Representatives of the Investor with such financial and operating data and such other information with respect to the business and operations of the Company and its Subsidiaries as the Investor may from time to time reasonably request. 4.2 RESTRICTIONS. Except as contemplated by this Agreement or with the prior written consent of Investor (which consent shall not be unreasonably withheld or delayed), during the period from the date of this Agreement to the earlier of the termination of this Agreement pursuant to Section 7.1 and the Closing, the Company will, and will cause each of its Subsidiaries to, conduct its operations according to its ordinary course of business and consistent with past practice and use its and their respective reasonable Best Efforts to preserve intact their current business organizations, keep available the services of their current officers and employees and preserve their relationships with customers, suppliers, licensors, licensees, advertisers, distributors and others having business dealings with them and to preserve goodwill. Without limiting the generality of the foregoing, and except as otherwise expressly provided in this Agreement or required by law prior to the Closing Date, the Company will not, and will cause its Subsidiaries not to, without the prior written consent of the Investor (which consent shall not be unreasonably withheld or delayed): 21 (a) (i) declare, set aside or pay any dividends on, or make any other distributions in respect of, any of its capital stock (except for any dividend payable by a wholly owned Subsidiary of the Company to the Company or any wholly owned Subsidiary of the Company), (ii) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (iii) purchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its Subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (b) authorize for issuance, issue, deliver, sell or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise), pledge or otherwise encumber any shares of its capital stock or the capital stock of any of its Subsidiaries, any other voting securities or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities or any other securities or equity equivalents (including without limitation stock appreciation rights), other than the issuance of Common Shares upon the exercise of the Company Stock Options or the warrants set forth in Section 3.2(c) of the Disclosure Schedule outstanding on the date of this Agreement and in accordance with their present terms, or pursuant to the 1993 Employee Stock Purchase Plan; (c) propose, authorize or effect any change or amendment to its articles, by-laws or equivalent Organizational Documents or alter through merger, liquidation. reorganization, restructuring or in any other fashion the corporate structure or ownership of any material Subsidiary of the Company; (d) take any action that would, or is reasonably likely to, result in any of its representations and warranties in this Agreement becoming untrue, or in any of the conditions to the Closing set forth in Section 6.1 or 6.2 not being satisfied; or (e) authorize any of, or commit or agree to take any of, the foregoing actions. 4.3 NO SOLICITATION. From and after the date hereof until the earlier of the Closing Date or the termination of this Agreement pursuant to Section 7.1: (a) The Company shall not, nor shall it permit any of its Subsidiaries to, nor shall it authorize (and shall use Best Efforts to prevent) any of its or its Subsidiaries' Representatives to, directly or indirectly through another Person, (i) solicit, initiate or encourage (including by way of furnishing non-public information), or take any other action designed to facilitate, any inquiries or the making of any proposal which constitutes a Company Takeover Proposal or (ii) participate in any negotiations regarding any Company Takeover Proposal; PROVIDED, HOWEVER, that if the Board of Directors of the Company or the Special Committee determines in good faith, following consultation with outside counsel, that 22 failure to do so would be reasonably likely to constitute a breach of its fiduciary duties to the Company's stockholders under applicable law, the Company may, in response to any Company Takeover Proposal made prior to the Company Stockholder Approval, which proposal was not solicited by it or any of its Subsidiaries and which did not otherwise result from a breach of this Section 4.3(a), and subject to providing prior written notice of its decision to take such action to the Investor and compliance with Section 4.3(c), (x) furnish information with respect to the Company and its Subsidiaries to any person making a Company Takeover Proposal pursuant to a customary confidentiality agreement (as determined by the Company or the Special Committee following consultation with its outside counsel) and (y) participate in negotiations regarding such Company Takeover Proposal. (b) Except as expressly permitted by this Section 4.3(b), neither the Board of Directors of the Company, the Special Committee, nor any other committee thereof shall (i) withdraw or modify, or propose publicly to withdraw or modify, in a manner adverse to the Investor, the approval or recommendation by such Board of Directors, the Special Committee, or such other committee of the Contemplated Transactions, (ii) approve or recommend, or propose to approve or recommend, any Company Takeover Proposal, or (iii) cause the Company to enter into any Company Acquisition Agreement. Notwithstanding the foregoing, the Board of Directors of the Company or the Special Committee, to the extent that it determines in good faith, following consultation with outside counsel, that in light of a Company Superior Proposal failure to do so would be reasonably likely to constitute a breach of its fiduciary duties to the Company's stockholders under applicable law, may terminate this Agreement solely in order to concurrently enter into a Company Acquisition Agreement with respect to a Company Superior Proposal, but only following notice to the Investor and payment to the Investor of a fee of $3.5 million. (c) In addition to the obligations of the Company set forth in paragraphs (a) and (b) of this Section 4.3, the Company shall immediately (but in any event within one day) advise the Investor orally and in writing of any request for information or any Company Takeover Proposal, the material terms and conditions of such initial request or Company Takeover Proposal and the identity of the person making such request or Company Takeover Proposal. (d) Nothing contained in this Section 4.3 shall prohibit the Company from taking and disclosing to its stockholders a position contemplated by Rule 14e-2(a) promulgated under the Exchange Act if, in the good faith judgment of the Board of Directors of the Company or the Special Committee, following consultation with outside counsel, failure so to disclose would be a violation of its obligations under applicable law; PROVIDED, HOWEVER, that, neither the Company nor its Board of Directors, the Special Committee, nor any other committee thereof shall withdraw or modify, or propose publicly to withdraw or modify, its position with respect to this Agreement or the Contemplated Transactions or approve or recommend, or propose publicly to approve or recommend, a Company Takeover Proposal unless this Agreement is first terminated in accordance with Section 4.3(b). 23 4.4 CERTAIN AGREEMENTS. The Company will immediately cease and cause its Representatives to cease any and all existing activities, discussions or negotiations with any parties conducted heretofore with respect to any Company Takeover Proposal, and shall use its Best Efforts to cause such parties in possession of confidential information about the Company or its Subsidiaries that was furnished by or on behalf of the Company or its Subsidiaries to return or destroy all such information in the possession of any such party or in the possession of any attorney, agent, advisor or representative of such party. Neither the Company nor any Subsidiary of the Company will waive or fail to enforce any provision of any confidentiality agreement entered into in connection with a potential Company Takeover Proposal or standstill or similar agreement to which it is a party without the prior written consent of the Investor. 4.5 CONTINUING COVENANTS. The Company covenants that from and after the date of this Agreement and through the Closing and thereafter so long as the Investor owns Common Shares and/or Series A Preferred Shares (including shares underlying the Warrant) representing on an as converted basis, in the aggregate, at least 782,828 Common Shares (or an equivalent adjusted number of shares of voting securities of the Company into which such Common Shares have been converted following any reclassification or combination or similar change to the common stock of the Company): (a) The Company shall not issue or authorize for issuance any shares of equity securities of the Company in violation of the provisions of the Certificate of Designation; (b) The Company shall use its Best Efforts to maintain its status as a registrant under the Exchange Act that is not in default or contravention of any requirement of the Exchange Act, except in the event that, following the Closing, there is a merger, sale of all or substantially all of the assets of the Company or similar transaction involving the Company and its Subsidiaries and requiring approval of the Board of Directors and shareholders of the Company; (c) The Company shall use its Best Efforts to maintain the listing and posting for trading of the Common Shares on Nasdaq, except in the event that, following the Closing, there is a merger, sale of all or substantially all of the assets of the Company or similar transaction involving the Company and its Subsidiaries and requiring approval of the Board of Directors and shareholders of the Company; (d) The Company shall at all times reserve and keep available, solely for issuance and delivery upon conversion of the Purchased Securities, the number of Common Shares from time to time issuable upon conversion of all of the Purchased Securities at the time outstanding. All Common Shares issuable upon conversion of the Purchased Securities shall be duly authorized and, when issued upon such conversion, shall be validly issued, fully paid and nonassessable, and admitted for listing and quotation on Nasdaq; (e) Upon the written request of the Investor from time to time following the 24 Closing, (i) nominate and recommend for election to the Board of Directors of the Company at each annual meeting of the stockholders of the Company (and each special meeting of the stockholders of the Company at which Directors are to be elected): (A) so long as the Investor owns Common Shares and/or Series A Preferred Shares (including shares underlying the Warrant) representing on an as converted basis, in the aggregate, at least 3,131,313 Common Shares (or an equivalent adjusted number of shares of voting securities of the Company into which such Common Shares have been converted following any reclassification or combination or similar change to the common stock of the Company), three (3) nominees for director designated by the Investor (but not its permitted transferees that are not affiliates of the Investor) in each such written request, or, if the size of the Board of Directors is changed with the consent of the Investor pursuant to Section 4.5(g) below, such other number of nominees for director designated by the Investor as would constitute one less than a majority of the Board of Directors, (B) so long as the Investor owns Common Shares and/or Series A Preferred Shares (including shares underlying the Warrant) representing on an as converted basis, in the aggregate, at least 1,565,656 Common Shares but less than 3,131,313 Common Shares (or an equivalent adjusted number of shares of voting securities of the Company into which such Common Shares have been converted following any reclassification or combination or similar change to the common stock of the Company), two (2) nominees for director designated by the Investor (but not its permitted transferees that are not affiliates of the Investor) in each such written request, or, if the size of the Board of Directors is changed with the consent of the Investor pursuant to Section 4.5(g) below, such other number of nominees for director designated by the Investor as would constitute at least two-sevenths of the members of the Board of Directors, and (C) so long as the Investor owns Common Shares and/or Series A Preferred Shares (including shares underlying the Warrant) representing on an as converted basis, in the aggregate, at least 782,828 Common Shares but less than 1,565,656 Common Shares (or an equivalent adjusted number of shares of voting securities of the Company into which such Common Shares have been converted following any reclassification or combination or similar change to the common stock of the Company), one (1) nominee for director designated by the Investor (but not its permitted transferees that are not affiliates of the Investor) in each such written request, or, if the size of the Board of Directors is changed with the consent of the Investor pursuant to Section 4.5(g) below, such other number of nominees for director designated by the Investor as would constitute at least one-seventh of the members of the Board of Directors; and (ii) nominate and use Best Efforts to cause to be elected as Chairman of the Board of Directors, Ron Burkle or such other nominee as is designated by the Investor (but not its permitted transferees that are not affiliates of the Investor) in such written request; (f) In the event that any member of the Board of Directors of the Company nominated by the Investor pursuant to the provisions of 4.5(e) or 5.1(b) vacates his position as a director of the Company as a result of his death, resignation, disqualification, removal or other cause other than pursuant to a vote of the stockholders of the Company, the Company agrees to appoint to the Board of Directors a replacement member designated by the Investor to serve out the remainder of the term of such former member in accordance with the provisions of the Certificate of Incorporation of the Company; and 25 (g) Except as set forth in Section 6.2(h), the Company shall not make any change in the size of its Board of Directors, change the term of office of any member of the Board of Directors, or otherwise reclassify its Board of Directors or amend or otherwise modify the effect of any provision of Article VII of the Restated Certificate of Incorporation of the Company, filed with the Office of the Secretary of State of the State of Delaware on January 27, 1995, without the prior written consent of the Investor. ARTICLE 5 ADDITIONAL AGREEMENTS 5.1 PREPARATION OF THE PROXY STATEMENT; STOCKHOLDER MEETING. (a) Promptly following the date of execution of this Agreement, the Company shall prepare and file with the SEC a Proxy Statement on Schedule 14A (the "Proxy Statement"). The Investor shall provide to the Company all information required by applicable securities laws to be included in the Proxy Statement regarding the Investor and its Affiliates and designees (as described below in Section 5.1(b)). The Company will use its reasonable Best Efforts to cause the Proxy Statement to be mailed to its stockholders as promptly as practicable after any comments thereto issued by the SEC are cleared by the SEC. (b) The Company will, as promptly as practicable following the date of execution of this Agreement, duly call, give notice of, convene and hold a meeting of its stockholders (the "Company Stockholders Meeting") for the purpose of obtaining the approval of the Company stockholders of: (i) the Company's issuance and sale of the Purchased Securities to the Investor, by means of the affirmative vote of a majority of the votes cast by holders of the outstanding Common Shares as required by Nasdaq, and (ii) the election to the Board of Directors of the Company of three (3) nominees designated by the Investor to the Company in writing prior to the filing of the Proxy Statement, to serve as members of a class of directors to serve for a term of two (2) years or until the annual meeting of the stockholders of the Company in the year 2001, if later, by means of the affirmative vote of a plurality of the votes cast by holders of the outstanding Common Shares as required by the Company's by-laws (such approval of the Company stockholders of the foregoing matters set forth in clauses (i) and (ii) being referred to herein as the "Company Stockholder Approval"). The Company will, through its Board of Directors in accordance with the provisions of Section 3.2(q), recommend to its stockholders that they vote in favor of the Company Stockholders Approval. Such recommendation, together with a copy of the Bear Stearns Opinion, shall be included in the Proxy Statement. The Company will use Best Efforts to hold such meeting as soon as practicable after the date of execution of this Agreement. 5.2 BEST EFFORTS. Each of the parties agrees to use its Best Efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the 26 other parties in doing, all things necessary, proper or advisable, to consummate, in the most expeditious manner practicable, the Closing and the other Contemplated Transactions. The Investor and the Company will use their Best Efforts and cooperate with one another (i) in promptly determining whether any filings are required to be made or consents, approvals, waivers, permits or authorizations are required to be obtained under any applicable law or regulation or from any governmental authorities or third parties in connection with the Contemplated Transactions, and (ii) in promptly making any such filings, in furnishing information required in connection therewith and in timely seeking to obtain any such consents, approvals, waivers, permits or authorizations, including any notification and report forms and related material that it may be required to file with the Federal Trade Commission and the Antitrust Division of the United States Department of Justice under the HSR Act. Each of the parties shall use its Best Efforts to obtain an early termination of the applicable waiting period under the HSR Act, and shall make any further filings or information submissions pursuant thereto that may be necessary, proper or advisable. 5.3 PUBLIC ANNOUNCEMENTS. The Investor and the Company will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other public statements with respect to the Contemplated Transactions, and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable law, court process or by obligations pursuant to any listing agreement with any national securities exchange or as are agreed upon in advance. The parties agree that the initial press release or releases to be issued with respect to the Contemplated Transactions shall be mutually agreed upon prior to the issuance thereof. 5.4 TAKEOVER STATUTES. If any "fair price," "moratorium," "control share acquisition" or other form of antitakeover statute or regulation shall become applicable to the Contemplated Transactions, the Company and the members of its Board of Directors, on the one hand, and the Investor and its general partner, on the other hand, shall grant such approvals and take such actions as are reasonably necessary so that the Contemplated Transactions may be consummated as promptly as practicable on the terms contemplated hereby and otherwise act to eliminate or minimize the effects of such statute or regulation on the Contemplated Transactions. 5.5 RESTRICTION ON INVESTOR. Except as expressly provided in this Agreement or required by law prior to the Closing Date, the Investor will not, without the prior written consent of the Company (which consent shall not be unreasonably withheld or delayed), take any action that would, or is reasonably likely to, result in any of its representations and warranties in this Agreement becoming untrue, or in any of the conditions to the Closing set forth in Section 6.1 or 6.3 not being satisfied. 5.6 RESTRICTIVE LEGEND. The Purchased Securities shall be stamped or otherwise imprinted with the following legend and the Investor agrees to transfer such Purchased Securities only in accordance therewith: 27 "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND NEITHER THIS SECURITY, NOR ANY INTEREST THEREIN, MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (ii) AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, SUCH EXEMPTION TO BE EVIDENCED BY SUCH DOCUMENTATION AS THE ISSUER MAY REASONABLY REQUEST." 5.7 STANDSTILL. Investor agrees that for so long as Investor beneficially owns Common Shares and/or Series A Preferred Shares (including shares underlying the Warrant) representing on an as converted basis, in the aggregate, at least 782,828 Common Shares, neither it nor its Affiliates will, directly or indirectly, without the prior written consent of a majority of the Board of Directors of the Company (other than the nominees or designees or the Investor), (i) acquire, agree to acquire, make any proposal to acquire or in any way participate in a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) to do any of the foregoing, any equity securities (other than the shares of Series A Preferred Stock and the Warrants or any shares of capital stock issuable upon the conversion or exercise thereof) of the Company, or (ii) make, or in any way participate in any "solicitation" of "proxies" (as such terms are used in the proxy rules of the Securities Exchange Commission) to vote any voting securities of the Company (other than in connection with the solicitation of proxies by the Board of Directors of the Company, or as contemplated by the Voting Agreement); provided, however, that the agreements of Investor set forth in this Section 5.7 shall not apply (A) following the breach by the Company of any of the covenants set forth in Section 4.5, upon which breach such agreements of the Investor shall be of no further force and effect; (B) in the event that any of the following events occurs and such event has not been endorsed or supported by the Board of Directors of the Company within ten (10) Business Days of the earlier of its occurrence or the receipt by the Board of Directors of notice of its anticipated occurrence: (x) the acquisition by any "group" (within the meaning of Section 13(d)(3) of the Exchange Act) of 20% of any class of equity securities of the Company, (y) the solicitation of proxies by any Person or group (other than Investor or the Board of Directors of the Company) or (z) the public announcement of any of the foregoing, or of any intent to engage in the foregoing, in which event the Investor shall be permitted to make a proposal to the disinterested members of the Board of Directors of the Company with respect to an acquisition or solicitation described in clause (i) or (ii) above; (C) (x) to the extent of any sales or transfers of Common Shares by any of the parties to the Voting Agreement (other than the Investor) or any of their transferees to any Person not subject to the Voting Agreement, and the Investor shall be permitted to acquire and/or solicit for the acquisition of Common Shares up to the aggregate amount of any such sales or transfers, or (y) upon the material breach of the Voting Agreement by any of the parties thereto (other than the Investor), (1) upon which material breach, if arising from the failure of the 28 breaching party to vote such party's shares in accordance with the provisions of the Voting Agreement and the Investor is unable to exercise its proxy with respect to such shares, the Investor shall be entitled to purchase the number of Common Shares equal to the percentage of ownership of the outstanding capital stock of the Company (including the Common Shares underlying the Warrant) owned by such breaching party or parties immediately following the date of this Agreement (or as of the date any such breaching party acquired its Common Shares if the breaching party is a transferee of a party to the Voting Agreement which transferee agreed to bound by the Voting Agreement), or (2) upon which material breach, if arising from the sale or other transfer of Common Shares by the breaching party in violation of the provisions of the Voting Agreement, the Investor shall be entitled to purchase the number of Common Shares equal to the aggregate amount of any such sales or transfers; or (D) in the event of any issuances of voting securities of the Company other than to current or former officers, employees, directors or consultants of the Company or its wholly owned Subsidiaries pursuant to the Option Plans or future stock option plans of the Company approved by the Board of Directors of the Company or pursuant to the Employment Agreements and Exchange Agreements listed at Section 3.2(c)(iii)(B) through (G) of the Disclosure Schedule, in which event the Investor shall be able to acquire and/or solicit for the acquisition of voting securities of the Company (including Common Shares) such that the Investor's total ownership of the Company is equal to the sum of (1) the number of Common Shares equal to twenty-three percent (23%) of the outstanding capital stock of the Company (including the Common Shares underlying the Warrant) PLUS (2) the number of Common Shares equal to the excess of twenty-four percent (24%) over the percentage of ownership of the outstanding capital stock of the Company (including the Common Shares underlying the Warrant) owned by the stockholders of the Company who are parties to the Voting Agreement (or any transferees of such stockholders who have agreed to the terms of the Voting Agreement) following the issuance of the voting securities referenced at the beginning of this clause (D). In the event that the Investor acquires shares pursuant to the provisions of clause (C) or (D)(2) in the preceding paragraph, the Investor agrees that, with respect to any vote of the shareholders of the Company other than a vote involving the election, replacement, removal or disqualification of any person nominated by the Investor pursuant to Section 4.5(e) hereof, it will vote the excess number of (X) Common Shares beneficially owned by the Investor OVER (Y) the number of Common Shares representing the percentage of ownership of the fully diluted capital stock of the Company represented by the Purchased Securities as of the date of this Agreement (including, without limitation, the Common Shares underlying the Warrant), as if the Purchased Securities had been issued to the Investor as of the date of this Agreement, PRO RATA in accordance with the votes of the other holders of Common Shares of the Company. 5.8 RESIGNATION OF INVESTOR DIRECTORS. The Investor agrees that if at any time as a result of a sale, transfer or otherwise it beneficially owns capital stock of the Company in an amount that would cause its number of director nominees to be reduced pursuant to Section 4.5(e), then the Investor shall cause its current designee or designees to the Board of Directors, as the case may be, to resign from the Board of Directors effective immediately as of such date in proportion to the amount of directors the Investor would be entitled to designate for nomination pursuant to Section 4.5(e). As a condition to the Company's obligation to nominate 29 and recommend Investor's designees under Section 4.5(e), each such designee shall agree to resign as set forth in this Section 5.8 under the circumstances set forth herein. ARTICLE 6 CONDITIONS PRECEDENT 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE CLOSING. The respective obligation of each party to effect the transactions to be effected by it at the Closing, shall be subject to the satisfaction, or waiver, on or prior to the Closing Date of the following conditions: (a) HSR ACT. The waiting period (and any extension thereof) applicable to the HSR Act shall have been terminated or shall have expired. (b) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of any of the Contemplated Transactions shall be in effect; PROVIDED, HOWEVER, that the parties hereto shall use their Best Efforts to have any such injunction, order, restraint or prohibition vacated. (c) COMPANY STOCKHOLDER APPROVAL. The Company Stockholder Approval shall have been obtained. (d) NASDAQ LISTING. The Company shall not have received any notice (which notice has not subsequently been withdrawn) that the Common Shares will not be eligible or approved for listing or quotation on Nasdaq as a result of the Contemplated Transactions. 6.2 CONDITIONS TO OBLIGATION OF THE INVESTOR. The obligation of the Investor to effect the transactions to be effected by it at the Closing, shall be subject to the satisfaction, or waiver, on or prior to the Closing Date of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company set forth in this Agreement, shall be true and correct in all respects, in each case as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date; PROVIDED that for purposes of determining the satisfaction of the foregoing, such representations and warranties shall be deemed true and correct if the failure or failures of such representations and warranties to be so true and correct (excluding the effect of any qualification set forth therein relating to "materiality", "Material Adverse Change" or "Material Adverse Effect") have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect or a material effect on the ability of the Company to consummate the Contemplated Transactions or to perform its obligations hereunder. The Investor shall have received a certificate signed on behalf of the Company by 30 the chief executive officer and the chief financial officer of the Company, dated as of the date of the Closing Date, to such effect. (b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have performed the obligations required to be performed by it under this Agreement at or prior to the Closing Date in all material respects, and the Investor shall have received a certificate signed on behalf of the Company by the chief executive officer and the chief financial officer of the Company, dated as of the date of the Closing Date, to such effect. (c) CONSENTS, ETC. The Investor has received evidence, in form and substance reasonably satisfactory to it, that such licenses, permits, consents, approvals, authorizations, qualifications and orders of Governmental Entities and other third parties as are necessary in connection with the transactions contemplated hereby have been obtained. (d) NO MATERIAL ADVERSE CHANGE From the date of this Agreement to the Closing Date, there shall not have occurred any Material Adverse Change with respect to the Company. (e) DELIVERY OF CERTAIN DOCUMENTS. The Company shall have delivered to the Investor (i) a certificate dated as of the Closing Date, executed by an officer of the Company, attaching true and correct copies of the Certificate of Incorporation and bylaws of the Company and the resolutions of its Board of Directors and stockholders made in connection with this Agreement and the Contemplated Transactions, and certifying as to the genuineness and authenticity of the signature, and the accuracy of the title, of each officer of the Company executing this Agreement or any document delivered at the Closing, and (ii) the legal opinion of Choate, Hall & Stewart, or such other counsel as is reasonably acceptable to the Investor, dated as of the Closing Date, as set forth in Exhibit F hereto. (f) DELIVERY AND PERFORMANCE OF AGREEMENTS. The Registration Rights Agreement, the Management Agreement and the Warrant shall have been duly executed and delivered by the Company. (g) CERTIFICATE OF DESIGNATION. The Company shall have filed with the Secretary of State of the State of Delaware the Certificate of Designation and such instrument shall have become effective. (h) BOARD ELECTION. The Board of Directors of the Company shall have been expanded to seven (7) members and the Investor's three (3) nominees to the Board of Directors shall have been elected, effective following the Closing. 6.3 CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the Company to effect the transactions to be effected by it at the Closing, shall be subject to the satisfaction, or waiver, on or prior to the Closing Date of the following conditions: 31 (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Investor set forth in this Agreement shall be true and correct in all respects, in each case as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date; PROVIDED that for purposes of determining the satisfaction of the foregoing, such representations and warranties shall be deemed true and correct if the failure or failures of such representations and warranties to be so true and correct (excluding the effect of any qualification set forth therein relating to "materiality", "material adverse change" or "material adverse effect") have not had and would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the ability of the Investor to consummate the Contemplated Transactions or to perform its obligations hereunder. The Company shall have received a certificate signed on behalf of the Investor by the chief executive officer and the chief financial officer of the general partner of the Investor, dated as of the date of the Closing Date, to such effect. (b) PERFORMANCE OF OBLIGATIONS OF THE INVESTOR. The Investor shall have performed the obligations required to be performed by it under this Agreement at or prior to the Closing Date in all material respects, and the Company shall have received a certificate signed on behalf of the Investor by the chief executive officer and the chief financial officer of the general partner of the Investor, dated as of the date of the Closing Date, to such effect. (c) DELIVERY OF CERTAIN DOCUMENTS. The Investor shall have delivered to the Company a certificate dated as of the Closing Date, executed by a general partner of the Investor, attaching true and correct copies of the Certificate of Limited Partnership of the Investor and the resolutions of its partners made in connection with this Agreement and the Contemplated Transactions, and certifying as to the genuineness and authenticity of the signature, and the accuracy of the title, of the general partner of the Investor executing this Agreement or any document delivered at the Closing. (d) DELIVERY AND PERFORMANCE OF AGREEMENTS. The Registration Rights Agreement shall have been duly executed and delivered by the Investor, the Management Agreement shall have been duly executed and delivered by the Yucaipa Companies, and the Purchase Price shall have been delivered to the Company pursuant to Section 2.3(c)(i). ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER 7.1 TERMINATION. Prior to the Closing, this Agreement may be terminated and the Contemplated Transactions may be abandoned: (i) at any time by mutual written consent of the Company and the Investor; (ii) by either the Company or the Investor if the Closing shall not 32 have occurred prior to the earlier of (A) ten (10) days following notice to the non-terminating party of the prior fulfillment or waiver of all conditions set forth in Article 6 hereof and (B) February 15, 2000, other than due to the failure of the party seeking to terminate this Agreement to perform its obligations under this Agreement required to be performed at or prior to the Closing; (iii) by either the Company or the Investor if consummation of the Contemplated Transactions would violate any nonappealable final order, decree or judgment of any Governmental Entity having competent jurisdiction; or (iv) by either party if, after 10 days notice to the other party, any condition to the terminating party's obligations to consummate the transactions contemplated by this Agreement to take place at the Closing is incapable of being satisfied prior to February 15, 2000; (v) by either the Company or the Investor if the Company Stockholder Approval is not received (or is voted down) prior to February 15, 2000; (vi) by the Company as provided in Section 4.3(b); or (vii) by either the Company or the Investor if a material breach of any provision of this Agreement has been committed by the other party, and such breach has not been cured or waived within ten (10) days of the delivery of written notice to the breaching party thereof; PROVIDED, THAT, no party may terminate this Agreement pursuant to clauses (ii), (iii), (iv), (v), (vi) or (vii) above, if such party is, at the time of any such attempted termination, in material breach of any term hereof. 7.2 EFFECT OF TERMINATION. (a) If there has been a termination pursuant to Section 7.1, then this Agreement shall be deemed void and of no further force and effect, and all further obligations of the parties hereunder shall terminate, except that the obligations set forth in Section 9.5 shall survive. Nothing contained in this Section 7.2 (with the exception of the last sentence of Section 7.2(b)), however, shall (i) relieve any party for any breach of the representations, warranties, covenants or agreements set forth in this Agreement prior to any such termination or the corresponding liability for indemnification arising therefrom pursuant to Article 8, or (ii) limit or restrict the availability of specific performance or other injunctive or equitable relief to the extent that specific performance or such other relief would otherwise be available to a party hereunder. (b) Notwithstanding the foregoing provisions of this Section 7.2, in the event of a termination of this Agreement: (i) by the Investor pursuant to Sections 7.1(iv) or 33 (vii) because of the breach or non-performance by the Company of any of its covenants or obligations set forth in Section 5.1 and prior to, simultaneously with or within twelve (12) months after such termination the Company enters into a Company Acquisition Agreement (substituting 23% for 10% in the definition of the term "Company Takeover Proposal" contained in the definition of Company Acquisition Agreement); (ii) after (A) a bona fide Company Takeover Proposal has been proposed by a third party and such Company Takeover Proposal has not been withdrawn prior to the Company Stockholders Meeting and the Company Stockholder Approval is not obtained at the Company Stockholders Meeting and (B) prior to, simultaneously with or within twelve (12) months after such termination the Company enters into a Company Acquisition Agreement (substituting 23% for 10% in the definition of the term "Company Takeover Proposal" contained in the definition of Company Acquisition Agreement); or (iii) after (A) the Company fails to comply with Section 4.3 and (B) a Company Takeover Proposal has been proposed by a third party; then the Company will immediately pay to the Investor a fee of Three Million Five Hundred Thousand Dollars ($3,500,000), in addition to the amount due to the Investor under Section 9.5, by wire transfer of immediately available funds to accounts designated by the Investor; provided, however, that any such fee otherwise payable pursuant to this Section 7.2 or Section 4.3(b) and the amount otherwise due under Section 9.5 shall not be payable, and any attempted termination of this Agreement by the Investor shall not be effective, if the Investor is, at the time of such attempted termination, in material breach of any term hereof. Upon the Investor's receipt from the Company of such $3,500,000 fee pursuant to this Section 7.2 or Section 4.3(b), plus the amount due under Section 9.5, this Agreement shall be deemed void and the Investor shall have no further claims against the Company for any breach of any provision of this Agreement, and all further obligations of the parties hereunder shall terminate. 7.3 AMENDMENT. This Agreement may be amended by mutual agreement of the parties at any time, but only pursuant to an instrument in writing duly executed on behalf of each of the Company and the Investor. 7.4 EXTENSION; WAIVER. At any time prior to the Closing Date, the parties may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties contained in this Agreement or in any document delivered pursuant to this Agreement or (c) waive compliance with any of the agreements or conditions contained in this Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing duly executed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of such rights. ARTICLE 8 INDEMNIFICATION; REMEDIES 8.1 SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY KNOWLEDGE. All 34 representations and warranties in this Agreement, the Disclosure Schedule and in any certificate or document delivered pursuant to this Agreement shall survive for a period of one (1) year following the Closing Date. This Section 8.1 shall not limit any covenant, restriction, obligation or other agreement of the parties set forth or contemplated herein, each of which shall survive for its respective term set forth in this Agreement. The right to indemnification, payment of Damages or other remedy based on such representations, warranties, covenants, restrictions, obligations and agreements will not be affected by any investigation conducted with respect to, or any Knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, payment of Damages, or other remedy based on such representations, warranties, covenants, and obligations. 8.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY THE COMPANY. The Company will indemnify and hold harmless the Investor and its Representatives, partners, controlling persons, and Affiliates and each of their respective Representatives (collectively, the "Company Indemnified Persons") from and against, and will pay to the Company Indemnified Persons the amount of, any and all losses, liabilities, claims, damages, or expenses (including costs of investigation, defense, litigation and reasonable attorneys' fees), whether or not involving a third-party claim (collectively, "Damages"), arising, directly or indirectly, from or in connection with: (a) any breach of any representation or warranty made by the Company in this Agreement, the Disclosure Schedule or any other certificate or document delivered by the Company pursuant to this Agreement, provided that notice of such breach is given to the Company pursuant to Section 8.5 or 8.6, as applicable, on or prior to the first anniversary of the Closing Date; or (b) any breach by the Company of any covenant, restriction, obligation or agreement of the Company in this Agreement. 8.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY THE INVESTOR. The Investor will indemnify and hold harmless the Company, its respective Representatives, and Affiliates and each of their respective Representatives (collectively, the "Investor Indemnified Persons"), and will pay to the Company the amount of any Damages arising, directly or indirectly, from or in connection with: (a) any breach of any representation or warranty made by the Investor in this Agreement or in any certificate or document delivered by the Investor pursuant to this Agreement, provided that notice of such breach is given to the Investor pursuant to Section 8.5 or 8.6, as applicable, within three months of the expiration of the survivability of the 35 representation or warranty; or (b) any breach by the Investor of any covenant, restriction, obligation or agreement of the Investor in this Agreement. 8.4 LIMITATION ON AMOUNT. (a) The Company will have no liability (for indemnification or otherwise) with respect to the matters described in clause (a) or clause (b) of Section 8.2 until the total of all Damages attributable to the Company with respect to such matters taken as a whole exceeds $250,000, after which the amount of such Damages in excess of such initial $250,000 shall be recoverable hereunder up to a maximum recovery equal to the entire amount of the Purchase Price paid by the Investor to the Company hereunder. Notwithstanding the foregoing, this Section 8.4(a) will not apply to any breach of any of the Company's representations and warranties set forth in Section 3.2(o), and the Company will be liable for all Damages with respect to such breaches. (b) The Investor will have no liability (for indemnification or otherwise) with respect to the matters described in clause (a) or clause (b) of Section 8.3 until the total of all Damages incurred by the Company with respect to such matters taken as a whole exceeds $25,000, after which the amount of such Damages in excess of such initial $25,000 shall be recoverable hereunder up to a maximum recovery equal to $100,000. 8.5 PROCEDURE FOR INDEMNIFICATION -- THIRD PARTY CLAIMS. (a) Promptly after receipt by an Indemnified Person described in Section 8.2 or 8.3 of notice of the commencement of any Proceeding against it, including reasonable details as to the basis for such claim (to the extent within the Knowledge of the Indemnified Person), such Indemnified Person will, if a claim is to be made against an indemnifying party under such Section, give notice to the indemnifying party of the commencement of such claim, but the failure to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to any Indemnified Person, except to the extent that the indemnifying party demonstrates that the defense of such action is prejudiced by the Indemnified Person's failure to give such notice. (b) If any Proceeding referred to in Section 8.5(a) is brought against an Indemnified Person and it gives notice to the indemnifying party of the commencement of such Proceeding, the indemnifying party will be entitled to participate in such Proceeding and, to the extent that it wishes (unless the indemnifying party fails to provide reasonable assurance to the Indemnified Person of its financial capacity to defend such Proceeding and provide indemnification with respect to such Proceeding), to assume the defense of such Proceeding with counsel reasonably satisfactory to the Indemnified Person and, after notice from the indemnifying party to the Indemnified Person of its election to assume the defense of such Proceeding, the indemnifying party will not, as long as it diligently conducts such defense, be liable to the Indemnified 36 Person under this Article 8 for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, in each case subsequently incurred by the Indemnified Person in connection with the defense of such Proceeding, other than reasonable costs of investigation; PROVIDED that if the indemnifying party is also a party to such Proceeding and, under applicable standards of professional conduct, joint representation of the Indemnified Person and the indemnifying party would be inappropriate, then the Indemnified Person shall be entitled to retain separate counsel whose fees and expenses shall be paid by the indemnifying party. If the indemnifying party assumes the defense of a Proceeding, (i) no compromise or settlement of such claims may be effected by the indemnifying party without the Indemnified Person's consent not to be unreasonably withheld unless (A) there is no finding or admission of any violation of Legal Requirements or any violation of the rights of any Person and no effect on any other claims that may be made against the Indemnified Person, and (B) the sole relief provided is monetary damages that are paid in full by the indemnifying party; and (ii) the Indemnified Person will have no liability with respect to any compromise or settlement of such claims effected without its consent. If notice is given to an indemnifying party of the commencement of any Proceeding and the indemnifying party does not, within ten (10) days after the Indemnified Person's notice is given, give notice to the Indemnified Person of its election to assume the defense of such Proceeding, the indemnifying party will be bound by any determination made in such Proceeding or any compromise or settlement effected by the Indemnified Person. The Indemnified Person shall provide its reasonable cooperation with the indemnifying party in connection with the defense of a proceeding assumed by indemnifying party hereunder, including the provision of information reasonably requested by the indemnifying party. (c) The Company and the Investor hereby consent to the non-exclusive jurisdiction of any court in which a Proceeding is brought against any Indemnified Person for purposes of any claim that an Indemnified Person may have under this Agreement with respect to such Proceeding or the matters alleged therein, and agree that process may be served on the Company and the Investor with respect to such a claim anywhere in the world. 8.6 PROCEDURE FOR INDEMNIFICATION -- OTHER CLAIMS. A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the party from whom indemnification is sought. 8.7 REMEDIES EXCLUSIVE. The remedies provided in this Section 8 shall be exclusive remedies of the parties hereto after the Closing in connection with any breach of a representation or warranty, non-performance, partial or total, of any covenant or agreement contained herein, except with respect to any breach or non-performance of any post-Closing covenant or obligation including, without limitation, those set forth in Section 4.5 or Section 5.7, or in the case of fraud, with respect to which the remedies shall not be limited to those set forth herein. 37 ARTICLE 9 GENERAL PROVISIONS 9.1 NOTICES. All notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be deemed given when received if delivered personally, on the next Business Day if sent by overnight courier for next Business Day delivery (providing proof of delivery), when confirmation is received, if sent by facsimile or in 5 Business Days if sent by U.S. registered or certified mail, postage prepaid (return receipt requested) to the other parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Investor, to: The Yucaipa Companies 10000 Santa Monica Blvd., 5th Floor Los Angeles, California 90067 Attn: Robert Bermingham Facsimile: 310-789-7201 with a copy to: Munger, Tolles & Olson LLP 355 South Grand Avenue, 35th Floor Los Angeles, California 90071-1560 Attn: Judith Kitano Facsimile: 213-687-3702 (b) if to the Company, to: Cyrk, Inc. 3 Pond Road Gloucester, Massachusetts 01930 Attn: President Facsimile: 978-281-2088 with a copy to: Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 38 Attn: Richard D. Pritz Facsimile: 212-259-6333 and Choate, Hall & Stewart Exchange Place 53 State Street Boston, Massachusetts 02109 Attn: Cameron Read Facsimile: 617-248-4000 9.2 INTERPRETATION. A reference made in this Agreement to an Article, Section, Exhibit or Schedule, shall be to an Article or Section of, or an Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." 9.3 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. 9.4 ENTIRE AGREEMENT; NO THIRDPARTY BENEFICIARIES. This Agreement, the Registration Rights Agreement and the Confidentiality Agreement together constitute the entire agreement between the parties with respect to the subject hereof and thereof, and supersede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter of such agreements. Except as explicitly provided in Sections 8.2 and 8.3, this Agreement is not intended to confer upon any Person other than the parties any rights or remedies. 9.5 COSTS AND EXPENSES. All costs and expenses in connection with the negotiation, preparation, execution, delivery and performance of this Agreement and the Contemplated Transactions (including, irrespective of whether the Closing shall have occurred, costs incurred by the Investor and its Affiliates in connection with an investment in (or acquisition of) the Company, which include, without limitation, all attorney fees and other consultant and advisor fees, including all fees and expenses arising from any due diligence investigation and fees of brokers, investment bankers or financial advisors) shall be borne by the Company, and the Company shall reimburse the Investor for all such costs and expenses on the earlier to occur of: (i) the Closing, (ii) the third Business Day following the Company Stockholders Meeting if the Company Stockholder Approval is not received, (iii) immediately following the termination of 39 the Agreement pursuant to Section 4.3(b) or under circumstances in which a fee is payable pursuant to Section 7.2(b), and (iv) the third Business Day following the termination of the Agreement for any other reason, other than for material breach of any term hereof by the Investor, provided, in the event of (i) above the Company's reimbursement obligation hereunder shall be limited to Two Million Two Hundred Thousand Dollars ($2,200,000) in the aggregate; provided, further, in the event of (ii) or (iv) above the Company's reimbursement obligation hereunder shall be limited to One Million Seven Hundred Thousand Dollars ($1,700,000) in the aggregate; and provided, further, in the event of (iii) above, the Company's reimbursement obligation hereunder shall be limited to One Million Two Hundred Thousand Dollars ($1,200,000) in the aggregate. 9.6 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 9.7 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise, by any of the parties without the prior written consent of the other parties. Any assignment in violation of the preceding sentence shall be void. Subject to the preceding two sentences, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. 9.8 ENFORCEMENT. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the State of Delaware or of the United States located in the State of Delaware in the event any dispute arises out of this Agreement or any of the Contemplated Transactions, and each party agrees (a) it will not attempt to deny or defeat personal jurisdiction or venue in any such court by motion or other request for leave from any such court and (b) it will not bring any action relating to this Agreement or any of the Contemplated Transactions in any court other than any such court. 9.9 SEVERABILITY. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law but if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or portion of any provision in such jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein, so long as the economic and legal substance of the Contemplated Transactions are not affected in a manner materially adverse to any party hereto. 9.10 FURTHER ASSURANCES. The parties agree (i) to furnish upon request to each other such further information, (ii) to execute and deliver to each other such other documents, and 40 (iii) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement. 9.11 CONSTRUCTION. In entering into this Agreement, each party represents and warrants that such party does so freely and voluntarily, after having had the opportunity to meet and confer with such party's respective attorneys regarding the contents and legal effect of this Agreement. Each party represents and warrants that such party has full power and authority to enter into and execute this Agreement. Every covenant, term, and provision of this Agreement shall be construed simply according to its fair meaning and not strictly for or against any party. In the event any claim is made by any party relating to any conflict, omission, or ambiguity in this Agreement, no presumption or burden of proof or persuasion shall be implied by virtue of the fact that this Agreement was prepared by or at the request of a particular party or such party's counsel. 41 IN WITNESS WHEREOF, the Investor and the Company have caused this Agreement to be signed by their respective general partner or officer hereunto duly authorized, all as of the date first written above. OVERSEAS TOYS, L.P. By: ---------------------------- Its: ---------------------------- CYRK, INC. By: ---------------------------- Its: ---------------------------- 42 EXHIBIT A DEFINITIONS "AFFILIATE" means, with respect to any Person, another Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first Person. "AGREEMENT" or "SECURITIES PURCHASE AGREEMENT" means this Securities Purchase Agreement, including all Exhibits and Disclosure Schedules attached hereto, as amended from time to time in accordance with the provisions of Section 7.3. Words such as "herein," "hereinafter," "hereof," "hereto" and "hereunder" refer to this Agreement as a whole, unless the context otherwise requires. "BEAR STEARNS OPINION" has the meaning set forth in Section 3.2(p). "BEST EFFORTS" means the commercially reasonable efforts that a prudent Person desirous of achieving a result would use in good faith in similar circumstances to ensure that such result is achieved as expeditiously as can reasonably be expected. "BUSINESS DAY" means any day other than a Saturday, Sunday or a day which is a legal holiday in the State of Delaware. "CERTIFICATE OF DESIGNATION" means the Certificate of Designation for the Series A Preferred Stock attached hereto as Exhibit B. "CLOSING" has the meaning set forth in Section 2.3. "CLOSING DATE" has the meaning set forth in Section 2.3. "CODE" means the Internal Revenue Code of 1986, as amended, or any successor law, and regulations issued by the IRS pursuant to the Internal Revenue Code or any successor law. "COMMON SHARES" has the meaning set forth in Section 3.2(c). "COMPANY" has the meaning set forth in the Preamble. "COMPANY ACQUISITION AGREEMENT" means any letter of intent, agreement in principle, acquisition agreement or other similar agreement related to any Company Takeover Proposal. "COMPANY SEC FINANCIAL STATEMENTS" has the meaning set forth in Section 3.2(e) "COMPANY SEC DOCUMENTS" has the meaning set forth in Section 3.2(e) 43 "COMPANY STOCK OPTIONS" means all outstanding officer, employee, director or consultant stock options to purchase shares of Common Stock granted under the Option Plans. "COMPANY STOCKHOLDER APPROVAL" has the meaning set forth in Section 5.1(b). "COMPANY STOCKHOLDERS MEETING" has the meaning set forth in Section 5.1(b). "COMPANY SUPERIOR PROPOSAL" means any Company Takeover Proposal (substituting 25% for 10% in the definition thereof), on terms which the Board of Directors of the Company or the Special Committee determines in its good faith judgment, following consultation with its outside counsel and its financial advisor, taking into account all legal, financial, regulatory and other aspects of such proposal, to be more favorable to the Company's stockholders than the Contemplated Transactions and for which financing, to the extent required, is then committed or which, in the good faith judgment of the Board of Directors of the Company or the Special Committee, following consultation with its outside counsel and its financial advisor, is reasonably capable of being obtained by such third party. "COMPANY TAKEOVER PROPOSAL" means, other than the transactions contemplated by this Agreement, any inquiry, proposal or offer from any Person unaffiliated with the Investor relating to (i) any direct or indirect acquisition or purchase (including by merger, consolidation, business combination, recapitalization, reorganization, liquidation, dissolution or similar transaction) from the Company or any of its Subsidiaries of assets, equity securities, or any other interest of or in the Company or any of its Subsidiaries with a fair market value, in the aggregate, of 10% or more of the total market capitalization of the Company (i.e., the average of the Closing Prices (as defined in the Certificate of Designation) of the Common Shares for the twenty (20) consecutive Trading Days (as defined in the Certificate of Designation) ending on the day before the Company Takeover Proposal is made MULTIPLIED by the number of outstanding Common Shares as of the most recent annual or quarterly SEC filing of the Company), (ii) any tender offer or exchange offer that if consummated would result in any person beneficially owning 10% or more of any class of any equity securities of the Company (other than the Series A Preferred Shares), or (iii) any merger, consolidation, business combination, recapitalization, reorganization, or similar transaction involving the Company in which the holders of voting stock of the Company immediately prior to such transaction do not own at least 90% of the voting stock of the company surviving such transaction. "CONFIDENTIALITY AGREEMENT" means that certain letter agreement dated as of January 25, 1999 by and between the Company and the Investor. "CONTEMPLATED TRANSACTIONS" means all of the transactions contemplated by this Agreement, including, without limitation, (i) the sale by the Company of the Series A Preferred Shares and the Warrant to the Investor, (ii) the execution, delivery, and performance of the Registration Rights Agreement, the Management Agreement, and the Voting Agreement, (iii) the performance by the Investor and the Company of their respective 44 covenants and obligations under this Agreement, and (iv) the Investor's acquisition and ownership of the Preferred Shares and the Warrant. "DAMAGES" has the meaning set forth in Section 8.2. "DGCL" means the General Corporation Law of the State of Delaware, as amended. "DISCLOSURE SCHEDULE" has the meaning set forth in Section 3.1. "EMPLOYEE AGREEMENTS AND PLANS" has the meaning set forth in Section 3.2(i). "EMPLOYMENT AGREEMENTS" has the meaning set forth in the Recitals. "ENVIRONMENTAL LAWS" has the meaning set forth in Section 3.2(l). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor law, and regulations and rules issued pursuant to that Act or any successor law. "ERISA AFFILIATE" has the meaning set forth in Section 3.2(i). "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any successor law, and regulations and rules issued pursuant to that Act or any successor law. "GAAP" means generally accepted accounting principles as used in the United States. "GOVERNMENTAL ENTIT(Y/IES)" has the meaning set forth in Section 3.2(d). "HSR ACT" has the meaning set forth in Section 3.2(d). "INDEMNIFIED PERSONS" means the Investor Indemnified Persons and the Company Indemnified Persons, each an "Indemnified Person". "INTELLECTUAL PROPERTY" has the meaning set forth in Section 3.2(n). "INVESTOR" has the meaning set forth in the Preamble. "INVESTOR INDEMNIFIED PERSONS" has the meaning set forth in Section 8.3. "IRS" means the United States Internal Revenue Service or any successor agency, and, to the extent relevant, the United States Department of the Treasury. "KNOWLEDGE" means, with respect to an individual, that such individual will be deemed to have "Knowledge" of a particular fact or other matter if (a) such individual is actually aware 45 of such fact or other matter, or (b) a prudent individual would be expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonably comprehensive investigation concerning the existence of such fact or other matter. A Person (other than an individual) will be deemed to have "Knowledge" of a particular fact or other matter if any individual who is serving, or who has at any time served, as a director or executive officer of such Person (or in any similar capacity) has, or at any time had, Knowledge of such fact or other matter. "LIENS" has the meaning set forth in Section 3.2(b). "MANAGEMENT AGREEMENT" has the meaning set forth in the Recitals. "MATERIAL ADVERSE CHANGE" or "MATERIAL ADVERSE EFFECT" means any change or effect that either individually or in the aggregate with all other such changes or effects is, or would reasonably be expected to be, materially adverse to the business, assets, financial condition or results of operations of the Company and its Subsidiaries taken as a whole (except for changes affecting the economy generally or resulting from the announcement or execution of this Agreement or the consummation of the Contemplated Transactions); "MATERIAL CONTRACTS" has the meaning set forth in Section 3.2(d). "NASD" has the meaning set forth in Section 3.2(r). "NASDAQ" has the meaning set forth in Section 3.2(r). "OPTION PLANS" mean the Company's 1993 Omnibus Stock Plan, 1997 Acquisition Stock Plan, or 1993 Employee Stock Purchase Plan, each an "Option Plan." "ORGANIZATIONAL DOCUMENTS" means (i) the articles or certificate of incorporation and the bylaws of a corporation, (ii) the partnership agreement and any statement of partnership of a general partnership, (iii) the limited partnership agreement and the certificate of limited partnership of a limited partnership, (iv) any charter or similar document adopted or filed in connection with the creation, formation, or organization of a Person, and (v) any amendment to any of the foregoing (including any pending or proposed amendments). "PERMITTED LIENS" means (i) liens, charges and encumbrances for any taxes, assessments or other governmental charges for sums not yet due; (ii) liens granted under the Company's or any of its Subsidiaries' senior secured lending facilities; (iii) purchase money liens, and (iv) such other liens, restrictions and other encumbrances, if any, which do not materially detract from the value of, or materially interfere with, the present use of the Company of the property subject thereof or affected thereby. "PERSON" means an individual, or a corporation, partnership, joint venture, association, trust, unincorporated organization or other entity. 46 "PREFERRED SHARES" has the meaning set forth in Section 3.2(c). "PROCEEDING" means any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Entity or arbitrator. "PROXY STATEMENT" has the meaning set forth in Section 5.1(a). "PURCHASE PRICE" has the meaning set forth in Section 2.2. "PURCHASED SECURITIES" has the meaning set forth in Section 2.1. "RECENT COMPANY SEC DOCUMENTS" has the meaning set forth in Section 3.2(e). "REGISTRATION RIGHTS AGREEMENT" has the meaning set forth in the Recitals. "REPRESENTATIVE" means with respect to a particular Person, any authorized director, officer, employee, agent, consultant, advisor, or other authorized representative of such Person, including legal counsel, accountants, and financial advisors. "SEC" has the meaning set forth in Section 3.2(d). "SECURITIES ACT" means the Securities Act of 1933, as amended, or any successor law, and regulations and rules issued pursuant to that Act or any successor law. "SERIES A PREFERRED SHARES" has the meaning set forth in Section 2.1. "SERIES A PREFERRED STOCK" has the meaning set forth in the Recitals. "SOFTWARE" has the meaning set forth in Section 3.2(n). "SPECIAL COMMITTEE" has the meaning set forth in Section 3.2(q). "STOCK PLANS" means the Option Plans, the warrants set forth in Section 3.2(c) of the Disclosure Schedule and any other plan, program, agreement or arrangement providing for the issuance or grant of any interest in respect of the capital stock of the Company or any Subsidiary of the Company. "SUBSIDIARY" of any Person means another Person, an amount of the voting securities, other voting ownership or voting partnership interests of which is sufficient to elect at least a majority of its board of directors or other governing body or, if there are no such voting interests, 50% or more of the equity interest of which, is owned directly or indirectly by such 47 first Person. "TAX RETURN(S)" means any return(s), report(s) or statement(s) required to be filed with any Governmental Entity with respect to any Tax(es). "TAX(ES)" means any and all tax(es) of any kind, including, without limitation, those on or measured by or referred to as income, gross receipts, sales, use, ad valorem, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, value added, property or windfall profits taxes, customs, duties or similar fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any Governmental Entity. "THREATENED" means a claim, Proceeding, dispute, action, or other matter will be deemed to have been "Threatened" if any demand or statement has been made (orally or in writing) or any notice has been given (orally or in writing). "UPDATES" has the meaning set forth in Section 4.1(e). "VOTING AGREEMENT" means the Voting Agreement, entered into as of the date hereof and as amended from time to time pursuant to the provisions of Section 4.2 thereof, by and among the Investor and the stockholders of the Company listed on the signature page thereof or who subsequently become a party thereto. "WARRANT" has the meaning set forth in the Recitals. EX-3.1 3 FORM OF CERTIFICATE OF DESIGNATION 1 Exhibit 3.1 CERTIFICATE OF DESIGNATION OF VOTING POWER, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS OF SERIES A SENIOR CUMULATIVE PARTICIPATING CONVERTIBLE PREFERRED STOCK OF C, INC. ------------------------ PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE ------------------------ C, Inc., a Delaware corporation (the "Corporation"), certifies that pursuant to the authority contained in Article IV of its Certificate of Incorporation (the "Certificate of Incorporation"), and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation at a meeting duly called and held on ________, 1999 duly approved and adopted the following resolution which resolution remains in full force and effect on the date hereof: RESOLVED, that pursuant to the authority vested in the Board of Directors by the Certificate of Incorporation, the Board of Directors does hereby designate, create, authorize and provide for the issue of a series preferred stock having a par value of $.01 per share, with a liquidation preference of $1,000 per share (the "Base Liquidation Preference") which shall be designated as Series A Senior Cumulative Participating Convertible Preferred Stock (the "Preferred Stock") 1 2 consisting of 40,000 shares, of which 25,000 shares shall be designated Series A1 Senior Cumulative Participating Convertible Preferred Stock (the "Series A1 Stock") and 15,000 shares shall be designated Series A2 Senior Cumulative Participating Convertible Preferred Stock (the "Series A2 Stock"), plus, in each case, such additional shares of Preferred Stock as may be issued pursuant to paragraph 2 hereof, having the following voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof as follows: 1. RANKING. The Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Corporation, rank (i) senior to all classes of Common Stock of the Corporation and to each other class of capital stock or series of preferred stock established after ______, ___ by the Board of Directors the terms of which do not expressly provide that it ranks senior to or on a parity with the Preferred Stock as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Corporation (collectively referred to with the Common Stock of the Corporation as "Junior Securities"); (ii) on a parity with any additional shares of Preferred Stock issued by the Corporation in the future and any other class of capital stock or series of preferred stock issued by the Corporation established after _______,____, by the Board of Directors, the terms of which expressly provide that such class or series will rank on a parity with the Preferred Stock as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Corporation (collectively referred to as "Parity Securities"); and (iii) junior to each class of capital stock or series of preferred stock issued by the Corporation established after , by the Board of Directors the terms of which expressly provide that such class or series will rank senior to the Preferred Stock as to dividend distributions and distributions upon liquidation, winding-up and dissolution of the Corporation (collectively referred to as "Senior Securities"). 2. DIVIDENDS. (i) The holders of shares of the Preferred Stock shall be entitled to receive, when, as and if dividends are declared by the Board of Directors out of funds of the Corporation legally available therefor, cumulative dividends from the date of issuance of the Preferred Stock accruing at the rate per annum of 4% of the Base Liquidation Preference per share, payable quarterly in arrears on each ________, ________, ________ and ________, commencing on ________, ____ (each a "Dividend Payment Date"), to the holders of record as of the next preceding ________, ________, ________ and ________, (each, a "Record Date") whether or 2 3 not such Record Date is a Business Day. If any Dividend Payment Date is not a Business Day, such payment shall be made on the next succeeding Business Day. Dividends will be payable, at the option of the Corporation, (A) in cash, (B) by delivery of shares of Preferred Stock of the same designation as the shares on which the dividend is paid or (C) through any combination of the foregoing. In addition, if the Corporation declares or pays any cash dividends on the Common Stock, the Corporation shall also declare and pay to the holders of the Preferred Stock at the same time that it declares and pays such dividends, the dividends which would have been declared and paid with respect to the Common Stock issuable upon conversion of the Preferred Stock had all of the outstanding Preferred Stock been converted immediately prior to the record date for such dividend. (ii) Dividends on the Preferred Stock shall accrue whether or not the Corporation has earnings or profits, whether or not there are funds legally available for the payment of such dividends and whether or not dividends are declared. Dividends will accumulate to the extent they are not paid on the Dividend Payment Date for the period to which they relate, compounded quarterly. (iii) No dividend whatsoever shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Preferred Stock with respect to any dividend period unless all dividends for all preceding dividend periods have been declared and paid, or declared and a sufficient sum set apart for the payment of such dividend, upon all outstanding shares of Preferred Stock. Unless full cumulative dividends on all outstanding shares of Preferred Stock for all past dividend periods shall have been declared and paid, or declared and a sufficient sum for the payment thereof set apart, then: (a) no dividend (other than a divided payable solely in shares of any Junior Securities) shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any shares of Junior Securities or Parity Securities; (b) no other distribution shall be declared or made upon, or any sum set apart for the payment of any distribution upon, any shares of Junior Securities or Parity Securities, other than a distribution consisting solely of Junior Securities; (c) no shares of Junior Securities or Parity Securities shall be purchased, redeemed or otherwise acquired or retired for value (excluding an exchange for shares of other Junior Securities or Parity Securities) by the Corporation or any of its subsidiaries; and (d) no monies shall be paid into or set apart or made available for a sinking or other like fund for the purchase, redemption or other acquisition or retirement for value of any shares of Junior Securities or Parity Securities by the Corporation or any of its subsidiaries. Holders of the Preferred Stock will not be entitled to any dividends, whether payable in cash, property or stock, in excess of the full cumulative dividends as herein described. 3 4 3. CONVERSION RIGHTS. (i) A holder of shares of Preferred Stock may convert such shares at any time, unless previously redeemed, at the option of the holder thereof into shares Common Stock of the Corporation. For the purposes of conversion, each share of Preferred Stock shall be valued at the Base Liquidation Preference plus accrued and unpaid dividends, which shall be divided by the Conversion Price in effect on the Conversion Date to determine the number of shares of Common Stock issuable upon conversion, except that the right to convert shares of Preferred Stock called for redemption shall terminate at the close of business on the Business Day preceding the Redemption Date and shall be lost if not exercised prior to that time, unless the Corporation shall default in payment of the redemption price contemplated by Section 5(i) or 5(ii). Immediately following such conversion, the rights of the holders of converted Preferred Stock shall cease and the persons entitled to receive the Common Stock upon the conversion of Preferred Stock shall be treated for all purposes as having become the owners of such Common Stock. (ii) To convert Preferred Stock, a holder must (A) surrender the certificate or certificates evidencing the shares of Preferred Stock to be converted, duly endorsed in a form satisfactory to the Corporation, at the office of the Corporation or transfer agent for the Preferred Stock, (B) notify the Corporation at such office that he elects to convert Preferred Stock and the number of shares he wishes to convert, (C) state in writing the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued, and (D) pay any transfer or similar tax if required pursuant to paragraph 3(iv). In the event that a holder fails to notify the Corporation of the number of shares of Preferred Stock which he wishes to convert, he shall be deemed to have elected to convert all shares represented by the certificate or certificates surrendered for conversion. The date on which the holder satisfies all those requirements is the "Conversion Date." As soon as practical following the Conversion Date, the Corporation shall deliver to the holder a certificate for the number of full shares of Common Stock issuable upon the conversion, and a new certificate representing the unconverted portion, if any, of the shares of Preferred Stock represented by the certificate or certificates surrendered for conversion. The person in whose name the Common Stock certificate is registered shall be treated as the stockholder of record on and after the Conversion Date. The holder of record of a share of Preferred Stock at the close of business on a Record Date with respect to the payment of dividends on the Preferred Stock will be entitled to receive such dividends with respect to such share of Preferred Stock on the corresponding Dividend Payment Date, notwithstanding the conversion of such share after such Record Date and prior to such Dividend Payment Date. The dividend 4 5 payment with respect to a share of Preferred Stock called for redemption on a date during the period from the close of business on any Record Date for the payment of dividends to the close of business on the Business Day immediately following the corresponding Dividend Payment Date will be payable on such Dividend Payment Date to the record holder of such share on such Record Date, notwithstanding the conversion of such share after such Record Date and prior to such Dividend Payment Date, and the holder converting such share of Preferred Stock need not include a payment of such dividend amount upon surrender of such share of Preferred Stock for conversion. If a holder of Preferred Stock converts more than one share at a time, the number of full shares of Common Stock issuable upon conversion shall be based on the total Base Liquidation Preferences plus accrued and unpaid dividends thereon of all shares of Preferred Stock converted. If the last day on which Preferred Stock may be converted is not a Business Day, Preferred Stock may be surrendered for conversion on the next succeeding Business Day. (iii) The Corporation shall not issue any fractional shares of Common Stock upon conversion of Preferred Stock. Instead the Corporation shall pay a cash adjustment based upon the Closing Price of the Common Stock on the Business Day prior to the Conversion Date. (iv) If a holder converts shares of Preferred Stock, the Corporation shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon the conversion. However, the holder shall pay any such tax that is due because the shares are issued in a name other than the holder's name. (v) The Corporation has reserved and shall continue to reserve out of its authorized but unissued Common Stock or its Common Stock held in treasury enough shares of Common Stock to permit the conversion of the Preferred Stock in full. All shares of Common Stock that may be issued upon conversion of Preferred Stock shall be fully paid and nonassessable. (vi) In case the Corporation shall pay or make a dividend or other distribution on any class of capital stock of the Corporation (other than the Preferred Stock) in Common Stock, the Conversion Price in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator of which shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, 5 6 such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination of the holders entitled to such dividends and distributions. For the purposes of this paragraph 3(vi), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation. The Corporation will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Corporation. (vii) In case the Corporation shall issue rights, options or warrants to all holders of its Common Stock entitling them to subscribe for, purchase or acquire shares of Common Stock at a price per share less than the current market price per share (determined as provided in paragraph 3(xi) below) of the Common Stock on the date fixed for the determination of stockholders entitled to receive such rights, options or warrants, the Conversion Price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such Conversion Price by a fraction the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription, purchase or acquisition would purchase at such current market price and the denominator of which shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription, purchase or acquisition, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination of the holders entitled to such rights, options or warrants. However, upon the expiration of any right, option or warrant to purchase Common Stock, the issuance of which resulted in an adjustment in the Conversion Price pursuant to this paragraph 3(vii), if any such right, option or warrant shall expire and shall not have been exercised, the Conversion Price shall be recomputed immediately upon such expiration and effective immediately upon such expiration shall be increased to the price it would have been (but reflecting any other adjustments to the Conversion Price made pursuant to the provisions of this paragraph 3 after the issuance of such rights, options or warrants) had the adjustment of the Conversion Price made upon the issuance of such rights, options or warrants been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights, options or warrants. No further adjustment shall be made upon exercise of any right, option or warrant if any adjustment shall be made upon the issuance of such security. For the purposes of this paragraph 3(vii), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation. The Corporation will not issue any rights, options or warrants in respect of shares of Common Stock held 6 7 in the treasury of the Corporation. (viii) In case the outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be reduced, and, conversely, in case the outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be increased, in each case to equal the product of the Conversion Price in effect on such date and a fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such subdivision or combination, as the case may be, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such subdivision or combination, as the case may be. Such reduction or increase, as the case may be, shall become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (ix) In case the Corporation shall, by dividend or otherwise, distribute to all holders of its Common Stock (A) evidences of its indebtedness or (B) shares of any class of capital stock, cash or other assets (including securities, but excluding (x) any rights, options or warrants referred to in paragraph 3(vii) above, (y) any dividends or distributions referred to in paragraph 3(vi) or 3(viii) above, and (z) cash dividends), then in each case, the Conversion Price in effect at the opening of business on the day following the date fixed for the determination of holders of Common Stock entitled to receive such distribution shall be adjusted by multiplying such Conversion Price by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph 3(xi) below) of the Common Stock on such date of determination (or, if earlier, on the date on which the Common Stock goes "ex-dividend" in respect of such distribution) less the then fair market value as determined by the Board of Directors (whose determination shall be conclusive and shall be described in a statement filed with the Transfer Agent) of the portion of the capital stock, cash or other assets or evidences of indebtedness so distributed (and for which an adjustment to the Conversion Price has not previously been made pursuant to the terms of this paragraph 3) applicable to one share of Common Stock, and the denominator shall be such current market price per share of the Common Stock, such adjustment to become effective immediately after the opening of business on the day following such date of determination of the holders entitled to such distribution. (ixA) In case a tender or exchange offer made by the Corporation or any 7 8 subsidiary of the Corporation for all or any portion of the Common Stock shall expire and such tender or exchange offer shall involve the payment by the Corporation or such subsidiary of consideration per share of Common Stock having a fair market value (as determined by the Board of Directors or, to the extent permitted by applicable law, a duly authorized committee thereof, whose determination shall be conclusive and described in a resolution of the Board of Directors or such duly authorized committee thereof, as the case may be) at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it shall have been amended) that exceeds the current market price per share (determined as provided in paragraph 3(xi) below) of the Common Stock on the Trading Day next succeeding the Expiration Time, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered or exchanged shares) on the Expiration Time multiplied by the current market price per share of the Common Stock on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) on the Expiration Time and the current market price per share of the Common Stock on the Trading Day next succeeding the Expiration Time, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. For the purposes of this paragraph 3(ixA), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation. (x) The reclassification or change of Common Stock into securities, including securities other than Common Stock (other than any reclassification upon a consolidation or merger to which paragraph 3(xviii) below shall apply) shall be deemed to involve (A) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of holders of Common Stock entitled to receive such distribution" within the meaning of paragraph 3(ix) above), and (B) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of Common Shares outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such 8 9 subdivision becomes effective" or "the day upon which such combination becomes effective," as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of paragraph 3(viii) above). (xi) For the purpose of any computation under paragraph 3(vii), or 3(ix) or 3(ixA) above, the current market price per share of Common Stock on any day shall be deemed to be the average of the Closing Prices of the Common Stock for the 20 consecutive Trading Days ending on the day before the day in question; provided, that, in the case of paragraph 3(ix), if the period between the date of the public announcement of the dividend or distribution and the date for the determination of holders of Common Stock entitled to receive such dividend or distribution (or, if earlier, the date on which the Common Stock goes "ex-dividend" in respect of such dividend or distribution) shall be less than 20 Trading Days, the period shall be such lesser number of Trading Days but, in any event, not less than five Trading Days. (xii) No adjustment in the Conversion Price need be made until all cumulative adjustments amount to 1% or more of the Conversion Price as last adjusted. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this paragraph 3 shall be made to the nearest 1/10,000th of a cent or to the nearest 1/10,000th of a share, as the case may be. (xiii) For purposes of this Certificate of Designation, "Common Stock" includes any stock of any class of the Corporation which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation and which is not subject to redemption by the Corporation. However, subject to the provisions of paragraph 3(xviii) below, shares issuable on conversion of shares of Preferred Stock shall include only shares of the class designated as Common Stock of the Corporation on the Preferred Stock Issue Date or shares of any class or classes resulting from any reclassification thereof and which have no preferences in respect of dividends or amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation and which are not subject to redemption by the Corporation; provided that, if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. (xiv) No adjustment in the Conversion Price shall reduce the Conversion Price below the then par value of the Common Stock. No adjustment in the 9 10 Conversion Price need be made under paragraphs 3(vi), 3(vii) and 3(ix) above if the Corporation issues or distributes to each holder of Preferred Stock the shares of Common Stock, evidences of indebtedness, assets, rights, options or warrants referred to in those paragraphs which each holder would have been entitled to receive had Preferred Stock been converted into Common Stock prior to the happening of such event or the record date with respect thereto. (xv) Whenever the Conversion Price is adjusted, the Corporation shall promptly mail to holders of Preferred Stock, first class, postage prepaid, a notice of the adjustment. The Corporation shall file with the transfer agent for the Preferred Stock, if any, a certificate from the Corporation's independent public accountants briefly stating the facts requiring the adjustment and the manner of computing it. Unless holders of a majority of the outstanding shares of Preferred Stock shall notify (a "Dispute Notice") the Corporation, within 30 days of the date the Corporation mails such notice of adjustment, that such holders (the "Disputing Holders") dispute such adjustment, such adjustment shall be final and binding. The Dispute Notice shall set forth in reasonable detail the basis for such dispute and shall name a representative (the "Representative") for the Disputing Holders. The Corporation and the Representative shall jointly engage an accounting firm of national reputation which shall be instructed to resolve such dispute as promptly as practicable. The decision of such accounting firm shall be final and binding. The Corporation and the Representative, on behalf of the Disputing Holders, shall each bear one-half of the fees and expenses (including the responsibility for any indemnity or similar obligations) of such accounting firm. (xvi) The Corporation from time to time may reduce the Conversion Price if it considers such reductions to be advisable in order that any event treated for federal income tax purposes as a dividend of stock or stock rights will not be taxable to the holders of Common Stock by any amount, but in no event may the Conversion Price be less than the par value of a share of Common Stock. Whenever the Conversion Price is reduced, the Corporation shall mail to holders of Preferred Stock a notice of the reduction. The Corporation shall mail, first class, postage prepaid, the notice at least 15 days before the date the reduced Conversion Price takes effect. The notice shall state the reduced Conversion Price and the period it will be in effect. A reduction of the Conversion Price pursuant to this paragraph 3(xvi) does not change or adjust the Conversion Price otherwise in effect for purposes of paragraphs 3(vi), 3(vii), 3(viii), 3(ix), 3(ixA) and 3(x) above. (xvii) If: (A) the Corporation takes any action which would require an 10 11 adjustment in the Conversion Price pursuant to paragraph 3(vii), 3(ix) or 3(x) above; (B) the Corporation consolidates or merges with, or transfers all or substantially all of its assets to, another entity, and stockholders of the Corporation must approve the transaction; or (C) there is a dissolution or liquidation of the Corporation; the Corporation shall mail to holders of the Preferred Stock, first class, postage prepaid, a notice stating the proposed record or effective date, as the case may be. The Corporation shall mail the notice at least 10 days before such date. However, failure to mail the notice or any defect in it shall not affect the validity of any transaction referred to in clause (A), (B) or (C) of this paragraph 3(xvii). (xviii) In the case of any consolidation of the Corporation or the merger of the Corporation with or into any other entity or the sale or transfer of all or substantially all the assets of the Corporation pursuant to which the Corporation's Common Stock is converted into other securities, cash or assets, upon consummation of such transaction, each share of Preferred Stock shall automatically become convertible into the kind and amount of securities, cash or other assets receivable upon the consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock into which such share of Preferred Stock is convertable immediately prior to such consolidation, merger, transfer or sale (assuming such holder of Common Stock failed to exercise any rights of election and received per share the kind and amount of consideration receivable per share by a plurality of non-electing shares). Appropriate adjustment (as determined by the Board of Directors of the Corporation) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustment of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other securities or property thereafter deliverable upon the conversion of Preferred Stock. If this paragraph 3(xviii) applies, paragraphs 3(vi), 3(viii) and 3(x) do not apply. (xix) In any case in which this paragraph 3 shall require that an adjustment as a result of any event becomes effective from and after a record date, the Corporation may elect to defer until after the occurrence of such event the issuance to the holder of any shares of Preferred Stock converted after such record date and before the occurrence of such event of the additional shares of Common Stock issuable upon such conversion over and above the shares issuable on the basis of the 11 12 Conversion Price in effect immediately prior to adjustment; provided, however, that if such event shall not have occurred and authorization of such event shall be rescinded by the Corporation, the Conversion Price shall be recomputed immediately upon such rescission to the price that would have been in effect had such event not been authorized, provided that such rescission is permitted by and effective under applicable laws. 4. LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation or reduction or decrease in its capital stock resulting in a distribution of assets to the holders of any class or series of the Corporation's capital stock, each holder of shares of the Preferred Stock will be entitled to payment out of the assets of the Corporation available for distribution of an amount equal to the greater of (a) the Adjusted Liquidation Preference as of the date fixed for liquidation, dissolution, winding-up or reduction or decrease in capital stock per share of Preferred Stock held by such holder times the number of shares of Preferred Stock held by such holder or (b) the amount that would have been paid to such holder of the Preferred Stock with respect to Common Stock issuable upon conversion of such holder's Preferred Stock had each share of such holder's outstanding Preferred Stock been converted to Common Stock immediately prior to the date of the liquidation, dissolution, winding-up or reduction or decrease in capital stock (such sum, the "Total Liquidation Payment"), before any distribution is made on any Junior Securities, including, without limitation, Common Stock of the Corporation. After payment in full of the Total Liquidation Payment to which holders of Preferred Stock are entitled, such holders will not be entitled to any further participation in any distribution of assets of the Corporation. If, upon any voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, the amounts payable with respect to the Preferred Stock and all other Parity Securities are not paid in full, the holders of the Preferred Stock and the Parity Securities will share equally and ratably in any distribution of assets of the Corporation in proportion to the full liquidation preference and accumulated and unpaid dividends, if any, to which each is entitled. However, neither the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Corporation nor the consolidation or merger of the Corporation with or into one or more Persons will be deemed to be a voluntary or involuntary liquidation, dissolution or winding-up of the Corporation or reduction or decrease in capital stock, unless such sale, conveyance, exchange or transfer shall be in connection with a liquidation, dissolution or winding-up of the business of the Corporation or reduction or decrease in capital stock. 5. REDEMPTION. 12 13 (i) MANDATORY OFFER OF REDEMPTION. Within 15 days following a Change of Control Event, the Corporation shall give notice to the holder of the Preferred Stock, describing in reasonable detail the material terms of the transaction and offering to purchase all of such holder's shares of Preferred Stock at a price per share in cash equal to 101% of the Adjusted Liquidation Preference as of the repurchase date, which shall be no earlier than 30 days, nor later than 60 days from the date such notice is mailed; PROVIDED, HOWEVER, that if the Change of Control Event occurs prior to ______ __ , 2002 [third anniversary of issuance], the Adjusted Liquidation Preference shall be deemed to equal the Adjusted Liquidation Preference plus the dividends that would have accrued on the shares of Preferred Stock (and assuming such dividends were paid by delivery of shares of Preferred Stock of the same designation) had such Preferred Stock remained outstanding until _________ __, 2002. The failure of the holder to accept such offer prior to the repurchase date shall be deemed a rejection of such offer. A "Change of Control Event" shall mean (A) the acquisition by any person or group (within the meaning of Section 12(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934), of beneficial ownership, direct or indirect, of securities of the Corporation representing 50% or more of the combined voting power of the Corporation's then outstanding equity securities, (B) (x) the acquisition by any person or group of beneficial ownership, direct or indirect, of securities of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding equity securities and (y) either (1) a representative or nominee of such person or group shall be elected or appointed to the Board of Directors of the Corporation without the support of at least 5/7 of the members of the Board of Directors of the Corporation, provided that, if there is a vote of the stockholders, the holders of the Preferred Stock shall have voted against such election or (2) a person designated by the Investor (as defined in the Securities Purchase Agreement dated as of August __, 1999 between the Investor and the Corporation) pursuant to Section 4.5(e) of such Securities Purchase Agreement shall not be elected to the Board of Directors of the Corporation as provided in such Section or (C) the consolidation of the Company with, or the merger of the Company with or into, another Person or the sale, assignment or transfer of all or substantially all of the Company's assets to any Person, or the consolidation of any Person with, or the merger of any Person with or into, the Company, in any such event in a transaction in which the outstanding voting capital stock of the Company is converted into or exchanged for cash, securities or other property, provided that following such transaction the holders of voting stock of the Company immediately prior to such transaction do not own more than 50% of the voting stock of the company surviving such transaction or to which such assets are transferred. Paragraph 5(i)(B) shall not be applicable if the Investor is not entitled to make a designation pursuant to Section 4.5(e) of the Securities Purchase Agreement. This 13 14 paragraph 5(i) shall not apply to any Change of Control resulting from actions by the Investor or any affiliate, transferee or person acting in concert therewith. (ii) OPTIONAL REDEMPTION. The Preferred Stock shall be subject to redemption, at the option of the Corporation (an "Optional Redemption"), at any time following ______ __, 2002 [third anniversary of issuance] and prior to ______ __, 2004 [fifth anniversary] at the "Optional Redemption Price" (as defined below) if the average of the Closing Prices of the Common Stock has exceeded $12.00 for sixty consecutive Trading Days following Preferred Stock Issue Date. The Preferred Stock shall be redeemable at any time following the fifth anniversary of the issuance of Preferred Stock at the Optional Redemption Price. The "Optional Redemption Price" per share shall be the Adjusted Liquidation Preference as of the Optional Redemption Date (as defined below). (iii) NOTICE OF REDEMPTION. The Corporation shall give the holder of Preferred Stock written notice of any Optional Redemption not less than 30 days nor more than 45 days prior to the proposed redemption date, specifying such redemption date (each, an "Optional Redemption Date"), the per share Optional Redemption Price and the number of such holder's shares to be redeemed on such date. Upon making an election to redeem shares pursuant to paragraph 5(ii) hereof, the Corporation shall be obligated to consummate such redemption. Notice of redemption having been given as aforesaid, the number of shares to be redeemed as specified in such notice shall be so redeemed on the redemption date specified. In case of redemption of less than all of the shares of Preferred Stock at the time outstanding, the shares to be redeemed shall be selected pro rata or by lot as determined by the Corporation in its sole discretion. (iv) EFFECT OF REDEMPTION. On the date established for redemption pursuant to this paragraph 5 hereof, all rights in respect of the shares of Preferred Stock to be redeemed, except the right to receive the applicable redemption price, plus accrued and unpaid dividends, if any (but only to the extent such accrued and unpaid dividends have not been included in the redemption price), to the date of redemption, shall cease and terminate (unless default shall be made by the Corporation in the payment of the applicable redemption price, plus accrued and unpaid dividends, if any, in which event such rights shall be exercisable until such default is cured), and such shares shall no longer be deemed to be outstanding, notwithstanding that any certificates representing such shares shall not have been surrendered to the Corporation. All shares of Preferred Stock redeemed pursuant to this paragraph 5 shall be retired and shall be restored to the status of authorized and unissued shares of preferred stock, without designation as to series or class, and may thereafter be reissued, subject to compliance with the terms hereof, as shares of any 14 15 series of preferred stock other than shares of Preferred Stock. No Preferred Stock may be redeemed except with funds legally available for such purpose. 6. VOTING RIGHTS. (i) The holder of the Preferred Stock shall vote along with the holders of the shares of Common Stock as a single class, except as provided in paragraph 6(iii), below, with each share of Common Stock entitled to one vote and each share of Preferred Stock entitled to one vote for each share of Common Stock issuable upon conversion of such Preferred Stock as of the relevant record date. (ii) The Corporation shall not, without the affirmative vote or consent of the holders of at least 50% of the shares of Preferred Stock then outstanding (with shares held by the Corporation not being considered to be outstanding for this purpose) voting or consenting as the case may be, as one class: (a) issue any Senior Securities or Parity Securities; (b) issue any preferred stock which is not a Senior Security or Parity Security and which has voting rights (except as required by law) unless such preferred stock votes as a single class with the Common Stock and the Preferred Stock; (c) amend this Certificate of Designation in any manner that adversely affects the specified rights, preferences, privileges or voting rights of holders of Preferred Stock; or (d) authorize the issuance of any additional shares of Preferred Stock, other than as contemplated by the Securities Purchase Agreement, dated as of _____ __, 1999 between ___ and the Corporation, the Warrants contemplated thereby and this Certificate of Designation; (iii) The Corporation in its sole discretion may without the vote or consent of any holders of the Preferred Stock amend or supplement this Certificate of Designation: (a) to cure any ambiguity, defect or inconsistency, provided such amendment or supplement is not adverse to the rights of the holders of the Preferred Stock; (b) to provide for uncertificated Preferred Stock in addition to or 15 16 in place of certificated Preferred Stock; or (c) to make any change that would provide any additional rights or benefits to the holders of the Preferred Stock or that does not adversely affect the legal rights under this Certificate of Designation of any such holder. Except as set forth above, (x) the creation or authorization of any shares of Junior Securities, Parity Securities or Senior Securities or the issuance of any shares of Junior Securities or (y) the increase or decrease in the amount of authorized capital stock of any class, including any preferred stock, shall not require the consent of the holders of the Preferred Stock and shall not be deemed to affect adversely the rights, preferences, privileges, special rights or voting rights of holders of shares of Preferred Stock. 7. EXCLUSION OF OTHER RIGHTS. Except as may otherwise be required by law, the shares of Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this resolution (as such resolution may be amended from time to time) and in the Certificate of Incorporation. The shares of Preferred Stock shall have no preemptive or subscription rights. 8. HEADINGS OF SUBDIVISIONS. The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 9. SEVERABILITY OF PROVISIONS. If any voting powers, preferences and relative, participating, optional and other special rights of the Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as such resolution may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as so amended) which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional or other special rights of Preferred Stock and qualifications, limitations and restrictions thereof herein set forth. 10. RE-ISSUANCE OF PREFERRED STOCK. Shares of Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged or converted, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized but unissued shares of preferred 16 17 stock of the Corporation undesignated as to series and may be designated or re-designated and issued or reissued, as the case may be, as part of any series of preferred stock of the Corporation, provided that any issuance of such shares as Preferred Stock must be in compliance with the terms hereof. 11. MUTILATED OR MISSING PREFERRED STOCK CERTIFICATES. If any of the Preferred Stock certificates shall be mutilated, lost, stolen or destroyed, the Corporation shall issue, in exchange and in substitution for and upon cancellation of the mutilated Preferred Stock certificate, or in lieu of and substitution for the Preferred Stock certificate lost, stolen or destroyed, a new Preferred Stock certificate of like tenor and representing an equivalent amount of shares of Preferred Stock, but only upon receipt of evidence of such loss, theft or destruction of such Preferred Stock certificate and indemnity, if requested, satisfactory to the Corporation and the transfer agent (if other than the Corporation). 12. CERTAIN DEFINITIONS. As used in this Certificate of Designation, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: "ADJUSTED LIQUIDATION PREFERENCE" means, with respect to each share of Preferred Stock, the sum of (a) the Base Liquidation Preference per share of Preferred Stock plus accrued and unpaid dividends thereon and (b) the result of (i) the amount by which (x) 7.5 percent of the Excess Retained Earnings exceeds (y) the aggregate amount of cash dividends paid pursuant to the final sentence of paragraph 2(i) that are not in excess of the dividends paid pursuant to the first sentence of paragraph 2(i), divided by (ii) the total number of shares of Preferred Stock outstanding on the date (the "Calculation Date") of the event giving rise to the calculation of the Adjusted Liquidation Preference (including, without limitation, the redemption of the Preferred Stock or the liquidation of the Corporation). "BUSINESS DAY" means any day except a Saturday, a Sunday, or any day on which banking institutions in New York, New York are required or authorized by law or other governmental action to be closed. "CLOSING PRICE" means, for each Trading Day, the last reported sale price regular way on the Nasdaq National Market or, if the Common Stock is not quoted on the Nasdaq National Market, the average of the closing bid and asked prices in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the corporation for that purpose. 17 18 "COMMON STOCK" means the Common Stock, par value $.01 per share, of the Corporation. "CONVERSION PRICE" shall initially mean $8.25 per share of Series A1 Stock and $9.00 per share of Series A2 Stock and thereafter shall be subject to adjustment from time to time pursuant to the terms of paragraph 3 hereof. "EXCESS RETAINED EARNINGS" means the excess, if any, of(i) retained earnings as shown on the most recent quarterly or annual consolidated balance sheet of the Corporation prior to the Calculation Date, over (ii) $75 million. For purposes of this definition, retained earnings shall be computed ignoring the effects of any acquisitions after the Preferred Stock Issue Date and ignoring the Corporation's investment in ThingWorld.com LLC (including any income therefrom or sale thereof). "EXCHANGE ACT" means the Securities Exchange Act of 1934. "PERSON" means any individual or corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "PREFERRED STOCK ISSUE DATE" means the date on which the first shares of Preferred Stock are originally issued by the Corporation under this Certificate of Designation. "TRADING DAY" means any day on which the Nasdaq National Market or other applicable stock exchange or market is open for business. "TRANSFER AGENT" shall be Boston Equiserve unless and until a successor is selected by the Corporation. 18 EX-4.1 4 FORM OF WARRANT 1 EXHIBIT 4.1 THIS WARRANT AND THE SECURITIES TO BE ISSUED UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. NEITHER THIS WARRANT NOR ANY INTEREST HEREIN NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (II) AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, SUCH EXEMPTION TO BE EVIDENCED BY SUCH DOCUMENTATION AS THE COMPANY MAY REASONABLY REQUEST. No. of Shares of Series A2 Preferred Stock: Warrant No. Dated: ______ __, 1999 WARRANT To Purchase Shares of Series A2 Preferred Stock of C, Inc. THIS IS TO CERTIFY THAT ___________________________, (the "Holder"), is entitled, at any time prior to _____ , 2004 (the "Expiration Date"), to purchase from [C, Inc.] (the "Company"), 15,000 shares of Series A2 Senior Cumulative Participating Convertible Preferred Stock (the "Series A2 Preferred Stock") as described in the attached Certificate of Designation of the Company (the "Certificate of Designation"), in whole or in part, at a purchase price of $1,000 per share, all on the terms and conditions and pursuant to the provisions hereinafter set forth. 1. DEFINITIONS As used in this Warrant, the following terms have the respective meanings set forth below: "Business Day" shall mean any day that is not a Saturday or Sunday or a day on 1 2 which banks are required or permitted to be closed in the State of New York. "Closing Price" shall have the meaning set forth in the Certificate of Designation. "Closing Date" shall mean the date of the Closing as such term is defined in the Securities Purchase Agreement, dated as of August __, 1999, between the Holder and the Company. "Common Stock" shall have the meaning set forth in the Certificate of Designation. "Trading Price" shall mean the average of the Closing Prices of the Common Stock for the 20 consecutive Trading Days ending on the day before the day in question "Warrant Price" shall mean an amount equal to (i) the number of shares of Series A2 Preferred Stock being purchased upon exercise of this Warrant pursuant to Section 2.1, multiplied by (ii) $1,000. "Warrant Stock" shall mean the shares of Series A2 Preferred Stock purchased by the Holder upon the exercise hereof. 2. EXERCISE OF WARRANT 2.1. MANNER OF EXERCISE. At any time or from time to time from and after the Initial Closing Date and until 5:00 P.M., New York time, on the Expiration Date, Holder may exercise this Warrant, on any Business Day, for all or any part of the number of shares of Series A2 Preferred Stock purchasable hereunder. In order to exercise this Warrant, in whole or in part, Holder shall deliver to the Company at its principal office at _____________________________ (i) a written notice of Holder's election to exercise this Warrant, which notice shall specify the number of shares of Series A2 Preferred Stock to be purchased, (ii) payment of the Warrant Price (x) in immediately available funds or (y) by the withholding from the shares of Warrant Stock to be issued upon exercise that number of shares of Series A2 Preferred Stock that, if converted as of the date of exercise, would be convertible into shares of Common Stock with an aggregate Trading Price as of the date of exercise equal to the Warrant Price and (iii) this Warrant. Such notice shall be substantially in the form appearing at the end of this Warrant as Exhibit A, duly executed by Holder. Upon receipt of the items specified in the second preceding sentence, the Company shall execute or cause to be executed and deliver or cause to be delivered to Holder a certificate or certificates representing the aggregate number of full shares of Series A2 Preferred Stock issuable upon such exercise, together with cash in lieu of any fraction of a share, as hereinafter provided. The stock certificate or certificates so delivered shall be in such denomination or denominations as Holder shall request in the notice and shall be registered in the name of Holder. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder shall be deemed to have become a holder of record of such shares for all purposes, as of the date the notice, together with the Warrant Price and this 2 3 Warrant, are received by the Company as described above. If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Stock, deliver to Holder a new Warrant evidencing the right of Holder to purchase the unpurchased shares of Series A2 Preferred Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request of Holder, appropriate notation may be made on this Warrant and the same returned to Holder. 2.2. SHARES TO BE VALIDLY ISSUED. All shares of Series A2 Preferred Stock issuable upon the exercise of this Warrant shall be validly issued, fully paid and nonassessable. The Company shall be entitled to withhold any amounts required to be withheld under applicable law from any amounts to be paid to the Holder hereunder. 2.3 NO FRACTIONAL SHARES. The Company shall not be required to issue fractions of shares upon the exercise of this Warrant. If any fraction of a share would otherwise be issuable, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the Adjusted Liquidation Preference (as defined in the Certificate of Designation). 3. ADJUSTMENTS 3.1 MERGER, CONSOLIDATION OR DISPOSITION OF ASSETS. In the case of any consolidation of the Company or the merger of the Company with or into any other entity or the sale or transfer of all or substantially all the assets of the Company pursuant to which the Series A2 Preferred Stock is converted into other securities, cash or assets, upon consummation of such transaction, this Warrant shall automatically become exercisable for the kind and amount of securities, cash or other assets receivable upon the consolidation, merger, sale or transfer by a holder of the number of shares of Series A2 Preferred Stock into which this Warrant might have been converted immediately prior to such consolidation, merger, transfer or sale (assuming such holder of Series A2 Preferred Stock failed to exercise any rights of election and received per share the kind and amount of consideration receivable per share by a plurality of non-electing shares). Appropriate adjustment (as determined by the Board of Directors of the Company) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the Holder, to the end that the provisions set forth herein shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of this Warrant. 3.2 ADJUSTMENTS TO COMMON STOCK. The Common Stock or other consideration into which the Warrant Stock may be converted shall be subject to the adjustments set forth in Section 3 of the Certificate of Designation as if such Warrant Stock had been outstanding since the Preferred Stock Issue Date (as defined in the Certificate of Designation). Notwithstanding the foregoing, no single event shall give rise to more than one such adjustment or entitle the Holder to a larger amount of Common Stock than such Holder would have received had it exercised this Warrant immediately and converted the Warrant Stock immediately following the time of the adjustment set forth in the immediately preceding sentence or entitle the Holder to any dividends on the Common Stock for any periods prior to conversion. 4. RIGHTS OF HOLDER 3 4 4.1 NO IMPAIRMENT. The Company shall not by any action, including, without limitation, amending its Certificate of Incorporation or comparable governing instruments 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 against impairment. Without limiting the generality of the foregoing, the Company will (a) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Series A2 Preferred Stock upon the exercise of this Warrant and (b) 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. 5. RESERVATION AND AUTHORIZATION OF SERIES A2 PREFERRED STOCK; From and after the Initial Closing Date, the Company shall at all times reserve and keep available for issue upon the exercise of Warrants such number of its authorized but unissued shares of Series A2 Preferred Stock as will be sufficient to permit the exercise in full of all outstanding Warrants. All shares of Series A2 Preferred Stock which shall be so issuable, when issued upon exercise of any Warrant and payment therefor in accordance with the terms of such Warrant, shall be duly and validly issued and fully paid and nonassessable, and not subject to preemptive rights. 6. TRANSFERABILITY; FORM OF WARRANTS 6.1 NO TRANSFER. None of the Warrant nor the Shares issuable upon exercise hereof nor any interest therein may be offered, sold, transferred, pledged, hypothecated or otherwise disposed of, except pursuant to (i) an effective registration statement under the Securities Act and any applicable state securities laws or (ii) an exemption from the registration requirements of the Securities Act and any applicable state securities laws, such exemption to be evidenced by such documentation as the Company may reasonably request, including an opinion of counsel, in writing and addressed to the Company (which counsel and opinion shall be reasonably satisfactory to the Company), that such transfer is not in violation of the Securities Act and any applicable state laws. The Company shall treat the Holder as the holder and owner hereof for all purposes, unless the Company has been given notice to the contrary. 6.2. WARRANT REGISTER; OWNERSHIP OF WARRANT. The Company will keep at its principal office a register in which the Company will provide for the registration of Warrants and the registration of transfers of Warrants. The Company may treat the person in whose name any Warrant is registered on such register as the owner thereof for all other purposes, and the Company shall not be affected by any notice to the contrary. 6.3. RESTRICTIVE LEGEND. Each certificate for Warrant Stock shall be stamped or otherwise imprinted with the following legend: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT 4 5 OF 1933 (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. NEITHER THIS SECURITY NOR ANY INTEREST HEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (ii) AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, SUCH EXEMPTION TO BE EVIDENCE BY SUCH DOCUMENTATION AS THE ISSUER MAY REASONABLY REQUEST. Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public distribution pursuant to a registration statement under the Securities Act ) shall also bear such legend unless, the holder of such certificate shall have delivered to the Company an opinion of counsel, in writing and addressed to the Company (which counsel and opinion shall be reasonably acceptable to the Company), that the securities represented thereby need no longer be subject to restrictions on resale under the Securities Act or any state securities laws. 6.3. REGISTRATION RIGHTS. The holder of Warrants and Warrant Stock shall have the registration rights set forth in the Registration Rights Agreement, dated as of ________ __, 1999 between the Holder and the Company. 7. LOSS OR MUTILATION Upon receipt by the Company from any Holder of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and indemnity reasonably satisfactory to it, and in case of mutilation upon surrender and cancellation hereof, the Company will execute and deliver in lieu hereof a new Warrant of like tenor to such Holder; PROVIDED, in the case of mutilation, no indemnity shall be required if this Warrant in identifiable form is surrendered to the Company for cancellation. 8. MISCELLANEOUS 8.1. EXPIRATION. This Warrant shall expire and be of no further force and effect on the Expiration Date. 8.2. NOTICE GENERALLY. Any notice, demand, request, consent, approval, declaration, delivery or other communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and either delivered in person with receipt acknowledged or sent by registered or certified mail, return receipt requested, postage prepaid or by a nationally recognized overnight courier or by telecopy and confirmed by telecopy answerback, addressed as follows: (a) If to the Holder, at its last known address appearing on the books of the Company maintained for such purpose. (b) If to the Company at 5 6 [ ] or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration, delivery or other communication hereunder shall be deemed to have been duly given or served (i) on the date on which personally delivered, with receipt acknowledged, (ii) on the date on which telecopied and confirmed by written or telephonic acknowledgment, (iii) on the date set forth on the executed return receipt in the case of registered or certified mail or (iv) on the next business day after the same shall have been deposited for overnight delivery with a nationally recognized overnight courier, provided that proof of receipt is received. Failure or delay in delivering copies of any notice, demand, request, approval, declaration, delivery or other communication to the Person designated above to receive a copy shall in no way adversely affect the effectiveness of such notice, demand, request, approval, declaration, delivery or other communication. 8.3. NO RIGHTS AS SHAREHOLDERS. This Warrant shall not entitle the Holder to any rights as a shareholder of the Company. 8.4. SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 3.1, this Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company. 8.5. AMENDMENT. This Warrant may be modified or amended or the provisions hereof waived only with the written consent of the Company and the Holder. 8.6. 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 provision or the remaining provisions of this Warrant, provided that no such severance shall be effective if it would change the economic costs or benefits of this Warrant to the Company or the Holder. 8.7. 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. 8.8. GOVERNING LAW. This Warrant shall be governed by the laws of the State of Delaware, without regard to the provisions thereof relating to conflict of laws. 6 7 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed as of the date first above written. Dated: , 1999 [C] By: _______________________ Name: Title: Acknowledged and Agreed: [Holder] By: Name: Title: 7 8 EXHIBIT A EXERCISE FORM [To be executed only upon exercise of Warrant] The undersigned registered owner of this Warrant irrevocably exercises this Warrant for the purchase of _____ Shares of Series A2 Preferred Stock of [C] and herewith makes payment therefor, all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Series A2 Preferred Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of the undersigned, if such shares of Series A2 Preferred Stock shall not include all of the shares of Series A2 Preferred Stock issuable as provided in this Warrant, that a new Warrant of like tenor and date for the balance of the shares of Series A2 Preferred Stock issuable hereunder be delivered to the undersigned. Check the following box in the case of a "cashless exercise" pursuant to Section 2.1(ii)(y) [ ] (Name of Registered Owner) (Signature of Registered Owner) (Street Address) (City) (State) (Zip Code) NOTICE: The signature on this subscription must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. 8 EX-4.2 5 FORM OF REGISTRATION RIGHTS AGMT WITH OVERSEAS TOY 1 Exhibit 4.2 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of ________ __, 1999, by and among OVERSEAS TOYS, L.P., a Delaware limited partnership (the "Investor") and CYRK, INC., a Delaware corporation (the "Company"). WHEREAS, the Investor and the Company are parties to that certain Securities Purchase Agreement dated September 1, 1999 (the "Securities Purchase Agreement"), whereby, among other things, the Company will issue to the Investor an aggregate of 25,000 shares of Series A Senior Cumulative Participating Convertible Preferred Stock of the Company (the "Series A Preferred Stock"), and a warrant to purchase an additional 15,000 shares of Series A Preferred Stock (the "Warrant"), pursuant to the terms and conditions set forth in the Securities Purchase Agreement; WHEREAS, pursuant to the covenants of the Company contained in the Securities Purchase Agreement, and as a condition to the Investor's obligation to consummate the closing of the transactions contemplated thereby, the Company is entering into this registration rights agreement (this "Agreement") with the Investor with respect to the Warrant and the shares of Company common stock, $.01 par value per share ("Common Stock"), underlying all of the shares of Series A Preferred Stock and the Warrant that are being acquired by the Investor pursuant to the Securities Purchase Agreement; NOW, THEREFORE, upon the premises and the mutual promises contained herein and in the Securities Purchase Agreement, and for good and valuable consideration, the receipt and adequacy of which are acknowledged, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following initially capitalized terms shall have the following meanings: (a) "Affiliate" means, with respect to any person, any other person who, directly or indirectly, is in control of, is controlled by or is under common control with the former person. (b) "Best Efforts" means the commercially reasonable efforts that a prudent Person desirous of achieving a result would use in good faith in similar circumstances to ensure that such result is achieved as expeditiously as can reasonably be expected. (c) "Holders" means the Investor or any Affiliate of the Investor or any trustee for the account of the Investor and any "transferee" (as such term is defined in Section 10(a) hereof) which is the record holder of Registrable Securities. (d) "Registrable Securities" means the Warrant and the shares of 2 Common Stock underlying all of the shares of Series A Preferred Stock and the Warrant that are being acquired by the Investor pursuant to the Securities Purchase Agreement (collectively, the "Acquired Securities"), any stock or other securities into which or for which such Acquired Securities may hereafter be changed, converted or exchanged, and any other securities issued to the Holders of such Acquired Securities (or such securities into which or for which such Acquired Securities are so changed, converted or exchanged) upon any reclassification, share combination, share subdivision, share dividend, merger, consolidation or similar transactions or events, PROVIDED that any such securities shall cease to be Registrable Securities if (i) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act (as defined below) and such securities shall have been disposed of in accordance with the plan of distribution set forth in such registration statement, (ii) such securities shall have been transferred pursuant to Rule 144, or (iii) such securities are held by a Holder other than the Investor, unless such Holder shall furnish the Company an opinion of counsel, which opinion shall be reasonably satisfactory to the Company, to the effect that all of such securities are not permitted to be distributed by such Holder in one transaction pursuant to Rule 144. (e) "Registration Expenses" means all reasonable expenses in connection with any registration of securities pursuant to this Agreement including, without limitation, the following: (i) SEC filing fees; (ii) the fees, disbursements and expenses of the Company's counsel(s) and accountants in connection with the registration of the Registrable Securities to be disposed of under the Securities Act; (iii) all expenses in connection with the preparation, printing and filing of the registration statement, any preliminary prospectus or final prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to any Holders, underwriters and dealers and all expenses incidental to delivery of the Registrable Securities; (iv) the cost of producing blue sky or legal investment memoranda; (v) all expenses in connection with the qualification of the Registrable Securities to be disposed of for offering and sale under state securities laws, including the fees and disbursements of counsel for the underwriters or Holders (provided that only the fees and disbursements of a single counsel or firm for the Holders shall be included) in connection with such qualification and in connection with any blue sky and legal investments surveys; (vi) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Registrable Securities to be disposed of; (vii) transfer agents', depositories' and registrars' fees and the fees of any other agent appointed in connection with such offering; (viii) all security engraving and security printing expenses; (ix) all fees and expenses payable in connection with the listing of the Registrable Securities on each securities exchange or inter-dealer quotation system on which a class of common equity securities of the Company is then listed; (x) all reasonable out-of-pocket expenses of the Company incurred in connection with road show presentations; (xi) courier, overnight delivery, word processing, duplication, telephone and facsimile expenses of the Company; and (xii) any one-time payment for directors and officers insurance directly related to such offering, provided the insurer provides a separate statement for such payment; PROVIDED that any underwriting discounts and commissions with respect to the registration of any Registrable 3 Securities shall not be included. (f) "Rule 144" means Rule 144 promulgated under the Securities Act, or any similar rule hereafter adopted. (g) "SEC" means the United States Securities and Exchange Commission. (h) "Securities Act" means the Securities Act of 1933, as amended, or any successor statute. 2. DEMAND REGISTRATION. (a) At any time, upon written notice from a Holder requesting that the Company effect the registration under the Securities Act of any or all of the Registrable Securities held by such Holder, which notice (a "Demand Registration Notice") shall specify the intended method or methods of disposition of such Registrable Securities, the Company shall use its Best Efforts to effect, in the manner set forth in Section 5, the registration under the Securities Act of such Registrable Securities for disposition in accordance with the intended method or methods of disposition stated in such request, PROVIDED that: (i) if prior to receipt of a Demand Registration Notice, the Company had commenced a financing plan and if such financing plan is an underwritten offering, and, in the good-faith business judgment of the Company's underwriter, a registration at the time and on the terms requested would materially and adversely affect or interfere with such financing plan of the Company or its subsidiaries (a "Transaction Blackout"), the Company shall not be required to effect a registration pursuant to this Section 2(a) until the earliest of (A) the abandonment of such offering, (B) 90 days after the termination of such offering, (C) the termination of any "hold back" period obtained by the underwriter(s) of such offering from any person in connection therewith or (D) 180 days after receipt by the Holder requesting registration of the written notice from the Company referred to above in this subsection (i); (ii) if, while a registration request is pending pursuant to this Section 2(a), the Company, with the prior approval of a majority of the Company's Board of Directors, may delay commencing to effect such registration until ninety (90) days after receipt of notice of such request if the disinterested members of the Board of Directors determine, in good faith, that the filing of a registration statement at the time of such request would be materially detrimental to the Company, provided that the Company shall not be permitted to delay a requested registration in reliance on this clause (ii) more than once in any 12-month period; and (iii) the Company shall not be obligated to file a registration statement relating to a registration request pursuant to this Section 2(a): (A) within a 4 period of six months after the effective date of any other registration statement of the Company demanded pursuant to this Section 2(a); or (B) if such registration request is for a number of Registrable Securities that represent in the aggregate (on an as converted basis) less than the lesser of: (x) one million (1,000,000) shares of Common Stock and (y) the remaining number of shares of Common Stock owned by the Investor and its Affiliates. (b) Notwithstanding any other provision of this Agreement to the contrary, a registration requested by a Holder pursuant to this Section 2 shall not be deemed to have been effected (and, therefore, not requested for purposes of Section 2(a)): (i) if it is withdrawn based upon material adverse information relating to the Company; or (ii) if after it has become effective such registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court for any reason other than a misrepresentation or an omission by such Holder and, as a result thereof, less than 90% of the Registrable Securities requested to be registered can be completely distributed in accordance with the plan of distribution set forth in the related registration statement. (c) In the event that any registration pursuant to this Section 2 shall involve, in whole or in part, an underwritten offering, the Holder initiating the demand pursuant to Section 2(a) shall have the right to designate an underwriter as the sole lead managing underwriters of such underwritten offering, subject to the Company's consent which shall not be unreasonably withheld. (d) Holders other than the Holder initiating the demand pursuant to Section 2(a) shall have the right to include their shares of Registrable Securities in any registration pursuant to Section 2(a); PROVIDED that the Investor may exclude participation by other Holders in connection with registrations pursuant to two demands (no two of which can be in consecutive years). In connection with those registrations in which multiple Holders participate, in the event such registration involves an underwritten offering and the Holder initiating demand pursuant to Section 2(a) is advised in writing (with a copy to the Company) by the lead managing underwriter designated by such Holder pursuant to Section 2(c) that, in such firm's good-faith opinion, marketing factors require a limitation on the number of shares to be underwritten, the number of shares to be included in the underwriting and registration shall be allocated PRO RATA among the Holders on the basis of the shares of Registrable Securities held by each such Holder. (e) The Company shall have the right to cause the registration of additional securities for sale for the account of any person (including the Company) in any registration of Registrable Securities requested by a Holder pursuant to Section 2(a); provided that the Company shall not have the right to cause the registration of such additional securities if such Holder is advised in writing (with a copy to the Company) by the lead managing underwriter designated by the Holder pursuant to Section 2(c) that, in such firm's good-faith opinion, registration of such additional securities would materially and adversely affect the 5 offering and sale of the Registrable Securities then contemplated by such Holder. (f) In the event that any Demand Registration Notice includes a request for registration of the Warrant (or any portion thereof), the Company may elect, by written notice (the "Election Notice") to the Investor given within five (5) business days of the Company's receipt of such Demand Registration Notice, to purchase the Warrant (or such portion thereof) in lieu of proceeding with the registration of the Warrant pursuant to this Section 2. On the third (3rd) business day following the Company's delivery to such Holder of the Election Notice, the Company shall pay to the Holder by wire transfer of immediately available funds an amount equal to (i) the average of the Closing Prices (as defined in the Warrant) of the Common Stock for the twenty (20) consecutive Trading Days (as defined in the Certificate of Designation of the Series A Preferred Stock) preceding the date of delivery of the Demand Registration Notice, MULTIPLIED BY (ii) the total number of shares of Common Stock that would be issuable upon conversion of the shares of Series A Preferred Stock represented by the Warrant (or such portion thereof) LESS the number of shares of Common Stock with an aggregate Trading Price (as defined in the Warrant) as of the date of the Demand Registration Notice equal to the Warrant Price (as defined in the Warrant) for the Warrant (or such portion thereof). 3. PIGGYBACK REGISTRATION. At any time if the Company proposes to register any of its Common Stock or any other of its common equity securities (collectively, "Other Securities") under the Securities Act (other than a registration on Form S-4 or S-8 or any successor form thereto), whether or not for sale for its own account, in a manner which would permit registration of Registrable Securities for sale for cash to the public under the Securities Act, it will each such time give prompt written notice to each Holder of its intention to do so as soon as practicable but in any event at least ten (10) business days prior to the anticipated filing date of the registration statement relating to such registration. Such notice shall offer each such Holder the opportunity to include in such registration statement such number of Registrable Securities as each such Holder may request. Upon the written request (a "Piggyback Registration Request") of any such Holder made within five (5) business days after the receipt of the Company's notice (which request shall specify the number of Registrable Securities intended to be disposed of and the intended method of disposition thereof), the Company shall effect, in the manner set forth in Section 5, in connection with the registration of the Other Securities, the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register, to the extent required to permit the disposition (in accordance with such intended methods thereof) of the Registrable Securities so requested to be registered, PROVIDED that: (a) if, at any time after giving such written notice of its intention to register any of its securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such securities, the Company may, at its election, give written notice of such determination to each holder of Registrable Securities and thereupon shall be relieved of its obligation to 6 register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith as provided in Section 4), without prejudice, however, to the rights of Stockholders to request that such registration be effected as a registration under Section 2; (b) (i) if the registration referred to in the first sentence of this Section 3 is to be an underwritten primary registration on behalf of the Company, and the managing underwriter advises the Company in writing that, in such firm's opinion, such offering would be materially and adversely affected by the inclusion therein of the Registrable Securities requested to be included therein, the Company shall include in such registration: (1) first, all securities the Company proposes to sell for its own account (the "Company Securities") and (2) second, up to the full amount of securities (including Registrable Securities) in excess of the number or dollar amount of the Company Securities, which, in the good-faith opinion of such managing underwriter, can be so sold without materially and adversely affecting such offering (and, if less than the full number of such securities, allocated PRO RATA among the Holders and Other Holders (as defined below) of such securities on the basis of the number of securities (including Registrable Securities) requested to be included therein by each such Holder and Other Holder) and (ii) if the registration referred to in the first sentence of this Section 3 is to be an underwritten secondary registration on behalf of holders of securities (other than Registrable Securities) of the Company (the "Other Holders"), and the managing underwriter advises the Company in writing that in their good-faith opinion such offering would be materially and adversely affected by the inclusion therein of the Registrable Securities requested to be included therein, the Company shall include in such registration: (1) first, all securities that the Other Holder who made the initial demand for such registration proposes to sell and (2) second, up to the full amount of securities (including Registrable Securities) in excess of the number or dollar amount of the securities set forth in the preceding clause (1), which, in the good-faith opinion of such managing underwriter, can be so sold without materially and adversely affecting such offering (and, if less than the full number of such securities, allocated PRO RATA among the Holders and the remaining Other Holders of such securities on the basis of the number of securities (including Registrable Securities) requested to be included therein by each Holder and each remaining Other Holder); (c) the Company shall not be required to effect any registration of Registrable Securities under this Section 3 incidental to the registration of any of its securities in connection with mergers, acquisitions, dividend reinvestment plans or stock option or other executive or employee benefit or compensation plans; and (d) no registration of Registrable Securities effected under this Section 3 shall relieve the Company of its obligation to effect a registration of Registrable Securities pursuant to Section 2 hereof. (e) In the event that any Piggyback Registration Request includes a request for registration of the Warrant (or any portion thereof), the Company may elect, by 7 written notice (the "Election Notice") to the Investor given within five (5) business days of the Company's receipt of such Piggyback Registration Request, to purchase the Warrant (or such portion thereof) in lieu of proceeding with the registration of the Warrant pursuant to this Section 3. On the third (3rd) business day following the Company's delivery to such Holder of the Election Notice, the Company shall pay to the Holder by wire transfer of immediately available funds an amount equal to (i) the average of the Closing Prices (as defined in the Warrant) of the Common Stock for the twenty (20) consecutive Trading Days (as defined in the Certificate of Designation of the Series A Preferred Stock) preceding the date of delivery of the Piggyback Registration Request, MULTIPLIED BY (ii) the total number of shares of Common Stock that would be issuable upon conversion of the shares of Series A Preferred Stock represented by the Warrant (or such portion thereof) LESS the number of shares of Common Stock with an aggregate Trading Price (as defined in the Warrant) as of the date of the Piggyback Registration Request equal to the Warrant Price (as defined in the Warrant) for the Warrant (or such portion thereof). 4. EXPENSES. The Company agrees to pay all Registration Expenses with respect to an offering pursuant to Section 2 and Section 3 hereof. 5. REGISTRATION AND QUALIFICATION. (a) If and whenever the Company is required to use its Best Efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Section 2 or 3 hereof, the Company shall: (i) prepare and file a registration statement under the Securities Act relating to the Registrable Securities to be offered as soon as practicable, but in no event later than 30 days (60 days if the applicable registration form is other than Form S-3) after the date notice is given, and use its Best Efforts to cause the same to become effective as promptly as practicable; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to (x) keep such registration statement effective until the earlier of such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the Holder or Holders thereof set forth in such registration statement or the expiration of nine months after such registration statement becomes effective and (y) comply with the provisions of the Securities Act; (iii) furnish to the Holders and to any underwriter of such Registrable Securities such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration 8 statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, and such other documents, as the Holders or such underwriter may reasonably request in order to facilitate the public sale of the Registrable Securities, and a copy of any and all transmittal letters or other correspondence to, or received from, the SEC or any other governmental agency or self-regulatory body or other body having jurisdiction (including any domestic or foreign securities exchange) relating to such offering; (iv) unless the exemption from state regulation of securities offerings under Section 18 of the Securities Act applies, use its Best Efforts to register or qualify all Registrable Securities covered by such registration statement under the securities or blue sky laws of such jurisdictions as the Holders or any underwriter of such Registrable Securities shall request, and use its Best Efforts to obtain all appropriate registrations, permits and consents required in connection therewith, and do any and all other acts and things which may be necessary or advisable to enable the Holders or any such underwriter to consummate the disposition in such jurisdictions of its Registrable Securities covered by such registration statement; (v) furnish to each Holder selling Registrable Securities by means of such registration (each a "Selling Holder"), at such Selling Holder's request, a signed counterpart, addressed to such Selling Holder, of (x) an opinion of counsel for the Company, dated the effective date of such registration statement (or, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement speaking both as of the effective date of the registration statement and the date of the closing under the underwriting agreement) and (y) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration statement includes an underwritten public offering, dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities and, in the case of the accountants' letter, such other financial matters, as such Selling Holder may reasonably request; (vi) immediately notify the Selling Holders in writing (x) at any time when a prospectus relating to a registration pursuant to Section 2 or 3 hereof is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the 9 circumstances under which they were made, not misleading, and (y) of any request by the SEC or any other regulatory body or other body having jurisdiction for any amendment of or supplement to any registration statement or other document relating to such offering, and in either such case (x) or (y) at the request of the Selling Holders, subject to Section 4 hereof, prepare and furnish to the Selling Holders a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of 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 are made, not misleading; (vii) otherwise use its Best Efforts to comply with all applicable rules and regulations of the SEC, and make available to its securities holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months, but not more than eighteen (18) months, beginning with the first month of the first fiscal quarter after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; (viii) use its Best Efforts to list such Registrable Securities on each securities exchange on which shares of Common Stock of the Company are then listed (including NASDAQ), if such securities are not already so listed and if such listing is then permitted under the rules of such exchange, and, if necessary, provide a transfer agent and registrar for such Registrable Securities not later than the effective date of such registration statement, with all expenses in connection therewith to be paid in accordance with Section 4 hereof; and (ix) furnish unlegended certificates representing ownership of the Registrable Securities being sold in such denominations as shall be requested by the Selling Holders or the underwriters with expenses therewith to be paid in accordance with Section 4 hereof. (b) The Holder of Registrable Securities on whose behalf Registrable Securities are to be distributed by one or more underwriters shall be parties to any underwriting agreements relating to the distribution of such Registrable Securities and the representations and warranties by, and the other agreements on the part of, the Company to and from the benefit of such underwriters, shall also be made to and for the benefit of such Holders of Registrable Securities. 6. UNDERWRITING, DUE DILIGENCE. (a) If requested by the underwriters for any underwritten offering of Registrable Securities pursuant to a registration requested under this Agreement, the Company 10 shall enter into an underwriting agreement with such underwriters for such offering, such agreement to contain such representations and warranties by the Company and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities and contribution substantially to the effect and to the extent provided in Section 7 hereof and the provision of opinions of counsel and accountants' letters to the effect and to the extent provided in Section 5(a)(v) hereof. The Selling Holders on whose behalf the Registrable Securities are to be distributed by such underwriters shall be parties to any such underwriting agreement and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters, shall also be made to and for the benefit of such Selling Holders. Such underwriting agreement shall also contain such representations and warranties by the Selling Holders on whose behalf the Registrable Securities are to be distributed as are customarily contained in underwriting agreements with respect to secondary distributions. Selling Holders may require that any additional securities included in an offering proposed by a Holder be included on the same terms and conditions as the Registrable Securities that are included therein. (b) In the event that any registration pursuant to Section 3 shall involve, in whole or in part, an underwritten offering, the Company may require the Registrable Securities requested to be registered pursuant to Section 3 to be included in such underwriting on the same terms and conditions as shall be applicable to the other securities being sold through underwriters under such registration. If requested by the underwriters for such underwritten offering, the Selling Holders on whose behalf the Registrable Securities are to be distributed shall enter into an underwriting agreement with such underwriters, such agreement to contain such representations and warranties by the Selling Holders and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnities and contribution substantially to the effect and to the extent provided in Section 7 hereof. Such underwriting agreement shall also contain such representations and warranties by the Company and such other person or entity for whose account securities are being sold in such offering as are customarily contained in underwriting agreements with respect to secondary distributions. (c) In connection with the preparation and filing of each registration statement registering Registrable Securities under the Securities Act, the Company shall give the Holders of such Registrable Securities and the underwriters, if any, and their respective counsel and accountants, such reasonable and customary access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified the Company's financial statements as shall be necessary, in the opinion of such Holder and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 7. INDEMNIFICATION AND CONTRIBUTION. 11 (a) In the case of each offering of Registrable Securities made pursuant to this Agreement, the Company agrees to indemnify and hold harmless each Holder, its officers and directors, each underwriter of Registrable Securities so offered and each person, if any, who controls any of the foregoing persons within the meaning of the Securities Act, from and against any and all claims, liabilities, losses, damages, expenses and judgments, joint or several, to which they or any of them may become subject, under the Securities Act or otherwise, including any amount paid in settlement of any litigation commenced or threatened, and shall promptly reimburse them, as and when incurred, for any reasonable legal or other expenses incurred by them in connection with investigating any claims and defending any actions, insofar as such losses, claims, damages, liabilities or actions shall arise out of, or shall be based upon, any untrue statement or alleged untrue statement of a material fact contained in the registration statement (or in any preliminary or final prospectus included therein) or any amendment thereof or supplement thereto, or in any document incorporated by reference therein, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that the Company shall not be liable to a particular Holder in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement, or any omission, if such statement or omission shall have been made in reliance upon and in conformity with information relating to such Holder furnished to the Company in writing by or on behalf of such Holder specifically for use in the preparation of the registration statement (or in any preliminary or final prospectus included therein) or any amendment thereof or supplement thereto. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of a Holder and shall survive the transfer of such securities. The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to each Holder, its officers and directors, underwriters of the Registrable Securities or any controlling person of the foregoing; PROVIDED, FURTHER, that, as to any underwriter or any person controlling any underwriter, this indemnity does not apply to any loss, liability, claim, damage or expense arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus if a copy of a prospectus was not sent or given by or on behalf of an underwriter to such person asserting such loss, claim, damage, liability or action at or prior to the written confirmation of the sale of the Registrable Securities as required by the Securities Act and such untrue statement or omission had been corrected in such prospectus. (b) In the case of each offering made pursuant to this Agreement, each Holder of Registrable Securities included in such offering, by exercising its registration rights hereunder, agrees to indemnify and hold harmless the Company, its officers and directors and each person, if any, who controls any of the foregoing within the meaning of the Securities Act (and if requested by the underwriters, each underwriter who participates in the offering and each person, if any, who controls any such underwriter within the meaning of the Securities Act), from and against any and all claims, liabilities, losses, damages, expenses and judgments, joint or several, to which they or any of them may become subject under the Securities Act or otherwise, including any amount paid in settlement of any litigation 12 commenced or threatened, and shall promptly reimburse them, as and when incurred, for any legal or other expenses incurred by them in connection with investigating any claims and defending any actions, insofar as any such losses, claims, damages, liabilities or actions shall arise out of, or shall be based upon, any untrue statement or alleged untrue statement of a material fact contained in the registration statement (or in any preliminary or final prospectus included therein) or any amendment thereof or supplement thereto, or any omission or alleged omission to state therein a material fact relating to the Holder required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement of a material fact contained in, or such material fact relating to the Holder is omitted from, information relating to such Holder furnished in writing to the Company by or on behalf of such Holder specifically for use in the preparation of such registration statement (or in any preliminary or final prospectus included therein). The foregoing indemnity is in addition to any liability which such Holder may otherwise have to the Company, or any of its directors, offices or controlling persons; PROVIDED, HOWEVER, that, as to any underwriter or any person controlling any underwriter, this indemnity does not apply to any loss, liability, claim, damage or expense wising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus if a copy of a prospectus was not sent to given by or on behalf of an underwriter to such person asserting such loss, claim damage, liability or action at or prior to the written confirmation of the sale of the Registrable Securities as required by the Securities Act and such untrue statement or omission had been corrected in such prospectus; and PROVIDED, FURTHER, that in no event shall any such Holder be liable for any amount in excess of the net proceeds received from the sale of the Registrable Securities by such Holder in the subject offering. (c) PROCEDURE FOR INDEMNIFICATION. Each party indemnified under paragraph (a) or (b) of this Section 7 shall, promptly after receipt of notice of any claim or the commencement of any action against such indemnified party in respect of which indemnity may be sought, notify the indemnifying party in writing of the claim or the commencement thereof; PROVIDED that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party on account of the indemnity agreement contained in paragraph (a) or (b) of this Section 7, except to the extent the indemnifying party was prejudiced by such failure, and in no event shall relieve the indemnifying party from any other liability which it may have to such indemnified party. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 7 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided that each indemnified party, its officers and directors, if any, and each person, if any, who controls such indemnified party within the meaning of the Securities Act, shall have the right to employ separate counsel 13 reasonably approved by the indemnifying party to represent them if the named parties to any action (including any impleaded parties) include both such indemnified party and an indemnifying party or an affiliate of an indemnifying party, and such indemnified party shall have been advised by counsel either (i) that there may be one or more legal defenses available to such indemnified party that are different from or additional to those available to such indemnifying party or such affiliate or (ii) a conflict may exist between such indemnified party and such indemnifying party or such affiliate, and in that event the fees and expenses of one such separate counsel for all such indemnified parties shall be paid by the indemnifying party. An indemnified party will not enter into any settlement agreement which is not approved by the indemnifying party, such approval not to be unreasonably withheld. The indemnifying party may not agree to any settlement of any such claim or action which provides for any remedy or relief other than monetary damages for which the indemnifying party shall be responsible hereunder, without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. In any action hereunder as to which the indemnifying party has assumed the defense thereof with counsel reasonably satisfactory to the indemnified party, the indemnified party shall continue to be entitled to participate in the defense thereof, with counsel of its own choice, but, except as set forth above, the indemnifying party shall not be obligated hereunder to reimburse the indemnified party for the costs thereof. In all instances, the indemnified party shall cooperate fully with the indemnifying party or its counsel in the defense of each claim or action. If the indemnification provided for in this Section 7 shall for any reason be unavailable to an indemnified party in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to herein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, in such proportion as shall be appropriate to reflect the relative fault of the indemnifying party on the one hand and the indemnified party on the other with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the indemnifying party on the one hand or the indemnified party on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission, but not by reference to any indemnified party's stock ownership in the Company. In no event, however, shall a Holder be required to contribute in excess of the amount of the net proceeds received by such Holder in connection with the sale of Registrable Securities in the offering which is the subject of such loss, claim, damage or liability. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this paragraph shall be deemed to include, for purposes of this paragraph, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claims. No person guilty of fraudulent misrepresentation (within the meaning of 14 Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 8. RULE 144. The Company shall take such measures and file such information, documents and reports as shall be required by the SEC as a condition to the availability of Rule 144. 9. HOLDBACK. (a) Each Holder agrees if so required by the managing underwriter, not to sell, make any short sale of, loan, grant any option for the purchase of, effect any public sale or distribution of or otherwise dispose of any securities of the Company, during the 30 days prior to and the 90 days after any underwritten registration pursuant to Section 2 or 3 hereof has become effective (or such shorter period as may be required by the underwriter), except as part of such underwritten registration. The Company may legend and may impose stop transfer instructions on any certificate evidencing Registrable Securities relating to the restrictions provided for in this Section 9. (b) The Company agrees, if so required by the managing underwriter, not to sell, make any short sale of, loan, grant any option for the purchase of (other than pursuant to employee benefit plans), effect any public sale or distribution of or otherwise dispose of its equity securities or securities convertible into or exchangeable or exercisable for any such securities during the 30 days prior to and the 90 days after any underwritten registration pursuant to Section 2 or 3 hereof has become effective, except as part of such underwritten registration and except pursuant to registrations on Form S-4, S-8 or any successor or similar forms thereto. 10. TRANSFER OF REGISTRATION RIGHTS. (a) A Holder may transfer all or any portion of its rights under this Agreement to any transferee of Registrable Securities (each, a "transferee"). The Holder making such transfer shall promptly notify the Company in writing stating the name and address of any transferee and identifying the amount of Registrable Securities with respect to which the rights under this Agreement are being transferred and the nature of the rights so transferred. In connection with any such transfer, the term "Holder" as used in this Agreement shall, where appropriate to assign the rights and obligations of a Holder hereunder to such direct transferee, be deemed to refer to the transferee holder of such Registrable Securities. (b) After any such transfer, the Holder making such transfer shall retain its rights under this Agreement with respect to all other Registrable Securities still owned by such Holder. 15 (c) Upon the request of the Holder making such transfer, the Company shall execute a Registration Rights Agreement with such transferee or a proposed transferee substantially similar to this Agreement. 11. MISCELLANEOUS. (a) INJUNCTIONS. Each party acknowledges and agrees that irreparable damage would occur in the event that any of the provisions of this Agreement was not performed in accordance with its specific terms or was otherwise breached. Therefore, each party shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court having jurisdiction, such remedy being in addition to any other remedy to which such party may be entitled at law or in equity. (b) SEVERABILITY. If any term or provision of this Agreement shall be held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms and provisions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and each of the parties shall use its Best Efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term or provision. (c) FURTHER ASSURANCES. Subject to the specific terms of this Agreement, each of the parties hereto shall make, execute, acknowledge and deliver such other instruments and documents, and take all such other actions, as may be reasonably required in order to effectuate the purposes of this Agreement and to consummate the transactions contemplated hereby. (d) WAIVERS, ETC. No failure or delay on the part of either party (or the intended third-party beneficiaries referred to herein) in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power preclude any other or further exercise thereof or the exercise of any other right or power. No modification or waiver of any provision of this Agreement nor consent to any departure therefrom shall in any event be effective unless the same shall be in writing and signed by an authorized officer of each of the parties, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. (e) ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties with respect to its subject matter. This Agreement supersedes all prior agreements and understandings between the parties, whether written or oral, with respect to the subject matter hereof. The paragraph headings contained in this Agreement are for reference purposes only, and shall not affect in any manner the meaning or interpretation of this Agreement. 16 (f) COUNTERPARTS. For the convenience of the parties, this Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original but all of which together shall be one and the same instrument. (g) AMENDMENT. This Agreement may be amended only by a written instrument duly executed by an authorized officer of the Company and an authorized partner of the Investor. (h) NOTICES. All notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be deemed given when received if delivered personally, on the next business day if sent by overnight courier for next business day delivery (providing proof of delivery), when confirmation is received, if sent by facsimile or in 5 business days if sent by U.S. registered or certified mail, postage prepaid (return receipt requested) to the other parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Investor, to: The Yucaipa Companies 10000 Santa Monica Blvd., 5th Floor Los Angeles, California 90067 Attn: Robert Bermingham Facsimile: 310-789-7201 with a copy to: Munger, Tolles & Olson LLP 355 South Grand Avenue, 35th Floor Los Angeles, California 90071-1560 Attn: Judith T. Kitano Facsimile: 213-687-3702 (b) if to the Company, to: Cyrk, Inc. 3 Pond Road Gloucester, Massachusetts 01930 Attn: Facsimile: 17 with a copy to: Choate, Hall & Stewart Exchange Place 53 State Street Boston, Massachusetts 02109 Attn: Cameron Read Facsimile: 617-248-4000 (i) GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. (j) TERM. This Agreement shall remain in full force and effect until there are no Registrable Securities outstanding or until terminated by the mutual agreement of the Company and the Investor. (k) ASSIGNMENT. Except as provided herein, the parties may not assign their rights under this Agreement and the Company may not delegate its obligations under this Agreement. (l) PRIORITY OF RIGHTS. The Company agrees that it shall not grant any registration rights to any third party unless such rights are expressly made subject to the rights of the Holders in a manner consistent with this Agreement. The Company also agrees that it shall not grant any Holder any registration rights which are senior to or take priority over the registration rights granted to all Holders under this Agreement (m) CONSTRUCTION. In entering into this Agreement, each party represents and warrants that such party does so freely and voluntarily, after having had the opportunity to meet and confer with such party's respective attorneys regarding the contents and legal effect of this Agreement. Each party represents and warrants that such party has full power and authority to enter into and execute this Agreement. Every covenant, term, and provision of this Agreement shall be construed simply according to its fair meaning and not strictly for or against any party. In the event any claim is made by any party relating to any conflict, omission, or ambiguity in this Agreement, no presumption or burden of proof or persuasion shall be implied by virtue of the fact that this Agreement was prepared by or at the request of a particular party or such party's counsel. IN WITNESS WHEREOF, the Investor and the Company have caused this Agreement to be duly executed by their authorized representative as of the date first above written. OVERSEAS TOYS, L.P. 18 By:______________________________________ Name:____________________________________ Title:___________________________________ CYRK, INC., By:______________________________________ Name:____________________________________ Title:___________________________________ EX-10.1 6 FORM OF MANAGEMENT AGMT WITH YUCAIPA COMPANIES 1 Exhibit 10.1 MANAGEMENT AGREEMENT THIS MANAGEMENT AGREEMENT (this "Agreement") is made and entered into as of _________ __, 1999 by and between THE YUCAIPA COMPANIES, a California general partnership ("Yucaipa") and CYRK, INC., a Delaware corporation (the "Company"). W I T N E S S E T H: WHEREAS, CYRK and Overseas Toys, L.P., an affiliate of Yucaipa, have entered into that certain Securities Purchase Agreement dated as of September 1, 1999 providing for the investment by Overseas Toys, L.P. in securities of the Company; WHEREAS, in connection therewith CYRK desires to have access to the management services of Yucaipa; and WHEREAS, Yucaipa has the ability to provide certain general business and financial consultation and advice and management services to CYRK in connection with the operation of its business; NOW, THEREFORE, in consideration of the premises and the mutual covenants of the parties hereto and other good and valuable consideration paid and received by each of the parties to this Agreement, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. ENGAGEMENT CYRK hereby engages Yucaipa as an independent contractor and consultant to provide general business consultation and advice and management services to CYRK and its subsidiaries in connection with the operation of their businesses. SECTION 2. MANAGEMENT SERVICES. Yucaipa, through its partners, affiliates and/or its or their employees, shall provide CYRK with consultation and advice, when and as reasonably requested by CYRK, in such fields as operations, planning and development, budgeting, accounting, general business management and such other fields as Yucaipa may offer from time to time. All partners and employees of Yucaipa or any of its affiliates entitled to receive any fees payable hereunder who serve CYRK or any of its subsidiaries as an officer, director or employee shall do so without charge during the term of this Agreement, except for (a) the fees and expenses provided for herein, (b) customary fees (or reimbursement or expenses) payable to members of the Board of Directors, in their capacity as such, provided that payment of such fees to such partners or employees of Yucaipa is approved by a majority of the disinterested members of the Board of Directors or (c) any other 2 agreement or arrangement approved by a majority of the disinterested members of the Board of Directors. SECTION 3. MANAGEMENT FEES. Commencing on the date hereof (the "Effective Date"), CYRK shall pay to Yucaipa an annual management fee, in consideration of the services rendered by Yucaipa pursuant to Section 2 above, equal to $500,000, payable in 12 equal installments in advance on the first day of each month and past due on the fifteenth day of each such month; provided that such fee will be payable in advance on the Effective Date for the partial fiscal period beginning on the Effective Date and ending on the last day of the current fiscal period. SECTION 4. OTHER CONSULTING SERVICES. CYRK and its subsidiaries (or any one of them) shall retain or employ Yucaipa as a financial advisor and/or consultant in connection with any acquisition or disposition transaction by CYRK or any of its subsidiaries, other than a sale of all of the outstanding capital stock of, or all or substantially all of the assets of CYRK. The parties expressly agree that the services contemplated by this Section 4 shall not include financial advisory or consulting services in connection with debt or equity financings. If any retention of Yucaipa by CYRK or any of its subsidiaries pursuant to this Section 4 is made pursuant to a retention or engagement agreement containing terms varying from or in addition to the terms contained in this Agreement, such agreement shall be reasonably acceptable to a majority of the members of the Board of Directors of CYRK, as the case may be, that are neither affiliates of Yucaipa nor designated or nominated to such Board of Directors by Yucaipa or any of its affiliates. SECTION 5. OTHER CONSULTING FEES CYRK shall pay to Yucaipa a cash fee for providing any financial advisory or consulting services pursuant to Section 4 above in connection with the acquisition or disposition transactions specified therein, equal to one percent (1.0%) of the amount or value of all cash and noncash consideration actually paid or received (including assumed indebtedness) by CYRK or any of its subsidiaries, as the case may be, in connection therewith. SECTION 6. REIMBURSEMENT OF EXPENSES. CYRK shall reimburse Yucaipa for all of its reasonable out-of-pocket costs and expenses incurred in connection with the performance of its obligations under this Agreement. Yucaipa shall bill CYRK for the amount of all such expenses monthly, and shall provide CYRK with a reasonable itemization of such expenses. Notwithstanding the foregoing, the aggregate amount of such costs and expenses for which Yucaipa may be reimbursed in connection with the rendering of management services under Section 2 hereof shall not exceed $500,000 in any fiscal year of CYRK (which maximum amount shall be prorated for the period beginning on the 3 Effective Date and ending on the last day of CYRK's current fiscal year). In addition to the foregoing, CYRK shall reimburse Yucaipa for all of its reasonable out-of-pocket costs and expenses incurred in connection with the rendering by Yucaipa of financial advisory or consulting services to CYRK and/or its subsidiaries, in connection with any acquisition or disposition transaction, or debt or equity financing, whether or not Yucaipa is obligated to render such services or has a right to be paid any fee relating thereto under Sections 4 or 5 of this Agreement. SECTION 7. TERM OF AGREEMENT. The term of this Agreement shall be for a period of five (5) years commencing on the Effective Date; provided, however, that the term shall be automatically renewed annually for a term of five (5) years on ___________ of each year, unless at least ninety (90) days prior notice is given by either party electing not to so renew this Agreement, in which event the term of this Agreement shall end at date that is five (5) years after the later of the date of this Agreement or date of the last renewal hereof. SECTION 8. TERMINATION. 8.1 TERMINATION AT WILL. CYRK may terminate this Agreement at any time by giving Yucaipa at least ninety (90) days written notice of such termination. 8.2 TERMINATION FOR CAUSE. (a) CYRK or Yucaipa may terminate this Agreement if the other party shall fail to reasonably perform any material covenant, agreement, term or provision of this Agreement to be kept, observed or performed by it and such failure shall continue for a period of sixty (60) days after written notice from the other party, which notice shall describe the alleged failure with particularity. Notwithstanding the foregoing, any failure or alleged failure of CYRK, or Yucaipa to perform any material covenant, agreement, term or provision of this Agreement shall not constitute cause for termination of this Agreement if the same shall be occasioned by or result from force majeure, directly or indirectly (b) Yucaipa may terminate this Agreement if CYRK shall fail to make any payment due to Yucaipa hereunder, if such payment is not made in full within twenty (20) days after written notice of such failure. 8.3 TERMINATION FOR CHANGE OF CONTROL. This Agreement may be terminated, at the election of Yucaipa or CYRK, if during the term hereof there shall have been a change in control of CYRK, which for purposes of this Agreement shall be deemed to have occurred upon any of the following events: (a) the acquisition after the Effective Date, in one or more transactions, of "beneficial ownership" (within the meaning of Rule 13d-3(a)(1) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) by any person 4 (other than Yucaipa or any of its partners or affiliates) or any group of persons (excluding any group which includes Yucaipa or say of its partners or affiliates) who constitute a group (within the meaning of Section 13(d)(3) of the Exchange Act) of any securities of CYRK such that, as a result of such acquisition, such person or group beneficially owns (within the meaning of Rule 13d-3(a)(1) under the Exchange Act) 51% or more of CYRK's then outstanding voting securities entitled to vote on a regular basis for a majority of the Board of Directors of CYRK; (b) the sale of all or substantially all of the assets of CYRK (including, without limitation, by way of merger, consolidation, lease or transfer) in a transaction where CYRK or the beneficial owners of common stock of CYRK do not receive (i) voting securities representing a majority of the voting power entitled to vote on a regular basis for the Board of Directors of the acquiring entity or of an affiliate which controls the acquiring entity, or (ii) securities representing a majority of the equity interest in the acquiring entity or of an affiliate which controls the acquiring entity, if other than a corporation; or (c) at any time the Continuing Directors (as defined below) do not constitute a majority of the Board of Directors of CYRK (or, if applicable, a successor corporation to the Company). For purposes of this Section 8.3, "Continuing Directors" shall mean, as of any date of determination, any member of the Board of Directors who (i) was a member of the Board of Directors on ________________ or (ii) was nominated for election or elected to the Board of Directors with the approval of a majority of the Continuing Directors who were members of the Board of Directors at the time of such nomination of election. 8.4 PAYMENTS UPON TERMINATION. (a) In the event of any termination pursuant to Section 8.1, Section 8.2(a) (if by Yucaipa) or Section 8.2(b) hereof, CYRK shall pay to Yucaipa an amount equal to the total management fees that would have been earned by Yucaipa under Section 3 hereof during the remaining term of this Agreement as if the Agreement has not been terminated. (b) In the event of any termination pursuant to Section 8.2(a) by CYRK, Yucaipa promptly shall refund to CYRK a prorated portion of the management fee received by it under Section 3 for the period in which such termination occurs. (c) In the event of any termination pursuant to Section 8.3, CYRK shall pay to Yucaipa an amount equal to the total management fees that would have been earned by Yucaipa under Section 3 hereof during the remaining term of this Agreement, as if the Agreement had not been terminated; provided that a discount rate of 10% shall be applied in valuing, for purposes of such payment, the management fees otherwise payable during such period. (d) Such amount, if any, which shall be due Yucaipa pursuant to this Section 8.4 in the event of any such termination shall be due and payable to Yucaipa, in full, as of the date of such termination. The parties intend that should the foregoing payments be determined to constitute liquidated damages, such payments shall in all events be deemed reasonable. 5 SECTION 9. NOTICES. 9.1 MANNER OF NOTICE. All notices, statements or other documents which any party shall be required or shall desire to give to the others hereunder shall be in writing and shall be given by the parties hereto only as follows: (a) by personal delivery, (b) by addressing it as indicated below, and by depositing it certified mail, postage prepaid, in the U.S. mail, first class, (c) by addressing it as indicated below, and by delivering it charges prepaid to a reputable overnight delivery service (e.g., Federal Express) or (d) by telecopier. 9.2 DELIVERY OF NOTICE; ADDRESS. If so delivered, mailed, couriered or telecopied, each such notice, statement or other document shall, except as herein expressly provided, be conclusively deemed to have been given when personally delivered, or on the third business day after the date of mailing, or on the first business day after the date of delivery to a reputable overnight delivery service, or when confirmation is received when sent by telecopier, as the case may be. The addresses of the parties shall be those of which the other parties actually receives written notice pursuant to this Section 9 and until further notice are: If to Yucaipa: The Yucaipa Companies 10000 Santa Monica Boulevard Fifth Floor Los Angeles, CA 90067 Attention: Bob Bermingham Facsimile: 310-789-7201 If to CYRK: CYRK, Inc. 3 Pond Road Gloucester, Massachusetts 01930 Attention: President Facsimile: 978-281-2088 SECTION 10. MISCELLANEOUS. 10.1 ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains all of the terms and conditions agreed upon by the parties hereto in connection with the subject matter hereof. This Agreement may not be amended, modified or changed except by written instrument signed by all of the parties hereto. 10.2 ASSIGNMENT; SUCCESSORS. This Agreement shall not be assigned and is not assignable by any party without the prior written consent of each of the other parties hereto; provided, however, that Yucaipa may assign, without the prior consent of CYRK or the Company, its rights and obligations under this Agreement to any of its affiliates controlled by 6 Ronald Burkle, and provided further, that Yucaipa may assign the right to receive any payment hereunder to any other person or entity. Subject to the preceding sentence, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective permitted successors and assigns. 10.3 CAPTIONS. All captions and headings are inserted for the convenience of the parties, and shall not be used in any way to modify, limit, construe or otherwise affect this Agreement. 10.4 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal domestic laws of the State of Delaware, without reference to the choice of law principles thereof. 10.5 ATTORNEYS' FEES. If any legal action is brought concerning any matter relating to this Agreement, or by reason of any breach of any covenant, condition or agreement referred to herein, the prevailing party shall be entitled to have and recover from the other party to the action all costs and expenses of suit, including attorneys' fees. 10.6 SEVERABILITY. If any term, provision or condition of this Agreement is determined by a court or other judicial or administrative tribunal to be illegal, void or otherwise ineffective or not in accordance with public policy, the remainder of this Agreement shall not be affected thereby and shall remain in full force and effect. 10.7 INTERPRETATION. In the event of a dispute hereunder, this Agreement shall be interpreted in accordance with its fair meaning and shall not be interpreted for or against any party hereto on the ground that such party drafted or caused to be drafted this Agreement or any part hereof. 10.8 INDEMNITY. The parties to this Agreement shall indemnify and hold one another and their respective officers, directors, employees and agents, harmless from any and all loss, cost, liability and damage (including attorneys' fees) arising out of or connected with, or claimed to arise out of or be connected with, any act performed or omitted to be performed under this Agreement, provided such act or omission was taken in good faith, and in the event of criminal proceedings, that the indemnitee had no reasonable cause to believe his conduct was unlawful. An adverse judgment or plea of nolo contendere shall not, of itself, create a presumption that the indemnitee did not act in good faith or that he had reasonable cause to believe his conduct was unlawful. Expenses incurred in defending a civil or criminal action shall be paid by the indemnitor upon receipt of an undertaking by or on behalf of the indemnitee to repay such amount if it be later shown that such person was not entitled to indemnification. 7 IN WITNESS WHEREOF, the parties hereto have caused this Management Agreement to be duly executed as of the date first above written. THE YUCAIPA COMPANIES By: __________________________ Name:_________________________ Title: _______________________ CYRK, INC. By: __________________________ Name:_________________________ Title: _______________________ EX-10.2 7 EMPLOYMENT AGREEMENT WITH A. BROWN 1 EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of __________, 1999, by and between Allan Brown (hereinafter referred to as "Executive"), Cyrk, Inc., a Delaware corporation (the "Corporation"), and Simon Marketing, Inc., a Delaware corporation ("SM"), with reference to the following facts: A. Pursuant to an Employment Agreement dated as of May 7, 1997 (the "Prior Agreement"), Executive has been employed by SM. B. SM is a wholly-owned subsidiary of the Corporation. C. Executive remains a person whose skills, experience and training are required by the Corporation and SM. Executive, the Corporation, and SM wish to terminate the Prior Agreement, and to enter into a new agreement whereby Executive will serve as Co-Chief Executive Officer and Co-President of the Corporation on the terms and conditions hereinafter set forth. D. In order to induce Executive to accept such employment, SM has agreed to guarantee the obligations of the Corporation hereunder. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 POSITION AND DUTIES The Corporation hereby employs Executive, and Executive accepts such employment, as Co-Chief Executive Officer and Co-President of the Corporation upon the terms and provisions set forth in this Agreement. Executive shall report only to the Board of Directors of the Corporation (the "Board") through the Chairman of the Board, and, subject to the directions of the Board, acting through the Chairman of the Board, shall have full general supervision, direction and control of all aspects of the business, officers and employees of the Corporation and its subsidiaries (including SM) that are customary for the Chief Executive Officer of a public company like the Corporation, except for such duties and responsibilities allocated by the Board (acting through its Chairman) to the other Co-Chief Executive Officer. All officers and employees of the Corporation and its subsidiaries (including SM) shall report directly or indirectly to Executive or to the Co-Chief Executive Officer as the Board may from time to time determine. The Corporation shall employ two administrative assistants and a driver to assist Executive on substantially the same basis on which such administrative assistants and driver were employed by SM immediately before the date of this Agreement. Executive shall devote his full working time and effort to the business and affairs of the Corporation and its subsidiaries and will act in accordance with the policies and directions of the Board, acting through its Chairman. Executive may 2 participate in other business activities and act as a director of any profit or nonprofit corporation, so long as such activity is not competitive with the business of the Corporation and its subsidiaries in any material respect and does not materially detract from the performance of his duties as a full time executive of the Corporation. The Prior Agreement is hereby terminated effective as of the day before the date of the closing under that certain Securities Purchase Agreement of even date herewith by and between Overseas Toys, L.P. and Cyrk, Inc. (the "Closing"). 1.2 BOARD OF THE CORPORATION; ADDITIONAL DUTIES So long as Executive is employed by the Corporation, Executive shall serve as a director of SM, and of such subsidiaries of the Corporation as the Board may designate, shall be nominated for election as a director of the Corporation at each meeting of the shareholders of the Corporation at which directors are elected (unless such nomination is unnecessary because Executive is serving as a director and his term is not expiring), and Executive shall perform additional duties for the Corporation and its subsidiaries (including SM) as the Board may reasonably request. In the event of the termination of Executive's employment for any reason, Executive agrees to resign as a director of the Company and of any or all subsidiaries of the Company upon the request of the Board, acting through its Chairman. 1.3 CONSULTING During the Consulting Term (as defined below), Executive shall make himself available from time to time as the Corporation and its subsidiaries (including SM) may reasonably request to consult with the Corporation and its subsidiaries (including SM) with regard to their business; provided, however, that (a) Executive shall not be required to be available more than 20 hours per month, or for more than two hours in any period of 24 consecutive hours, (b) Executive shall not be required to be available except on reasonable advance notice, and (c) Executive shall not be required to travel outside of a fifty (50) mile radius from his residence. 2. TERM Executive's employment under this Agreement shall commence on the date of the Closing, and shall continue for a period of three (3) years, or five (5) years if Executive gives a notice of extension before the expiration of thirty (30) months from the date hereof, unless in either case sooner terminated as hereinafter provided (the "Term"). This Agreement shall not become effective before the Closing, or if the Closing does not occur. The "Consulting Term" shall commence on the expiration or earlier termination of the Term and shall continue for five (5) years thereafter, unless sooner terminated by the giving of thirty (30) days' written notice of termination by Executive to the Corporation, which Executive may give at any time after the second anniversary of the commencement of the Consulting Term. 3. COMPENSATION -2- 3 3.1 SALARY As compensation for the services to be performed by Executive during the Term of this Agreement, the Corporation shall pay Executive a salary of $750,000 per year during the Term, payable in accordance with the Corporation's practices in effect from time to time, but not less often than biweekly. 3.2 BONUSES Upon execution of this Agreement, Executive shall receive a cash bonus of $2,250,000 (the "Signing Bonus"). If for any reason or for no reason, other than as set forth in Sections 6.4 or 6.6, Executive's employment with the Corporation and all of its subsidiaries is terminated by either Executive or the Corporation prior to the fifth anniversary of the Closing (including, without limitation, if Executive does not extend the Term to five years as set forth in Section 2), then within thirty (30) days of any such termination, Executive (or his estate if the termination is on account of Executive's death) shall repay to the Corporation the portion of the Signing Bonus attributable to any portion of such five-year period remaining after the termination of Executive's employment, determined by prorating the Signing Bonus over the five-year period, with the proration over any period of less than a full calendar year being made on a daily basis of a 365 day year. Executive shall not be obligated to repay any portion of the Signing Bonus in the event of his termination of employment as described in Sections 6.4 or 6.6. Executive shall be entitled to participate in any bonus pool or discretionary bonus arrangement of the Corporation or its subsidiaries (including SM) at a level commensurate with his position as Co-Chief Executive Officer and Co-President of the Corporation; provided, however, that nothing in this Section 3.2 shall be deemed to require the Corporation to pay equal bonuses to the two Co-Chief Executive Officers or Co-Presidents. Such bonuses shall be based on reasonable criteria pertaining to the Corporation's performance. For each fiscal year of the Corporation, Executive shall receive a bonus of at least 2.133% of his annual salary for each percentage point by which the Corporation's actual EBITDA for such fiscal year exceeds 85% of the Corporation's projected or targeted EBITDA for such fiscal year as determined by the Board; provided, however, that this sentence shall not obligate the Corporation to pay Executive a bonus for any fiscal year greater than 32% of Executive's salary for such fiscal year. 3.3 BENEFITS Executive shall be entitled to participate in all pension plans, profit sharing plans, life, medical, dental, disability or other insurance plans or policies or other similar plans or benefits the Corporation or its subsidiaries (including SM) may provide generally for their senior executives or for employees of the Corporation or its subsidiaries (including SM) generally from time to time in effect during the Term, but as to medical and dental insurance plans, with terms no less favorable to Executive than provided to Executive by the SM immediately preceding the date of this Agreement. During the Consulting Term, the Corporation and its subsidiaries (including SM) will continue to provide Executive with group life, health and disability insurance coverage at their expense. During the Term, the -3- 4 Corporation shall reimburse Executive for medical and health-related expenses not covered or reimbursed by insurance (including, but not limited to, services recommended by a physician) in the same manner as was SM's practice immediately before the date of this Agreement. The Corporation shall at all times during the Term and during the Consulting Term pay for and maintain for the benefit of Executive and his designees the policies of split dollar life insurance in effect immediately before the date of this Agreement (the "Split Dollar Policies"). If for any reason any of such policies shall terminate or not be renewed, the Corporation will use its best reasonable commercial efforts to secure replacement policies providing comparable coverage. Executive, or his designee, shall be the owner of the policies for all purposes, subject to whatever rights the Corporation may have to a return of its premiums under certain circumstances. The Corporation shall continue to pay the premiums on such policies after the termination of the Consulting Term so long as Executive is willing to provide consulting services to the Corporation after the expiration of the Consulting Term on the same basis as the senior executives of the Corporation and Executive continues to be bound by the provisions of Section 8 of this Agreement. Executive shall be reimbursed for his reasonable estate planning, legal representation and advice, tax planning and return preparation and accounting fees and related expenses. (All of the benefits referred to in this Section 3.3 are collectively referred to as "Additional Benefits.") 3.4 STOCK OPTIONS Executive shall be considered for grants of options to acquire shares of the Corporation's common stock, SARS, phantom stock rights and any similar option or securities compensation, at a level commensurate with Executive's position as Co-Chief Executive Officer and Co-President of the Corporation, when and as such grants are considered for other executives or employees of the Corporation or its subsidiaries (including SM), but any grant is wholly at the discretion of the Board or appropriate Board committee. 3.5 PERIODIC REVIEW The Corporation shall review Executive's salary, stock options, and other benefits then being provided to Executive not less frequently than annually and may, but shall not be obligated to, increase Executive's salary. 3.6 REIMBURSEMENTS Executive shall be promptly reimbursed by the Corporation for all amounts reasonably expended by Executive in the course of performing duties for the Corporation, including without limitation, reasonable expenses for travel, entertainment, parking, automobile and driver, business meetings, professional dues, club memberships, and credit cards, all in accordance with policies set by the Board from time to time, subject to the following: (a) Executive shall be entitled to first class travel, meals and lodging; -4- 5 (b) The Corporation shall reimburse Executive for the travel expenses of a travelling companion, who may be a family member of Executive, and, if a family member of Executive, whose travel, meals and hotel accommodations may be the same as those of Executive; and (c) The Corporation shall reimburse Executive for the travel expenses of Executive's wife, minor children and caregiver travelling with Executive on a business trip which extends, or which is expected to extend, for more than seven (7) days, whose travel, meals and hotel accommodations may be the same as those of Executive. During the Term, Executive shall be entitled to the use of a Jaguar XJR or equivalent automobile on the same terms and conditions as the then-current practice of the Corporation and its subsidiaries (including SM) for their senior executives. 3.7 DEDUCTIONS There shall be deducted from Executive's gross compensation appropriate amounts for standard employee deductions (e.g. , income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.8 LOCATION Executive's office shall be in Century City, California. In the event that SM relocates its headquarters from Century City, California, Executive shall in no event be required to move his residence from Los Angeles, California, nor perform his duties outside of Century City, and shall be allowed to function as Co-Chief Executive Officer and Co-President of the Corporation from an appropriate and satisfactory office, and with an appropriate and satisfactory staff, provided to him in Century City. Executive will not be required to increase his travel beyond that currently undertaken by him and Executive shall at all times determine whether and when to travel on business trips. 4. VACATION Executive shall be entitled to not less than four (4) weeks of paid vacation for each twelve (12) month period of employment which shall accrue on a pro rata basis from the date of this Agreement. Subject to the foregoing minimum vacation, Executive shall be entitled to paid vacation, holidays and leave time in accordance with the plans, policies, programs and practices in effect generally with respect to other senior employees of the Corporation and its subsidiaries (including SM). 5. INDEMNIFICATION The Corporation, and its subsidiaries (including SM) shall, to the maximum extent permitted by law, jointly and severally indemnify and hold Executive harmless from and against any expenses, including reasonable attorney's fees, judgements, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising out of, or related to, Executive's employment by the Corporation or by its -5- 6 subsidiaries (including SM). The Corporation and its subsidiaries (including SM) shall advance to Executive any reasonable expenses, including reasonable attorneys' fees and costs of settlement, reasonably incurred in defending any such proceeding to the maximum extent permitted by law. The Corporation and its subsidiaries (including SM) shall cause Executive to be covered under directors and officers liability insurance policies in reasonable amounts in accordance with past practice. 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 EXPIRATION OF TERM Upon the expiration of the Term as specified in Section 2. 6.2 MUTUAL AGREEMENT Whenever the Corporation and Executive mutually agree in writing to termination. 6.3 TERMINATION FOR CAUSE At any time by the Corporation for cause. For purposes of this Agreement, "cause" shall mean and be limited to (a) Executive's conviction by, or entry of a plea of guilty in, a court of competent jurisdiction for a felony involving moral turpitude or harm to the business or reputation of the Corporation, and such conviction or guilty plea becoming final and non-appealable; and (b) material breach of duty or this Agreement by the Executive or his habitual neglect of such duty to perform his duties under this Agreement, in each case after reasonable written notice and a reasonable opportunity (of not less than thirty (30) days) to cure. Executive may not be terminated for cause unless and until the Board has made such determination and such determination has been confirmed after hearing by an independent arbitrator as provided in Section 12.1; provided, however, that the Corporation may suspend Executive's duties and authority hereunder with pay pending the outcome of such arbitration. 6.4 TERMINATION WITHOUT CAUSE The Corporation shall have the right to terminate Executive's employment with the Corporation without cause at any time, but in the event of any such termination, Executive shall be paid a lump sum payment equal to the present value of all "Compensation" for the greater of the unexpired portion of the Term, or one (1) year. For this purpose, the term "Compensation" shall mean (a) salary at the rate in effect on the date of termination, and (b) the average of the bonuses (but not the Signing Bonus) which Executive received with respect to the two (2) fiscal years of the Corporation preceding the fiscal year in which the termination occurs, with the bonus Executive received with respect to any short or partial fiscal year being annualized on the basis of a twelve-month year. The present value of Executive's Compensation shall be determined by discounting each element -6- 7 of Compensation from the date it would otherwise have been paid had this Agreement not been terminated until the date Executive receives the lump-sum payment under this Section 6.4 at a discount rate equal to the applicable federal rate (as defined in Section 1274(d) of the Internal Revenue Code) compounded semi-annually. Executive shall not be required to seek other employment or otherwise to mitigate his damages in the event of his discharge without cause. Executive shall have the right to "gross up" protection against any golden parachute excise tax under Section 4999 of the Internal Revenue Code. In addition, the Corporation shall continue to pay the premiums on the Split Dollar Policies for the balance of the Term and thereafter as provided in Section 3.3, and shall, at its expense, continue to provide Executive with coverage under all life, medical, dental, disability or other insurance plans or policies contemplated by Section 3.3 for the balance of the Term and for the Consulting Term, notwithstanding such termination. Executive acknowledges that payment of the foregoing amounts by the Corporation shall release the Corporation and its subsidiaries, and their respective officers, directors and affiliates from any further obligations or liability to Executive arising from termination of Executive's employment. 6.5 DEATH/DISABILITY For the purposes of this Agreement, disability shall mean the absence of Executive performing Executive's duties with the Corporation or its subsidiaries (including SM) on a full time basis for one hundred eighty (180) days in any period of twelve (12) consecutive months, as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Corporation or its insurers and reasonably acceptable to Executive or Executive's legal representative. If Executive shall become disabled, Executive's employment may be terminated by written notice to Executive, in which event Executive shall be entitled to receive disability insurance payments under policies maintained by the Corporation providing annual payments on terms no less favorable to Executive than those currently applicable to the chief executive officer and chief operating officer of the Corporation and its subsidiaries (including SM), or as increased from time to time, and continuation of medical and dental insurance, and payment of the premiums on his Split Dollar Policies through age 66. In addition, the Corporation shall, at its expense, continue to provide Executive with coverage under all other life, medical, dental, or other insurance plans or policies contemplated by Section 3.3 for the Consulting Term, notwithstanding such termination of Executive's employment. If Executive dies during the Term, the Corporation shall pay to Executive's estate (or such other person as Executive may designate in writing during his lifetime to the Corporation with the written consent of his spouse), Executive's salary and pro-rated Bonus through the date of death. 6.6 BY EXECUTIVE FOR GOOD REASON Executive shall have the right to terminate his employment with the Corporation at any time for good reason. For purposes of this Agreement, "good reason" shall mean and be limited to (a) any material diminution, on a cumulative basis, of Executive's duties, authority or position with the Corporation as specified in Section 1, or (b) a material breach by the Corporation of a material obligation of the Corporation under this -7- 8 Agreement, which such material breach is not cured within thirty (30) days written notice by Executive to the Corporation. Upon any termination of employment by Executive for good reason, Executive shall be entitled to receive the lump sum payment provided in Section 6.4 hereof within five (5) days after Executive gives notice of termination hereunder, and the other benefits provided in Section 6.4, as though the Corporation had terminated Executive's employment without cause. Executive's termination for good reason shall not be effective until confirmed after hearing by an independent arbitrator as provided in Section 12.1. 7. CHANGE OF CONTROL If the Corporation adopts any policy or enters into an agreement during the Term providing severance benefits and termination rights to any executive officer, or acceleration of options to acquire shares of its common stock, SARS, phantom stock rights and any similar option or securities compensation, on a change of control of the Corporation, then Executive shall be granted termination and acceleration rights and benefits as least as favorable as those granted to any such executive officer. 8. NON-COMPETE AND NO SOLICITATION 8.1 NON-COMPETITION. During the Term and the Consulting Term, the Executive will not directly or indirectly, as a consultant to, or employee, officer, director, stockholder (except as a holder of less than 5% of the outstanding stock of any publicly traded corporation), partner or other owner of or participant in any business entity other than the Corporation and its subsidiaries (including SM), engage in or assist any other person or entity to engage in any business which competes with any business in which the Corporation or its subsidiaries (including SM) or any of their affiliates is engaging or is preparing to engage at the time of termination of the Executive's employment, anywhere in the United States or anywhere else in the world where the Corporation or its subsidiaries (including SM) or any of their affiliates do business. 8.2 NON-SOLICITATION. The Executive acknowledges that he has had and will have extensive contacts with employees, customers and suppliers of the Corporation and its subsidiaries (including SM). Accordingly, the Executive covenants and agrees that, during the Term and the Consulting Term, he will not, without the written consent of the Corporation (i) solicit the services of any of the employees of the Corporation or its subsidiaries (including SM), who were employed by the Corporation or its subsidiaries (including SM) within the one (1) year period immediately prior to the termination of the Executive's employment with the Corporation, (ii) provide services to, or solicit, divert or take away, or attempt to divert or take away from the Corporation or its subsidiaries (including SM) the business of any person or entity who was a customer, or who had been actively solicited by the Corporation or its subsidiaries (including SM) to become a customer, of the Corporation, or its subsidiaries (including SM) within the one (1) year period immediately prior to the termination of the Executive's employment with the Corporation, or (iii) solicit, divert or take away, or attempt to divert or take away, from the Corporation or its subsidiaries (including SM) the business of any person or entity who was a supplier of the Corporation or its subsidiaries (including SM) within the one (1) year -8- 9 period immediately prior to the termination of the Executive's employment with the Corporation. 8.3 REMEDIES. Without limiting the remedies available to the Corporation, the Executive acknowledges that his talents and services are special and unique, and that a breach of any of the covenants contained in Section 8.1 or Section 8.2 could result in irreparable injury to the Corporation for which there might be no adequate remedy at law, and that, in the event of such a breach of threat thereof, the Corporation shall be entitled to obtain a temporary restraining order and/or a preliminary injunction and a permanent injunction restraining him from engaging in any activities prohibited by Section 8.1 or in Section 8.2 or such other equitable relief as may be required to enforce specifically any of the covenants of Section 8.1 or Section 8.2. The provisions of Section 8.1 and the provisions of Section 8.2 shall survive the termination of this Agreement and shall continue thereafter in full force and effect in accordance with the terms of Section 8.1 and 8.2. 9. CONFIDENTIALITY 9.1 The Executive will not at any time, directly or indirectly, disclose or divulge, except as required in connection with the performance of his duties for the Corporation, and except to legal counsel or as required or requested by any governmental agency or pursuant to legal process, any Confidential Information (as hereinafter defined) acquired by him during or in connection with his employment by the Corporation. As used herein "Confidential Information" means all trade secrets of the Corporation and its subsidiaries (including SM), including information of others that the Corporation and its subsidiaries (including SM) have agreed to keep confidential; provided, that Confidential Information shall not include any information that has entered or enters the public domain through no fault of the Executive or which the Executive is required to disclose by legal process or to defend himself in a legal proceeding. 9.2 The Executive shall make no use whatsoever, directly or indirectly, of any Confidential Information, except as required in connection with the performance of his duties for the Corporation or its subsidiaries (including SM). Nothing herein is intended to preclude Executive after termination of his employment with the Corporation from being employed in a similar capacity by others or for his own account and from using the business techniques, marketing skills and contacts and relationships which Executive possesses. 9.3 After the termination of the Executive's employment with the Corporation, upon the Corporation's request, the Executive shall immediately deliver to the Corporation all Confidential Information (including all copies) in his possession. 9.4 All copyrightable work by the Executive produced primarily during business hours or relating to the Corporation's businesses, which is produced during the Term, is intended to be "work made for hire" as defined in Section 101 of the Copyright Act of 1976, and shall be the property of the Corporation. If the copyright to any such copyrightable work is not the property of the Corporation by operation of law, the Executive will, without further consideration, assign to the Corporation all right, title and interest in such copyrightable work and will assist the Corporation and its nominees in every way, at the Corporation's -9- 10 expense, to secure, maintain and defend for the Corporation's benefit copyrights and any extensions and renewals thereof on any and all such work, including translations thereof in any and all countries, such work to be and to remain the property of the Corporation whether copyrighted or not. 10. GUARANTEE BY SUBSIDIARIES (INCLUDING SM) SM hereby unconditionally guarantees the due and timely performance by the Corporation of all of its obligations hereunder. If for any reason the Corporation fails to perform such obligations, SM shall, upon notice thereof from Executive, perform such obligations and Executive may proceed directly against the Corporation or SM in the event of any breach of this Agreement by the Corporation. The Corporation shall cause each new subsidiary which it organizes to guarantee unconditionally the due and timely performance by the Corporation of all of its obligations hereunder as soon as practicable after its formation. 11. LOAN TO EXECUTIVE 11.1 EXECUTIVE LOAN The parties to this Agreement hereby acknowledge that the Corporation has made a loan to Executive secured by certain shares of the common stock of the Corporation owned by Executive, which such loan has an outstanding balance as of the date of this Agreement of $575,000. The parties to this Agreement agree that such loan shall be extended until the expiration of the Term of this Agreement on the same terms and conditions as were in effect as of the date of this Agreement. The parties to this Agreement further agree that such loan shall be forgiven on the expiration of the Term of this Agreement, or on the earlier termination of this Agreement pursuant to Sections 6.4, 6.5 or 6.6. 11.2 LINE OF CREDIT Upon request from Executive, the Corporation will make available to Executive a revolving line of credit (the "Line of Credit") of up to $2,000,000. The Line of Credit (i) shall bear interest at the applicable federal rate and be payable at maturity, (ii) may be drawn upon up through and including the date of the annual meeting of the shareholders of the Corporation in 2001 at which directors are elected, provided that Executive shall not be entitled to draw on the Line of Credit after (A) the date of termination as to Executive of the Voting Agreement of even date herewith by and among Overseas Toys, L.P., Executive and other stockholders of the Corporation listed on the signature page thereof, or (B) the effective date of Executive's termination of employment by the Corporation for "cause" under Section 6.3 or of Executive's voluntary termination of his employment without "good reason," as defined in Section 6.6, (iii) will provide that amounts borrowed and repaid may -10- 11 be reborrowed, (iv) will be due and payable six months after the earliest applicable date specified in clause (ii) of this sentence (including subclauses (A) and (B) thereof), and (v) will otherwise be on commercially reasonable terms and conditions. The Line of Credit will be full recourse and will be secured by a pledge of the minimum number of shares of common stock of the Corporation owned by Executive required to be pledged under applicable Federal margin requirements to secure the Line of Credit (or, if Federal margin requirements are not applicable to the Line of Credit, the minimum number of shares which would be required to be pledged to secure the Line of Credit if such Federal margin requirements were applicable). 12. MISCELLANEOUS 12.1 ARBITRATION Except for equitable relief as provided in Section 8.3 and provisional relief by a court pending arbitration, arbitration in accordance with the then most applicable rules of the American Arbitration Association shall be the exclusive remedy for resolving any dispute or controversy between the parties, including, but not limited to, any dispute of any nature between the parties as well as any dispute regarding the termination of Executive's employment, or the application, interpretation or validity of this Agreement. If the parties are unable to agree upon an arbitrator, they shall select a single arbitrator from a list of nine arbitrators designated by the office of the American Arbitration Association having responsibility for Century City, California, all of whom shall be retired judges who are actively involved in hearing private employment cases or who are members of the American Arbitration Association's employment panel. If the parties are unable to agree upon an arbitrator from the list, they shall each strike names alternatively from the list, with the first to strike being determined by lot. The remaining name on the list shall be the arbitrator. The Corporation shall initially bear the fees and expenses of the arbitrator and all other expenses of the arbitration other than any filing fees required of claimants by the American Arbitration Association. Each party shall be responsible for the payment of his, her or its attorney's fees and the costs associated with the preparation and presentation of his, her or its case; provided, however, the arbitrator may, to the extent permitted by law, award attorneys fees, costs and expenses to the prevailing party. Judgment may be entered on the award of the arbitrator in any court having jurisdiction. Unless mutually agreed otherwise by the parties, any arbitration shall be conducted in Century City, California. The arbitrator shall be empowered to grant only such relief as would be available in a court of law. The arbitrator shall, upon an appropriate motion, dismiss any claim without an evidentiary hearing if the party bringing the motion establishes that he or she, or it would be entitled to summary judgement if the matter had been pursued in court litigation. In the event of any conflict between this Section 12.1 and the rules of the American Arbitration Association, the provisions of this Section 12.1 shall be determinative. The arbitrator shall render an award and written opinion, and the award shall be final and binding upon the parties. If any of the provisions of the Agreement are determined to be unlawful or otherwise unenforceable, in whole or in part, such determination shall not affect the validity of the remainder of this Agreement, and this Agreement shall be reformed to the extent necessary to carry out its provisions to the greatest extent possible and to insure that the resolution of all conflicts -11- 12 between the parties, including those arising out of statutory claims, shall be resolved by neutral, binding arbitration. If a court should find that this arbitration provision is not absolutely binding, then the parties intend any arbitration decision and award to be fully admissible in evidence in any subsequent action, given great weight by any finder of fact, and treated as determinative to the maximum extent permitted by law. 12.2 NO THIRD-PARTY BENEFICIARIES This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 12.3 ENTIRE AGREEMENT This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 12.4 SUCCESSION AND ASSIGNMENT This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the Corporation and Executive; provided, however, that the Corporation may (i) assign any or all of its rights and interests hereunder to one or more of its affiliates, (ii) designate one or more of its affiliates to perform its obligations hereunder (in any or all of which cases the Corporation nonetheless shall remain responsible for the performance of all of its obligations hereunder); and (iii) assign its rights and interests hereunder to any entity into which the Corporation may be merged or which may succeed to substantially all of its assets or business. 12.5 COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 12.6 HEADINGS The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this agreement. 12.7 NOTICES All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it -12- 13 is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO CORPORATION: CYRK, INC. 3 Pond Road Gloucester, Massachusetts 01930 Attn: Chief Financial Officer with copy to: Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 Attn. Richard D. Pritz and Choate, Hall & Stewart Exchange Place 53 State Street Boston, Massachusetts 02109 Attn. Cameron Read IF TO EXECUTIVE: ALLAN BROWN 29020 Cliffside Drive Malibu, CA 90265 with copy to: Irell & Manella LLP 1800 Avenue of the Stars, Suite 900 Los Angeles, CA 90067-4276 Attn: Martin N. Gelfand, Esq. Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail) , but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. -13- 14 12.8 GOVERNING LAW This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California without giving effect to any choice or conflict of law provision or rule (whether of the State of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of California. 12.9 AMENDMENTS AND WAIVERS No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by Corporation and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 12.10 SEVERABILITY Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. [Next page is signature page] -14- 15 IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. "THE CORPORATION" CYRK, INC. By: ____________________________ Its: ____________________________ "SM" SIMON MARKETING, INC. By: ____________________________ Its: ____________________________ "EXECUTIVE" -------------------------------- Allan Brown -15- EX-10.3 8 EMPLOYMENT AGREEMENT WITH P. BRADY 1 Exhibit 10.3 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of September 1, 1999, by and between Patrick Brady (hereinafter referred to as "Executive"), and Cyrk, Inc., a Delaware corporation (the "Corporation"), with reference to the following facts: A. Executive has been employed by the Corporation since 1989, and has served as its Chief Executive Officer since December 31, 1998. B. Executive remains a person whose skills, experience and training are required by the Corporation. Executive and the Corporation wish to enter into an employment agreement whereby Executive will serve as Co-Chief Executive Officer and Co-President of the Corporation on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 POSITION AND DUTIES The Corporation hereby employs Executive, and Executive accepts such employment, as Co-Chief Executive Officer and Co-President of the Corporation upon the terms and provisions set forth in this Agreement. Executive shall report only to the Board of Directors of the Corporation (the "Board") through the Chairman of the Board, and, subject to the directions of the Board, acting through the Chairman of the Board, shall have full general supervision, direction and control of all aspects of the business, officers and employees of the Corporation and its subsidiaries that are customary for the Chief Executive Officer of a public company like the Corporation, except for such duties and responsibilities allocated by the Board (acting through its Chairman) to the other Co-Chief Executive Officer. All officers and employees of the Corporation and its subsidiaries shall report directly or indirectly to Executive or to the other Co-Chief Executive Officer as the Board may from time to time determine. The Corporation shall employ two administrative assistants to assist Executive on substantially the same basis on which such administrative assistants were employed by the Corporation immediately before the date of this Agreement. Executive shall devote his full working time and effort to the business and affairs of the Corporation and its subsidiaries and will act in accordance with the policies and directions of the Board, acting through its Chairman. Executive may participate in other business activities and act as a director of any profit or nonprofit corporation, so long as such activity is not competitive with the business of the Corporation and its subsidiaries in any material respect and does not materially detract from the performance of his duties as a full time executive of the Corporation. -1- 2 1.2 BOARD OF THE CORPORATION; ADDITIONAL DUTIES So long as Executive is employed by the Corporation, the Corporation shall nominate and recommend Executive for election to the Board, Executive shall serve as a director of such subsidiaries of the Corporation as the Board may designate, and Executive shall perform additional duties for the Corporation and its subsidiaries as the Board may reasonably request. In the event of the termination of Executive's employment for any reason, Executive agrees to resign as a director of the Company and of any or all subsidiaries of the Company upon the request of the Board, acting through its Chairman. 2. TERM Executive's employment under this Agreement shall commence on the date of closing under the Securities Purchase Agreement of even date herewith by and between Overseas Toys, L.P. and Cyrk, Inc. (the "Closing"), and shall continue for a period of three (3) years unless sooner terminated as hereinafter provided (the "Term"). This Agreement shall not be effective prior to the Closing or if the Closing does not occur. 3. COMPENSATION 3.1 SALARY As compensation for the services to be performed by Executive during the Term of this Agreement, the Corporation shall pay Executive a salary of $600,000 per year during the Term, payable in accordance with the Corporation's practices in effect from time to time, but not less often than biweekly. 3.2 BONUSES Executive shall be entitled to participate in any bonus pool or discretionary bonus arrangement of the Corporation or its subsidiaries at a level commensurate with his position as Co-Chief Executive Officer and Co-President of the Corporation; provided, however, that nothing contained in this Section 3.2 shall require that the Corporation pay the same bonus to Executive and the other Co-Chief Executive Officer and Co-President. Any bonus paid to Executive pursuant to this Section 3.2 shall be based on reasonable criteria pertaining to the Corporation's performance subject to the provisions of the following sentence. For each full fiscal year of the Corporation during the Term, Executive shall receive a bonus of $26,666.66 for each percentage point (PRO RATED for partial percentage points) by which the Corporation's actual EBITDA for such fiscal year exceeds 85% of the Corporation's projected or targeted EBITDA for such fiscal year as determined by the Board, up to a maximum bonus of $400,000 if the Corporation's actual EBITDA for such fiscal year meets or exceeds the Corporation's projected or targeted EBITDA for such fiscal year as determined by the Board; provided, however, that Executive shall receive an additional bonus of $80,000 if the Corporation's actual EBITDA for such fiscal year equals or exceeds 115% of the Corporation's projected or targeted EBITDA for such fiscal year as determined by the Board; provided -2- 3 further, however, that with respect to partial fiscal years during the Term (i.e., from the date hereof until December 31, 1999 and from January 1, 2002 until the third anniversary of the date hereof), Executive shall receive a PRO RATED portion of the bonus otherwise payable to Executive in accordance with this sentence (i.e., (A) the amount of the bonus Executive would have received with respect to the full fiscal year containing such partial fiscal year if the Term had included the full fiscal year, multiplied by (B) the number of days elapsed in such partial fiscal year, and divided by (C) 365) if the Corporation's actual EBITDA for the full fiscal year containing such partial fiscal year exceeds 85% of the Corporation's projected or targeted EBITDA for such fiscal year as determined by the Board. If the Corporation's actual EBITDA for any fiscal year during the Term does not exceed 85% of the Corporation's projected or targeted EBITDA for such fiscal year as determined by the Board, then the payment of any bonus to Executive for such fiscal year shall be subject to the sole discretion of the Board. 3.3 BENEFITS Executive shall be entitled to participate in all pension plans, profit sharing plans, life, medical, dental, disability or other insurance plans or policies or other similar plans or benefits the Corporation or its subsidiaries may provide generally for their senior executives or for employees of the Corporation or its subsidiaries generally from time to time in effect during the Term, but as to medical and dental insurance plans, with terms no less favorable to Executive than provided to Executive by the Corporation immediately preceding the date of this Agreement. Subject to the last sentence of Section 3.6 hereof, during the Term, the Corporation shall reimburse Executive for medical and health-related expenses not covered or reimbursed by insurance (including, but not limited to, services recommended by a physician) in the same manner as was the Corporation's practice immediately before the date of this Agreement. The Corporation shall at all times, unless Executive's employment is terminated by the Corporation for cause in accordance with the provisions of Section 6.3 or by Executive without "good reason" as defined in Section 6.6, pay for and maintain for the benefit of Executive and his designees the policies of split dollar life insurance in effect immediately before the date of this Agreement (the "Split Dollar Policies"); provided, however, that the ten remaining annual premium payments shall not exceed $80,000 per annum; and provided further, however, that the Corporation may substitute such Split Dollar Policies for similar policies of split dollar life insurance as long as such substitution does not subject Executive to higher tax payments than Executive currently is obligated to make with respect to the Split Dollar Policies (unless the Corporation reimburses Executive on a "gross up" basis for the difference in such tax payments). If for any reason any of such policies shall terminate or not be renewed, the Corporation will use its best reasonable commercial efforts to secure replacement policies providing comparable coverage. Executive, or his designee, shall be the owner of the policies for all purposes, subject to whatever rights the Corporation may have to a return of its premiums under certain circumstances. 3.4 STOCK OPTIONS -3- 4 Executive shall be considered for grants of options to acquire shares of the Corporation's common stock, SARS, phantom stock rights and any similar option or securities compensation, at a level commensurate with Executive's position as Co-Chief Executive Officer and Co-President of the Corporation, when and as such grants are considered for other executives or employees of the Corporation or its subsidiaries, but any grant is wholly at the discretion of the Board or appropriate Board committee. 3.5 PERIODIC REVIEW The Corporation shall review Executive's salary, stock options and other benefits then being provided to Executive not less frequently than annually and may, but shall not be obligated to, increase Executive's salary. 3.6 REIMBURSEMENTS Executive shall be promptly reimbursed by the Corporation for all amounts reasonably expended by Executive in the course of performing duties for the Corporation, including without limitation, reasonable expenses for travel, entertainment, automobile, parking, business meetings, professional dues, club memberships, and credit cards, all in accordance with policies set by the Board from time to time, provided that Executive shall be entitled to first class travel, meals and lodging when traveling in the course of performing his duties for the Corporation. During the Term, Executive shall be entitled to the use of a Jaguar XJR or equivalent automobile on the same terms and conditions as the then-current practice of the Corporation and its subsidiaries for their senior executives. Executive shall be reimbursed for his reasonable estate planning, legal representation and advice, tax planning and return preparation and accounting fees and related expenses; provided that the maximum aggregate reimbursement to Executive pursuant to this sentence, PLUS the aggregate amount of any reimbursements to Executive pursuant to the second sentence of Section 3.3, shall not exceed $100,000 per year. 3.7 DEDUCTIONS There shall be deducted from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 3.8 LOCATION The Corporation's two primary places of business are in the vicinities of Boston, Massachusetts and Los Angeles, California, and Executive shall perform his primary duties at either or both of such locations as the Board, acting through its Chairman, shall reasonably determine. In the event that the Corporation relocates its headquarters to a location other than one within the Boston or Los Angeles areas, Executive shall in no event be required to move his residence to a location other than one within the Boston or Los Angeles areas, nor perform his duties outside of Boston and Los Angeles, and shall be allowed to function as Co-Chief Executive Officer and -4- 5 Co-President of the Corporation from an appropriate and satisfactory office, and with an appropriate and satisfactory staff, provided to him in either Boston or Los Angeles as determined by the Board. 4. VACATION Executive shall be entitled to not less than four (4) weeks of paid vacation for each twelve (12) month period of employment which shall accrue on a pro rata basis from the date of this Agreement. Subject to the foregoing minimum vacation, Executive shall be entitled to paid vacation, holidays and leave time in accordance with the plans, policies, programs and practices in effect generally with respect to other senior employees of the Corporation and its subsidiaries 5. INDEMNIFICATION The Corporation, and its subsidiaries shall, to the maximum extent permitted by law, jointly and severally indemnify and hold Executive harmless from and against any expenses, including reasonable attorney's fees, judgements, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising out of, or related to, Executive's employment by the Corporation or by its subsidiaries. The Corporation and its subsidiaries shall advance to Executive any reasonable expenses, including reasonable attorneys' fees and costs of settlement, reasonably incurred in defending any such proceeding to the maximum extent permitted by law. The Corporation and its subsidiaries shall cause Executive to be covered under directors and officers liability insurance policies in reasonable amounts in accordance with past practice. 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 EXPIRATION OF TERM Upon the expiration of the Term as specified in Section 2. 6.2 MUTUAL AGREEMENT Whenever the Corporation and Executive mutually agree in writing to termination. 6.3 TERMINATION FOR CAUSE At any time by the Corporation for cause. For purposes of this Agreement, "cause" shall mean and be limited to (a) Executive's conviction by, or entry of a plea of guilty in, a court of competent jurisdiction for a felony involving moral turpitude or harm to the business or reputation of the Corporation, and such conviction or guilty plea becoming final and non-appealable; and (b) material breach of duty or this Agreement by Executive or his habitual neglect of such duty to perform his duties under -5- 6 this Agreement, in each case after reasonable written notice and a reasonable opportunity (of not less than thirty (30) days) to cure. Executive may not be terminated for cause unless and until the Board has made such determination and such determination has been confirmed after hearing by an independent arbitrator as provided in Section 12.1; provided, however, that the Corporation may suspend Executive's duties and authority hereunder with pay pending the outcome of such arbitration. 6.4 TERMINATION WITHOUT CAUSE The Corporation shall have the right to terminate Executive's employment with the Corporation without cause at any time, but in the event of any such termination, Executive shall be paid a lump sum payment equal to the present value of all "Compensation" for the unexpired portion of the Term plus an additional two (2) years. For this purpose, the term "Compensation" shall mean (a) salary at the rate in effect on the date of termination, and (b) the average of the bonuses which Executive received with respect to the two (2) fiscal years of the Corporation preceding the fiscal year in which the termination occurs, with the bonus Executive received with respect to any short or partial fiscal year being annualized on the basis of a twelve-month year. The present value of Executive's Compensation shall be determined by discounting each element of Compensation from the date it would otherwise have been paid had this Agreement not been terminated until the date Executive receives the lump-sum payment under this Section 6.4 at a discount rate equal to the applicable federal rate (as defined in Section 1274(d) of the Internal Revenue Code) compounded semi-annually. Executive shall not be required to seek other employment or otherwise to mitigate his damages in the event of his discharge without cause. Executive shall have the right to "gross up" protection against any golden parachute excise tax under Section 4999 of the Internal Revenue Code. In addition, the Corporation shall continue to pay the premiums on the Split Dollar Policies (or any policies substituted therefor in accordance with the provisions of Section 3.3), and shall, at its expense, continue to provide Executive with coverage under all life, medical, dental, disability or other insurance plans or policies contemplated by Section 3.3 for the balance of the Term, notwithstanding such termination. Executive acknowledges that payment of the foregoing amounts by the Corporation shall release the Corporation and its subsidiaries, and their respective officers, directors and affiliates from any further obligations or liability to Executive arising from termination of Executive's employment. 6.5 DEATH/DISABILITY For the purposes of this Agreement, disability shall mean the absence of Executive performing Executive's duties with the Corporation or its subsidiaries on a full time basis for one hundred eighty (180) days in any period of twelve (12) consecutive months, as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Corporation or its insurers and reasonably acceptable to Executive or Executive's legal representative. If Executive shall become disabled, Executive's employment may be terminated by written notice to Executive, in which event Executive shall be entitled to receive disability insurance -6- 7 payments under policies maintained by the Corporation providing annual payments on terms no less favorable to Executive than those currently applicable to the chief executive officer and chief operating officer of the Corporation and its subsidiaries, or as increased from time to time, and continuation of medical and dental insurance, and payment of the premiums on his Split Dollar Policies through age 66. If Executive dies during the Term, the Corporation shall pay to Executive's estate (or such other person as Executive may designate in writing during his lifetime to the Corporation with the written consent of his spouse), Executive's salary and pro-rated Bonus through the date of death. 6.6 BY EXECUTIVE FOR GOOD REASON Executive shall have the right to terminate his employment with the Corporation at any time for good reason. For purposes of this Agreement, "good reason" shall mean and be limited to (a) any material diminution, on a cumulative basis, of Executive's duties, authority or position with the Corporation as specified in Section 1, or (b) a material breach by the Corporation of a material obligation of the Corporation under this Agreement, which such material breach is not cured within thirty (30) days written notice by Executive to the Corporation. Upon any termination of employment by Executive for good reason, Executive shall be entitled to receive the lump sum payment provided in Section 6.4 hereof within five (5) days after Executive gives notice of termination hereunder, and the other benefits provided in Section 6.4, as though the Corporation had terminated Executive's employment without cause. Executive's termination for good reason shall not be effective until confirmed after hearing by an independent arbitrator as provided in Section 12.1. 7. CHANGE OF CONTROL If the Corporation adopts any policy or enters into an agreement during the Term providing severance benefits and termination rights to any executive officer, or acceleration of options to acquire shares of its common stock, SARS, phantom stock rights and any similar option or securities compensation, on a change of control of the Corporation, then Executive shall be granted termination and acceleration rights and benefits as least as favorable as those granted to any such executive officer. 8. NON-COMPETE AND NO SOLICITATION 8.1 NON-COMPETITION. During the Term Executive will not directly or indirectly, as a consultant to, or employee, officer, director, stockholder (except as a holder of less than 5% of the outstanding stock of any publicly traded corporation), partner or other owner of or participant in any business entity other than the Corporation and its subsidiaries, engage in or assist any other person or entity to engage in any business which competes with any business in which the Corporation or its subsidiaries or any of their affiliates is engaging or is preparing to engage at the time of termination of Executive's employment, anywhere in the United States or anywhere else in the world where the Corporation or its subsidiaries or any of their affiliates do business. -7- 8 8.2 NON-SOLICITATION. Executive acknowledges that he has had and will have extensive contacts with employees, customers and suppliers of the Corporation and its subsidiaries. Accordingly, Executive covenants and agrees that, during the Term and for an additional two (2) years thereafter, he will not, without the written consent of the Corporation (i) solicit the services of any of the employees of the Corporation or its subsidiaries, who were employed by the Corporation or its subsidiaries within the one (1) year period immediately prior to the termination of Executive's employment with the Corporation, (ii) provide services to, or solicit, divert or take away, or attempt to divert or take away from the Corporation or its subsidiaries the business of any person or entity who was a customer, or who had been actively solicited by the Corporation or its subsidiaries to become a customer, of the Corporation, or its subsidiaries within the one (1) year period immediately prior to the termination of Executive's employment with the Corporation, or (iii) solicit, divert or take away, or attempt to divert or take away, from the Corporation or its subsidiaries the business of any person or entity who was a supplier of the Corporation or its subsidiaries within the one (1) year period immediately prior to the termination of Executive's employment with the Corporation. 8.3 REMEDIES. Without limiting the remedies available to the Corporation, Executive acknowledges that his talents and services are special and unique, and that a breach of any of the covenants contained in Section 8.1 or Section 8.2 could result in irreparable injury to the Corporation for which there might be no adequate remedy at law, and that, in the event of such a breach of threat thereof, the Corporation shall be entitled to obtain a temporary restraining order and/or a preliminary injunction and a permanent injunction restraining him from engaging in any activities prohibited by Section 8.1 or in Section 8.2 or such other equitable relief as may be required to enforce specifically any of the covenants of Section 8.1 or Section 8.2. The provisions of Section 8.1 and the provisions of Section 8.2 shall survive the termination of this Agreement and shall continue thereafter in full force and effect in accordance with the terms of Section 8.1 and 8.2. 9. CONFIDENTIALITY 9.1 Executive will not at any time, directly or indirectly, disclose or divulge, except as required in connection with the performance of his duties for the Corporation, and except to legal counsel or as required or requested by any governmental agency or pursuant to legal process, any Confidential Information (as hereinafter defined) acquired by him during or in connection with his employment by the Corporation. As used herein "Confidential Information" means all trade secrets of the Corporation and its subsidiaries, including information of others that the Corporation and its subsidiaries have agreed to keep confidential; provided, that Confidential Information shall not include any information that has entered or enters the public domain through no fault of Executive or which Executive is required to disclose by legal process or to defend himself in a legal proceeding. 9.2 Executive shall make no use whatsoever, directly or indirectly, of any Confidential Information, except as required in connection with the performance of his -8- 9 duties for the Corporation or its subsidiaries. Nothing herein is intended to preclude Executive after termination of his employment with the Corporation from being employed in a similar capacity by others or for his own account and from using the business techniques, marketing skills and contacts and relationships which Executive possesses. 9.3 After the termination of Executive's employment with the Corporation, upon the Corporation's request, Executive shall immediately deliver to the Corporation all Confidential Information (including all copies) in his possession. 9.4 All copyrightable work by Executive produced primarily during business hours or relating to the Corporation's businesses, which is produced during the Term, is intended to be "work made for hire" as defined in Section 101 of the Copyright Act of 1976, and shall be the property of the Corporation. If the copyright to any such copyrightable work is not the property of the Corporation by operation of law, Executive will, without further consideration, assign to the Corporation all right, title and interest in such copyrightable work and will assist the Corporation and its nominees in every way, at the Corporation's expense, to secure, maintain and defend for the Corporation's benefit copyrights and any extensions and renewals thereof on any and all such work, including translations thereof in any and all countries, such work to be and to remain the property of the Corporation whether copyrighted or not. 10. GUARANTEE BY SUBSIDIARIES The Corporation hereby unconditionally guarantees the due and timely performance of all of its obligations hereunder. If for any reason the Corporation fails to perform such obligations, the Corporation's subsidiaries shall, upon notice thereof from Executive, perform such obligations and Executive may proceed directly against the Corporation or its subsidiaries in the event of any breach of this Agreement by the Corporation. The Corporation shall cause each new subsidiary which it organizes to guarantee unconditionally the due and timely performance by the Corporation of all of its obligations hereunder as soon as practicable after its formation. 11. LOAN TO EXECUTIVE 11.1 EXECUTIVE LOAN The parties to this Agreement hereby acknowledge that the Corporation has made a loan to Executive secured by certain shares of the common stock of the Corporation owned by Executive, which such loan has an outstanding balance as of the date of this Agreement of $78,525. The parties to this Agreement agree that such loan shall be extended until the expiration of the Term of this Agreement on the same terms and conditions as were in effect as of the date of this Agreement. The parties to this Agreement further agree that such loan shall be forgiven on the expiration of the Term of this Agreement, or on the earlier termination of this Agreement pursuant to Sections 6.4, 6.5 or 6.6. -9- 10 11.2 LINE OF CREDIT Upon request from Executive, the Corporation will make available to Executive a revolving line of credit (the "Line of Credit") of up to $2,000,000. The Line of Credit (i) shall bear interest at the applicable federal rate and be payable at maturity, (ii) may be drawn upon up through the date of the annual meeting of the shareholders of the Corporation in 2001 at which directors are elected, provided that Executive shall not be entitled to draw on the Line of Credit after (A) the date of termination as to Executive of the Voting Agreement of even date herewith by and among Overseas Toys, L.P., Executive, and other stockholders of the Corporation listed on the signature page thereof, or (B) the date of Executive's termination of employment by the Corporation for "cause" under Section 6.3 or of Executive's voluntarily termination of his employment without "good reason," as defined in Section 6.6, (iii) will provide that amounts borrowed and repaid may be reborrowed, (iv) will be due and payable six months after the earliest applicable date specified in clause (ii) (including subclauses (A) and (B) thereof) of this sentence, and (v) will otherwise be on commercially reasonable terms and conditions. The Line of Credit will be full recourse and will be secured by a pledge of the minimum number of shares of common stock of the Corporation owned by Executive required to be pledged under applicable Federal margin requirements to secure the Line of Credit (or, if Federal margin requirements are not applicable to the Line of Credit, the minimum number of shares which would be required to be pledged to secure the Line of Credit if such Federal margin requirements were applicable). 12. MISCELLANEOUS 12.1 ARBITRATION Except for equitable relief as provided in Section 8.3 and provisional relief by a court pending arbitration, arbitration in accordance with the then most applicable rules of the American Arbitration Association shall be the exclusive remedy for resolving any dispute or controversy between the parties, including, but not limited to, any dispute of any nature between the parties as well as any dispute regarding the termination of Executive's employment, or the application, interpretation or validity of this Agreement. If the parties are unable to agree upon an arbitrator, they shall select a single arbitrator from a list of nine arbitrators designated by the office of the American Arbitration Association having responsibility for Century City, California, all of whom shall be retired judges who are actively involved in hearing private employment cases or who are members of the American Arbitration Association's employment panel. If the parties are unable to agree upon an arbitrator from the list, they shall each strike names alternatively from the list, with the first to strike being determined by lot. The remaining name on the list shall be the arbitrator. The Corporation shall initially bear the fees and expenses of the arbitrator and all other expenses of the arbitration other than any filing fees required of claimants by the American Arbitration Association. Each party shall be responsible for the payment of his, her or its attorney's fees and the costs associated with the preparation and presentation of his, her or its case; provided, however, the arbitrator may, to the extent permitted by law, award attorneys fees, costs and expenses to the -10- 11 prevailing party. Judgment may be entered on the award of the arbitrator in any court having jurisdiction. Unless mutually agreed otherwise by the parties, any arbitration shall be conducted in Century City, California. The arbitrator shall be empowered to grant only such relief as would be available in a court of law. The arbitrator shall, upon an appropriate motion, dismiss any claim without an evidentiary hearing if the party bringing the motion establishes that he or she, or it would be entitled to summary judgement if the matter had been pursued in court litigation. In the event of any conflict between this Section 12.1 and the rules of the American Arbitration Association, the provisions of this Section 12.1 shall be determinative. The arbitrator shall render an award and written opinion, and the award shall be final and binding upon the parties. If any of the provisions of the Agreement are determined to be unlawful or otherwise unenforceable, in whole or in part, such determination shall not affect the validity of the remainder of this Agreement, and this Agreement shall be reformed to the extent necessary to carry out its provisions to the greatest extent possible and to insure that the resolution of all conflicts between the parties, including those arising out of statutory claims, shall be resolved by neutral, binding arbitration. If a court should find that this arbitration provision is not absolutely binding, then the parties intend any arbitration decision and award to be fully admissible in evidence in any subsequent action, given great weight by any finder of fact, and treated as determinative to the maximum extent permitted by law. 12.2 NO THIRD-PARTY BENEFICIARIES This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 12.3 ENTIRE AGREEMENT This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 12.4 SUCCESSION AND ASSIGNMENT This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the Corporation and Executive; provided, however, that the Corporation may (i) assign any or all of its rights and interests hereunder to one or more of its affiliates, (ii) designate one or more of its affiliates to perform its obligations hereunder (in any or all of which cases the Corporation nonetheless shall remain responsible for the performance of all of its obligations hereunder); and (iii) assign its rights and interests hereunder to any entity into which the Corporation may be merged or which may succeed to substantially all of its assets or business. -11- 12 12.5 COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 12.6 HEADINGS The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this agreement. 12.7 NOTICES All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: IF TO CORPORATION: CYRK, INC. 3 Pond Road Gloucester, Massachusetts 01930 Attn: Chief Financial Officer with copy to: Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019 Attn: Richard D. Pritz and: Choate, Hall & Stewart Exchange Place 53 State Street Boston, Massachusetts 02109 Attn: Cameron Read IF TO EXECUTIVE: Patrick Brady -12- 13 71 Eastern Point Blvd. Gloucester, MA 01930 with copy to: Stroock & Stroock & Lavan LLP 100 Federal Street Boston, MA 02110-1813 Attn: Jeffery S. Laventhal Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 12.8 GOVERNING LAW This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California without giving effect to any choice or conflict of law provision or rule (whether of the State of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of California. 12.9 AMENDMENTS AND WAIVERS No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by Corporation and Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. -13- 14 12.10 SEVERABILITY Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. "THE CORPORATION" CYRK, INC. By: ____________________________ Its: ____________________________ "EXECUTIVE" -------------------------------- Patrick Brady -14- EX-99.1 9 TERMINATION AGREEMENT WITH CERTAIN EMPLOYEES 1 EXHIBIT 99.1 TERMINATION AGREEMENT This Termination Agreement is entered into as of September 1, 1999 by and among Cyrk, Inc., a Delaware corporation (the "COMPANY"), Patrick Brady, Allan Brown, Gregory Shlopak, Eric Stanton and Eric Stanton Self-Declaration of Revocable Trust (each a "STOCKHOLDER", and collectively the "STOCKHOLDERS"). INTRODUCTION The Company and the Stockholders are parties to a Shareholders Agreement, dated June 9, 1997, as amended on July 21, 1997, and attached hereto as EXHIBIT A (the "SHAREHOLDERS AGREEMENT"). The Company and each of the Stockholders wish to terminate the Shareholders Agreement in its entirety pursuant to the terms and conditions set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: SECTION 1. TERMINATION. As of the closing (the "CLOSING") of the transactions contemplated by the Securities Purchase Agreement between the Company and Overseas Toys, L.P. (the "INVESTOR"), dated the date hereof (the "SECURITIES PURCHASE AGREEMENT"), the Shareholders Agreement shall be terminated in its entirety, and shall be of no further force and effect. For the avoidance of doubt, Eric Stanton hereby acknowledges and agrees that at the Closing any right he had to be named to the Board of Directors of the Company (the "BOARD") pursuant to his Consulting Agreement with SMI Merger and the Company, dated May 7, 1997 (the "CONSULTING AGREEMENT"), or otherwise shall be terminated in its entirety and shall be of no further force and effect. In addition, Eric Stanton also acknowledges and agrees that he shall not exercise any right to be named to the Board pursuant to the Shareholders Agreement, the Consulting Agreement or otherwise from the date hereof until the termination of the Securities Purchase Agreement. SECTION 2. CONFLICTS. If there arises any conflict among any provision of the Shareholders Agreement and/or this Agreement, on the one hand, and any provision in the Voting Agreement entered into as of the date hereof among the Stockholders and the Investors (the "VOTING AGREEMENT"), on the other hand, then such provisions or provisions in the Voting Agreement, as the case may be, shall prevail. SECTION 3. GOVERNING LAW. This agreement shall be governed by and construed in accordance with the laws of the state of Delaware, without regard to its choice of law principles. 2 SECTION 4. COUNTERPARTS. This agreement may be executed in multiple counterparts, and counterparts by facsimile, each of which shall be deemed an original, but all of which when taken together shall constitute one and the same instrument. -2- 3 IN WITNESS WHEREOF, the parties have signed this Agreement as of the date first above written. CYRK, INC. _______________________ By:__________________________ Patrick Brady Patrick Brady, President, Chief Executive Officer and Chief Operating Officer _______________________ Allan Brown THE ERIC STANTON SELF- DECLARATION OF REVOCABLE TRUST _______________________ By:__________________________ Gregory Shlopak Eric Stanton, as Trustee _______________________ Eric Stanton -3- 4 EXHIBIT A (See Attached). -4- -----END PRIVACY-ENHANCED MESSAGE-----