EXHIBIT 10.1
EXCHANGE AND EXTENSION AGREEMENT
     THIS EXCHANGE AND EXTENSION AGREEMENT (“Agreement”) is made and entered
into as of June 30, 2006 by and between Crown EMAK Partners, LLC, a Delaware
limited liability company (the “Investor”), and EMAK Worldwide, Inc., a Delaware
corporation (the “Company”).
RECITALS
     A. The Investor and the Company entered into a Securities Purchase
Agreement, dated as of March 29, 2000 (the “Purchase Agreement”), pursuant to
which the Investor acquired an aggregate of 25,000 shares of Series A
mandatorily redeemable senior cumulative participating convertible preferred
stock, par value $.001 per share, (the “Series A Stock”). In connection with
such purchase, the Company granted to the Investor five year warrants
(collectively, the “Preferred Warrants”) to purchase shares of Series B senior
cumulative participating convertible preferred stock, par value $.001 per share,
(the “Series B Stock”), and Series C senior cumulative participating convertible
preferred stock, par value $.001 per share, (the “Series C Stock”).
     B. On March 19, 2004, the Company and the Investor entered into a Warrant
Exchange Agreement whereby the Investor received new warrants to purchase an
aggregate of 916,666 shares of Common Stock (“Common Warrants”) in exchange for
cancellation of the existing Preferred Warrants (which would also have been
convertible into 916,666 shares of Common Stock) (the “Exchange Transaction”).
As a result of the Exchange Transaction, the Investor received an extension of
time in which to exercise its right to purchase additional equity in the
Company, and the Company obtained an elimination of the preferred rights and
preferences as well as the preferred dividend associated with the Series B Stock
and Series C Stock.
     C. On December 30, 2004, the Company entered into an Exchange Agreement
with the Investor whereby the Investor received 25,000 shares of Series AA
mandatorily redeemable senior cumulative preferred stock, par value $0.001 per
share, (the “Series AA Stock”) in exchange for 25,000 shares of Series A Stock.
Also on December 30, 2004, the Company filed with the Delaware Secretary of
State a Certificate of Designation of Series AA Senior Cumulative Convertible
Preferred Stock (the “Certificate of Designation”).
     D. The Investor and the Company now desire to provide for certain
modifications to the rights and preferences of the Series AA Stock, as well as
for the amendment of the Common Warrants, pursuant to the terms and conditions
set forth in this Agreement (the “Transactions”).
     E. The Investor and the Company intend that the amendment of the Common
Warrants be exempt from registration pursuant to Section 3(a)(9) of the
Securities Act of 1933, as amended.
     For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the Company and the Investor hereby agree as follows:

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     1. Exchange of Rights and Obligations under Certificate of Designation.
     1.1 Elimination of Preferred Dividend. Upon the terms and subject to the
conditions hereof, the Investor agrees to the elimination of the 6% cumulative
dividend on the Series AA Stock effective as of April 1, 2006 (after accrual of
the March 31, 2006 dividend, which remains due and will continue to accrue
interest at 6% per annum, compounded quarterly, until paid). The elimination of
the dividend will be effected pursuant to an amendment to the Certificate of
Designation in the form attached hereto as Exhibit A (the “Amended Series AA
Certificate”).
     1.2 Reduction of Conversion Price. Upon the terms and subject to the
conditions hereof, the Company agrees to change the Conversion Price (as defined
in the Certificate of Designation) of the Series AA Stock from Fourteen Dollars
and Seventy-Five Cents ($14.75) per share to Nine Dollars ($9.00) per share. The
change in the Conversion Price will be effected pursuant to the Amended
Series AA Certificate.
     1.3 Extension of Common Warrants. Upon the terms and subject to the
conditions hereof, the Company agrees that effective upon the Closing (as
defined in Section 2.1 below), the expiration date of each of the Common
Warrants to purchase shares of Common Stock (“Warrant Shares”), shall be
extended for two (2) years, as set forth below:

              Number of   Exercise Price   Current   New Warrant Shares   Per
Share   Expiration Date   Expiration Date 357,000   $16.00   March 29, 2010  
March 29, 2012   79,333   $18.00   March 29, 2010   March 29, 2012 393,000  
$16.00   June 20, 2010   June 20, 2012   87,333   $18.00   June 20, 2010  
June 20, 2012

     1.4 Change of Voting Rights for Preferred Directors. Upon and subject to
the conditions hereof, the Investor agrees to amendment of the rights of the
holders Series AA Stock pertaining to election of Series AA Directors to permit
the designation of two directors unless the number of Common Directors exceeds
seven, except in situations involving a potential Change of Control (as defined
in the Certificate of Designation) triggering the right to appoint a third
director. The change in the voting rights for preferred directors is subject to
the approval of the Company’s stockholders and will be effected pursuant to the
Amended Series AA Certificate.
     2. Closing.
     2.1 The closing of the Transactions (the “Closing”) will occur as soon as
reasonably practicable following delivery of (i) the Rights Amendment (as
defined in Section 3.8 below), (ii) drafts of the various filings to be made
pursuant to federal securities laws with respect to consummation of the
Transactions, and (iii) the opinion of the Company’s general counsel in
substantially the form attached hereto as Exhibit B, in

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each case in form and substance reasonably satisfactory to the Investor
(together, the “Closing Conditions”).
     2.2 Upon satisfaction of the Closing Conditions, the Investor, by its
execution of this Agreement, hereby consents to the amendment of the Certificate
of Designation and the filing of the Amended Series AA Certificate with the
Delaware Secretary of State.
     2.3 Upon satisfaction of the Closing Conditions, the Company agrees to
cause to be filed with the Delaware Secretary of State the Amended Series AA
Certificate.
     2.4 All acts, deliveries and confirmations comprising the Closing
regardless of chronological sequence shall be deemed to occur contemporaneously
and simultaneously upon the occurrence of the last act, delivery of confirmation
of the Closing and none of such acts, deliveries or confirmations shall be
effective unless and until the last of the same has occurred.
     3. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Investor as follows:
     3.1 Organization, Standing and Power. The Company is duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the requisite power and authority to carry on its business as now being
conducted.
     3.2 Authority; Binding Obligations. The Company has all requisite power and
authority to enter into this Agreement and to consummate the Transactions. The
execution and delivery of this Agreement by the Company and the consummation by
the Company of the Transactions have been duly authorized by all necessary
action on the part of the Company. This Agreement has been duly executed and
delivered by, and constitutes the valid and binding obligation of, the Company,
enforceable against the Company in accordance with its terms, subject to the
effect of applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws affecting the rights of creditors generally and the effect of
general principles of equity. The Amended Series AA Certificate, when executed,
delivered and filed with the Secretary of State of Delaware, will be duly
executed and delivered by, and constitute the valid and binding obligation of,
the Company, enforceable against the Company in accordance with its terms.
     3.3 Capitalization. The authorized capital stock of the Company consists of
50,000,000 shares of Common Stock and 1,000,000 shares of preferred stock,
$0.001 par value per share, of which 25,000 shares are designated as Series AA
Stock and 25,000 are designated as Series A junior participating preferred stock
(“Junior Preferred”). As of March 31, 2006, there were (i) 5,836,609 shares of
Common Stock issued and outstanding, (ii) 3,167,258 shares of Common Stock held
in the treasury of the Company or held by any subsidiary of the Company;
(iii) 683,914 shares of Common Stock reserved for issuance under the Company’s
stock option plans upon exercise of authorized but unissued stock options;
(iv) 1,998,793 shares of Common Stock issuable

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upon exercise of outstanding stock options issued under the Company’s stock
option plans; (v) 25,000 shares of Series AA Stock issued and outstanding; and
(vi) no shares of Junior Preferred issued or outstanding. All shares of Common
Stock issuable pursuant to the terms of the Series AA Stock and the Common
Warrants (as amended) have been reserved and kept available for issuance by the
Board of Directors of the Company.
     3.4 Non-Contravention. The execution and delivery of this Agreement does
not, and the consummation of the Transactions and compliance with the provisions
hereof will not, conflict with, or result in any breach or violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of or “put” right with
respect to any obligation or to loss of a benefit under, or result in the
creation of any pledges, claims, liens, charges, encumbrances and security
interests of any kind or nature (collectively, “Liens”) upon its properties or
assets under (i) the Company’s Certificate of Incorporation, (ii) any loan or
credit agreement, note, bond, mortgage, indenture, lease, contract or other
agreement, instrument, permit, concession, franchise or license applicable to
the Company or any of its properties or assets which is material to the Company,
each as amended to date or (iii) any judgment, order, decree, statute, law,
ordinance, rule, regulation or arbitration award applicable to the Company
(including the rules and regulations of the Nasdaq Stock Market), or its
properties or assets, other than, in the case of clauses (ii) and (iii), any
such conflicts, breaches, violations, defaults, rights, losses or Liens that
individually or in the aggregate would not have a material adverse effect with
respect to the Company or would not prevent or materially hinder or delay the
ability of the Company to consummate the Transactions.
     3.5 Valid Issuance. The Warrant Shares upon receipt of the consideration
called for in the Common Warrants (as amended), will be duly authorized, validly
issued, fully paid and non-assessable and free and clear of any lien, security
interest, option or other charge or encumbrance, and free of all preemptive and
other third party rights.
     3.6 Rights Agreement. Consummation of the Transactions will not result in
any of the Investor or its affiliates becoming an “Acquiring Person” under the
Rights Agreement dated as of March 15, 2006, between the Company and Continental
Stock Transfer & Trust Company, as amended by the Rights Amendment (defined in
Section 3.8 below).
     3.7 Stockholder Approval. The Company has received the requisite approval
of its common stockholders for the Amended Series AA Certificate.
     3.8 Amendment of Rights Agreement. The Company has entered into an
amendment of the Rights Agreement dated as of March 15, 2006, between the
Company and Continental Stock Transfer & Trust Company providing that the
consummation of the Transactions will not result in any of the Investor or its
affiliates becoming an “Acquiring Person” thereunder (the “Rights Amendment”).

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     4. Representations of the Investor. The Investor represents to the Company
that:
     4.1 Organization, Standing and Power. The Investor is duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has the requisite power and authority to carry on its business as now being
conducted.
     4.2 Authority. The Investor has all requisite power and authority to enter
into this Agreement and to consummate the Transactions. The execution and
delivery of this Agreement by the Investor and the consummation by the Investor
of the Transactions have been duly authorized by all necessary action on the
part of the Investor. This Agreement has been duly executed and delivered by,
and constitutes the valid and binding obligation of, the Investor, enforceable
against the Investor in accordance with its terms, subject to the effect of
applicable bankruptcy, insolvency, reorganization, moratorium and other similar
laws affecting the rights of creditors generally and the effect of general
principles of equity.
     4.3 Non-contravention. The execution and delivery of this Agreement does
not, and the consummation of the Transactions and compliance with the provisions
hereof will not, conflict with, or result in any breach or violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of or “put” right with
respect to any obligation or to loss of a benefit under, or result in the
creation of Liens upon its properties or assets under, (i) the Investor’s
Certificate of Formation or operating agreement, each as amended to date,
(ii) any loan or credit agreement, note, bond, mortgage, indenture, lease,
contract or other agreement, instrument, permit, concession, franchise or
license applicable to the Investor or any of its properties or assets which is
material to the Investor, each as amended to date or (iii) any judgment, order,
decree, statute, law, ordinance, rule, regulation or arbitration award
applicable to the Investor, or its properties or assets, other than, in the case
of clauses (ii) and (iii), any such conflicts, breaches, violations, defaults,
rights, losses or Liens that individually or in the aggregate would not have a
material adverse effect with respect to the Investor or would not prevent or
materially hinder or delay the ability of the Investor to consummate the
Transactions.
     4.4 Series AA Stock and Common Warrant Ownership. The Investor owns
beneficially and of record, and has good and valid title to, all of the
Series AA Stock and all of the Common Warrants, free and clear of any Liens.
There are no agreements affecting the right of the Investor to enter into this
Agreement with respect to the Series AA Stock or the Common Warrants.
     4.5 Brokers. No broker, investment banker, financial advisor or other
person is entitled to any broker’s, finder’s, financial advisor’s or other
similar fee or commission in connection with the Transactions based upon
arrangements made by or on behalf of the Investor.
     4.6 Investor Status. The Investor has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of its investment in the Series AA Stock (as amended hereby), the Common
Stock (issuable

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upon conversion of the Series AA Stock), the Common Warrants (as amended) and
the Warrant Shares, and is able to bear the economic risks of such investment.
     4.7 Accredited Investor. The Investor is an “accredited investor” as
defined in Rule 501(a) under the 1933 Act. The Investor is acquiring the
Series AA Stock (as amended hereby) and the Common Warrants (as amended) for its
own account and not with a view to any resale, distribution or other disposition
thereof (or the Common Stock issuable upon conversion or exercise thereof) in
violation of the United States securities laws.
     4.8 No Other Agreements. The Investor has made no other agreements,
arrangements or understandings concerning the Transactions or the Company or any
of its subsidiaries with (a) any director, officer, employee or consultant of
the Company or any of its subsidiaries, or (b) any stockholder beneficially
owning at least 5% of the outstanding Common Stock.
     5. Covenants and Other Agreements.
     5.1 Further Amendment of Series AA Certificate. The Company covenants and
agrees that at its next annual meeting of stockholders expected to be held in
June 2007 (the “2007 Annual Meeting”), it will seek the approval of its
stockholders to further amend the Amended Series AA Certificate to delete the
last sentence of paragraph 2(iii), which provides as follows: “Notwithstanding
the foregoing, in no event shall the Conversion Price be adjusted pursuant to
this paragraph 2(iii) to less than the current market price per share of Common
Stock (determined as provided in paragraph 3(xii)) on the Exchange Date.” (the
“Subsequent Stockholder Approval”). Until such time as the Subsequent
Stockholder Approval is obtained, and an amendment to the Amended Series AA
Certificate is filed with the Secretary of State of Delaware deleting the last
sentence of paragraph 2(iii), the Company shall not pay any cash dividend on
Common Stock. The Company also covenants and agrees that no changes to paragraph
6 in the Certificate of Designation as reflected in the Amended Series AA
Certificate will impair or limit the Investor’s right to designate or elect
directors at a special meeting or by written consent, and that promptly
following the Closing, the Company will file an Amended and Restated Certificate
of Designation in form and substance reasonably satisfactory to the Investor.
     5.2 Standstill Agreement. Section 5.6 of the Purchase Agreement is hereby
amended in the following respects:

  (a)   the date of March 29, 2010 shall be deemed to be March 29, 2012;     (b)
  the capitalized term “Warrants” shall be deemed to refer to the Common
Warrants as amended pursuant to Section 1.3 of this Agreement; and     (c)   the
capitalized term “Series A Preferred Stock” shall be deemed to refer to the
Series AA Stock as amended pursuant to the Amended Series AA Certificate.

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     5.3 Registration Rights Agreement. The Registration Rights Agreement (as
defined in the Purchase Agreement) between the Investor and the Company, dated
as of March 29, 2000, is hereby deemed amended, to the extent necessary, to
provide that the term “Registrable Securities” shall be deemed to include all
shares of Common Stock issuable upon conversion of the Series AA Stock (as
amended hereby) or upon exercise of the Common Warrants, as amended.
     5.4 Public Announcements. The Investor and the Company will consult with
each other before issuing, and provide each other the opportunity to review and
comment upon, any press release or other public statements with respect to the
Transactions, and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by applicable
law, court process or by obligations pursuant to any listing agreement with any
national securities exchange or as are agreed upon in advance. The parties agree
that the initial press release or releases to be issued with respect to the
Transactions shall be mutually agreed upon prior to the issuance thereof.
     5.5 Tax Treatment. The Investor and the Company agree that, for federal and
applicable state income tax purposes, they will treat the Transactions as deemed
exchanges of the Common Warrants and the Series AA Preferred Stock for new
Common Warrants and new Series AA Preferred Stock governed by
Sections 368(a)(1)(E) and 354 of the Internal Revenue Code of 1986, as amended
(the “Code”), Section 1036 of the Code, or all such sections (and corresponding
provisions of state income tax law), in which no gain or loss is recognized by
the Investor for such purposes. The parties shall file their applicable tax
returns in a manner consistent with such treatment.
     5.6 Reservation of Shares. The Company will reserve and keep available at
all times shares of Common Stock for the purpose of enabling the Company to
satisfy its obligations to issue shares of Common Stock pursuant to the terms of
the Series AA Stock and the Common Warrants (as amended).
     6. Miscellaneous.
     6.1 Entire Agreement. This Agreement, the Purchase Agreement (as amended
hereby), the Registration Rights Agreement (as amended hereby), the Warrants (as
amended hereby), and the exhibits hereto and thereto and the other documents
referenced herein and therein constitute the entire understanding and agreement
of the parties hereto with respect to the subject matter hereof and thereof and
supersede all prior and contemporaneous agreements or understandings,
inducements or conditions, express or implied, written or oral, between the
parties with respect hereto and thereto.
     6.2 Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Delaware regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
     6.3 Assignment. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part, by
operation of

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law or otherwise, by any of the parties without the prior written consent of the
other parties. Any assignment in violation of the preceding sentence shall be
void. Subject to the preceding two sentences, this Agreement will be binding
upon, inure to the benefit of, and be enforceable by, the parties and their
respective successors and assigns.
     6.4 Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the State of Delaware
or of the United States located in the State of Delaware in the event any
dispute arises out of this Agreement or any of the Transactions, and each party
agrees (a) it will not attempt to deny or defeat personal jurisdiction or venue
in any such court by motion or other request for leave from any such court and
(b) it will not bring any action relating to this Agreement or any of the
Transactions in any court other than any such court.
     6.5 Severability. Whenever possible, each provision or portion of any
provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein, so long as the economic and legal substance of the
Transactions are not affected in a manner materially adverse to any party
hereto.
     6.6 Further Assurances. The parties agree (i) to furnish upon request to
each other such further information, (ii) to execute and deliver to each other
such other documents, and (iii) to do such other acts and things, all as the
other party may reasonably request for the purpose of carrying out the intent of
this Agreement and the documents referred to in this Agreement.
     6.7 Construction. In entering into this Agreement, each party represents
and warrants that such party does so freely and voluntarily, after having had
the opportunity to meet and confer with such party’s respective attorneys
regarding the contents and legal effect of this Agreement. Each party represents
and warrants that such party has full 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.

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     6.8 Amendment. This Agreement may be amended by mutual agreement of the
parties at any time, but only pursuant to an instrument in writing duly executed
on behalf of each of the Company and the Investor.
     6.9 Counterparts. This Agreement may be executed concurrently in two or
more counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
     6.10 Fees and Expenses. All fees and expenses incurred by the Investor in
connection with this Agreement and the Transactions, whether or not consummated,
shall be paid by the Company.
(Signature page follows)

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     IN WITNESS WHEREOF, the Investor and the Company have caused this Agreement
to be signed by their respective officers hereunto duly authorized as of the
date first written above.

            CROWN EMAK PARTNERS, LLC
 
      /s/ JEFFREY S. DEUTSCHMAN       Jeffrey S. Deutschman, its Manager       
   
    EMAK WORLDWIDE, INC.
 
      By:   /s/ TERESA L. TORMEY         Teresa L. Tormey, its Chief
Administrative Officer            

(Signature page to Exchange and Extension Agreement)

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