As Filed with the Securities and Exchange Commission on ____________, 1999
Registration No. 333-60487
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Cyber Merchants Exchange, Inc. d.b.a. C-ME.com
(Name of small business issuer in its charter)
-----------------
California 95-4597370
(State or other jurisdiction) (I.R.S. Employer Identification No.)
7370
(Primary Standard Industrial Classification Code)
Frank S. Yuan
320 S. Garfield Avenue, Suite 318
Alhambra, CA 91801
(626) 588-3660
(Name, Address and Telephone Number of Agent for Service)
-----------------------
Copies to:
William D. Evers, Esq.
Rafael Aguirre-Sacasa, Esq. Lynnwood Jen
Evers & Hendrickson, LLP Ace Diversified Capital, Inc.
155 Montgomery, 12th Floor 8855 E. Valley Blvd., Suite 205
San Francisco, CA 94104 Rosemead, CA 91770-1753
Phone No.: (415) 772-8100 Tel: (626) 292-3800
Fax No.: (415) 772-8101 Fax: (626) 292-3818
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
- -------------------------------- -------------------- ---------------------- ---------------------- -------------------
Proposed Maximum
Title of each class Amount to be Aggregate Offering Amount of
of Securities to be Registered Registered Price Per Share Price (1) Registration Fee
- -------------------------------- -------------------- ---------------------- ---------------------- -------------------
<S> <C> <C> <C> <C>
Common Stock, no par value 2,500,000 $8.00 $20,000,000 $5,900
Total $20,000,000 $5,900
- -------------------------------- -------------------- ---------------------- ---------------------- -------------------
<FN>
(1) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as
amended (the "Securities Act"), solely for purposes of calculating the
registration fee.
</FN>
</TABLE>
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification.
SUBJECT TO COMPLETION DATED _________
Preliminary Prospectus
CYBER MERCHANTS EXCHANGE, INC. d.b.a. C-ME.com
2,500,000 SHARES
COMMON STOCK
All of the 2,500,000 shares of common stock (the "Common Stock")
offered hereby (the "Offering") are being sold on a best efforts basis by Cyber
Merchants Exchange, Inc. d.b.a. C-ME.com ("C-ME" or the "Company"), directly and
through a selling group organized by the Company and Ace Diversified Capital,
Inc. See "Plan of Distribution." Prior to this Offering, there has been no
public market for the Company's common stock; therefore, the public offering
price has been determined by the Company. The offering price for the Common
Stock will be $8.00 per share. See "Risk Factors -- No Prior Market; Possible
Volatility of Share Price; and Arbitrary Determination of Selling Price.
Officers, directors and beneficial stockholders of the Company will be permitted
to purchase the Common Stock offered herein in order to reach the Minimum of
125,000 shares ($1,000,000) of the Company's Common Stock (the "Minimum"). See
"Risk Factors -- Eligibility of Officers, Directors, and Beneficial Stockholders
to Participate in the Offering so as to reach the Minimum Resale." The Company
has applied to have the Common Stock approved for quotation on the National
Association of Securities Dealers Automatic Quotation system under the symbol
"CMEE" and the American Stock Exchange under the symbol "ME."
Until the completion of the Offering, all subscription payments will be
deposited into an escrow account at Imperial Trust Company, Los Angeles,
California. If the Minimum is not obtained within one hundred and eighty (180)
days of the date of the commencement of this Offering, all proceeds deposited in
the escrow account will be promptly refunded in full with interest, without any
deduction for expenses. See "Risk Factors -- Loss of Use of Monies for up to one
hundred and eighty (180) days." The Company reserves the right to reject any
offer to purchase shares in whole or in part. See "Plan of Distribution."
The common stock offered hereby involves a high degree of risk. See
"Risk Factors."
<TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<CAPTION>
- -------------------------------------------- ------------------------- ----------------------- ---------------------
Underwriting
Discounts and Proceeds to the
Price to Public (1) Commissions (2) Company (3)
- -------------------------------------------- ------------------------- ----------------------- ---------------------
<S> <C> <C> <C>
Per Share: $ 8.00 $ 0.56 $ 7.44
- -------------------------------------------- ------------------------- ----------------------- ---------------------
Total Minimum (125,000 Shares): $ 1,000,000 $ 70,000 $ 930,000
- -------------------------------------------- ------------------------- ----------------------- ---------------------
Total Maximum (2,500,000 Shares): $20,000,000 $1,400,000 $18,600,000
- -------------------------------------------- ------------------------- ----------------------- ---------------------
<FN>
(1) The Price to Public has been arbitrarily determined by the Company. Among
factors considered in determining the public offering price were the
Company's current financial condition, its future prospects, the state of
the markets for its services, the experience of management, and the
economics of the industry in general. See "Risk Factors -- Arbitrary
Determination of Selling Price."
(2) The shares are being sold on a best efforts basis through a selling group
organized by the Company and Ace Diversified Capital, Inc. See "Plan of
Distribution."
(3) Before deducting estimated expenses of $150,000 payable by the Company,
including registration fees, escrow agent fees, costs of printing, copying
and postage and other offering costs, in addition to legal and accounting
fees.
</FN>
</TABLE>
Ace Diversified Capital, Inc.
The date of this Prospectus is ____________, 1999
2
<PAGE>
No person has been authorized to give any information or to make any
representations in connection with this Offering other than those contained in
this Prospectus and, if given or made, such information and representations must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any of
the securities offered hereby to any person in any jurisdiction in which such
offer or solicitation is unlawful. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information contained herein is correct as of any date subsequent to
the date hereof.
This Prospectus is available in an electronic format, upon appropriate request
from a resident of those states in which this Offering may lawfully be made. The
Company will transmit promptly, without charge, a paper copy of this Prospectus
to any such resident upon receipt of a request.
REFERENCE DATA
Upon the date of this Prospectus, the Company became subject to the
informational filing requirements of the Securities Exchange Act of 1934, as
amended ("Exchange Act") for its current fiscal year. Upon completion of this
Offering the Company may be required to register under the Exchange Act and
continue to file required annual and quarterly reports.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by an independent public accounting firm
after the end of its fiscal year. The Company's fiscal year ends on June 30. In
addition, the Company will send shareholders quarterly reports with unaudited
financial information for the first three quarters of each fiscal year.
The Company was incorporated under the laws of the state of California,
on July 16, 1996. The Company's corporate office and principal place of business
is located at 320 S. Garfield Avenue, Suite 318, Alhambra, California 91801. The
Company's telephone number is (626) 588-3660 or (888) 564-6263 (JOIN CME). The
Company's fax number is (626) 588-3655. The Company's E-mail address is
[email protected] and its World Wide Web site is http://www.c-me.com.
3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. This Prospectus contains certain statements of a
forward-looking nature relating to future events or future financial performance
of the Company. Prospective investors are cautioned that such statements are
only predictions and involve risks and uncertainties. The Company's actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business", as well as those discussed
elsewhere in this Prospectus.
The Company
Cyber Merchants Exchange, Inc. d.b.a. C-ME.com (the "Company" or
"C-ME") is a business-to-business electronic commerce company serving the
worldwide retail industry. The Company provides its customers with an
Internet-based communications system that enables retailers and suppliers to
conduct negotiations and to facilitate electronically the purchase and sale of
merchandise on a global basis. Using proprietary software, the Company maintains
a secure yet open electronic network that enables retailers to conduct on-line
communications and transactions with their vendors and suppliers. This
communications and trading process is generally referred to in the retail
industry as "sourcing." High volumes of product and transaction data are
exchanged between retailers and their suppliers in order for buy-sell
transactions to be initiated, negotiated and closed. This critical sourcing
process typically requires a substantial amount of time and attention from both
the retail merchandise buyer and the salesperson of a manufacturer or
distributor. The Company's related software products and services are designed
to make this sourcing function substantially more effective and efficient, and
to facilitate the workflow management of retail industry buyers and sellers.
When utilized to their full capability and employed on a wide-scale
basis, the Company believes that its products are capable of reducing a
retailer's cost of sourcing and, more importantly, substantially expediting the
sourcing process and more effectively managing the quality performance of
vendors. Consequently, the Company's software products and services enable
merchandising, manufacturing and shipping decisions to be made by all parties at
dates closer to the selling season, helping such parties make better informed
and more timely business decisions. The objective is to enable clients that
source product through the Company's software products and services to obtain
lower costs, increased sales volume, faster inventory turnover, fewer
involuntary price discounts and improved margins and profitability.
The C-ME System
The Company's Internet-based system was designed to meet the general
merchandising needs of retailers and their vendor suppliers, with an initial
emphasis placed on the bargain, or "off-price," apparel market segment. The
Company has an immediate opportunity to gain a dominant share of the bargain
apparel supply-chain automation market. To that end, the Company has developed
three interrelated services:
Virtual Trade Show ("VTS") - The Company's VTS system provides apparel
buyers and sellers with a continuous, revolving product forum showcase, and
gives the Company a dynamic gateway presence on the World Wide Web. The VTS
functions in two capacities:
1) The system houses, for general marketing purposes, vendors' products in
easily recognizable standard industry categories. The showcases contain
complete descriptions, vital information (sizes, shipping, cost, etc.), and
digital photographs of the products.
2) The system allows buyers to search for products efficiently. The VTS
features the Company's Product Driven Search Engine which retrieves
products by category, such as shoes, men's outerwear, or women's sweaters.
In addition, through the use of the Company's focused broadcasting or
"FOCASTING" software (see "Business"), retail buyers have the ability to
customize their product searches by having selected product categories
broadcasted, or "pushed," to their computers with daily-changing products.
Buyers must log on with a password in order to utilize the VTS FOCASTING
software.
Internet Sourcing Network ("ISN") - The ISN features the Company's
FOCASTING and Dynamic End-User Profile System, or DEPS, software applications
(see "Business"). The ISN is a private network which uses the Internet as its
communication medium and links the Company's retail customers with their
vendors. The ISN's primary function is to assist retail buyers in sourcing
merchandise for their product divisions. The network is accessible only by the
Company's retail customers.
The primary benefit of the ISN is that it improves retailers'
coordinated buying practices. Because the FOCASTING software allows each buyer
to create specific product profiles in the ISN, a senior buyer can set up
profiles to encompass product areas falling within the buying responsibility of
a junior buyer. For example, the General Merchandising Manager's profile would
have access to all products that are the responsibility of buyers in his
division. This would encompass a particular buyer's profile. The General
Merchandising Manager and the buyer would see the same products on their
respective computer screens. If the General Merchandising Manager sees a product
he likes which the buyer might not have noticed, he can call it to the buyer's
attention. This creates oversight and allows for coordinated buying strategies.
The ISN promotes interactivity between the retailer and vendor by
handling buyer product inquiries and vendor responses via e-mail. The buyer has
the ability to send either bulk e-mails to all vendors within an industry or
personal e-mails to selected vendors on the ISN. These may be used to apprise
vendors of the amount of merchandise a buyer can order during a given period
("Open to Buy"), of special products being sought, or to request more specific
information on a product. The ISN can also be used to announce business critical
information. Via the ISN, the retailer can apprise vendors of buying divisions'
merchandise planning and buying goals. These interactive features give the
Company's retail customers ready access to diverse merchandise and makes vendors
an active part in merchandising decisions, thus giving both the retailer and the
vendor a competitive advantage over companies not using the ISN.
The ISN provides vendors with a pro-active means of showing their
products to major retailers, in contrast to passive marketing vehicles such as
paper catalogs or samples sent to buyers by mail. The Company standardizes all
of its vendors' product line sheets and catalogs in a uniform format which
retail buyers are familiar with and will use daily. This current source of
information ensures prices, terms, styles, and materials are easy to compare
between vendors. This uniform ISN format shortens the time it takes for buyers
to view product availability and pricing. At any time, the vendor may add or
remove displayed products on its own or with the assistance of the Company. When
marketing products through the ISN, vendors will no longer have to devote
resources to supporting these retailers' formerly distinct buying formats.
Internet Electronic Data Interchange ("EDI") - The Internet EDI system,
under development by the Company, is designed to promote back-end efficiencies
between the retailer and its supply chain. Management expects the Company's
Internet EDI to supplant EDI systems currently being used by off-price retailers
and their vendors, and to complement mass merchant and national chain retailers
supply chain automation systems.
The Company will incorporate standard EDI functions into its Internet
EDI. With the Company's Internet EDI, retailers may send purchase orders to
their vendors; send invoice, packing list, and shipping information to
retailers; all done in "real-time." All of the electronic documents may be
accompanied by digitized product photos to identify the order with the product.
This feature is designed to reduce confusion and mistakes in retailers'
accounting, receiving, and returns departments. Internet EDI may also provide a
retailer with quality assurance by matching the purchased item with the item
displayed on the ISN with that on the digitally generated purchase order and
invoice.
Business Development Strategy
Initially, the Company will focus its retailer-centric approach to
target off-price retailers. The Company has focused its entire range of services
towards automating the time-intensive and costly sourcing methods still being
used by off-price retailers and providing these retailers' vendors with an
effective Web-based tool to market their products. Moreover, if the Company's
system gains a dominant share of this market, Management plans to incorporate a
transaction function into its services, thereby making the system a complete
sourcing-to-purchasing solution. This first step of the Company's business
strategy is designed to accumulate a critical mass of vendor data and product
information.
The Company's strategy is designed to enable it to provide a complete
front-end Web-based sourcing and production system for retailers and their
supply chain vendors. The Company plans to develop system enhancements that will
enable it to serve not only as a sourcing resource but also as a complete
closed-loop system that will integrate the entire supply chain architecture.
That is, the Company's services may be designed to help retailers with
distribution from planning, scheduling, delivery, freight management, trade
processing, cross-docking, receiving, processing, factoring, and warehouse
management. In addition, the Company's services may close the loop with a
complete back-end solution from order management and fulfillment to inventory
management (including administration and replenishment) to store operations to
Point-of-Sale ("POS"). Additionally, a transaction function may be built into
the system whereby a commission may be charged to retailers when they purchase
merchandise displayed by vendors on the Company's services.
The Company believes it is in the interest of the retailers' buyers to
contact their vendors and encourage their vendors to subscribe to the Company's
services because of the potential buying efficiencies gained through the
Company's services. Interested vendors may either contact the Company to
subscribe or retailers may provide the Company with their vendor contacts. The
Company's sales and marketing professionals may then contact these vendors to
offer the Company's services.
Management has established contracts with several retailers. The most
significant of these are Burlington Coat Factory Warehouse Corporation ("BCF")
and Family Bargain Corporation ("FBAR"). See "Risk Factor-Reliance on
Collaborative Retail Customers."
4
<PAGE>
The Offering
Common Stock offered by the Company 125,000 shares (Minimum)
2,500,000 shares (Maximum)
Common Stock outstanding prior
to the Offering, as of December
31, 1998 5,750,000 shares(1)
Use of Proceeds If the Company raises the Minimum, it
intends to use the proceeds for expanding
its current operations (i.e., sales and
marketing of the Company's services,
advertising, establishing ISN's, up-grade
its existing computer infrastructure and
Internet access, and working capital
purposes). If the Company raises the
Maximum, it intends to use the proceeds for
expanding its current operations on a larger
scale. Such expansion would also include
extending its sales and marketing coverage
to the Pacific Rim, where many wholesalers
and manufacturers base their operations.
(1) The Company has 5,750,000 shares of Common Stock currently outstanding and
250,000 shares of common stock reserved for issuance upon exercise of currently
exercisable stock options. See "Stock Options." The Company also granted BCF a
warrant to purchase the Company's Common Stock, on a fully diluted basis, equal
to ten percent (10%) of the Company pursuant to the Warrant Agreement dated
October 15, 1997. See "Key Contracts and Strategic Partners--Burlington Coat
Factory Warehouse Corporation" and "Warrants."
<TABLE>
Summary Financial Data:
<CAPTION>
Statement of Operations Data: Year Ended June 30, Six months ended December 31,
-------------------------- -----------------------------
1997 1998 1997 1998
----------- ----------- ------------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 35,900 $ 65,722 $ 38,640 $ 29,380
Operating Loss (637,208) (586,807) (261,658) (262,933)
Interest Income(1) 50,397 16,338 9,963 17,066
Loss Before Income Taxes (586,811) (570,560) (251,695) (245,867)
Net Loss (587,611) (571,360) (251,695) (245,867)
Basic and Diluted Net Loss Per Share(2) (0.14) (0.11) (0.05) (0.04)
Weighted Average Shares Used in
Computation of Net Loss Per Share(3) 4,223,178 5,281,889 4,793,478 5,533,944
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data: June 30, 1998 December 31, 1998
--------------------------------------------- ---------------------------------------------
(Audited) (As Adjusted) (Unaudited) (As Adjusted)
Actual Minimum(4) Maximum(4) Actual Minimum(4) Maximum(4)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Working capital .............. $ 337,646 $ 1,117,646 $18,787,646 $ 107,660 $ 887,660 $18,557,660
Total assets ................. $ 472,496 $ 1,252,496 $18,922,496 $ 208,244 $ 988,244 $18,658,244
Stockholders' Equity ......... $ 421,029 $ 1,201,029 $18,871,029 $ 175,162 $ 955,162 $18,625,162
<FN>
(1) Interest income from loan to Frank Yuan. See "Certain Transactions."
(2) See Note 1 of Notes to Financial Statements for the determination of shares
used in computed basic and diluted net loss per share.
(3) Based on shares outstanding as of December 31, 1998, excludes, as of
December 31, 1998, (i) 170,000 shares of common stock issuable upon
exercise of options outstanding under the Company's 1996 Stock Option Plan
at a weighted average exercise price of $0.22 per share and 80,000 shares
reserved for future issuance thereunder and (ii) 680,555 (if the Minimum is
sold) or 944,444 (if the Maximum is sold) shares of Common Stock issuable
upon exercise of outstanding warrants at a weighted exercise price of $4.00
per share. See "Management -- Stock Options" and Notes 1 and 5 of Notes to
Financial Statements.
(4) Adjusted based upon the net proceeds to the Company from the sale of the
Shares. After deducting offering expenses and underwriting discounts and
commissions, the net proceeds are estimated to be approximately $780,000 if
the Minimum is sold and $18,450,000 if the Maximum is sold.
</FN>
</TABLE>
RISK FACTORS
An investment in the Shares being offered hereby involves a high degree
of risk as these are speculative securities. Consequently, in addition to the
other information set forth in this Prospectus, the following risk factors
should be considered carefully by potential investors in evaluating an
investment in the Company's Shares.
Future Capital Needs - Additional Funding Requirements
From its inception in July 1996, the Company funded its operations
primarily by raising $1,050,000 through the private sale of 9,500,000 shares of
common stock to a limited group of investors. In addition, prior to this
Offering, the Company raised approximately $500,000 through the private sale of
an additional 2,000,000 shares. In March 1998, the Board of Directors and
shareholders effected a 1-for-2 reverse stock split such that after the reverse
split a total of 5,750,000 issued shares and 250,000 shares reserved for stock
options, remain outstanding. Management believes that the Minimum amount
($1,000,000) together with cash flows from the sale of its Internet services are
sufficient to fund operations for the next 12 months and will enable the Company
to market its ISN and pursue additional strategic retail customers. If the
Maximum ($20,000,000) is raised, the Company expects to fund its current
operations, pursue the development of ISN's with Internet EDI capabilities, and
expand its operations into the Pacific Rim. Any excess funds will be held in
reserve until needed. Because this Offering is being conducted on a best-efforts
basis there can be no assurance that either the Minimum or Maximum amounts will
be raised. If the Minimum is not achieved, the Company will have to curtail
present operations significantly and seek alternative funding sources. In the
event the Company is unable to reach the Minimum within one hundred and eighty
(180) days of the date of the commencement of this Offering, the Company will
promptly refund all proceeds to the investors, with interest and without any
deduction for expenses. See "Use of Proceeds."
In the event the Company requires additional financing, it may seek
such financing through bank borrowing, debt or other equity financing. There can
be no assurance that such financing will be available to the Company on
acceptable terms, if at all. Any future equity financing may involve the sale of
additional shares of the Company's Common Stock on terms that have not yet been
established. These terms may be more favorable than those contained herein and
would result in dilution to the investors in this Offering.
6
<PAGE>
Limited Operating History; History of Losses
Although incorporated in July 1996, the Company started its operations
in November, 1996. The process of establishing and operating an early stage
Internet venture required the Company to incur substantial development costs at
a time when revenue sources were limited. As a result, the Company incurred
operating losses of $637,208 and $586,807 in the fiscal year ended June 30, 1997
and June 30, 1998, respectively. The revenues from the sale of the Company's
services prior to June 30, 1997 and June 30, 1998 totaled $35,900 and $65,722,
respectively. See "Selected Financial Data" and "Financial Statements." Because
the Company has only recently begun to market its ISN and collect subscription
fees, it is difficult to predict when, if ever, it will produce an operating
profit.
Viability of Company as Going Concern
Based on its proposed development strategy, and in the event the
Company only raises the Minimum, the Company anticipates that the net proceeds
from this Offering will be adequate to satisfy the Company's capital and
operational requirements for approximately twelve (12) months from the
termination of the Offering, at which time it may seek to raise additional
capital. If the Company is unable to raise the Minimum, it may seek to raise
capital through other means or it may be unable to continue as a going concern.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations", and Note 1 to Notes to Financial Statements and Independent
Auditors' Report.
Reliance on Collaborative Retail Customers
The Company's present strategy is to seek collaborative partners,
mainly retailers, for the purpose of creating ISN's for them in exchange for
their co-marketing efforts. Such collaborative arrangements, if entered into,
may provide the Company with additional revenues and make it easier for the
Company to attract subscribers. Although the Company has successfully secured
such relationships with BCF and FBAR, there can be no assurance that the Company
will be successful in finding other suitable collaborative retail customers to
establish ISN's, nor can there be any assurance as to the timing or terms of any
such collaboration.
If the Company is unable to enter into favorable collaborative
arrangements, the Company may not have sufficient resources to develop further
the ISN's or to market its services to a sufficient number of vendors. The
amount and timing of resources devoted to convincing vendors to join the ISN's
will be controlled by the retailer. Should the retailer fail to perform any
essential functions, the Company's business and results could be materially
adversely affected. Moreover, BCF has informed the Company that BCF's vendors
have responded negatively to participating in the Company's programs. BCF views
its prospects for revenue from the participation agreement as exceedingly dim.
As of the date hereof, only a handful of BCF's vendors have agreed to join BCF's
ISN, and the system is being used by BCF on a limited basis only. In addition,
although the Company will seek exclusive agreements with its collaborative
retail customers, there can be no assurance that any of the Company's
anticipated collaborative retail customers would not pursue alternative
technologies or develop alternative methods on their own or in collaboration
with others, including the Company's competitors.
Eligibility of Officers, Directors and Beneficial Stockholders to Participate in
the Offering so as to reach the Minimum
The terms of this Offering permit Officers, Directors and Beneficial
Stockholders of the Company to purchase the Shares offered herein in order to
reach the Minimum. The purchase of the Shares by the Company's Officers,
Directors and Beneficial Stockholders to reach the Minimum would indicate that
the Company could experience difficulties in selling the balance of the Shares
beyond the Minimum. Any difficulties in fully subscribing the Offering could
have a material adverse effect on the value of the investor's interest in the
Company. Moreover, in the event that Officers, Directors and Beneficial
Stockholders do purchase any Shares offered herein, the percentage ownership of
these persons (see "Principal Stockholders") will increase thus decreasing the
ownership percentages of any new investors.
Immediate and Substantial Dilution
The price at which the Shares are to be sold in the Offering is
significantly higher than the price per share that was paid by the Company's
current shareholders. Investors participating in this Offering will incur
immediate and substantial dilution in that the net tangible book value per share
of Common Stock after the Offering will be substantially less than the per share
offering price of Common Stock. The investors in this Offering will suffer
immediate dilution of approximately $7.84 (or 98% of the Offering Price) if the
Minimum is sold, and approximately $5.74 (or 72% of the Offering Price) if the
Maximum is sold. To the extent outstanding options or warrants to purchase the
Common Stock are exercised, new investors will incur further dilution. See
"Dilution."
Arbitrary Determination of Selling Price
The $8.00 per share offering price for the Shares offered herein was
determined by the Company. The $8.00 per share offering price assumes the
Company's valuation to be: (i) approximately $75,555,552 based on a total of
9,444,444 shares to be outstanding upon completion of the Offering if the
Maximum (2,500,000 shares) is sold and assuming the exercise of 250,000 options
to purchase Common Stock (of which 80,000 have not been issued) and the exercise
of BCF's warrant to purchase Common Stock (ten percent (10%) of the total
outstanding number of shares which in the case of the Maximum would equal
944,444 shares of Common Stock); and (ii) approximately $54,444,448 based on a
total of 6,805,556 shares to be outstanding upon completion of the Offering if
the Minimum (125,000 shares) is sold and assuming the exercise of 250,000
options to purchase Common Stock (of which 80,000 have not been issued) and the
exercise of BCF's warrant to purchase Common Stock (ten percent (10%) of the
total outstanding number of shares which in the case of the Minimum would equal
680,556 shares of Common Stock). The offering price does not necessarily bear
any relationship to the Company's asset value or net worth. Factors considered
by the Company in setting the purchase price include the Company's current
financial condition, its future prospects, the state of the markets for its
services, the experience of management, and the economics of the industry in
general, among others. Each prospective investor should make an independent
evaluation of the fairness of the purchase price.
Impact of "Year 2000" Problem.
The Company and its affiliates may be adversely affected by the "Year
2000" problem, which is a result of computer programs being written using two
digits rather than four to define the applicable year. As a result of this
problem, the Company's date-sensitive computer programs that use a two digit
dating system may recognize a date using "00" as the year 1900 rather than 2000.
The impact of this problem is difficult to assess at this time, but this problem
could result in a system failure or miscalculation causing disruptions of
operations, including a temporary inability to process transactions, send
invoices, retain accurate data, or engage in normal business activities. The
Year 2000 problem could also affect the operations of clients, vendors, and
others with whom the Company does business, thereby adversely affecting the
Company as well. Management is undertaking an evaluation of its computer
programs for Year 2000 problems and plans to make appropriate corrections to or
substitutions of software if necessary. Based on its current evaluation of its
computer software, Management does not believe that the Company's operations
will be significantly affected by the Year 2000 problem. However, if
modifications or substitutions of software prove to be necessary and are not
made, or if others with whom the Company does business (including suppliers,
contractors and utility companies) suffer more significant Year 2000 problems,
the Year 2000 problem could have an adverse effect upon the operations of the
Company.
Intellectual Property Protection.
The Company believes that its proprietary technology has significant
value and will be important to the marketing of its services and products. The
Company has no patents and relies primarily on copyright and trade secret laws
to protect its proprietary technology. The Company has no trademarks registered
anywhere. It is possible that competitors of the Company or others will adopt
product or service names similar to the Company's, thereby impeding the
Company's ability to build brand identity and possibly leading to customer
confusion. In addition, litigation may be necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trade secrets,
to determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation, whether
successful or unsuccessful, could result in substantial costs and diversions of
resources, either of which could have a material adverse effect on the Company's
business, financial condition, and operating results.
Best Efforts.
The Company is offering the Shares on a "best efforts" basis through a
selling group organized by the Company. Accordingly, there can be no assurance
that any or all of the Shares will be sold.
Loss of Use of Monies for up to One Hundred and Eighty (180) Days.
The Shares are offered directly by the Company through a selling group
subject to the subscription and payment for not less than 125,000 Shares,
offered by the Company during the "Holding Period," which shall begin with the
commencement of the Offering and terminate upon the earlier of (i) the date upon
which the escrow agent, Imperial Bank, confirms that it has received the Minimum
in deposited funds in a specified escrow account, (ii) within 180 days of the
date of the commencement of this Offering, (iii) the date upon which the Company
terminates the Offering prior to the sale of the Minimum, or (iv) the date upon
which the Company announces the completion of the Offering at any time after the
sale of the Minimum. All subscription payments received during the Holding
Period will be deposited into an interest bearing escrow account. Accordingly,
the investors could lose the use of their monies for up to a period of 180 days
if the Minimum has not been reached. If the Minimum has not been reached, all
proceeds will be promptly returned to subscribers without deduction for
commissions or expenses.
7
<PAGE>
Dependence on the Internet
Because the Company's products and services are directly marketed over
the Internet, the future success of the Company will depend in large part on
whether the Internet proves to be a viable commercial marketplace. Whether
because of inadequate development of the necessary infrastructure or as a result
of fraud, or any other cause, if retailers lack confidence in sourcing products
over the Internet the Company's business, operating results and financial
condition will be materially adversely affected.
Rapid Technological Change; Dependence on New Product Development
The Internet market in which the Company intends to compete is
characterized by rapid and significant technological developments, frequent new
product introductions and enhancements, continually evolving business
expectations and swift changes. To compete effectively in such markets, the
Company must continually improve and enhance its existing products and services
and develop new technologies and products that incorporate technological
advances, satisfy increasing customer expectations and compete effectively on
the basis of performance and price. The Company's success will also depend
substantially upon its ability to anticipate, and to adapt its products and
services to its collaborative retail customers preferences. There can be no
assurance that technological developments will not render some of the Company's
products and services obsolete, or that the Company will be able to respond with
improved or new products, services, and technology that satisfy evolving
retailer and vendor expectations. Failure by the Company to develop or introduce
new products, services, and enhancements in a timely manner could have a
material adverse effect on the Company's business, financial condition and
operations. Also, to the extent one or more of the Company's competitors
introduces products that better address the retailer's needs, the Company's
business would be materially adversely affected.
Delays in New Product and Service Development and Introduction
The process of developing products and services such as those offered
by the Company is extremely complex and it is highly likely that the Company
will experience delays in developing and introducing new products and services
in the future. If the Company is unable to develop and introduce new products,
services or enhancements to existing products and services in a timely manner in
response to changing market conditions or customer requirements, the Company's
business, operating results and financial conditions would be materially
adversely affected. Also, announcements of currently planned or other new
products and services may cause customers to delay their subscription decisions
in anticipation of such products and services, which could have a material
adverse effect on the Company's business, operating results and financial
condition, especially if the introduction of such products and services is
delayed.
Flaws and Defects in Products and Services
Products and services as complex as those offered by the Company may
contain undetected flaws or defects when first introduced or as new versions are
released. Any inaccuracy or defects may result in adverse products and service
reviews and a loss or delay in market acceptance. There can be no assurance that
flaws or defects will not be found in the Company's products and services. If
found, flaws and defects would have a material adverse effect upon the Company's
business operations and financial condition.
Management of Potential Growth
The Company's ability to manage its future growth, if any, will require
it to continue to implement and improve its operational, financial and
management information systems and control and to hire and train new
8
<PAGE>
employees, including management, marketing and technical personnel, and also to
motivate and manage its new employees and to integrate them into its overall
operations and culture. Although the management team has successfully grown
other companies, there can be no assurance that the Company will be able to
perform such actions successfully. The Company's failure to manage growth
effectively would have a material adverse effect on the Company's results of
operations and its ability to execute its business strategy.
No Prior Market; Possible Volatility of Share Price
Prior to this Offering, there has not been a public market for the
Shares and none is anticipated to develop in the near future. It is unlikely
that a regular trading market will develop in the near term or that, if
developed, it will be sustained. In the event a regular public trading market
does not develop, any investment in the Company's Common Stock would be highly
illiquid. Accordingly, an investor in the Shares may not be able to sell the
Shares readily.
Although the Company intends to apply for quotation on the Nasdaq
National Market, if the Common Stock is listed, there can be no assurance as to
the development or liquidity of any trading market for the Common Stock or that
investors in the Common Stock will be able to resell their shares at or above
the initial public offering price. The initial public offering price for the
shares of Common Stock has been determined by the Company and may not be
indicative of the market price of the Common Stock after the Offering.
Furthermore, the trading price of the Common Stock is likely to be
highly volatile and could be subject to wide fluctuations in response to factors
such as actual or anticipated variations in the Company's quarterly operating
results, announcements of technological innovations, or new services by the
Company or its competitors, changes in financial estimates by securities
analysts, conditions or trends in the Internet and online commerce industries,
changes in the market valuations of other Internet or online service companies,
announcements by the Company or its competitors of significant acquisitions,
strategic relationships, joint ventures or capital commitments, additions or
departures of key personnel, sales of Common Stock or other securities of the
Company in the open market and other events or factors, many of which are beyond
the Company's control. Further, the stock markets in general, and the Nasdaq
National Market and the market for Internet-related and technology companies in
particular, have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of such
companies. The trading prices of many technology companies' stocks are at or
near historical highs and reflect valuations substantially above historical
levels. There can be no assurance that these trading prices and valuations will
be sustained. These broad market and industry factors may materially and
adversely affect the market price of the Common Stock, regardless of the
Company's operating performance. Market fluctuations, as well as general
political and economic conditions such as recession or interest rate or currency
rate fluctuations, may also adversely affect the market price of the Common
Stock. In the past, following periods of volatility in the market price of a
company's securities, securities class-action litigation has often been
instituted against such company. Such litigation, if instituted, could result in
substantial costs and a diversion of Management's attention and resources, which
would have a material adverse effect on the Company's business, results of
operations and financial condition.
Adverse Effect on Market Price of Shares by Shares Eligible for Future Sale
All 5,750,000 shares of Common Stock issued by the Company and 250,000
shares reserved for stock options, after taking into account the 1-for-2 reverse
stock split prior to this Offering, were offered and sold by the Company in
private transactions in reliance on an exemption from registration under the
Securities Act. Accordingly, all of such securities are "restricted securities"
within the meaning of Rule 144 and cannot be resold without registration, except
in reliance on Rule 144 or another applicable exemption from registration.
In general, Rule 144 imposes a minimum holding period of one year for
restricted securities. Thereafter, if restricted or other securities are sold
for the account of a person (or persons whose shares are required to be
aggregated), including any affiliate of the Company, the amount of securities
sold, together with all sales of restricted securities and other securities of
the same class for the account of such person within the preceding three months
shall not exceed the greater of: (i) one percent of the shares or other units of
the class outstanding as shown by the most recent report or statement published
by the issuer, or (ii) the average weekly reported volume of trading in such
securities on all national securities exchanges and/or reported through the
automated quotation system of a registered securities association during the
four calendar weeks preceding the filing of the required notice, or if no such
notice is required, the date of receipt of the order to execute the transaction
by the broker or the date of execution of the transaction directly with a market
maker, or (iii) the average weekly volume of trading in such securities reported
through the consolidated transaction reporting system contemplated by Rule
11Aa3-1 under the Securities Exchange Act of 1934 during the four-week period
specified in (ii) above. The seller also must comply with the notice and manner
of sale requirements of Rule 144, and there must be current public information
available about the Company. In addition, any person (or persons whose shares
are aggregated) who is not, at the time of the sale, nor during the preceding
three months, an affiliate of the Company, and who has beneficially owned
restricted shares for at least two years, can sell such shares under Rule 144
without regard to notice, manner of sale, public information or the volume
limitations described above.
Future sales of Shares of Common Stock by the Company could materially
adversely affect the prevailing market price, if any, of the Company's Common
Stock. In addition, there are 250,000 shares reserved for future issuance under
the Company's stock option plan for grants to management and employees. The
shares of Common Stock underlying these options would represent 4.2% of the
Company's outstanding Common Stock prior to this Offering, assuming all the
options were exercised. The Company is unable to predict the effect those sales
by the Company, if any, or potential sales under any future stock option plan,
may have on the market price of the Common Stock prevailing at the time of any
such sales.
Additionally, BCF owns a warrant (the "Warrant") to purchase the
Company's Common Stock, on a fully diluted basis, equal to ten percent (10%) of
the Company pursuant to the Warrant Agreement dated October 15, 1997. The
Warrant is currently exercisable at $4.00 per share. The Warrant expires upon
the earlier of the following dates: (i) October 15, 2002 or (ii) 30 days after
the closing of a firm
9
<PAGE>
underwritten public offering of the Company's securities with which the
aggregate gross proceeds to the Company are at least $5,000,000 and the offering
price is at least $4.00 per share. The exercise of the Warrant would result in a
substantial amount of shares being issued which could dilute the investors in
this Offering if the Warrant was exercised at a time when the shares of the
Company were trading at a price above this Offering price.
Dividends
The Company has not paid any dividends or made distributions to its
investors and is not likely to do so in the foreseeable future. The Company
presently intends to retain earnings for use in its business. Additionally, the
Company may fund a portion of its future expansion through debt financing, and a
condition of such financing may prohibit the payment of dividends while the debt
is outstanding. Therefore, investors should purchase Shares with the
understanding that Management's goal is to build value by increasing the size of
the business and not by paying dividends. See "Dividend Policy."
Control
Regardless of whether the Minimum or Maximum number of the Shares are
sold pursuant to this Offering, control of the Company will remain with the
present equity owners after the completion of the Offering. As a result, these
stockholders will be able to control the Company and its operations, including
the election of at least a majority of the Company's Board of Directors and
thus, the policies of the Company. See "Principal Stockholders."
Competition
With the popularity of the Internet growing daily and as computer
hardware (i.e., servers) and creating/maintaining web sites becomes more
affordable, other on-line services may appear or are already established which
will try to create an electronic link between vendors (wholesalers and
manufacturers) on one side and retailers on the other. Some of those businesses
may have far greater financial and marketing resources, operating experience and
name recognition than the Company. Potential competitors include AT-Net
(http://www.at-net.com), Apparel Exchange (http://aparelex.com), RagNet
(http://www.ragnet.com), XMNet (http://www.xmnet.com), E.R.I.C Worldwide
Enterprises (http://ericww.com), ICES, Inc. (http://www.icesinc.com), The Mart
(http://www.themart.com), Apparel.Net (http://www.apparel.net), and Global
Textile Network (http://www.g-t-n.com). All these web sites take different
approaches ranging from creating "yellow page" type listing to acting as a
middleman in transactions. To the best of the Company's knowledge, all of them
charge membership and transaction fees higher than those charged by the Company
to join its VTS. Moreover, as far as the Company is aware, some of these
companies charge buyers a monthly access fee to view products over the Internet.
Most importantly, the Company believes that none of these web sites focus on the
retailers. It is Management's belief that an important factor that vendors
consider in joining an Internet service is whether retail buyers will actually
see their products. Management also believes that buyers will be less inclined
to visit a web site where they have to pay to visit if there are no assurances
that the web site will include substantive product information. As such,
Management believes that these competing web sites will have difficulty
attracting and maintaining subscribers as well as attracting buyers. The Company
seeks to address this potential drawback by offering services which are
retailer-centric. See "Business: Sales and Marketing." Notwithstanding, these
potential competitors, as well as the entry of more competitors offering similar
web sites, could have a material adverse effect upon the Company's business,
operating results and financial condition.
Dependence on Founder and Key Personnel
The Company's business depends to a large extent on retaining the
services of its founder, Frank S. Yuan (Chief Executive Officer and President),
as well as James Zheng (Chief Technology Officer) and David Rau (Chief Financial
Officer). Frank S. Yuan is a principal stockholder in the Company. The Company's
operations could be materially adversely affected if, for any reason, one or
more of the above officers ceases to be active in the Company's management. The
Company has sought to minimize the possible
10
<PAGE>
loss of Mr. Rau to competitors by having each of them execute employment
agreements containing non-competition and non-disclosure covenants. It is
important to note that the ability of the Company, or a State court, to enforce
or partially enforce the non-competition covenant in the employment agreements
may be limited by State law. The Company has no key-person life insurance policy
on any of the above-mentioned key personnel. See "Management" and "Principal
Stockholders."
Lack of Full-Time Systems Administrator
Currently, the Company utilizes the services of James Zheng and his
assistant, Joseph Sloan, who both function as the Company's Systems
Administrator. However, neither of them are working in that capacity on a
full-time basis. Rather, Mr. Zheng is working on an on-call basis and devotes at
least one day a week to maintaining the Company's system, network, and database.
Mr. Sloan works solely on an on-call basis. Depending on the success of this
Offering, the Company expects to hire a full-time Systems Administrator.
Pending Litigation
The Company has been named as a defendant, along with BCF, in a lawsuit
brought by Stanley Rosner ("Rosner"), an individual. In March 1998, Rosner
commenced an action in the Supreme Court of the State of New York, Nassau
County, New York, (Index No. 98-006524). Rosner alleges breach of oral and
written contracts between the Company and Rosner and between BCF and Rosner in
1997. Rosner claims that he is due certain fees from both the Company and BCF
for services allegedly rendered in connection with certain transactions and
alleged transactions involving the Company and BCF. Such transactions and
alleged transactions relate to the Internet services that the Company may
provide to BCF and contemplated transactions arising from vendors of BCF. Rosner
claims that he is due damages in an amount not less than $5,000,000 plus
unspecified punitive damages from both the Company and BCF. Rosner's attorney
has agreed that the Company and BCF are entitled to have the venue of the
lawsuit transferred from Nassau County, New York to New York County (Manhattan),
New York; Rosner's attorney also agreed to arrange for the transfer. Rosner's
attorney also agreed that the Company's and BCF's responsive papers would be due
no later than ten (10) days after notice of such transfer had been served. To
date, the Company has not received notice of the proposed transfer of venue and
has not filed its responsive papers or otherwise moved against the complaint.
The Company intends to vigorously defend this action. The Company
believes that it is not obligated to make any payments to Rosner and has
meritorious defenses to all of Rosner's allegations. However, if the Company
does not prevail and a significant damage award against the Company is granted,
this would have a material adverse effect upon the Company.
USE OF PROCEEDS
<TABLE>
The net proceeds to the Company from the sale of the Shares in this
Offering are estimated to be approximately $780,000 if the Minimum is sold, and
$18,450,000 if the Maximum is sold, after offering expenses. The Company expects
to use the net proceeds for the purposes outlined below.
<CAPTION>
Minimum Up To Up To Up To Maximum
$780,000 $5,000,000 $10,000,000 $15,000,000 $18,450,000
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
UNITED STATES OPERATIONS
Marketing
Staff
Director of Marketing $ 75,000 $ 75,000 $ 75,000 $ 75,000
Retailer-Focused Marketers $ 75,000 $ 150,000 $ 225,000 $ 300,000
Vendor-Focused Marketers $ 100,000 $ 250,000 $ 400,000 $ 500,000 $ 600,000
Marketing Materials (printed
brochures, etc.) $ 50,000 $ 200,000 $ 400,000 $ 500,000 $ 600,000
Advertising
Print Ads (trade publications,
Internet, etc.) $ 200,000 $ 2,000,000 $ 4,000,000 $ 6,000,000 $ 8,000,000
Trade Shows (attendance, booth, etc.) $ 60,000 $ 200,000 $ 500,000 $ 750,000 $ 1,000,000
Technical
Staff
Chief Technology Officer $ 120,000 $ 120,000 $ 120,000 $ 120,000
Technical Support $ 50,000 $ 100,000 $ 150,000 $ 150,000 $ 150,000
Customer Service $ 20,000 $ 40,000 $ 60,000 $ 80,000
R&D Internet EDI $ 50,000 $ 150,000 $ 200,000 $ 300,000 $ 400,000
Upgrade Computers Hardware/Internet Access $ 40,000 $ 75,000 $ 100,000 $ 125,000 $ 150,000
Working Capital
LA Office Expansion $ 50,000 $ 100,000 $ 150,000 $ 200,000 $ 250,000
NY Office Set-Up $ 100,000 $ 200,000 $ 300,000 $ 400,000
Reserve $ 180,000 $ 535,000 $ 1,515,000 $ 1,695,000 $ 1,725,000
FOREIGN OPERATIONS
Office Set-Up (fixtures, computers, etc.) $ 100,000 $ 200,000 $ 400,000 $ 600,000
Marketing/Advertising (print ads,
marketing materials, etc.) $ 400,000 $ 800,000 $ 1,600,000 $ 2,000,000
Working Capital (payroll, rent,
utilities, etc.) $ 500,000 $ 1,000,000 $ 2,000,000 $ 2,000,000
TOTAL $ 780,000 $ 5,000,000 $10,000,000 $15,000,000 $18,450,000
</TABLE>
11
<PAGE>
Description of Use of Proceeds
Minimum: If the minimum amount of shares are subscribed to as part of
this Offering, the Company intends to use the proceeds for the expansion of its
current operations (i.e., sales and marketing of the Company's services,
advertising, establishing ISN's, up-grading its existing computer infrastructure
and Internet access, and working capital purposes).
Maximum: If the maximum amount of shares are subscribed to as part of
this Offering, the Company will use all proceeds received as noted above.
The Company does not contemplate changes in the proposed allocation of
estimated net proceeds of this Offering. However, the foregoing are estimates
and events may require changes. Therefore, the Company reserves the right to
make changes, if appropriate. Pending application of the net proceeds as
described herein, the Company intends to invest the net proceeds in short-term,
interest bearing, investment-grade securities.
DIVIDEND POLICY
The Company has not declared or paid dividends since its inception. The
Company presently intends to retain all earnings to facilitate growth and does
not anticipate paying cash dividends in the foreseeable future. Although the
Company has no present plans to pursue additional financing through bank
borrowing, debt or other equity financing, the pursuit of such financing may
prohibit the payment of dividends. See "Description of Capital Stock."
CAPITALIZATION
The following table sets forth the actual unaudited capitalization of
the Company on December 31, 1998, and also provides the pro forma capitalization
of the Company as of December 31, 1998, after giving effect to the sale of the
Minimum (125,000 Shares) and the Maximum (2,500,000 Shares) number of Shares
offered hereby at the public offering price of $8.00 per share and the
application of the estimated net proceeds:
12
<PAGE>
December 31, 1998
------------------
Pro Forma As Adjusted
---------------------
Actual Minimum Maximum
------------ ------------ ------------
Stockholders' Equity:
Common Stock, No Par Value,
40,000,000 Shares Authorized
5,750,000 (Actual) 5,875,000 (Minimum)
8,250,000 (Maximum) Shares
Issued and Outstanding $ 1,550,000 $ 2,330,000 $ 20,000,000
Additional Paid-In Capital: 30,000 30,000 30,000
Accumulated Deficit (1,404,838) (1,404,838) (1,404,838)
------------ ------------ ------------
Total Stockholders' Equity: $ 175,162 $ 955,162 $ 18,625,162
============ ============ ============
In reliance upon the registration exemption provided for in Section
4(2) of the Securities Act of 1933, as amended, the Company raised working
capital through two separate private offerings. The Company initially raised
$1,050,000 through the first private offering resulting in the issuance of
9,500,000 shares of the Company's Common Stock. Thereafter, pursuant to the
approval of the Board of Directors, the Company raised an additional $500,000
through the second private offering resulting in the issuance of 2,000,000
shares of the Company's Common Stock. As a result of the two private offerings
the Company had issued a total of 11,500,000 shares of the Company's Common
Stock, excluding 500,000 shares that have been issued or are held in reserve as
stock options. Subsequently, in March 1998, the Board of Directors and
shareholders effected a 1-for-2 reverse stock split such that a total of
6,000,000 shares, including stock options, remain outstanding.
DILUTION
On December 31, 1998, the Company had an unaudited net tangible book
value of $175,162 or $0.03 per share. The net tangible book value per share is
equal to the Company's total assets less total liabilities, divided by the total
number of outstanding shares of Common Stock. After giving effect to the sale of
the Minimum and Maximum number of shares offered hereby at the public offering
price of $8.00 per share, and the application by the Company of the estimated
net proceeds after deducting expenses, the pro forma net tangible book value of
the Company as of December 31, 1998, would have been $955,162 and $18,625,162
respectively, or $0.16 per share and $2.26 per share, respectively. This
represents an immediate increase in net tangible book value of $0.13 and $2.23
per share, respectively, to existing shareholders and an immediate dilution of
$7.84 per share and $5.74 per share to new investors purchasing shares in this
Offering. The following table illustrates the per share dilution in net tangible
book value per share to new investors at the Minimum and Maximum Offering:
Minimum Maximum
-------- --------
Public Offering Price Per Share $ 8.00 $ 8.00
Net Tangible Book Value Per Share as
of December 31, 1998 $ 0.03 $ 0.03
Increase in Net Tangible Book Value
Per Share attributed to New Investors $ 0.13 $ 2.23
Pro Forma Net Tangible Book Value Per
Share after this Offering: $ 0.16 $ 2.26
Net Tangible Book Value Dilution Per
Share to New Investors $ 7.84 $ 5.74
13
<PAGE>
<TABLE>
The following table sets forth, on a pro forma basis, as of December
31, 1998, the difference between existing stockholders and the purchasers of
Shares at the Minimum and Maximum amounts sold in this Offering with respect to
the number of shares purchased, the total consideration paid, and the average
price paid per share:
<CAPTION>
Shares Purchased Total Consideration
---------------------- -------------------------
Number Percent Amount Percent Average Price Per Share
------ ------- ------ ------- -----------------------
<S> <C> <C> <C> <C> <C>
Minimum Sold
Existing Shareholders (1) 6,000,000 98% $ 1,620,020 62% $0.27
New Investors 125,000 2% $ 1,000,000 38% $8.00
----------- -----
Total: 6,125,000 100% $ 2,620,020 100% $0.43
========= === =========== === =====
Maximum Sold
Existing Shareholders(1) 6,000,000 71% $ 1,620,020 8% $0.27
New Investors 2,500,000 29% $20,000,000 92% $8.00
--------- --- ----------- --- -----
Total 8,500,000 100% $21,620,020 100% $2.54
========= === =========== === =====
<FN>
(1) As used herein, the 6,000,000 shares purchased by existing shareholders
assumes 5,750,000 shares of issued Common Stock plus the grant and exercise of
175,000 shares of stock reserved for stock options at $0.40 per share, and
75,000 shares for $20.
</FN>
</TABLE>
SELECTED FINANCIAL DATA
<TABLE>
The selected financial data presented below, for the years ended June
30, 1997 and 1998, respectively have been derived from the Financial Statements
of the Company which have been audited by KPMG, LLP, independent certified
public accountants. The Financial Statements and the independent auditors'
report therein are included elsewhere in this Prospectus. The selected financial
data for the six months ended December 31, 1997 and 1998, respectively, are
derived from unaudited financial statements of the Company. In the opinion of
Management, the unaudited financial statements have been prepared on
substantially the same basis as the audited financial statements, and, include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the results of operations for such periods. The financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto included elsewhere in the Prospectus.
<CAPTION>
Statement of Operations Data: Year Ended June 30, Six months ended December 31
-------------------------- ----------------------------
1997 1998 1997 1998
----------- ----------- ------------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 35,900 $ 65,722 $ 38,640 $ 29,380
Operating Loss (637,208) (586,807) (261,658) (262,933)
Interest Income(1) 50,397 16,338 9,963 17,066
Loss Before Income Taxes (586,811) (570,560) (251,695) (245,867)
Net Loss (587,611) (571,360) (251,695) (245,867)
Basic and Diluted Net Loss Per Share(2) (0.14) (0.11) (0.05) (0.04)
Weighted Average Shares Used in
Computation of Net Loss Per Share 4,223,178 5,281,889 4,793,478 5,533,944
<FN>
(1) Interest income from loan to Frank Yuan, see "Certain Transactions".
(2) See Note 1 of Notes to Financial Statements.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data: June 30, 1998 December 31, 1998
--------------------------------------------- ---------------------------------------------
(Audited) (As Adjusted) (Unaudited) (As Adjusted)
Actual Minimum Maximum Actual Minimum Maximum
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Working capital .............. $ 337,646 $ 1,117,646 $18,787,646 $ 107,660 $ 887,660 $18,557,660
Total assets ................. $ 472,496 $ 1,252,496 $18,922,496 $ 208,244 $ 988,244 $18,658,244
Stockholders' equity ......... $ 421,029 $ 1,201,029 $18,871,029 $ 175,162 $ 955,162 $18,265,162
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the financial
statements and the related notes thereto included elsewhere in this Prospectus.
This Prospectus contains certain forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to those discussed in "Risk Factors"
and elsewhere in this Prospectus.
Introduction
The Company was formed in July, 1996 to develop, establish, and market
web-based E-commerce solutions for retailers and their supply chains. These
solutions take the form of three interlocking services: (1) a Virtual Trade Show
("VTS"), (2) an Internet Sourcing Network ("ISN"), and (3) Internet EDI (which
is still in the developmental stages). The business strategy of the Company is
focused on establishing collaborative relationships with U.S.-based retailers
wherein the Company will provide the retailer with an ISN in return for their
assistance in marketing the ISN to their supply chain vendors. After
establishing ISN's for these collaborative retail customers, the Company intends
to use the Internet's near-global accessibility to expand these retailers'
supply chains to foreign producing countries, primarily in the Pacific Rim. If
the Maximum amount is raised, the Company intends to use a substantial portion
of the proceeds from this Offering to implement its business strategy.
During the development stage of the Company, the Company's primary
activities have involved developing its VTS and ISN software and database (the
"Software"), organizing its sales force, and marketing its VTS and ISN. Research
and development costs are expensed as incurred. Selling expenses consist
primarily of salaries, commissions, and administrative costs associated with the
Company's payroll and marketing personnel. General and administrative expenses
include the costs of consultants and other administrative functions of the
Company.
Financial Condition and Results of Operations:
The Company has had two and one-half years of operation.
Fiscal Years Ended June 30, 1997 and 1998
The following discussion sets forth information for the fiscal year
ended June 30, 1998 compared with the fiscal year ended June 30, 1997. This
financial information has been derived from audited financial statements of the
Company contained elsewhere in the Prospectus.
For the fiscal year ended June 30, 1998, the Company had revenues
totaling $65,722 representing an increase of $29,822 from same period a year
ago, consisting primarily of fees paid by users of the Company's VTS, web design
services and ISN's users. The Company's operating expenses for the year ended
June 30, 1998, totaling $652,529 consisted of $139,680 for the cost of revenue
and $512,849 for general administration and selling expenses, representing a
decrease of $20,579 from the year ended June 30, 1997. Consequently, the Company
experienced a net loss of $571,360 for the year ended June 30, 1998.
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Six months ended December 31, 1997 and 1998
The following discussion sets forth information for the six months
ended December 31, 1998 compared with the six months ended December 31, 1997.
This information has been derived from unaudited interim financial statements of
the Company contained elsewhere in the Prospectus and reflects, in Management's
opinion, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for these
periods. Results of operations for any interim period are not necessarily
indicative of results to be expected from the full fiscal year.
For the six months ended December 31, 1998, the Company had revenues
totaling $29,380 representing a decrease of $9,260 from same period a year ago,
consisting primarily of fees paid by users of the Company's VTS, web design
services and ISN's users. The Company's operating expenses for the six months
ended December 31, 1998, totaling $292,313 consisted of $60,361 for the cost of
revenue and $231,952 for general administration and selling expenses,
representing a decrease of $7,985 from the six months ended December 31, 1997.
Consequently, the Company experienced a net loss of $245,867 for the six months
ended December 31, 1998.
Status of Operations
Originally, the Company's business model was to solicit vendors to
display products on its VTS. Accordingly, the Company solicited approximately
1,800 vendors who had shown some interest in joining the Company's VTS program.
The Company was able to complete 600 websites for the vendors who showed
interest in the VTS; however, only 250 of the 600 vendors eventually committed
to the Company's services. Based on this experience, the Company decided to
change its business model. The Company's current business model focuses on the
retailer and forming strategic retail relationships. Pursuant to this new
business model, the Company plans to utilize the marketing power of its retail
customers to attract subscriptions from vendors. Under this new business model,
the Company believes that the collection rate for any accounts will improve.
Participation Agreements
On October 15, 1997, the Company entered into a Participation Agreement
with Burlington Coat Factory Warehouse Corporation ("BCF"). Under the terms of
the Participation Agreement, BCF would assist the Company in marketing the ISN
to BCF's vendors in return for a portion of the monthly hosting fees. The
Company is required to pay BCF 50 percent of the monthly hosting fees collected
from vendors who join BCF's ISN as well as 50 percent of the additional monthly
hosting fees collected from vendors who decide to join BCF's ISN as a secondary
ISN. The Company is also required to pay BCF 33 percent of the monthly hosting
fees collected from vendors who appear on BCF's vendor list but wish to join
another ISN the Company has created for a different retailer as well as 33
percent of monthly hosting fee collected from foreign (non-US) vendors who join
BCF's ISN. Moreover, the Company is required to pay BCF 5 percent of all monthly
hosting fees collected from US vendors of products in the apparel, linens,
juvenile furniture, and footwear industries who did not join BCF's ISN. See
"Risk Factors--Reliance on Collaborative Retail Customers," and "Key Contracts
and Collaborative Retail Customers."
On January 27, 1998, the Company entered into a similar Participation
Agreement with Family Bargain Corporation ("FBAR"). Under the terms of the
Participation Agreement, FBAR would assist the Company in marketing the ISN to
FBAR's vendors in return for a portion of the monthly hosting fees. Unlike the
Company's Participation Agreement with BCF, FBAR will only receive 33 percent of
the monthly hosting fees collected from vendors who join FBAR's ISN.
Income Taxes
Since its inception, the Company has been taxed as a C corporation.
Accordingly, the Company has available as of December 31, 1998 approximately
$1,300,000 in net operating loss carry forwards which can be used to offset
future federal taxable income. However, the utilization of net operating losses
may be subject to certain limitations as prescribed by Section 382 of the
Internal Revenue Code.
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Liquidity and Capital Resources
Since its inception, the Company's principal source of capital has been
private placements of equity. Specifically, through the use of private
placements, the Company was able to raise $1,550,000 in capital through the
issuance of 11.5 million shares of Common Stock described as follows:
a. From August, 1996 to January, 1997, the Company raised $1,050,000 in
an initial private placement of 9.5 million shares of Common Stock. 4.5 million
shares were sold to Frank S. Yuan, founder and President of the Company, for
$50,000. The remaining 5 million shares were sold at $0.20 per share.
b. From November, 1997 to March, 1998, the Company raised an additional
$500,000 through a second private placement of 2 million shares of Common Stock.
All the shares were sold for $0.25 per share.
In March, 1998, the Board of Directors and majority of the shareholders
approved a 1-for-2 reverse stock split. The reverse stock split would also
affect the stock options held by key employees. See "Stock Options." After
giving effect to the 1-for-2 reverse stock split, the Company had a total of
5.75 million shares of Common Stock outstanding.
The Company experienced losses from operations of $571,360 for the year
ended June 30, 1998 and $245,867 for the six months ended December 31, 1998.
From the inception of the Company in July 1996, the Company has incurred
substantial costs for the development of its software. These software costs are
the main reasons for the Company's losses in year one. In years two and three,
the Company incurred substantial costs for its overhead and marketing programs
to launch the Company's services. The marketing costs and overhead are the
primary reasons for the costs relating to operations for these two years. As of
December 31, 1998, the Company had $133,227 in cash and cash equivalents and
$175,162 in net stockholders' equity. In December 1998, the Company obtained a
written commitment for a line of credit from a bank. The bank committed to
provide a $300,000 line of credit, bearing interest at the bank's prime rate
plus 1.5%. The line of credit will expire on June 30, 1999. The Company
committed to issue a warrant of 20,000 shares of the Company's common stock to
the bank. The warrant will have a term of five years and have an exercise price
equal to the initial public offering price of the Company's common stock. Since
December 31 1998, the Company has continued to experience losses from operation
and increases in net deficit. Management estimates the Company's monthly burn
rate to be between $20,000 and $40,000. As for November and December, 1998, the
Company's burn rate was $18,451 and $44,579 respectively. Accordingly, the
Company needs to raise capital to be continue its development strategy.
Management expects this capital requirement to be met from the proceeds of the
Offering if an amount greater than the Minimum is raised. If the Company is
unable to raise the Minimum amount in this Offering, it may look to raise
capital through other means, or it may be unable to continue as a going concern.
See "Risk Factors -- Limited Operating History; History of Losses" and Note 1 of
Notes to Financial Statements and Independent Auditors' Report.
Based on its development strategy, the Company anticipates that the net
proceeds of this Offering, if the Minimum is raised, will be adequate to satisfy
the Company's capital and operation requirements for approximately 12 months
from the consummation of this Offering, at which time the Company may seek to
raise additional capital. The Minimum net proceeds of this Offering prior to the
deduction of offering expenses are estimated to be approximately $780,000
($18,450,000 if the Maximum amount is raised), assuming an estimated initial
public offering price of $8.00 per share. The Company's future capital
requirements may vary materially from those now planned because of results of
operation, retailer and wholesaler acceptance of the Company's services, among
other factors. See "Risk Factors -- Reliance on Collaborative Retail Customers;
Dependence on the Internet."
In the event of unanticipated developments during the next 12 months,
or to satisfy future funding requirements, the Company will fund its operation
through public or private offerings of securities, with collaborative or other
arrangements with corporate partners or from other sources. Additional financing
may not be available when needed or on terms acceptable to the Company. If
adequate financing is not available, the Company may be required to delay, scale
back or eliminate certain of its development programs and curtail its
development strategy. To the extent the Company raises additional capital by
issuing securities, dilution to investors purchasing shares in this Offering may
result.
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BUSINESS
Overview
Cyber Merchants Exchange, Inc. d.b.a. C-ME.com (the "Company" or
"C-ME") is a business to business electronic commerce company serving the
worldwide retail industry. The Company provides its customers with an
Internet-based communications system that enables retailers and suppliers to
conduct negotiations and to facilitate electronically the purchase and sale of
merchandise on a global basis. Using proprietary software, the Company maintains
a secure yet open electronic network that enables retailers to conduct on-line
communications and transactions with their vendors and suppliers. This
communications and trading process is generally referred to in the retail
industry as "sourcing." High volumes of product and transaction data are
exchanged between retailers and their suppliers in order for buy-sell
transactions to be initiated, negotiated and closed. This critical sourcing
process typically requires a substantial amount of time and attention from both
the retail merchandise buyer and the salesperson of a manufacturer or
distributor. The Company's related software products and services are designed
to make this sourcing function substantially more effective and efficient, and
to facilitate the workflow management of retail industry buyers and sellers.
When utilized to their full capability and employed on a wide-scale
basis, the Company believes that its products are capable of reducing a
retailer's cost of sourcing and, more importantly, substantially expediting the
sourcing process and more effectively managing the quality performance of
vendors. Consequently, the Company's software products and services enable
merchandising, manufacturing and shipping decisions to be made by all parties at
dates closer to the selling season, helping such parties make better informed
and more timely business decisions. The objective is to enable clients that
source products through the Company's software products and services to obtain
lower costs, increased sales volume, faster inventory turnover, fewer
involuntary price discounts and improved margins and profitability.
Services Offered
Overview of the C-ME System
The Company's Internet-based system was designed to meet the general
merchandising needs of retailers and their vendor suppliers, with an initial
emphasis placed on the bargain, or "off-price," apparel market segment. To that
end, the Company has developed three interrelated services:
Virtual Trade Show ("VTS") - The Company's VTS system provides apparel
buyers and sellers with a continuous, revolving product forum showcase, and
gives the Company a dynamic gateway presence on the World Wide Web. The VTS
functions in two capacities:
1) The system houses, for general marketing purposes, vendors'
products in easily recognizable standard industry categories.
The showcases contain complete descriptions, vital information
(sizes, shipping, cost, etc.), and digital photographs of the
products.
2) The system allows buyers to search for products efficiently.
The VTS features the Company's Product Driven Search Engine
which retrieves products by category, such as shoes, men's
outerwear, or women's sweaters. In addition, through the use
of the Company's focused broadcasting or "FOCASTING" software,
retail buyers have the ability to customize their product
searches by having selected product categories broadcasted, or
"pushed," to their computers with daily-changing products.
Buyers must log on with a password in order to utilize the
VTS FOCASTING software.
To join the VTS, vendors pay $300 to place up to 15 product listings on
the system and a $30 monthly maintenance fee; a significant savings compared to
standard trade show booths which can cost up to $10,000 for a 10' x 10' booth.
Each additional product displayed by the vendor increases the monthly
maintenance fee by $1. If the vendor requires C-ME to input text and upload
graphics for a product, the vendor is charged $5 per product. A member's
contract is valid as long the vendor maintains its subscription. As an added
benefit, vendors who join the VTS receive a detailed home page along with a
shared domain name.
The VTS is dynamic by nature. As such, vendors who display products on
the VTS have the ability to change or update their product information
independently from any computer with Internet access. The changes can be viewed
immediately by buyers logged into the system.
The VTS serves to build a critical mass of products accessible to all
retail buyers and other interested parties. This critical mass creates the
potential for the Company to establish a frequently visited Web marketplace that
will attract advertisers and other fee-paying retail customers. Two hundred and
fifty vendors are currently listed in the VTS.
Internet Sourcing Network ("ISN") - The ISN features the Company's
FOCASTING and Dynamic End-User Profile System, or DEPS, software applications.
The ISN is a private network which uses the Internet as its communication medium
and links the Company's retail customers with their vendors. The ISN's primary
function is to assist retail buyers in sourcing merchandise for their product
divisions. The network is accessible only by the Company's retail customers, and
vendors who join the ISN.
The primary benefit of the ISN is that it improves retailers'
coordinated buying practices. Because the FOCASTING software allows each buyer
to create specific product profiles in the ISN, a senior buyer can set up
profiles to encompass product areas falling within the buying responsibility of
a junior buyer. For example, the General Merchandising Manager's profile would
have access to all products that are the responsibility of buyers in his
division. This would encompass a particular buyer's profile. The General
Merchandising Manager and the buyer would see the same products on their
respective computer screens. If the General Merchandising Manager sees a product
he likes which the buyer might not have noticed, he can call it to the buyer's
attention. This creates oversight and allows for coordinated buying strategies.
The ISN also serves as an effective time management tool for all buying
divisions. For example, if a buyer normally spends 30 hours each week sifting
through product catalogs, making phone calls, and reviewing samples, the ISN can
reduce this time dramatically. All the buyer has to do is review a product
profile on a daily basis to see ever-changing product availability,
specifications, quantities, etc. The buyer can then mark those products he is
interested in and discard (remove from the profile) those products that are of
no interest. The discarded products provide subscribing vendors with important
feedback relating to the demand for their products and allows them to tailor
more relevant product offerings based on buyers' preferences.
The ISN enables retail buyers to customize their product searches by
merchandise category, and receive on their computer displays only those products
for which they have buying responsibility. For instance, a retailer's shoe buyer
may tune his profile to the shoe "channel," which FOCASTs (broadcasts) product
profiles of shoe vendors which are members of the ISN.
Each retail buyer accesses the ISN via any computer with Internet
access. The buyer then keys in his password, and is prompted to his personal
profile. The buyer's profile has pre-set product categories based on the buyer's
purchasing responsibilities. Each level of management has varying levels of
access to the merchandise it can preview. For instance, if a buyer has the Men's
General Merchandise Manager profile, the ISN will display all product categories
within the Men's division with no access restrictions.
Through the DEPS software, the ISN updates each buyer individually when
a "new" product in the buyer's profile has been submitted for display by the
vendor. When a buyer views his product profile, notifications of "New" or
"Close-out" items that have been added to the profile are displayed
automatically. The automatic notification system facilitates quick decision
making on the buyer's part. Once the buyer has seen the new item, the
notification icon disappears and the product will remain available for viewing
unless discarded.
In addition, the DEPS software enables the buyer to delete any products
from his database. When a product is deleted from the ISN, an e-mail message is
automatically transmitted to the vendor stating that the vendor's product has
been deleted and provides the reason for its deletion. The vendor can
immediately respond to the buyer if the reason for deletion can be negotiated or
simply replace the deleted product with a new product. The buyer may restore the
deleted product to his database for future consideration.
The ISN promotes interactivity between the retailer and vendor by
handling buyer product inquiries and vendor responses via e-mail. The buyer has
the ability to send either bulk e-mails to all vendors within an industry or
personal e-mails to selected vendors on the ISN. These may be used to apprise
vendors of the amount of merchandise a buyer can order during a given period
("Open to Buy"), of special products being sought, or to request more specific
information on a product. The ISN can also be used to announce business critical
information. Via the ISN, the retailer can apprise vendors of buying divisions'
merchandise planning and buying goals. These interactive features give the
Company's retail customers ready access to diverse merchandise and makes vendors
an active part in merchandising decisions, thus giving both the retailer and the
vendor a competitive advantage over companies not using the ISN.
The ISN provides vendors with a pro-active means of showing their
products to major retailers, in contrast to passive marketing vehicles such as
paper catalogs or samples sent to buyers by mail. The Company standardizes all
of its vendors' product line sheets and catalogs in a uniform format which
retail buyers are familiar with and will use daily. This current source of
information ensures prices, terms, styles, and materials are easy to compare
between vendors. This uniform ISN format shortens the time it takes for buyers
to view product availability and pricing. At any time, the vendor may add or
remove displayed products on its own or with the assistance of the Company. When
marketing products through the ISN, vendors will no longer have to devote
resources to supporting these retailers' formerly distinct buying formats.
As part of the Company's contracts with its retail customers, the
retailer's management may mandate that its buyers view their ISN profiles on a
periodic basis. The frequent review of the ISN by qualified buyers inspires
vendor confidence in the ISN. The vendor is certain that its products are being
viewed by highly targeted buyers actively searching for deals. Retailers' use of
the ISN will play a key part in the Company's marketing strategy. After a time,
vendors will expect sales to result from their participation in the ISN. The
Company is developing a system to gauge vendor sales attributable to retailers'
use of the system. The Company will use the flow of data to demonstrate the
efficacy of the ISN to new vendor prospects.
The first ISN a vendor joins (the primary ISN) costs $300 to set-up 15
product listings and a $150 monthly maintenance fee. Each additional ISN
(secondary ISN) increases the monthly maintenance fee paid by the vendor by only
$20. The same fees apply to added services as for those offered to VTS members.
Membership continues for as long as the vendor maintains its subscription.
Vendors who join an ISN receive a free listing and home page on the VTS.
The Company installs, configures and customizes ISNs for its retail
customers. In order to forge all-important relationships with large retailers,
and achieve a buy-side critical mass quickly, the Company has not charged
retailers to use the ISN. The Company has valued its ISN development,
implementation and training for retailer clients at $50,000 to $100,000 per
retailer, depending on the retailer's size and product lines.
Internet Electronic Data Interchange ("EDI") - The Internet EDI system,
under development by the Company, is designed to promote back-end efficiencies
between the retailer and its supply chain.
The Company will incorporate standard EDI functions into its Internet
EDI. With the Company's Internet EDI, retailers may send purchase orders to
their vendors; vendors may send invoice, packing list, and shipping information
to retailers; all done in "real-time." All of the electronic documents may be
accompanied by digitized product photos to identify the order with the product.
This feature is designed to reduce confusion and mistakes in retailers'
accounting, receiving, and returns departments. Internet EDI may also provide a
retailer with quality assurance by matching the purchased item with the item
displayed on the ISN with that on the digitally generated purchase order and
invoice.
The Company's Internet EDI operates on Web-based software which may
integrate with any retailer's computer mainframe and database. Customized
integration of the Internet EDI into the retailer's computing environment takes
approximately 6 months to complete, and will be performed by the Company for a
fee should the retailer's MIS department need implementation assistance. The
Internet EDI will be offered at no cost to retailers and will be packaged and
implemented for retailers with the ISN. At this juncture, Management also
believes it is more effective to provide vendors with free Internet EDI access.
This strategy encourages retailers and vendors to adopt the Company's services.
A charge according to the amount of data transferred, or possibly based on the
value of the transaction supported by Internet EDI, may be levied on retailers
and vendors once the Internet EDI has gained a critical mass of users.
Supporting Technology
The Company has developed three proprietary technologies designed to
improve the efficiency and efficacy of the sourcing process:
Product Driven Search Engine - The Company believes the keyword search
functions employed by traditional search engines are impractical for merchandise
sourcing. Rather, the Company developed a product driven search engine which
simplifies the search process. The Company's search engine is linked to dynamic
Internet listings of the vendor's product catalog and line sheets, complete with
detailed product descriptions and digital photographs. These products are then
indexed and separated into easily recognizable categories which facilitates
quick product searches by retail buyers.
Focused Broadcasting ("FOCASTING") - The Company's FOCASTING software
enables retail buyers to create individual web pages filled with only those
products that fall within their buying responsibilities, thereby limiting
unnecessary "surfing." After the buyer creates his customized web page, the
FOCASTING software will "push" or broadcast directly to the buyer's desktop all
products contained within the Company's database that fall within the selected
product categories. For example, if a Men's jeans buyer created a customized web
page using FOCASTING and selected "Men's Jeans," the FOCASTING software will
transmit all the information and images relating to Men's Jeans within the
Company's database to the buyer each time he logs on.
Dynamic End-User Profile System ("DEPS") - The DEPS software provides
retail buyers and vendors with numerous interactive functions. Featured in the
Company's ISN, the DEPS software allows the user to maneuver and manipulate
(delete, restore, etc.) the product information contained within his own product
database. In addition, DEPS alerts the user whenever "new" or "close-out" items
are added to the user's database. This allows the user to efficiently search for
information regarding unique buying opportunities. The DEPS software also
enables interaction between the buyer and vendor. For the vendor, DEPS enables
them to remotely change, upload and delete their product information based on
user requests as well as receive business critical announcements from the
buyers. For example, after the FOCASTING software transmits all the information
within the selected categories, the DEPS software will allow the buyer to delete
items from the FOCASTed products without affecting what other buyers see. When
the product is deleted, the buyer will be prompted to a message screen whereby
the buyer can explain the reason for his deletion. This explanation will then be
transmitted to the vendor whose product was deleted. After receipt of this
message, the vendor can then remotely upload new products for the buyer to
consider. The DEPS software will then alert the buyer when these "new" items
have been uploaded. Additionally, the DEPS software promotes interactivity
between the retailer and vendor by allowing the buyer to send either bulk or
personal e-mails to all vendors on the ISN. These may be used to announce when
the buyer will purchase merchandise ("Open to Buy"), request special products,
to request more specific information on a product or announce business critical
information such as divisional or retailer-wide merchandise buying and planning
goals. These interactive features available through DEPS give vendors a
competitive edge in providing a means of rapid response to buyers' needs and
vendors' products.
Industry Background
As the worldwide retail industry faces competitive pressures and shifts
in consumer demand, traditional sourcing methods are coming under heightened
scrutiny, especially in light of proven emerging technologies which can now
offer dramatic improvements in efficiency, costs and business process
management. Most purchasing automation efforts address the post-order end of the
merchandise flow. The pre-order and order processes, the crucial "upstream"
lengths of the spectrum, may soon be automated. Retailers, in particular those
serving global or national markets, are increasingly exploring automated
purchasing solutions.
The Market Need In Focus
Retail supply-chain needs efficient electronic flow of goods/services,
enabling just-in-time receiving, lower overall costs, fewer data errors and
closer relationships between retailers and suppliers for better service and
planning.
Major retailers need buying efficiency and integration, supplier
partnering, lower costs, fewer data errors, and mapped input into existing
systems.
Qualified suppliers need customer partnering, closer relationships via
system tie-in to retailers, sales and bidding efficiency, Internet presence,
qualified presence in a network system with visibility and mapped output to an
array of customers and prospects.
Global Retail Market
The retail industry is characterized by intense competition,
consolidation and tightening profit margins. Consumers increasingly are more
discerning and consequently demand that retailers offer more value in return for
their purchasing dollar. Pressure on retailers affects all players in the
sourcing environment.
To attract and keep consumers, retailers must offer more desirable
products and prices, while optimizing factors such as product variety, inventory
carrying costs, retail prices and costs of goods. Successful buyers must now
sort, view, decipher and effectively act upon immense volumes of product and
purchasing data. The average large department store carries more than one
million stock keeping units ("SKUs") at any one time, each unique in terms of
product style, size, color, features, packaging, and so forth. Retailers need to
source these SKUs from hundreds, or in some cases thousands, of vendors
worldwide.
Sourcing related communications between retailers and their vendors are
a continuing dialogue about products, pricing, delivery, special promotions,
packaging and a host of other issues. To date, these communications have largely
been carried out through paper flow, phone calls, faxes, courier services, or
through travel and personal visits. It is time consuming, challenging and
expensive to maintain retail supply communications in this manner. Moreover, to
compare different merchandise buying programs on a consistent and meaningful
basis requires a major undertaking for which buyers often lack adequate
resources.
Current sourcing methods often result in less than optimal merchandise
buying, characterized by frequent misalignment between what the consumers want
and what is actually on the store shelf, not to mention lost sales, costly
retail price discounts, or even unsold merchandise returned to the supplier.
Business-To-Business Electronic Commerce In Retail
Retail buyers spend 60 to 80 percent of their time sourcing (searching
for and locating) merchandise and suppliers. The buying process is complex and
multi-faceted. A buyer's decision process involves selecting qualified suppliers
based on production volume, delivery, quality, and price. The buyer's objectives
include achieving pre-set goals for sales, turnover rate, expense levels,
margins and profitability; and updating product selection to meet fashion
trends. In order for retailers to remain competitive, buyers must be selective
and efficient in their purchasing decisions.
The expanding number and variety of products sold by each retailer,
together with pricing pressure and geographic diversity, drives the
globalization of retailer-supplier relationships. Growing volume and complexity
in merchandise sourcing relationships requires an information systems solution.
Long considered an art, merchandise buying must now be approached as a science,
with the help of technology.
To better manage their relationships and merchandise flow, both
retailers and suppliers are turning to information technology, and specifically
to electronic commerce solutions. C-ME believes that the electronic commerce
market is at the beginning of a long term expansion driven by adoption of the
Internet as a marketing venue and data highway.
However, despite the promises of E-commerce, the apparel wholesale
industry is characterized by low-level technology. Past Information Technology
(IT) investments spent by off-price retailers have been geared toward improving
back-end efficiencies, such as inventory control, distribution, and
point-of-sale ("POS") data.
One major area of investment by retailers is EDI, with nearly 100,000
companies which includes retailers and vendors around the world using EDI in one
form or another. EDI was developed over twenty years ago to facilitate back-end
efficiencies (i.e., purchase order fulfillment and processing) between retailers
and their vendors. Using EDI, purchase orders, shipping documents and
notifications were transformed into electronic format and transmitted over
Value-Added Networks (VANs) maintained by third-party providers. By means of
EDI, participating vendors are privy to an instant and continuous flow of
information concerning retail sales by styles, sizes and colors along with the
level of retail inventory. The ultimate goal of EDI is to help retailers and
their vendors realize significant cost savings versus non-automated means of
doing business. For example, the cost of a paper-based transaction in the
apparel industry is $26, versus $4 via electronic means.
Forward looking retailers are now allowing their vendors greater access
to formerly confidential sales and inventory data, in order to develop "quick
response" supply chain management efficiencies. Wal-Mart Stores' Retail Link
technology, for instance, gives 3,200 vendors access to its POS data to
replenish inventory at its 2,000 stores. For example, at each store, workwear
clothing inventory was customized by the vendor according to demographics,
regional tastes and weather patterns. With up to date information, via EDI,
apparel vendors may adjust cost sensitive production schedules and shipments in
accordance with instantly transmitted retailer supplied data, thereby increasing
turnover, avoiding costly mark-downs, and reducing inventory levels without
suffering loss of sales.
Proprietary EDI systems are expensive and exclusionary. Vendors pay
between $5,000 and $20,000 a year for access to standard EDI, depending on the
amount of data sent. Moreover, retailers pay monthly subscription fees for EDI
access and must buy and maintain third-party EDI software. The cost structure of
EDI inevitably favors large retailers, such as J.C. Penney, Wal-Mart and K-Mart,
and their larger vendors. This leaves many small to mid-sized vendors with no
effective path into large retailer's increasingly automated supply chain. This
leaves many small to mid-sized retailers without an electronic channel to link
up with their vendor base.
In order to successfully face these challenges, retailers and suppliers
are increasingly turning to information technology, and specifically electronic
commerce applications, as a means of managing their retailer-supplier
relationships. The Company believes that this trend towards electronic commerce
solutions represents an opportunity for application and service providers who
understand the unique requirements of the retail industry and can provide the
necessary reliability and security to consummate and manage sourcing
transactions. The challenge is coming up with an affordable E-commerce solution
that addresses both the front-end and back-end problems facing the retailer and
its supply chain vendors. The Company services are designed specifically to meet
these challenges.
Sales and Marketing
Direct Sales and Marketing Group
The Company plans to establish a direct sales and marketing force
divided into groups concentrating on three principal target markets: (i)
domestic retailers, (ii) domestic vendors, and (iii) foreign retailers and
vendors.
Initially, the Company anticipates to focus a majority of its marketing
efforts on attracting domestic retailers to its services. The marketing team
will be headed by a Director of Marketing who will coordinate the team's efforts
towards achieving a critical mass of retailers. That is, the Company's marketing
efforts will be retailer-initiated with the Company's marketers following up and
bringing the vendors on to the Company's system. Depending upon the proceeds
raised in the Offering, the Company proposes to hire retailer and vendor-focused
marketers. The Company's marketing team will include salespeople whose primary
responsibility will be to attract additional retail customers to the Company and
salespeople whose primary responsibility will be to introduce the Company's
services to the retailers' vendors. The Company may deploy marketing
professionals in foreign countries to serve these important retailers and vendor
clients.
Target Markets
Retailers - In line with the Company's retailer-centric approach, the
Company plans to target all types of retailers, from conventional department
stores to national chains to mass merchandising stores to off-price stores, as
its potential partners. The Company's services offer this diverse group of
retailers the same benefits, which include an internal management tool to track
the performance of its buyers. Additionally, the Company's services provide
retailers with an automated sourcing vehicle which will centralize buying and
increase buyer productivity.
Through the use of the Company's services, retailers can scale back
trade show attendance and vendor showroom visits. Additionally, buyers can make
their trade show and showroom visits more productive by pre-selecting
merchandise they wish to see or vendors they wish to visit.
The Company's services offer retailers distinct advantages. For
example, department stores, national chains, and mass merchants buy 80 to 90
percent of their private label merchandise directly from manufacturers. And,
since most of these manufacturers, factories, and plants reside overseas, the
Company's services leverages the global reach of the Internet to give these
retailers direct access to foreign manufacturers. This type of ready access
alone has the potential to save retailers both time and money.
Retailers can now have greater access to a wider array of merchandise
to help diversify their merchandise sourcing base. The Company's services are
designed to assist retailers in their ability to quickly, inexpensively, and
easily access information on diverse product lines. Ultimately, the Company's
services benefit the consumer by giving them access to a broader array of goods
at low prices.
The Company also plans to pursue other retail market segments,
including national chain department stores such as J.C. Penney, sporting goods
stores, and mass merchandising department stores after it has gained a dominant
share of the off-price retailer market.
Vendors - The first group of vendors targeted are merchant wholesalers
which are primarily engaged in buying and selling merchandise on their own
account and include jobbers, distributors, importers, and exporters. The Company
also seeks subscribers in the manufacturers' sales and marketing branches.
Lastly, the Company has targeted agents, brokers, and commission merchants which
include establishments whose operators are in business for themselves and are
primarily engaged in selling or buying goods for others (i.e., auction
companies, import agents, export agents, selling agents, merchandise brokers,
and commission merchants).
Listed below are vendor market segments targeted by C-ME, their unique
attributes, and how each segment will benefit from participating in C-ME's
Internet-based sourcing solution.
Wholesalers and Jobbers - These vendors represent the largest
portion of the Company's targeted subscribers. According to Gale
Publishing, there are approximately 11,000 U.S.-based wholesalers in
the apparel industry alone. These vendors, who purchase merchandise
manufactured by others for resale purposes, benefit from the direct
access to retailers the Company's services provide. And, because the
merchandise sold by these vendors are sensitive to time and price
pressures, the Company's services expedite the presentation of time and
price sensitive products to retailers for quick consideration.
Manufacturers - Manufacturers make up a sizable portion of the
Company's targeted subscribers. For example, Gale Publishing has
determined that there are approximately 5,000 U.S.-based manufacturers
in the apparel industry alone. These vendors perform the entire range
of production, from designing to finishing. Manufacturers either sell
their goods directly to retailers through their own sales offices, or
more commonly, to wholesalers who in turn sell the manufacturers' goods
to retailers. Some manufacturers act as wholesalers for other
manufacturers' products.
In terms of IT, manufacturers concentrate on acquiring
relatively simple technologies to improve manufacturing efficiencies,
and have specifically geared computer applications toward improving the
coordination of inventory management practices with their retail
customers. Management believes that manufacturers will have to employ
as many quality Web-based marketing vehicles as possible in order to
maintain their competitiveness. The Company seeks to provide the
preeminent E-commerce solution used by vendors to market their products
and connect to their retail customers.
In addition, once Internet commerce becomes more common,
manufacturers may use the Internet to sell their goods directly to
consumers, just as a number of quality manufacturers have opened retail
outlet stores in an effort to sell directly to the public. Should this
come to pass, the Company may be well-positioned to develop and
facilitate its manufacturer members' E-commerce systems.
Brokers and Commission Merchants - These vendors include
auction companies, import and export agents, and selling agents, all of
whom act as intermediaries who buy and sell goods in the middle of the
supply chain - between wholesalers and manufacturers with retailers,
both domestic and overseas. There are over 8,000 of these entities
operating in the U.S. Management has targeted these vendors as they
sell products directly to retailers and, in most cases, need to enhance
their market presence via low-cost Web solutions such as those offered
by C-ME.
Overseas Vendors - Potential foreign vendor subscribers are
concentrated in the Pacific Rim and include all types of wholesalers,
manufacturers and brokers. In the Pacific Rim alone, Management
estimates that there are over 100,000 potential subscribers in the
apparel trade. C-ME has targeted foreign-owned manufacturers,
wholesalers and brokers that sell merchandise directly to U.S.
retailers.
Most foreign vendors are not connected to their U.S. retailers
by any electronic means and therefore must conduct business via fax,
phone, and courier service. This can prove expensive and
time-consuming. Different time zones also pose communication problems
during business hours. The Company's services will provide overseas
vendors with easy to use, up to date Web technology which is becoming
an essential tool for transacting business with U.S. retailers.
Management believes the lure of conducting business directly with major
U.S.-based retailers via the Company's services will be extremely
attractive and enable the Company to attract and gain a substantial
market share overseas.
The prospect of direct access to foreign vendors is equally
compelling to U.S.-based retailers because retailers can directly
source their products from manufacturers. This enables retailers to
circumvent wholesalers and other intermediaries and improve operating
margins and inventory management.
Business Development Strategy
Initially, the Company will focus its retailer-centric approach on
targeting off-price retailers. The Company has focused its entire range of
services towards automating the time-intensive and costly sourcing methods still
being used by off-price retailers and providing these retailers' vendors with an
effective Web-based tool to market their products. Moreover, if the Company's
system gains a dominant share of this market, Management plans to incorporate a
transaction function into its services, thereby making the system a complete
sourcing-to-purchasing solution. This first step of the Company's business
strategy is designed to accumulate a critical mass of vendor data and product
information.
The Company may also target foreign vendors. Management believes that
foreign vendors will be eager and immediately attracted to the prospects of
conducting business directly with U.S.-based retailers. The domestic and foreign
data accumulated by the Company provides a valuable source of information that
can be used by retailers for sourcing and production purposes for their
extensive "private label" or direct buying needs.
The Company's strategy is designed to enable it to provide a complete
front-end Web-based sourcing and production system for retailers and their
supply chain vendors. The Company plans to develop system enhancements that will
enable it to serve not only as a sourcing resource but also as a complete
closed-loop system that will integrate the entire supply chain architecture.
That is, the Company's services may be designed to help retailers with
distribution from planning, scheduling, delivery, freight management, trade
processing, cross-docking, receiving, processing, factoring, and warehouse
management. In addition, the Company's services may close the loop with a
complete back-end solution from order management and fulfillment to inventory
management (including administration and replenishment) to store operations to
Point-of-Sale ("POS"). Additionally, a transaction function may be built into
the system whereby a commission may be charged to retailers when they purchase
merchandise displayed by vendors on the Company's services.
Potential Revenue Streams
The Company's main source of revenue until the year 2001 will be
generated in the form of fees paid by subscribing vendors and for additional
services performed by the Company. The primary revenue stream for the Company
will be generated from vendors who join one of the Company's ISN through the
Company's retail customers. The Company charges the vendor a one-time setup fee
of $300 and $150 monthly hosting fee for a vendor to join the primary ISN. If
the same vendor joins a secondary ISN, it will only cost this vendor an
additional $20 monthly hosting fee. For example, Vendor A joins BCF's ISN as a
primary ISN and will pay a one time setup fee of $300 plus $150 monthly hosting
fee. If Vendor A is willing to join FBC's ISN as a secondary ISN, Vendor A only
pays an additional $20 for the monthly hosting fee for a total of $170 monthly
hosting. If the vendor only joins the VTS, it will only cost this vendor $300
one-time setup and $30 monthly hosting. If this vendor has already joined the
ISN, the Company waives the $30 monthly hosting fee for the VTS listing.
The Company expects to generate additional revenue from the following
sources:
o Premium marketing services in the form of mass e-mails sent to
retailers, and banner advertisements placed on the VTS.
Management believes vendors will be willing to pay for
prominent exposure in the apparel community.
o A 1.5 percent buying commission on transactions consummated
between vendors and retailers, paid by the retailer, when a
transaction function is incorporated into the Company's system
in the year 2000.
o Fees from enhancements to retailers' ISNs.
o Fees from each additional service integrating the supply chain
architecture.
Marketing and Sales Alliances
The Company believes it is in the interest of the retailers' buyers to
contact their vendors and encourage their vendors to subscribe to the Company's
services because of the potential buying efficiencies gained through the
Company's services. Interested vendors may either contact the Company to
subscribe or retailers may provide the Company with their vendor contacts. The
Company's sales and marketing professionals may then contact these vendors to
offer the Company's services. This retailer-initiated marketing approach is
incorporated in each agreement the Company enters into with its retail
customers. The marketing by the Company's retail customers may include, at the
discretion of the retail customers:
o A letter from the retailer's management sent to vendors
announcing the retailer's use of the ISN, and stating the
importance of joining the ISN.
o Production of glossy brochures describing the benefits of
joining the ISN, mailed to the retailers' vendors.
o Joint press conferences announcing the use of the ISN.
o Phone calls made by the retailers' buyers informing vendors of
the buyer's frequent use of the ISN and how the ISN will bring
the vendor more sales opportunities.
o Retailer-sponsored conferences attended by vendors.
In return for retailers' co-marketing efforts, the Company's retail
customers receive a portion of the monthly subscription fee charged to vendors
who join the retailer's ISN. For example, BCF's fee sharing rate stands at 50
percent, while FBAR's was contracted at 30 percent. Management does not intend
to extend such lucrative fee sharing arrangements with future retail customers.
Future fee sharing percentages will depend on the size of the retailer.
Management anticipates this percentage to be between 0 to 25 percent.
The Company will also employ more traditional marketing methods such as
using print advertising in trade publications, banner ads on and hyper-links to
industry related Web sites, and exhibitions at major trade shows.
Key Contracts and Collaborative Retail Parners
Management has established or is in the process of establishing
affiliations and contracts with several retailers. The most significant of these
are listed below:
Burlington Coat Factory Warehouse Corporation - The Company has
negotiated a contract with BCF. Under the terms of this contract, the
Company will build an exclusive ISN for BCF for free. In return, BCF
will provide the Company with a list of its existing vendors and assist
the Company in marketing the ISN to these vendors. Management
anticipates charging the vendors a $300 set-up fee and a $150 monthly
hosting fee. BCF will receive 50 percent of the monthly hosting fees
collected from vendors who join BCF's ISN as well as 50 percent of the
additional monthly hosting fees collected from vendors who decide to
join BCF's ISN as a secondary ISN. BCF will also receive 33 percent of
the monthly hosting fees collected from vendors who appear on BCF's
vendor list but wish to join another ISN the Company has created for a
different retailer as well as 33 percent of monthly hosting fees
collected from foreign (non-US) vendors who join BCF's ISN. BCF will
also receive 5 percent of all monthly hosting fees collected from US
vendors of products in the apparel, linens, juvenile furniture, and
footwear industries who did not join BCF's ISN. Lastly, BCF received a
stock warrant whereby BCF has the option to purchase an equity interest
of up to 10 percent of the Company (See "Risk Factors--Reliance on
Retail Customers," "Principal Stockholders" and "Description of
Securities; Warrants").
Family Bargain Corporation - The Company has negotiated a contract with
FBAR, a San Diego-based retailer, to develop an exclusive ISN. FBAR,
through General Textiles and Factory 2-U, operates over 150 off-price
retail apparel and housewares stores located throughout California,
Arizona, Washington, New Mexico, Oregon, Nevada, and Texas. FBAR has
agreed to send letters to its vendors encouraging them to join the ISN.
In return for its efforts in marketing and promoting the ISN, FBAR will
receive 33 percent of the monthly hosting fees.
Competition
Defined broadly, the Company's competition includes each company
providing pre-order and order sourcing flow in the retail industry. Much of this
sourcing flow is currently conducted by the retailers or suppliers themselves
through (i) facsimile or telephonic communications or (ii) EDI-based computer
systems over private networks. These internal systems may involve extensive
hardware and software requirements that are prohibitively expensive for many
retailers and suppliers. The Company believes that most retailers and suppliers
will move to electronic-based sourcing flow as the costs of such systems
decrease over time. The Company's ISN is intended to provide retailers and
suppliers with the efficiencies offered by electronic-based sourcing without
incurring the costs of an EDI-based system.
Several competitors are pursuing the same general market as the
Company. They fall under five categories:
Web site showrooms for apparel vendors - These Web sites
display vendors' products on the Web, either at the Web site itself, or
via a link to the vendor's Web site. These sites do not integrate the
retail buyer into the viewing system, as does the Company's ISN.
Retailers may be "members" of these sites, but there is no assurance
that buyers visit with any regularity, much less buy products from the
site. Major sites include: AT-Net, which charges vendors $1,800 per
year to maintain a product showroom; Apparel.Net, which does not charge
a monthly subscription but rather generates fees from creating and
hosting Web sites for its prospective members; and The Virtual Garment
Center, which lists thousands of links to apparel companies' Web sites.
Web site marketplaces - These sites attempt to facilitate
business-to-business apparel commerce. Sites include: ICES, a web site
catering to upscale retail buyers and their vendors (retailers are able
to view and purchase merchandise via the system; annual membership fees
range from $2,000 to $5,500 per vendor); Global Textile Network lists
thousands of apparel vendor Web sites, and houses showrooms, and
attempts to facilitate an apparel trade marketplace via bid boards and
e-mail requests for products.
Automated supply chain solution companies - QCS, which is
developing an Internet-based subscription service which enables their
retailers to collaborate with their supply chain partners using
standard Web browsers.
Standard EDI suppliers - Major players in this area include
IBM Advantis, Sterling, Premenos, GE Information Services, and
Harbinger Corporation. Costs associated with using EDI through these
third-party providers range from $5,000 to $20,000 a year. Though these
companies are developing Internet-enhanced EDI systems, their
Internet-based products may cannibalize their widespread VANs which
provide an existing and recurring revenue stream.
On-line Catalog Aggregators - Competitors in the larger
general merchandise arena include Commerce One, which has developed
Buysite Electronic Procurement Application, giving purchasing
departments access to 5,000 suppliers' on-line catalogs. Participants
in Commerce One's Electronic Network include Office Depot, 3M, and
Black and Decker. Netscape and Ariba also compete in the intranet
procurement market. Another notable company in this class is
Industry.Net. Despite initial success, Industry.Net's $5,000 per month
fees proved too expensive to all but a few subscribers. Consequently,
Industry.Net is currently out of business.
Despite competition from this diverse group, Management believes that
it has several competitive advantages. First, the Company's pricing structure
and strategic retail alliances make it the most attractive among its
competitors. The Company believes solutions provided by the competition are
simply too expensive, complex, and time consuming to implement. Moreover, the
Company believes its retailer-centric approach of first offering a front-end
E-commerce sourcing solution to gain a critical mass of vendor subscribers is
more practical than those offered by the competition. Competitors offering
complete front-end and back-end solutions without first achieving a critical
mass of subscribers may find it difficult to attract both retailers and vendors.
Lastly, the Company's management lends a wealth of experience in industries
critical to the services being offered by the Company, including high
technology, retail buying, wholesaling, and importing. In total, Management does
not feel that these firms will encroach on its target market.
Intellectual Property Rights
The Company intends to seek U.S. patent and trademark protection on its
products and developments, where appropriate, and to protect its proprietary
technology under U.S. and foreign laws affording protection for trade secrets
and copyrights. Except for filing an application with the U.S. Copyright Office,
the Company, to date, has not filed for any such protection of either patent or
trademark or any other type of intellectual property rights in the U.S. or any
foreign country.
The Company relies primarily upon copyrights, trade secrets, technical
know-how and other unpatented proprietary information relating to its product
development. To protect its trade secrets, technical know-how and other
proprietary information, the Company's employees are required to enter into
agreements providing for maintenance of confidentiality. The Company also has
entered into non-disclosure agreements to protect its confidential information
delivered to third parties in conjunction with possible corporate collaborations
and for other purposes. However, there can be no assurance that these types of
agreements will effectively prevent unauthorized disclosure of the Company's
confidential information, that these agreements will not be breached, that the
Company would have adequate remedies for any breach or that the Company's trade
secrets and proprietary know-how will not otherwise become known or
independently discovered by others.
While the Company has not been involved in any patent or other
intellectual property rights litigation, there can be no assurance that third
parties will not assert claims against the Company with respect to existing and
future products. In the event of litigation to determine the validity of any
third party's claims, such litigation could result in significant expense to the
Company, and divert the efforts of the Company's technical and management
personnel, whether or not such litigation is determined in favor of the Company.
The Internet industry is subject to frequent litigation regarding patent and
other intellectual property rights. Leading companies and organizations in the
Internet industry have numerous patents that protect their intellectual property
rights in these areas. In the event of an adverse result of any such litigation,
the Company could be required to expend significant resources to develop
non-infringing technology or to obtain licenses to the technology which is the
subject of the litigation. There can be no assurance that the Company would be
successful in such development or that any such license would be available on
commercially reasonable terms.
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Facilities
The Company leases its principal offices located at 320 South Garfield
Avenue, Suite 318, Alhambra, California 91801.
Legal Proceedings
The Company has been named as a defendant, along with BCF, in a lawsuit
brought by Stanley Rosner ("Rosner"), an individual. In March, 1998, Rosner
commenced an action in the Supreme Court of the State of New York, Nassau
County, New York (Index No. 98-006524). Rosner alleges breach of oral and
written contracts between the Company and Rosner and between BCF and Rosner in
1997. Rosner claims that he is due certain fees from both the Company and BCF
for services allegedly rendered in connection with certain transactions and
alleged transactions involving the Company and BCF. Such transactions and
alleged transactions relate to the Internet services that the Company may
provide to BCF and contemplated transactions arising from vendors of BCF. Rosner
claims that he is due damages in an amount not less than $5,000,000 plus
unspecified punitive damages from both the Company and BCF. Rosner's attorney
has agreed that the Company and BCF are entitled to have the venue of the
lawsuit transferred from Nassau County, New York to New York County (Manhattan),
New York; Rosner's attorney also agreed to arrange for the transfer. Rosner's
attorney also agreed that the Company's and BCF's responsive papers would be due
no later than ten (10) days after notice of such transfer had been served. To
date, the Company has not received notice of the proposed transfer of venue and
has not filed its responsive papers or otherwise moved against the complaint.
The Company intends to vigorously defend this action. The Company
believes that it is not obligated to make any payments to Rosner and has
meritorious defenses to all of Rosner's allegations. However, if the Company
does not prevail and a significant damage award against the Company is granted,
this would have a material adverse effect upon the Company.
Employees
The Company currently has 6 full-time employees, of which 1 is in sales
and marketing, 1 is in engineering and development, and 4 are in management and
administrative support services. The Company also has 6 outside Board Members.
All of the Company's employees are located within the United States. The
Company's employees are not represented by a labor union and Management believes
that its relations with its employees are satisfactory.
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company and their
respective ages and positions with the Company are set forth in the following
table.
NAME AGE POSITION
---- --- --------
Howard W. Moore 68 Vice-Chairman
Frank S. Yuan 50 Chief Executive Officer, President, and
Chairman of the Board
Charles Rice 56 Director
Deborah Shamaley 39 Director
Robert Lee 41 Director
Robert Hsieh 50 Director
Peter Lin 28 Director
David Rau 43 Chief Financial Officer
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Board of Directors
Directors of the Company currently do not receive salaries or fees for
serving as directors of the Company. There are presently seven (7) directors on
the Board. All directors are reimbursed by the Company for any expense incurred
in attending Board meetings.
Howard W. Moore. Mr. Moore has served as Vice-Chairman of the Company since
December, 1998. Mr. Moore has extensive experience in the toy industry.
Beginning in 1948, Mr. Moore started a family toy business called Moore's Toy
Stores. In 1957, Mr. Moore founded Toy Barn Stores in Baltimore, Maryland. Then
in 1966, Mr. Moore founded and served as the President and Chief Executive
Officer of Toy Town, USA, Inc. In 1978, Toy Town, USA, Inc. was sold to Lionel
Corporation. From 1978 to 1979, Mr. Moore served as Executive Vice President for
Lionel Leisure. Mr. Moore joined Toys "R" Us in 1980 as its Vice President of
Purchasing. From there, Mr. Moore became the Toys "R" Us' Executive Vice
President and General Merchandising Manager. Moreover, in 1983, Mr. Moore was
appointed a member of Toys "R" Us' Executive Committee, where he served until
1990. In 1985, Mr. Moore was appointed to the Board of Directors for Toys "R"
Us, where he continues to serve to this day. In addition, Mr. Moore serves as a
member of Toys "R" Us' Governance Committee. In 1990, Mr. Moore retired from
Toys "R" Us and founded Howard Moore Associates, which provides consulting to
the toy industry in the areas of marketing, product licensing, and
merchandising/packaging. Currently, Mr. Moore acts as a consultant for Today's
Kids, Leapfrog, Wild Planet, Catylist, and Whamo as well as for start-up
companies, product developers, and toy inventors. Finally, Mr. Moore has
brokered the sale of four toy companies plus multiple product lines.
Frank S. Yuan. Founded the Company in 1996. Mr. Yuan has served as the Chief
Executive Officer, President and Chairman of the Board since the Company's
inception. Mr. Yuan has a well-diversified business background, which includes
more than 20 years experience in the apparel and computer wholesale industries.
In 1986, Mr. Yuan founded U.N. Imports, Inc. -- a men's apparel import/wholesale
company. Mr. Yuan has been working for UN Imports, Inc. since 1986. Prior to
that, Mr. Yuan founded Frenchy's Clothing Co., a 3 store men's clothing retail
chain, and Foria International, Inc., a men's clothing line that manufactured
apparel under the "Knights of Round Table" label. Mr. Yuan also co-founded
UNI-CGS, Inc. -- a computer hardware importer and wholesaler. Besides experience
in the apparel and computer industries, Mr. Yuan also has substantial experience
in real estate where he founded UNI-Fortune Company. UNI-Fortune was responsible
for developing and selling two retail shopping centers, three office buildings,
six condominium projects, and a 400+ unit apartment complex. Mr. Yuan was also
the co-founder of two community commercial banks -- United National Bank and
EverTrust Bank. Lastly, Mr. Yuan founded and served as the Chairman of the Board
for Western Cities Titles Insurance Company -- a title insurance company selling
title insurance in Los Angeles County, California. Mr. Yuan has a B.A. in
Economics from Fu-Jen Catholic University in Taiwan (1970) and a M.B.A. from
Utah State University (1973).
Charles Rice. Mr. Rice has been a member of the Company's Board of Directors
since February 1, 1997. Mr. Rice has 30 years of experience in wholesale apparel
buying. He has extensive buying experience as a men's apparel buyer for Sears,
Roebuck and Company and Montgomery Ward. Mr. Rice is currently employed by Deer
Creek Enterprises, Ltd. where he serves as a manufacturer's representative for
Sunkyong America/Leader Apparel. Mr. Rice has a B.S. in Business and Economics
from the University of Delaware (1963).
Deborah Shamaley. Mrs. Shamaley has been a member of the Company's Board of
Directors since February 1, 1997. In March, 1985, Mrs. Shamaley co-founded the
Texas Apparel Group. The Texas Apparel Group was later renamed The Apparel Group
(TAG). TAG specialized in buying and selling wholesale/retail,
off-price/close-out women's apparel. TAG grew to 228 employees with 23 retail
outlets across Texas, New Mexico, Arkansas, Oklahoma, Missouri, and Mexico,
including 8 franchise outlets. TAG sold to 1,800 wholesale accounts; which
included BCF, Sears, J.C. Penney's, Nordstrom, Sam's, 50 Off, Factory 2-U, and
One Price Clothing Stores. Sales rose from $1.08 million in its first year of
business to $37.3 million at its peak. In 1996, Mrs. Shamaley sold her interest
in TAG and has since retired.
Robert H.J. Lee. Mr. Lee has been a member of the Company's Board of Directors
since February 1, 1997. Mr. Lee was the founder and President of PicoPower
Technology, Inc. which specialized in inventing low wattage chips for use in the
growing portable computer market. During the three years PicoPower was in
business, its sales rose to $40 million. In 1994, PicoPower was sold to Cirrus
Logic for approximately $60 million. From 1995 to 1996, Mr. Lee served as
Corporate Vice President for Cirrus Logic. In 1996, Mr. Lee became an
independent venture capitalist. In April, 1997, Mr. Lee joined 2M Invest Corp.
(a venture capital fund) and became its Managing Director. Mr. Lee also serves
as the Chairman for several companies including Link Max, Inc. (a company
specializing in Intranet services), Cycore A/S (a Swedish corporation
specializing in 3-D graphics rendering and special effects rendering software),
and Kaukas Systems, Inc. (a company specializing in providing a voice call back
response service for doctors). Mr. Lee has a degree from Chien-Hsien Institute
of Technology in Taiwan (1975) and a M.S. in Computer Science from Stevens
Institute of Technology (1982).
Robert Hsieh, Ph.D. Dr. Hsieh has been a member of the Company's Board of
Directors since February 1, 1997. Dr. Hsieh currently serves as the
Vice-Chairman of Microtek Lab, Inc. (USA) and Microtek International, Inc.
(Taiwan). Dr. Hsieh founded Microtek Lab, Inc. and was the guiding force behind
the development of its desktop scanner
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business. Under Dr. Hsieh's leadership, Microtek launched the industry's first
desktop scanner in 1984, which has grown progressively since then to include a
full array of color and grayscale models. Dr. Hsieh also co-founded, and is the
Co-Chairman of, Ulead Systems -- a Windows-based applications software company.
Dr. Hsieh has also served on numerous Boards of Directors for high-tech
companies, including C-Cube, Sierra Imaging Technology, and Hologram Imaging
Technology. Dr. Hsieh has a B.S. degree in Electrical Engineering from National
Cheng Kung University in Taiwan (1968) and a M.S. (1971) and Ph.D. (1978) in
Electrical Engineering from the University of Cincinnati.
Peter Lin. Mr. Lin has been a member of the Company's Board of Directors since
February 1, 1997. Mr. Lin is currently a Senior Financial Analyst specializing
in mergers and acquisitions for Watson Pharmaceuticals, Inc. Prior to that, Mr.
Lin was a Corporate Actions Analyst for Capital Research and Management Company
from September, 1993 to September, 1996 and for the Franklin Templeton Group
from October, 1992 to September, 1993. Mr. Lin was an Associate Portfolio
Manager in Global Investment Advisors, Inc., the General Partner of Global
Strategic Investment, and is the Investment/Portfolio Manager of the Lotus
Group. Mr. Lin has a B.S. in Business Administration from University of
California, Berkeley (1991) and a M.I.S. degree from Claremont Graduate
University in California (1998).
Officers
David Rau. Mr. Rau joined the Company in August, 1996 and serves as its
Controller and Chief Financial Officer. Mr. Rau also serves as the
Controller/CFO for U.N. Imports, Inc. and has served in that capacity since
1986. Mr. Rau has a B.A. in Economics from Fu-Jen Catholic University in Taiwan
(1977), a M.B.A. from Eastern New Mexico University (1983), and a M.S. in
Computer Science from North Texas State University (1986).
Other Key Advisors and Employees
James Zheng. Mr. Zheng serves as the Company's Chief Technology Officer and was
instrumental in designing, developing, and implementing the Company's
product-driven search engine, database structure, and on-line
purchasing/ordering systems. Mr. Zheng also designed and built the Company's
network, based on TCP/IP. Concurrent with his responsibilities at the Company,
Mr. Zheng owns a multimedia company HZ Multimedia, Inc. where he develops
interactive multimedia application in the areas of corporate presentation,
marketing, and computer-based training as well as provides consulting services
in cross-platform multimedia and Internet application development. Some of his
clients have included Fidelity National Title Insurance Company, Toshiba of
America, LPL Financial Services, Ross Roy Communications, Inc., Santa
Fe/Burlington Northern Railroad, JLG Technology, and Mazda Motor of America. Mr.
Zheng also worked at AIMS Multimedia from 1994 to 1996 where he functioned as a
software engineer, webmaster and UNIX systems engineer. Mr. Zheng has a B.S.
degree in Computer Science from Zhengzhou University, China (1989). Mr. Zheng
also has a M.S. degree in Computer Science from University of California,
Riverside (1992), where he is also a Ph.D. candidate.
James K. Ho, Ph.D. Dr. Ho serves as a consultant for the Company. Dr. Ho is a
professor of information and decision sciences at the University of Illinois at
Chicago, where he also serves as director of applied research and consulting
services for the College of Business Administration. He did his undergraduate
work at Columbia University and obtained his Ph.D. from Stanford University. Dr.
Ho has published widely in academic and professional journals and authored three
books and numerous research articles including "Evaluating the World Wide Web: A
Study of 1000 Commercial Sites," "A Comparative Study of Commercial Web Sites in
Australia, France, Hong Kong, and USA," and "Focasting: The future of Web
Advertising." He has extensive experience working with international
organizations, major corporations, as well as small businesses in the
application of information technology in the workplace. Based on his recent
book, "Prosperity in the Information Age", he conducts
26
<PAGE>
executive seminars on "Competing in the Information Age: Maximizing the Payoff
from Information Technology" and on "Internet Strategies: Beyond Web Sites and
Home Pages." Dr. Ho teaches courses in information and operations management for
MBA, MS, and Ph.D. students, making extensive use of Web resources. It was Dr.
Ho who suggested that the Company implement a FOCASTING (Focused Broadcasting)
function in the Company's web site to provide an added value for the Company's
subscribers.
Joseph Sloan. Mr. Sloan serves as a consultant to the Company. Mr. Sloan is
currently the senior UNIX administrator for Toyota in charge with implementing
its call center database, direct response marketing database, web site, external
UNIX mail gateway, and new UNIX system. Mr. Sloan has a background in system and
network administration of Solaris, SGI Irix, BSD, LINUX and other UNIX systems.
Moreover, Mr. Sloan has a background in UNI - PC integration, administration of
mail, DNS, web and security as well as utility programming in Perl, Shell, C/C++
and other languages. Mr. Sloan has worked at McDonnell Douglas Corporation where
he wrote ATE and Mil-1553 avionics test software and Hughes Aircraft Co. where
he was responsible for large-scale naval electronics warfare systems for the
Navy of the Republic of China. Mr. Sloan has an Associate Degree in Electronics
Technology from Fullerton College (1981). Mr. Sloan is currently completing his
B.S. Degree in Computer Engineering from California State Long Beach.
Executive Compensation
The following table sets forth, for the fiscal year ended June 30,
1998, annual compensation, including salary and bonuses paid by the Company to
each executive officer and all executive officers as a group.
Name and Principal Parties Annual Compensation
-------------------------- -------------------
Salary Bonus
------ -----
Frank S. Yuan $ 50,000 -0-
Chief Executive Officer and President
David Rau $ 33,600 -0-
Chief Financial Officer
All executive officers as a group (Frank S. Yuan $ 83,600 -0-
and David Rau)
27
<PAGE>
Employment Agreements
Mr. Rau entered into an employment agreement with the Company in
October 1996, pursuant to which Mr. Rau will serve as part-time treasurer. The
term of the agreement is "at will"; either party may terminate the agreement
upon ten (10) days written notice. Pursuant to the agreement with Mr. Rau, the
Company will pay Mr. Rau a base salary of $33,600 beginning October 1996.
Directors and Officers Insurance
The Company is exploring the possibility of obtaining Directors' and
Officers' liability insurance. The Company has obtained a premium quotation but
has not entered into any contracts with any insurance company to provide said
coverage as of the date of this Prospectus. There is no assurance that the
Company will be able to obtain such insurance.
Indemnification of Officers and Directors
At present, the Company has not entered into individual indemnity
agreements with its Officers or Directors. However, the Company's Articles of
Incorporation and By-Laws provide a blanket indemnification and state that the
Company shall indemnify, to the fullest extent under California law, its
Directors and Officers against certain liabilities incurred with respect to
their service in such capacities. In addition, the Articles of Incorporation
provide that the personal liability of Directors and Officers for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, Officers, and controlling persons of the
Company pursuant to the foregoing provision, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a Director, Officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such Director, Officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by the Company is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such case.
Stock Options
The Company has adopted a non-qualified Stock Option Plan covering
250,000 shares of the Company's Common Stock, pursuant to which directors,
officers, key employees, and consultants working for the Company are eligible to
receive stock options. The plan is administered by the Board of Directors and
the President of the Company (the "Administrator"). The selection of
participants, allotment of shares, determination of price and other conditions
of purchase of the stock options are determined by the Administrator in order to
attract and retain persons
28
<PAGE>
instrumental to the success of the Company. As determined by the Administrator,
payment upon exercise of options may be in cash or other payment method.
Generally, the vesting, exercise and termination schedules are determined by the
Administrator at the time of grant, as is the exercise price. The stock options,
in most cases, are terminated if the Grantee resigns, terminates, or no longer
holds his/her position with the Company prior to vesting. The table below
reflects stock options granted by the Company to executive officers and other
persons. The table covers all options granted by the Company through December
31, 1998. As of December 31, 1998, no options have been exercised.
Name of Date No. of Exercise
Holder Granted Shares Price
- -------------- ------- ------- --------------------
Alan Chang(1) 1996 50,000 $0.40/share
David Rau(2) 1996 25,000 $10.00
James Zheng(3) 1996 50,000 $10.00
Monica Cheang(4) 1997 10,000 $0.40/share
Luz Jimenez(5) 1997 5,000 $0.40/share
David Rau(5) 1998 5,000 $0.40/share
Laura Mercado(5) 1998 5,000 $0.40/share
Catherine Jampierre(5) 1998 5,000 $0.40/share
Howard W. Moore(6) 1998 15,000 $0.40/share
Total Granted 170,000 $0.40/share - $10.00
Total Ungranted 80,000(7)
(1) Alan Chang was granted a restricted stock option to purchase 50,000 shares
of Common Stock at $0.40 per share pursuant to an employment contract executed
on October 8, 1996. The option vested two years after the execution of the
employment contract. At the time of Mr. Chang's resignation from the Company
only 50 percent of the option (25,000 shares) had vested. Pursuant to the terms
of the Company's 1996 Stock Option Plan, Mr. Chang must exercise the option
within three months of his resignation from the Company.
(2) David Rau was granted a restricted stock option to purchase 25,000 shares of
Common Stock for a total cost of $10.00 pursuant to an employment contract
executed on October 28, 1996. The option vested two years after the execution of
the employment contract. However, Mr. Rau can only exercise 50 percent of the
option (12,500 shares) within 15 days after the end of his second year of
employment. The remaining 50 percent of the option (12,500 shares) is
exercisable within 15 days after the end of his third year of employment.
(3) James Zheng was granted a restricted stock option to purchase 50,000 shares
of Common Stock for a total cost of $10.00 pursuant to an employment contract
executed on November 1, 1996. The option vested two years after the execution of
the employment contract. However, Mr. Zheng can only exercise 50 percent of the
option (25,000 shares) within 15 days after the end of his second year of
employment. The remaining 50 percent of the option (25,000 shares) is
exercisable within 15 days after the end of his third year of employment.
(4) Monica Cheang, who serves as the Company's Office Administrator, was granted
a restricted stock option to purchase 10,000 shares of Common Stock at $0.40 per
share. Ms. Cheang can only exercise 50 percent of her option (5,000 shares)
within 15 days after the end of her second year of employment. The remaining 50
percent of the option (5,000 shares) is exercisable within 15 days after the end
of her third year of employment.
(5) Luz Jimenez, David Rau, Laura Mercado and Catherine Jampierre were each
granted restricted stock option to purchase 5,000 shares of Common Stock at
$0.40 per share. They can only exercise 50 percent of their option (2,500
shares) within 15 days after the end of their second year of employment. The
remaining 50 percent of the options (2,500 shares) are exercisable within 15
days after the end of their third year of employment.
(6) In consideration for serving as the Company's Vice-Chairman, Mr. Moore was
granted restricted stock options to purchase 15,000 shares of Common Stock at
$0.40 per share.
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<PAGE>
(7) The Board of Directors has empowered Management to grant the remaining
80,000 share of ungranted stock options to key employees.
The stock options described above are non-qualified stock options that
were issued by the Company to certain employees and executive officers. As of
September 30, 1998, no options have been exercised or canceled.
CERTAIN TRANSACTIONS
On September 17, 1996, the Company loaned Frank S. Yuan $922,020. The
loan was evidenced by a written promissory note that required Mr. Yuan to pay
monthly interest on the outstanding principal balance of the loan at a rate of 8
percent per annum. Furthermore, Mr. Yuan was required to make principal payments
on demand. To secure the promissory note, Mr. Yuan granted the Company a
security interest in two credit facilities offered by American International
Bank and United National Bank totaling $1,500,000. Mr. Yuan has since paid off
the loan in its entirety.
In July 1996, The Frank S. Yuan Family Trust purchased 2,250,000 shares
for $50,000, and on November 26, 1997, the Frank S. Yuan Family Trust purchased
450,000 shares for $225,000. Frank S. Yuan is the trustee of The Frank S. Yuan
Family Trust.
All future transactions, including loans, between the Company and its
officers, directors, principal shareholders and affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties.
30
<PAGE>
PRINCIPAL STOCKHOLDERS
<TABLE>
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's Common Stock as of December
31, 1998, and as adjusted to reflect the sale of the Shares offered hereby, for
(i) each executive officer or director of the Company who beneficially owns
Shares; (ii) each stockholder known to the Company to beneficially own 5 percent
or more of the outstanding Shares of its Common Stock; and (iii) all executive
officers and directors as a group. The Company believes that the beneficial
owners of the Common Stock listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such Shares,
subject to community property laws where applicable.
<CAPTION>
Executive Officers, Shares Percentage of Common Shares Outstanding
Directors, and 5% Beneficially
Stockholders(1) Owned(2) After Offering
- ------------------- ------------ -----------------------------------------------------------------
Before Minimum Minimum Maximum Maximum
Offering w/o BCF w/BCF(3) w/o BCF w/BCF(4)
-------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Howard W. Moore(6) 15,000 0.3% 0.3% 0.2% 0.2% 0.2%
Frank S. Yuan Family Trust(7) 2,700,000 45% 44.1% 39.6% 31.8% 28.6%
Charles Rice 60,000 1% 1% 0.9% 0.7% 0.6%
Deborah Shamaley 300,000 5% 4.9% 4.4% 3.5% 3.2%
Robert H.J. Lee 250,000 4.2% 4.1% 3.7% 2.9% 2.6%
Robert Hsieh 62,500 1% 1% 0.9% 0.7% 0.7%
Peter Lin (8) 295,000 4.9% 4.8% 4.3% 3.5% 3.1%
David Rau (9) 30,000 0.5% 0.5% 0.4% 0.3% 0.3%
James Zheng (10) 50,000 0.8% 0.8% 0.8% 0.6% 0.5%
UNI, L.P.(11) 474,000 7.9% 7.7% 7.1% 5.6% 5.0%
All Officers, Directors,
and 5% Shareholders as Group 4,236,500 70.6% 69.2% 62.3% 49.8% 44.8%
All Other Stockholders(12) 1,763,500 29.4% 28.8% 25.9% 20.8% 18.7%
New Stockholders if Minimum Sold 125,000 2% 1.8%
New Stockholders if Maximum Sold 2,500,000 29.4% 26.5%
BCF if Minimum Sold 680,555(3) 10.0%
BCF if Maximum Sold 944,444(4) 10%
<FN>
(1) All officer, directors, and five-percent shareholders of the Company may be
reached at Cyber Merchants Exchange, Inc., 320 S. Garfield Ave., Ste. 318,
Alhambra, CA 91801.
(2) Based on 6,000,000 shares outstanding (5,750,000 shares outstanding plus
250,000 shares reserved for stock options of which stock options of 145,000
shares have been granted ). (After the 1-for-2 reverse stock split.)
(3) As part of the Company's contract with BCF, the Company granted BCF a stock
warrant to obtain a 10 percent equity interest in the Company. See, "Key
Contracts and Collaborative Retail customers - Burlington Coat Factory Warehouse
Corporation." Assumes the exercise by BCF of its stock warrant to obtain a 10
percent equity interest in the Company at $4.00 per share. If the minimum amount
of shares (125,000 shares) are subscribed to pursuant to this Offering, BCF's
stock warrant would entitle it to purchase up to 680,556 shares. This number of
shares is determined by taking the difference between that number of shares
6,810,556 (of which 6,125,000 shares represents 90 percent; 6,125,000 / .90 =
6,810,556) and 6,125,000 shares. Thus, if the minimum amount of shares are
subscribed to, BCF can purchase up to 680,556 shares for $4.00 per share.
(4) As part of the Company's contract with BCF, the Company granted BCF a stock
warrant to obtain a 10 percent equity interest in the Company. See, "Key
Contracts and Collaborative Retail customers - Burlington Coat Factory Warehouse
Corporation." Assumes the exercise by BCF of its stock warrant to obtain a 10
percent equity interest in the Company at $4.00 per share. If the maximum amount
of shares (2,500,000 shares) are subscribed to pursuant to this Offering, BCF's
stock warrant would entitle it to purchase up to 944,444 shares. This number of
shares is determined by taking the difference between that number of shares
9,444,444 (of which 8,250,000 shares represents 90 percent; 8,250,000 / .90 =
9,444,444) and 8,250,000 shares. Thus, if the maximum amount of shares are
subscribed to, BCF can purchase up to 944,444 shares for $4.00 per share.
(5) Assumes the exercise by Howard W. Moore of his stock options (15,000
shares).
(6) Frank Yuan and Vicky Yuan are the trustees of the Frank S. Yuan Family
Trust. Jerome Yuan is the beneficiary of the Frank S. Yuan Family Trust.
(7) Peter Lin was an Associate Portfolio Manager in Global Investment Advisors,
Inc., the General Partner of Global Strategic Investment, and is the
Investment/Portfolio Manager of the Lotus Group.
(8) Assumes the exercise by David Rau of his stock options (30,000 shares). Mr.
Rau is also the beneficial owner of 30,000 shares (after 1-for-2 reverse stock
split) that were purchased at $0.42 average cost per share.
See Footnote 11, below.
(9) Assumes the exercise by James Zheng of his stock options (50,000 shares).
Mr. Zheng is also the beneficial owner of 50,000 shares (after 1-for-2 reverse
stock split) that were purchased at $0.40 per share. See Footnote 11, below.
(10) The following table sets forth the beneficial owners of UNI, L.P. after
giving effect to the 1-for-2 reverse stock split:
1st Round 1st Round 2nd Round 2nd Round
Name of Partner Residence Shares Investment Shares Investment
- --------------- --------- ------ ---------- ------ ----------
Alan Chang CA USA 1,250 $ 500 250 $ 125
Edward Chang CA USA 1,250 $ 500 250 $ 125
Helen Chang NY USA 5,000 $ 2,000 1,000 $ 500
Monica Cheang CA USA 5,000 $ 2,000 1,000 $ 500
Gary & Grace Chou CA USA 5,000 $ 2,000 1,000 $ 500
Martin Chow CA USA 12,500 $ 5,000 2,500 $ 1,250
Peter & Jenny Chow CA USA 5,000 $ 2,000 1,000 $ 500
Mei-Jui Hsu CA USA 0 $ 0 5,000 $ 2,500
Nina Hsu CA USA 25,000 $ 10,000 0 $ 0
Inky Hwang CA USA 12,500 $ 5,000 0 $ 0
Wei H. Kao CA USA 12,500 $ 5,000 2,500 $ 1,250
Judson Lee CA USA 37,500 $ 15,000 0 $ 0
Ming- Feng Lee NV USA 0 $ 0 5,000 $ 2,500
Ingrio Liao CA USA 0 $ 0 5,000 $ 2,500
Jacqueline Michaela Liao CA USA 25,000 $ 10,000 0 $ 0
Willy Ma CA USA 12,500 $ 5,000 2,500 $ 1,250
David Rau CA USA 25,000 $ 10,000 5,000 $ 2,500
Fredrik Ross Runnerstrum CA USA 5,000 $ 2,000 1,000 $ 500
Martha Shih CA USA 2,500 $ 1,000 500 $ 250
Andy & Maureen Storch IL USA 2,500 $ 1,000 500 $ 250
Helen T. Wang CA USA 0 $ 0 5,000 $ 2,500
Albert S. Yuan CA USA 2,500 $ 1,000 500 $ 250
Lili C. & Kenneth Yuan CA USA 12,500 $ 5,000 0 $ 0
Norbert Yuan CA USA 12,500 $ 5,000 2,500 $ 1,250
Ya-Yuan C. & Harry Yuan CA USA 12,500 $ 5,000 2,500 $ 1,250
James Zheng CA USA 50,000 $ 20,000 0 $ 0
Shi-Pin Yuan Taiwan 30,000 $ 12,000 6,000 $ 3,000
Yi-Kung Hwang Taiwan 37,500 $ 15,000 0 $ 0
Shih-Li Yuan Taiwan 42,500 $ 17,000 6,000 $ 3,000
Hwa-Hung Tseng Taiwan 22,500 $ 9,000 0 $ 0
======== ======== ======== ========
Total: 417,500 $167,000 56,500 $ 28,250
(11) Assumes the exercise by Monica Cheang (10,000), Laura Mercado (5,000),
Catherine Jampierre (5,000), David Rau (5,000) and Luz Jimenez (5,000) of their
stock options. Also assumes the grant and exercise of the remaining 80,000
shares held in reserve for stock options.
</FN>
</TABLE>
DESCRIPTION OF SECURITIES
Common Stock
On June 30, 1997, the authorized capital stock of the Company consisted
of 50,000,000 Shares of Common Stock. On March 24, 1998, the Company's Articles
of Incorporation were amended so that the Company's authorized capital stock
consisted of 40,000,000 Shares of Common Stock and 10,000,000 Shares of
Preferred Stock, without par value. As of December 31, 1998, there were
5,750,000 Shares of Common Stock outstanding and held of record by 36
stockholders. There are no outstanding shares of Preferred Stock. The holders of
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders, except that upon giving the
legally required notice, stockholders may cumulate their Shares in the election
of directors. The Company may pay dividends at the time and to the extent
declared by the Board of Directors and in accordance with California corporate
law. The Common Stock has no preemptive or other subscription rights, and there
are no conversion rights or redemption or sinking fund provisions with respect
to such Shares. All outstanding Shares of Common Stock are, and the Shares
offered hereby will be, upon the completion of this Offering, fully paid and not
assessable.
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<PAGE>
Warrants
BCF owns a warrant (the "Warrant") to purchase the Company's Common
Stock, on a fully diluted basis, equal to ten percent (10%) of the Company
pursuant to the Warrant Agreement dated October 15, 1997. See "Key Contracts and
Collaborative Retail customers - Burlington Coat Factory Warehouse Corporation."
The Warrant is currently exercisable at $4.00 per share. The Warrant expires
upon the earlier of the following dates: (i) October 15, 2002 or (ii) 30 days
after the closing of a firm underwritten public offering of the Company's
securities with which the aggregate gross proceeds to the Company are at least
$5,000,000 and the offering price is at least $4.00 per share. The Common Stock
issued upon the exercise of this Warrant has certain registration rights. In the
event the Company sells only the Minimum, BCF shall have a warrant to purchase
680,556 shares of the Company's Common Stock. In the event the Company sells the
Maximum, BCF shall have a warrant to purchase 944,444 shares of the Company's
Common Stock.
PLAN OF DISTRIBUTION
General
The Company proposes to offer and sell the Shares of Common Stock
directly to members of the public residing in the following states: California,
Illinois, New Jersey and New York. Announcements of this Offering, in the form
prescribed by Rule 134 of the Securities Act, will be communicated to selected
persons. A copy of this Prospectus will be delivered to those who request it,
together with the Subscription Agreement. All shares will be sold at the public
offering price of $8.00 per share. The Company reserves the right to reject any
subscription or share purchase agreement in full or in part.
The Company will effect offers and sales of shares through printed
copies of this Prospectus delivered by mail and electronically by the Company
and through broker-dealers. Any voice or other communications will be conducted
in certain states through its executive officers, and in other states through a
designated sales agent, licensed in those states. Under Rule 3a4-1 of the
Exchange Act, none of these employees of the Company will be deemed a "broker,"
as defined in the Exchange Act, solely by reason of participation in this
Offering, because (1) none is subject to any of the statutory disqualifications
in Section 3(a)(39) of the Exchange Act, (2) in connection with the sale of the
shares hereby offered, none will receive, directly or indirectly, any
commissions or other remuneration based either directly or indirectly on
transactions in securities, (3) none is an associated person (partner, officer,
director or employee) of a broker or dealer and (4) each meets all of the
following conditions: (A) primarily performs substantial duties for the issuer
otherwise than in connection with transactions in securities; (B) was not a
broker or dealer, or an associated person of a broker or dealer, within the
preceding 12 months; and (C) will not participate in selling an offering of
securities for any issuer more than once every 12 months.
The Company has also engaged certain broker-dealers to act as best
efforts underwriters for this Offering (collectively the "Selling Group"). The
Selling Group is comprised on Ace Diversified Capital, Inc., Drake & Co., U.S.
Pacific Financial Services, Travis Morgan Securities, Corporate Investment
Group, AM Razo and Company Securities Inc., Tradeway Securities Group, Inc., and
Malachi Group, Inc. The Company has executed and entered into Best Efforts
Compensation Agreements with each member of the Selling Group, whereby the
Company has granted each broker/dealer a different allotment of the 2,500,000
shares to sell. The following table sets forth the Maximum number of shares that
each broker-dealer has been allotted of the total 2,500,000 shares being offered
herein.
Name of Broker-dealer Number of Shares Allotted to Sell
- --------------------- ---------------------------------
Ace Diversified Capital, Inc. 400,000
Drake & Co. 100,000
U.S. Pacific Financial Services 300,000
Travis Morgan Securities 100,000
Corporate Investment Group 50,000
AM Razo and Company Securities 50,000
Tradeway Securities Group, Inc. 50,000
Malachi Group, Inc. 50,000
TOTAL 1,100,000
It is important to note that since the Company has allotted only
1,100,000 of the 2,500,000 shares offered herein, the Company, through its
officers, will have to sell the remaining 1,400,000 shares (and any of the
1,100,000 shares allotted to, but not sold, by the Broker-dealers) directly to
the public. The Company, however, reserves the right in its sole and absolute
discretion to increase said allotments to an amount not to exceed the 2,500,000
shares offered herein.
The maximum placement agent commission is seven percent (7%). The
Company is not responsible for any due diligence fees. There are no arrangements
for reimbursement of the expenses incurred by the members of the Selling Group.
The Company will pay and bear all costs incident to the performance of its
obligations under the Best Efforts Compensation Agreements, but not including
the fees and expenses incurred by legal counsel for any of the members of the
Selling Group.
Each member of the Selling Group shall receive warrants to purchase up
to five percent (5%) of the number of shares of Common Stock allotted by the
Company to each broker/dealer (pursuant to the terms of each respective Best
Efforts Compensation Agreement) at a price equal to one hundred and sixty-five
percent (165%) of the final offering price (165% of $8.00 or an exercise price
for the warrants of $13.20 per share). The number of warrants granted to each
broker/dealer will be based on a pro rata amount of allotted shares of Common
Stock that are sold by each broker/dealer. For example, if a broker/dealer sells
all of its allotted shares, the broker/dealer will receive warrants for the full
five percent; in the alternative, if the broker/dealer sells none of its
allotted shares, the broker/dealer will not receive any warrants.
Each warrant shall be assignable, shall contain net exercise
provisions, and shall expire four (4) years after the effective date of this
registration statement.
The warrants and the underlying securities are "restricted securities"
and may not be sold, transferred, assigned, pledged or hypothecated, except by
operation of law or in conjunction with a reorganization, for a period of one
year following the effective date of this registration statement. The warrants
and the underlying securities (in the event the warrants are exercised) will
contain a restrictive legend describing the restriction and the time period.
Determination of Offering Price
Prior to this Offering there has been no market for the common stock of
the Company, and there can be no assurances that a market will develop or be
sustained. Accordingly, the public offering price has been determined by the
Company's Board of Directors. Among factors considered in determining the public
offering price were the Company's results of operations, the Company's current
financial condition, its future prospects, the state of the markets for its
products, the experience of management and the economics of the industry segment
in general.
The Shares are offered on a "Minimum-Maximum" basis: 125,000 Shares
(the "Minimum"), and 2,500,000 Shares (the "Maximum"). The Shares are offered
directly by the Company subject to the subscription and payment for not less
than the Minimum, offered by the Company during the "Holding Period," which
shall begin with the commencement of the Offering and terminate upon the earlier
of (i) the date upon which the escrow agent, Imperial Bank, confirms that it has
received the Minimum in deposited funds in a specified escrow account, (ii)
within 180 days of the date of the commencement of this Offering, (iii) the date
upon which the Company terminates the Offering prior to the sale of the Minimum,
or (iv) the date upon which the Company terminates the Offering after the sale
of the Minimum. All subscription payments received during the Impound Period
will be deposited into an interest bearing escrow account entitled: "Imperial
Trust Company Escrow Account for Cyber Merchants Exchange, Inc." at Imperial
Trust Company, 201 N. Figueroa, Suite 610, Los Angeles, California 90012.
All payments for Shares must be made payable to the order of "Imperial
Trust Company Escrow Account for Cyber Merchants Exchange, Inc." and delivered
with a completed subscription agreement to the Company. Within three business
days of receipt, the Company will transmit for deposit into the escrow account,
all payments and corresponding copies of subscription agreements. During the
Impound Period, subscribers will not have the right to any return of
subscriptions.
In the event less than $1,000,000 in subscriptions are received within
180 days of the date of the commencement of this Offering, then 100% of the
proceeds shall be promptly returned to the prospective investors by the Escrow
Agent, pursuant to the terms of an Escrow Agreement the Company has filed with
the Securities and Exchange Commission. When the balance of the bank account
reaches $1,000,000, the Escrow Agent shall then release such funds to the
Company and they will be used in the manner described under "Use of Proceeds."
Unless the Minimum number of Shares offered hereby are sold by the end
of the Offering period (i.e., within 180 days of the date of the commencement of
this Offering), all proceeds will be promptly returned to subscribers without
deduction for commissions or expenses. If the Minimum amount is raised, the
remaining 2,375,000 shares will continue to be offered until the earlier of the
sale of all of the Shares being offered, termination of the Offering or until
expiration of the offering period.
The Shares are offered subject to prior sale and the Company reserves
the right to reject any offer in whole or in part. The Company will send written
confirmation by U.S. mail to notify subscribers of the acceptance of their
subscriptions within ten days of their acceptance (i.e., signed copies of the
Subscription Agreement). Common Stock certificates will be delivered to
investors by means of Federal Express or other delivery service within two weeks
after the Minimum has been sold, and thereafter within 30 days of acceptance of
the subscription by the Company.
Registration Rights
The Company has issued a stock warrant to BCF pursuant to which BCF was
granted certain registration rights.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by its counsel, Evers & Hendrickson, LLP, San
Francisco, California.
34
<PAGE>
EXPERTS
The financial statements of the Company as of June 30, 1998 and 1997
and for the years then ended, included herein and in the Registration Statement
in reliance upon the report of KPMG, LLP, independent certified public
accountants, appearing elsewhere herein, and upon authority of said firm as
experts in accounting and auditing.
The report of KPMG, LLP covering the June 30, 1998 and 1997 financial
statements contains an explanatory paragraph that states that the Company's
recurring losses from operations raise substantial doubt about the entity's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of that uncertainty.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2, including amendments thereto,
relating to the shares offered hereby has been filed with the Securities and
Exchange Commission, Office of Small Business Policy, Washington, D.C. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the shares
offered hereby, reference is made to such Registration Statement, exhibits and
schedules. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office located at 450 Fifth Street,
N.W., Washington, D.C. 20549, the Northeast Regional Office located at 7 World
Trade Center, 13th Floor, New York, New York, 10048 and copies of all or any
part thereof may be obtained from the Public Reference Branch of the Commission
upon the payment of certain fees prescribed by the Commission. In addition the
Commission maintains a World Wide Web site on the Internet at http://www.sec.org
that contains reports, proxy and information statements and other documents
filed electronically with the Commission, including the Registration Statement.
The Company intends to furnish its shareholders with annual reports containing
financial statements audited by its independent public accountants and quarterly
reports containing unaudited financial information for the first three quarters
of each fiscal year.
35
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article IV of the Registrant's Articles of Incorporation provides that the
liability of the directors of this corporation for monetary damages shall be
eliminated to the fullest extent permissible under California law and that the
corporation is authorized to indemnify the directors and officers of the
corporation to the fullest extent permissible under California law.
Section 2.15 of Article II of the Registrant's By-laws provides that it may
indemnify any director, officer, agent or employee as to those liabilities and
on those terms and conditions as are specified in Section 317 of the California
Corporations Code. In any event, the Registrant shall have the right to purchase
and maintain insurance on behalf of any such persons whether or not the
Registrant would have the power to indemnify such person against the liability
insured against.
Insofar as indemnification for liabilities arising under the Securities Act,
indemnification may be permitted to directors, officers or persons controlling
the Registrant pursuant to the foregoing section. The Registrant has been
informed that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses of the Registrant in connection with the issuance and distribution of
the securities being registered are estimated as follows, assuming the Maximum
offering amount is sold:
SEC filing fees 5,900
Blue Sky filing fees 10,500
Accountant's fees and expenses 25,000
Legal fees and expenses 40,000
Printing 20,000
Marketing expenses 20,000
Postage 5,000
Transfer Agent's fees 5,000
Miscellaneous 18,600
Total $150,000
The Registrant will bear all expenses shown above.
36
<PAGE>
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
a) The following information is given for all securities that Cyber Merchants
Exchange, Inc. (the "Company") sold within the past three years without
registering the securities under the Securities Act. It is important to
note that the sales of securities listed below occurred before the Company
effected a 1-for-2 reverse stock split in March of 1998.
Date Title Amount
---- ----- ------
1. 7/16/96 to 12/31/96 Common Stock $ 1,050,000
2. 10/1/97 to 12/31/97 Common Stock $ 500,000
<TABLE>
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
<CAPTION>
1st Round 1st Round 2nd Round 2nd Round
Name of Shareholder Shares Investment Shares Investment Residence
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
DJR Telecom, Inc. 50,000 $10,000 10,000 $2,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Jeannie Chen 100,000 $20,000 0 $0 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Amy Me-Ling Young 100,000 $20,000 20,000 $5,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
R. Douglas Smith 25,000 $5,000 5,000 $1,250 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Finefeld Group, Inc. 250,000 $50,000 50,000 $12,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Calsafe Capital Corporation 250,000 $50,000 50,000 $12,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Chang-Huan & Haily Chen Hsueh 250,000 $50,000 50,000 $12,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Robert H.J. Lee 500,000 $100,000 0 $0 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
T.K. Lin Investment Co. 250,000 $50,000 0 $0 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Su, Peng Chang-Ching 50,000 $10,000 10,000 $2,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Robert & Ning-Ning Hsieh(1) 250,000 $50,000 0 $0 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
UNI L.P. 835,000 $167,000 113,000 $28,250 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Yuan Family Trust 4,500,000 $50,000 900,000 $225,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Guo Li Gang 350,000 $70,000 70,000 $17,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Song-Nien Yeh 150,000 $30,000 0 $0 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Global Strategic Investment, L.P.(2) 470,000 $94,000 120,000 $30,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Charles Hung, Jr. 30,000 $6,000 0 $0 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Chang Pension Trust 0 0 50,000 $12,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Shen, Xu 0 0 40,000 $10,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Yao, Jie 0 0 16,000 $4,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Lin, Po wen 0 0 50,000 $12,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Baumin Lee & Jung Chang 0 0 60,000 $15,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Aretha Lee 0 0 40,000 $10,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
John J. Shay 0 0 100,000 $25,000 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Tsay, Yuh Tsuen 0 0 34,000 $8,500 Taiwan
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
C. Stewart & Ying-Foon Chow 0 0 30,000 $7,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Jerry Yeh 0 0 30,000 $7,500 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Charles & Margaret Rice 100,000 $20,000 20,000 $5,000 IL
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Lonnie B. Martin 10,000 $2,000 2,000 $500 TX
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Deborah Shamaley 500,000 $100,000 100,000 $25,000 TX
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Loyis & Barbara Vargochik 50,000 $10,000 0 $0 NC
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Lux Corporation(3) 125,000 $25,000 0 $0 WA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Avram Jay & Eleanor Kaiser 25,000 $5,000 5,000 $1,250 FL
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Arlene & Peter Langone 5,000 $1,000 0 $0 CT
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Wen-Tsung Chen 250,000 $50,000 0 $0 Taiwan
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
William & Dee Mowbray 25,000 $5,000 5,000 $1,250 CA
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
Total 9,500,000 $1,050,000 2,000,000 $500,000
- ---------------------------------- ------------- -------------- ------------- --------------- -------------
<FN>
(1) As part of a divorce settlement, Robert Hsieh and Ning-Ning Hsieh each
currently owns 125,000 shares of the Company's Common Stock.
(2) Lotus Group succeeded Global Strategic Investment's interest in the
Company. Peter Lin was an Associate Portfolio Manager in Global Investment
Advisors, Inc., the General Partner of Global Strategic Investment, and is
the Investment/Portfolio Manager of the Lotus Group.
(3) Claire's Stores, Inc. acquired all of the assets of Lux Corporation.
</FN>
</TABLE>
State Exemptions Relied Upon
California: Cal. Corp. Code Section 25102(f)
Illinois: 815 ILCS 5/4 Sections 4(B), (G), and (S)
Florida: Fla. Stat. Section 517.061(11)
Texas: Texas Securities Act Sections 5(E) and (I)
Connecticut: Uniform Securities Act Ch. 672a Section 36b-21(b)(9)(A)
Washington: RCW 21.20.320(1)
North Carolina: Securities Act Section 78A-17(9)
b) No underwriters were used in connection with any of the issuances of
shares. The class of persons to whom the Company issued shares was those
persons known to the
1. Founders, Employees, Directors, consultants, business associates,
private investors
2. Employees, Directors, consultants, business associates, private
investors
c) No underwriters were used in connection with any of the issuances of shares
or options so there were no underwriting discounts or commissions. The
transactions and the types and amounts of consideration received by the
Company were:
1. Cash
2. Cash
d) The sales were made pursuant Section 4(2) of the Securities Act. Each
investor was provided with a Private Placement Memorandum which described
the information needed so that prospective investors could make an informed
investment decision.
Item 27. EXHIBITS
ITEM (601) DOCUMENT PAGE
- ---------- -------- ----
1.1 Best Efforts Compensation Agreement with Ace Diversified Capital,
Inc.
1.2 Best Efforts Compensation Agreement with Drake & Co.
1.3 Best Efforts Compensation Agreement with U.S. Pacific Financial
Services
1.4 Best Efforts Compensation Agreement with Travis Morgan Securities
1.5 Best Efforts Compensation Agreement with Corporate Investment
Group
1.6 Best Efforts Compensation Agreement with AM Razo & Company
Securities Inc.
1.7 Best Efforts Compensation Agreement with Malachi Group, Inc.
1.8 Best Efforts Compensation Agreement with Tradeway Securities
Group, Inc.
1.9 Supplements to Best Efforts Compensation Agreements
1.10 Form of Warrant for Best Efforts Compensation Agreements
3.1 Articles of Incorporation, July 16, 1996
3.2 Amendment to Articles of Incorporation filed
March 30, 1998
3.3 By-laws
4.1 Article II of By-laws (Reference is made to
Exhibit 3.3)
4.2 Share Specimen
4.3 Warrant held by Burlington Coat Factory
Warehouse Corporation
5 Opinion of Evers & Hendrickson, LLP with
respect to the legality of the shares being
registered
10.1 Lease of registrant's facilities
37
<PAGE>
10.2 Participation Agreement with Burlington Coat
Factory Warehouse Corporation
10.3 Contract with Family Bargin Corporation
10.4 Employment contract with David Rau
10.5 Escrow Agreement with Imperial Bank
10.6 1996 World Wide Magic Net, Inc. Stock Option Plan
23.1 Consent of KPMG, LLP
23.2 Consent of Evers & Hendrickson, LLP
99.1 Share Purchase Agreement
Item 28. UNDERTAKINGS
a) The Registrant hereby undertakes that is will:
1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the plan of
distribution.
2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the bona fide
offering.
3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the Offering.
e) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion or the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
38
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe the registrant
meets all of the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned in the City
of Alhambra, on __________________.
Cyber Merchants Exchange, Inc.
By:________________________ By:_________________________________
Frank S. Yuan David Rau
Chief Executive Officer, Chief Financial Officer
President, and Chairman of the Board
<TABLE>
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<CAPTION>
Signature Title Date
<S> <C> <C>
________________________ Vice-Chairman ____________________
Howard W. Moore
________________________ Chief Executive Officer ____________________
Frank S. Yuan President, Chairman of the Board
________________________ Chief Financial Officer ____________________
David Rau
________________________ Director ____________________
Deborah Shamaley
________________________ Director ____________________
Charles Rice
________________________ Director ____________________
Robert Hsieh
________________________ Director ____________________
Robert Lee
________________________ Director ____________________
Peter Lin
</TABLE>
39
<PAGE>
No person is authorized in connection with any offering made hereby to give any
information or to make any representation not contained herein and, if given or
made, such information or representation must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any security other than the Securities
offered hereby to any person in any jurisdiction in which it is unlawful to make
such an offer or solicitation. Neither the delivery of this Prospectus nor any
sale made hereunder shall under any circumstances create any implication that
there has been no change in the affairs of the Company since the date of this
Prospectus or that the information contained herein is correct as of any date
subsequent to the date of this Prospectus.
TABLE OF CONTENTS Page
----
Summary......................................................................___
Risk Factors.................................................................___
Use of Proceeds..............................................................___
Dividend Policy..............................................................___
Capitalization...............................................................___
Dilution.....................................................................___
Selected Financial Data......................................................___
Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................___
Business.....................................................................___
Management...................................................................___
Certain Transactions.........................................................___
Principal Stockholders.......................................................___
Description of Securities....................................................___
Plan of Distribution.........................................................___
Legal Matters................................................................___
Experts......................................................................___
Additional Information.......................................................___
Financial Statements.........................................................F-1
Until ____________, 1999 (90 days after the effective date of this Prospectus),
all dealers effecting transactions in the Securities, whether or not
participating in this Offering, may be required to deliver a Prospectus. This in
addition to the obligation of dealers to deliver a Prospectus when acting as
Selling Group members and with respect to their unsold allotments or
subscriptions.
---------------
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
---------------
2,500,000 Shares of
Common Stock
PROSPECTUS
____________________
40
<PAGE>
<TABLE>
CYBER MERCHANTS EXCHANGE, INC.
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
<S> <C>
Report of KPMG LLP, Independent Auditors............................................... F-2
Balance Sheets as of June 30, 1997 and 1998 and December 31, 1998 (unaudited).......... F-3
Statements of Operations for the years ended June 30, 1997 and 1998 and for the six
months ended December 31, 1997 and 1998 (unaudited).................................... F-4
Statements of Stockholders' Equity for the years ended June 30, 1997 and 1998 and for
the six months ended December 31, 1997 and 1998 (unaudited)............................ F-5
Statements of Cash Flows for the years ended June 30, 1997 and 1998 and for the
six months ended December 31, 1997 and 1998 (unaudited)................................ F-6
Notes to Financial Statements.......................................................... F-7
</TABLE>
<PAGE>
KMPG
725 South Figueroa Street
Los Angeles, CA 90017
The Board of Directors
Cyber Merchants Exchange, Inc.:
We have audited the accompanying balance sheets of Cyber Merchants Exchange,
Inc. (the "Company") as of June 30, 1998 and 1997 and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the account principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of June 30, 1998
and 1997 and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company has experienced operating losses and negative
cash flows from operating activities since inception. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KMPG LLP
Los Angeles, California
October 16, 1998
F-2
<PAGE>
<TABLE>
CYBER MERCHANTS EXCHANGE, INC.
Balance Sheets
<CAPTION>
June 30
--------------------------
Assets 1997 1998 December 31, 1998
----------- ----------- ------------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 4,078 81,636 133,227
Certificates of deposit -- 300,000 --
Accounts receivable 9,560 7,477 7,515
Notes receivable 419,570 -- --
Other current assets 5,901 -- --
----------- ----------- -----------
Total current assets 439,109 389,113 140,742
Property and equipment, net 97,524 78,821 62,940
Other assets 4,583 4,562 4,562
----------- ----------- -----------
$ 541,216 472,496 208,244
=========== =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 44,552 47,502 26,822
Deferred revenue 4,275 3,965 6,260
----------- ----------- -----------
Total current liabilities 48,827 51,467 33,082
----------- ----------- -----------
Stockholders' equity:
Preferred stock, no par value. Authorized 10,000,000
shares; none issued and outstanding -- -- --
Common stock, no par value. Authorized 40,000,000
shares; issued and outstanding 4,750,000 shares at
June 30, 1997 and 5,750,000 shares as of June 30,
1998 and as of December 31, 1998, respectively 1,050,000 1,550,000 1,550,000
Additional paid-in capital 30,000 30,000 30,000
Accumulated deficit (587,611) (1,158,971) (1,404,838)
----------- ----------- -----------
Net stockholders' equity 492,389 421,029 175,162
Commitments and contingency (note 6)
----------- ----------- -----------
$ 541,216 472,496 208,244
=========== =========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
CYBER MERCHANTS EXCHANGE, INC.
Statements of Operations
<CAPTION>
Year ended June 30 Six months ended December 31
1997 1998 1997 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues - subscriber's fees $ 35,900 65,722 38,640 29,380
Operating costs and expenses:
Cost of revenues 123,104 139,680 69,133 60,361
General and
administrative expenses 550,004 512,849 231,165 231,952
----------- ----------- ----------- -----------
Operating loss (637,208) (586,807) (261,658) (262,933)
----------- ----------- ----------- -----------
Other income (expenses):
Loss on sale of fixed assets -- (91) -- --
Interest income 50,397 16,338 9,963 17,066
----------- ----------- ----------- -----------
Loss before
income taxes (586,811) (570,560) (251,695) (245,867)
----------- ----------- ----------- -----------
Income taxes 800 800 -- --
----------- ----------- ----------- -----------
Net loss $ (587,611) (571,360) (251,695) (245,867)
----------- ----------- ----------- -----------
Basic and diluted net loss per share $ (0.14) (0.11) (0.05) (0.04)
=========== =========== =========== ===========
Weighted Average Shares used in
computation of net loss per share 4,223,178 5,281,889 4,793,478 5,533,944
=========== =========== =========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
CYBER MERCHANTS EXCHANGE, INC.
Statements of Stockholders' Equity
<CAPTION>
Common stock Net
--------------------------- Additional Accumulated stockholders'
Shares Amount paid-in capital deficit equity
---------- ---------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 -- $ -- -- -- --
Issuance of common
stock at inception 4,750,000 1,050,000 -- -- 1,050,000
Deferred compensation
related to stock options -- -- 30,000 -- 30,000
Net loss -- -- -- (587,611) (587,611)
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 4,750,000 $1,050,000 30,000 (587,611) 492,389
Issuance of common stock 1,000,000 500,000 -- -- 500,000
Net loss -- -- -- (571,360) (571,360)
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1998 5,750,000 $1,550,000 30,000 (1,158,971) 421,029
Net loss (unaudited) -- -- -- (245,867) (245,867)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998
(unaudited) 5,750,000 $1,550,000 30,000 (1,404,838) 175,162
========== ========== ========== ========== ==========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
CYBER MERCHANTS EXCHANGE, INC.
Statements of Cash Flows
<CAPTION>
Year ended June 30 Six months ended December 31
1997 1998 1997 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (587,611) (571,360) (251,695) (245,867)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 24,632 38,623 16,777 15,881
Compensation expense related
to stock options 30,000 -- -- --
Loss on sale of fixed assets -- 91 -- --
Provision for doubtful accounts -- 3,600 1,700 --
Changes in assets and liabilities:
Accounts receivable (9,560) (1,517) (4,472) (38)
Other current assets (5,901) 5,901 2,854 --
Other assets (4,583) 21 21 --
Accounts payable and
accrued expenses 44,552 2,950 (22,326) (20,680)
Deferred revenue 4,275 (310) 945 2,295
----------- ----------- ----------- -----------
Net cash used in operating activities (504,196) (522,001) (256,196) (248,409)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities of (payment to)
certificates of deposit -- (300,000) (500,000) 300,000
Purchase of property and equipment (122,156) (23,421) (12,779) --
Proceeds from sale of property and equipment -- 3,410 -- --
Net proceeds received from (paid to) note receivable (419,570) 419,570 418,970 --
----------- ----------- ----------- -----------
Net cash provided by
(used in) investing activities (541,726) 99,559 (93,809) 300,000
----------- ----------- ----------- -----------
Cash flows provided by financing activities
- proceeds from issuance of common stock 1,050,000 500,000 485,250 --
----------- ----------- ----------- -----------
Net increase in cash and cash
equivalents 4,078 77,558 135,245 51,591
Cash and cash equivalents at beginning of period -- 4,078 4,078 81,636
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 4,078 81,636 139,323 133,227
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ -- -- -- --
Income taxes 800 1,600 -- --
=========== =========== =========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-6
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
Notes to Financial Statements
(Information as of December 31, 1998 and 1997 and for the six months ended
December 31, 1998 and 1997, respectively is unaudited)
(1) Summary of Significant Accounting Policies
Cyber Merchants Exchange, Inc. (the Company and formerly known as World
Wide Magic Net, Inc.) is a developer of business-to-business electronic
commerce network, whereby a retailer can go on-line, review product
information and purchase items through the network developed and
maintained by the Company. The Company was incorporated in July 1996 and
commenced operations in November 1996.
(a) Unaudited Interim Financial Information
The interim financial statements of the Company for the six months
ended December 31, 1997 and 1998, included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the SEC. Certain information and note disclosures
normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations relating to
interim financial statements.
In the opinion of management, the accompanying unaudited interim
financial statements reflect all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the
financial position of the Company at December 31, 1998, and the
results of its operations and its cash flows for the six months
ended December 31, 1997 and 1998.
(b) Liquidity and Going Concern
The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the
accompanying financial statements, the Company has experienced
operating losses and negative cash flows from operating activities
since inception.
Management's plans include obtaining additional financing from
outside sources, increasing revenues through collaborative
arrangements with other companies and other marketing efforts, and
controlling operating costs and expenses. There can be no
assurance that the Company will realize such plans.
These matters raise substantial doubt about the Company's ability
to continue as a going concern. Accordingly, the accompanying
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
(c) Revenue Recognition
Subscriber's fees represent revenues generated through a one-time,
nonrefundable set-up fee and monthly hosting fees. Revenues are
recognized after the services have been rendered and no
significant vendor obligation remains. Unearned but billed
revenues are deferred.
(d) Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with
an original maturity of three months or less to be cash and cash
equivalents.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation of
property and equipment is calculated on
F-7
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
Notes to Financial Statements
(Information as of December 31, 1998 and 1997 and for the six months ended
December 31, 1998 and 1997, respectively is unaudited)
the straight-line method over the estimated useful lives of the
assets, generally three to five years. Leasehold improvements are
amortized over the shorter of the amortized useful lives or lease
term.
(f) Income Taxes
The Company accounts for income taxes using Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes reflect the impact of
"temporary differences" between assets and liabilities for
financial reporting purposes and such amounts as measured by tax
law and regulations.
(g) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates.
(h) Stock Options
SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income disclosure
for employee stock option grants over the vesting period as if the
fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma disclosure provisions of SFAS
No. 123.
(i) Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting
and disclosure of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997 and requires
reclassification of financial statements for earlier periods to be
provided for comparative purposes. The Company has not determined
the manner in which it will present the information required by
SFAS No. 130 in its annual financial statements for the year
ending June 30, 1999. The Company's total comprehensive loss for
all periods presented herein would not have differed from those
amounts reported as net loss in the statements of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131,"Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for the way
companies report information about operating segments in annual
financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and
major customers. The disclosures prescribed by SFAS No. 131 will
be effective for the year ending June 30,
F-8
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
Notes to Financial Statements
(Information as of December 31, 1998 and 1997 and for the six months ended
December 31, 1998 and 1997, respectively is unaudited)
1999. The Company has determined that it does not have any
separately reportable business segments as of June 30, 1998.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") No. 98-1,
"Software for Internal Use," which provides guidance on accounting
for the cost of computer software developed or obtained for
internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The Company
does not expect that the adoption of SOP No. 98-1 will have a
material impact on its financial statements.
(j) Net Loss per Share
Basic and diluted net loss per share are computed using the
weighted average number of outstanding shares of common stock.
Pursuant to SEC Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued for nominal consideration,
prior to the anticipated effective date of an initial public
offering, are included in the calculation of basic and diluted net
loss per share as if they were outstanding for all periods
presented.
Net loss per share for the six months ended December 31, 1998 and
the year ended June 30, 1998, respectively does not include the
effect of 170,000 stock options and 160,000 stock options,
respectively, and 944,444 common stock warrants because their
effects are anti-dilutive.
Net loss per share for the six months ended December 31, 1997 does
not include the effect of 155,000 stock options and 944,444 Common
Stock warrants because their effect are anti-dilutive.
Net loss per share for the year ended June 30, 1997 does not
include the effect of 155,000 stock options because their effects
are anti-dilutive.
(2) Property and Equipment
A summary of property and equipment, at cost is as follows:
June 30
-------------------------
1997 1998 December 31, 1998
--------- --------- -----------------
(Unaudited)
Leasehold improvements $ 4,351 4,351 4,351
Furniture and fixtures 20,026 20,844 20,844
Computer equipment and software 81,509 98,579 98,579
Office equipment 16,270 16,270 16,270
--------- --------- ---------
122,156 140,044 140,044
Less accumulated depreciation
and amortization (24,632) (61,223) (77,104)
--------- --------- ---------
$ 97,524 78,821 62,940
========= ========= =========
F-9
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
Notes to Financial Statements
(Information as of December 31, 1998 and 1997 and for the six months ended
December 31, 1998 and 1997, respectively is unaudited)
(3) Notes Receivable
At June 30, 1997, the notes receivable represent $417,020 due from the
Company's President, bearing an interest rate at 8% and $2,550
interest-free loans to other employees. All of the notes receivable were
repaid in fiscal year 1998.
(4) Income Taxes
Income tax expense is comprised of the minimum state franchise tax. The
difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. Federal statutory
rate of 34% is due to a valuation allowance for any benefit from net
operating losses
The Company has gross deferred tax assets relating principally to tax
effects of net operating loss carryforwards. In assessing the
recoverability of deferred tax assets, management considers whether it is
more likely than not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become
deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over
the periods in which the deferred tax items are recognizable for tax
reporting purposes, management does not believe it is more likely than
not the Company will realize the benefits of these differences at
December 31, 1998, June 30, 1998 and 1997. As such, management has
recorded a valuation allowance for the full amount of deferred tax assets
at December 31, 1998, June 30, 1998 and 1997.
At December 31, 1998, the Company has available net operating losses of
approximately $1,300,000 for Federal income tax purposes to offset future
taxable income, if any, and expire at various dates through the year
2013. However, the utilization of net operating losses may be subject to
certain limitations as prescribed by Section 382 of the Internal Revenue
Code.
(5) Stockholders' Equity
On January 29, 1998, the Company's Board of Directors approved a 1-for-2
reverse split of the Company's common stock. All common share amounts in
the accompanying financial statements have been adjusted for all periods
presented. On March 24, 1998, the Company's amended its articles of
incorporation to have authorized capital stock of 40,000,000 shares of
common stock and 10,000,000 shares of preferred stock.
On October 15, 1997, the Company entered into an agreement with
Burlington Coat Factory Warehouse Corporation (BCF). Under the agreement,
the Company and BCF will jointly develop a network whereby participants
of the network can do business through Internet. BCF agrees to assist in
marketing and promoting this network service to its vendors. In return,
BCF is free to use the network designed and maintained by the Company and
will share a certain portion of the fee revenue generated by this network
with the Company. In addition, the Company granted a warrant to BCF to
allow BCF to purchase up to 10% of the outstanding shares of common stock
of the Company on a fully diluted basis, subject to certain conditions as
defined in the warrant agreement. The common stock if issued to BCF will
have a registration right same as other shares may be issued in a public
offering.
F-10
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
Notes to Financial Statements
(Information as of December 31, 1998 and 1997 and for the six months ended
December 31, 1998 and 1997, respectively is unaudited)
The Company's stock option plan provides for the granting of stock
options to employees. The Company has reserved 250,000 shares of common
stock for issuance under the plan. The terms and conditions of grants of
stock options are determined by the Board of Directors. Generally,
one-half of the granted option is exercisable after the employee's second
year of employment. The remaining option is exercisable after the end of
the employee's third year of employment.
<TABLE>
A summary of stock option activity is as follows:
<CAPTION>
Weighted average
Number of shares exercise price
----------------- ------------------
<S> <C> <C>
Balance at June 30, 1996 -- $ --
Options granted 155,000 .21
Options terminated -- --
Options exercised -- --
----------------- ------------------
Balance at June 30, 1997 155,000 .21
Options granted 15,000 .40
Options terminated (10,000) .40
Options exercised -- --
----------------- ------------------
Balance at June 30, 1998 160,000 .21
Options granted (unaudited) 15,000 .40
Options terminated (unaudited) (5,000) .40
Options exercised (unaudited) -- --
----------------- ------------------
Balance at December 31, 1998 (unaudited) 170,000 .22
================= ==================
</TABLE>
At December 31, 1998, there were 62,500 shares of options exercisable.
For the year ended June 30, 1997, all options, except for options granted
to 2 employees for 75,000 shares of common stock, were granted at an
exercise price equal to the fair value of the common stock, and
accordingly, no compensation cost has been recognized for these stock
options in the financial statements. Compensation expense aggregating
$30,000 was recorded for the issuance of the options with an exercise
price below fair market value of the common stock.
The Company applies APB Opinion No. 25 in accounting for its Plan. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss would have been
increased to the pro forma amount indicated below:
June 30
1998 1997
---- ----
As reported $(571,360) $(587,611)
Pro forma (577,000) (593,000)
The compensation cost was calculated under the minimum-value method using the
assumptions of the three-year weighted average expected life of the options and
a 6% risk-free interest rate.
(6) Commitments and Contingency
F-11
<PAGE>
CYBER MERCHANTS EXCHANGE, INC.
Notes to Financial Statements
(Information as of December 31, 1998 and 1997 and for the six months ended
December 31, 1998 and 1997, respectively is unaudited)
The Company leases office space under a noncancelable operating lease
that expires on October 27, 1999.
Future minimum lease payments under noncancelable operating leases as of
June 30, 1998 are as follows:
Year ending June 30:
1999 $ 37,968
2000 12,248
--------------------
Total minimum lease payments $ 50,216
====================
Rent expense for the years ended June 30, 1998 and 1997 was approximately
$38,000 and $26,000, respectively.
The Company has been named as a defendant, along with Burlington Coat
Factory Warehouse (BCF), in a lawsuit brought by Stanley Rosner (Rosner),
an individual. In March 1998, Rosner commenced an action in the Supreme
Court of the State of New York alleging breach of oral and written
contracts between the Company and Rosner and between BCF and Rosner in
1997. Rosner claims that he is due certain fees from both the Company and
BCF for services allegedly rendered in connection with certain
transactions involving the Company and BCF. These transactions and
alleged transactions relate to the Internet services that the Company may
provide to BCF, and contemplated transactions arising from vendors of
BCF. Rosner claims that he is due damages in an amount not less than
$5,000,000 plus unspecified punitive damages from both the Company and
BCF. The Company intends to vigorously defend this action. The Company
believes that it is not obligated to make any payments to Rosner and has
meritorious defenses to all of Rosner's allegations.
However, if held liable for the entire amount, this would have a
materially adverse effect upon the Company.
In December 1998, the Company obtained a written commitment for a line of
credit from a bank. The bank committed to provide a $300,000 line of
credit, bearing interest at the bank's prime rate plus 1.5%. The line of
credit will expire on June 30, 1999. The Company committed to issue a
warrant of 20,000 shares of the Company's common stock to the bank. The
warrant will have a term of five years and have an exercise price equal
to the initial public offering price of the Company's common stock.
F-12
2,500,000 SHARES
CYBER MERCHANTS EXCHANGE, INC. d.b.a. C-ME.com
Common Stock
BEST EFFORTS COMPENSATION AGREEMENT
Alhambra, California
April 13, 1999
Lynwood Jen
Ace Diversified Capital, Inc.
8855 E. Valley Blvd., Ste. 205
Rosemead, CA 91770
Dear Mr. Jen:
CYBER MERCHANTS EXCHANGE, INC.d.b.a. C-ME.Com, a California corporation (the
"Company"), proposes to issue and sell an aggregate of two million five hundred
thousand (2,500,000) shares of the Company's Common Stock, no par value per
share (the "Common Stock" or "Shares").
The Shares will be offered to the public by the Company at a price of
$6.00-$9.00 per share (the "Offering"). The purpose of this Agreement is to set
forth the understanding of the parties relating to the right of Ace Diversified
Capital, Inc., a California Corporation ("Broker-Dealer") to participate in the
sale of the Shares as a broker-dealer exercising its best efforts to sell the
Shares.
Section 1. Representations and Warranties of the Company . The Company
represents and warrants to and agrees with Broker-Dealer that:
(a) A registration statement on Form SB-2 (File No. 333-41411) with
respect to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the
applicable rules and regulations (the "1933 Act Regulations") of the Securities
and Exchange Commission (the "Commission"), and has been filed with the
Commission; and such amendments to such registration statement as may have been
required prior to the date hereof have been filed with the Commission, and such
amendments have been similarly prepared. Such registration statement went
effective with the Commission on _________________, 199__ (the "Date of
Registration"). Copies of such registration statement and amendment or
amendments of each related preliminary prospectus, and the exhibits, financial
statements and schedules, as finally amended and revised, have been delivered to
you.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement became
effective and, in the event any post-effective amendment thereto becomes
effective prior to the closing of the Offering, shall also mean such
registration statement as so amended. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Shares in the form in which
it is first filed with the Commission pursuant to Rule 424(b) of the 1933 Act
Regulations or, if no filing pursuant to Rule 424(b) of the 1933 Act Regulations
is required, shall mean the form of final prospectus included in the
Registration Statement at the time such Registration Statement becomes
effective.
(b) When the Registration Statement became effective, when the
Prospectus was first filed pursuant to Rule 424(b) of the 1933 Act Regulations,
when any amendment to the Registration Statement becomes effective,
<PAGE>
and when any supplement to the Prospectus is filed with the Commission, (i) the
Registration Statement, the Prospectus and any amendments thereof and
supplements thereto will conform in all material respects with the applicable
requirements of the 1933 Act and the 1933 Act Regulations, and (ii) neither the
Registration Statement, the Prospectus nor any amendment or supplement thereto
will contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by Broker-Dealer
expressly for use in the Registration Statement.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the state of California with all
requisite corporate power and authority to own, lease and operate its properties
and the properties it proposes to own, lease and operate as described in the
Registration Statement and the Prospectus and to conduct its business as now
conducted and as proposed to be conducted as described in the Registration
Statement and the Prospectus. The Company has been duly qualified to do business
and is in good standing as a foreign corporation in each other jurisdiction in
which the ownership or leasing of its properties or the nature or conduct of its
business as now conducted or proposed to be conducted as described in the
Registration Statement and the Prospectus requires such qualification, except
where the failure to do so would not have a material adverse effect on the
Company.
(d) The Company has full legal right, power and authority to enter into
this Agreement, to issue, sell and deliver the Shares as provided herein and to
consummate the transactions contemplated herein. This Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid and
binding agreement of the Company, enforceable in accordance with its terms,
except to the extent that enforceability may be limited by bankruptcy,
insolvency, reorganization or other laws of general applicability relating to or
affecting creditors, rights, or by general equity principles and except to the
extent the indemnification provisions set forth in Section 5 of this Agreement
may be limited by federal or state securities laws or the public policy
underlying such laws.
(e) Each consent, approval, authorization, order, license, certificate,
permit, registration, designation or filing by or with any governmental agency
or body necessary for the valid authorization, issuance, sale and delivery of
the Shares, the execution, delivery and performance of this Agreement and the
consummation by the Company of the transactions contemplated hereby, has been
made or obtained and is in full force and effect.
(f) Neither the issuance, sale and delivery by the Company of the
Shares, nor the execution, delivery and performance of this Agreement nor the
consummation of the transactions contemplated hereby by the Company will
conflict with or result in a breach or violation of any of the terms and
provisions of, or (with or without the giving of notice or the passage of time
or both) constitute a default under, the Articles of Incorporation, by-laws of
the Company; any indenture, mortgage, deed of trust, loan agreement, note, bond
or other agreement or instrument to which the Company, is a party or to which
it, any of its properties or other assets; or any applicable statute, law,
judgment, decree, order, rule or regulation of any court or governmental agency
or body applicable to the Company or its property; or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property or asset
of the Company.
(g) The Shares to be issued and sold hereunder have been validly
authorized by the Company. When issued and delivered against payment therefor,
the Shares will be duly and validly issued, fully paid and non-assessable. No
preemptive rights of shareholders exist with respect to any of the Shares. No
person or entity holds a right to require or participate in the registration
under the 1933 Act of the Shares pursuant to the Registration Statement; and,
except as set forth in the Prospectus, no person holds a right to require
registration under the 1933 Act of any shares of Common Stock of the Company at
any other time. No person or entity has a right of participation or first
refusal with respect to the sale of the Shares by the Company. The form of
certificates evidencing the Shares complies with all applicable requirements of
California law.
(h) The Common Stock to be issued upon exercise of the common stock
purchase warrants to be issued to Broker-Dealer (the "Warrants") are duly
authorized, and when issued and delivered pursuant to this Agreement, will be
duly authorized, validly issued, fully paid and non-assessable and free of
pre-emptive rights of any security holder of the Company. Neither the filing of
the Registration Statement nor the offering or sale of the Shares gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock, except as described
in the Registration Statement.
<PAGE>
(i) This Agreement has been duly and validly authorized, executed and
delivered by the Company. The Company has full power and lawful authority to
issue and sell the shares of Common Stock to be sold by it upon exercise of the
Warrants (the "Warrant Shares") on the terms and conditions set forth herein,
and no consent, approval, authorization or other order of any governmental
authority is required in connection with such authorization, execution and
delivery or with the authorization, issue and sale of the Warrant Shares or the
Warrants, except as may be required under the 1933 Act or state securities laws.
(j) The Company has 5,750,000 shares (and 250,000 shares of Common
Stock reserved for issuance upon exercise of currently exercisable stock
options) of issued and outstanding shares of Common Stock, after effecting a
1-for-2 reverse stock split. The Company has no other issued and outstanding
capital stock. The Company's authorized capitalization is as set forth in the
Prospectus under the caption "Capitalization." Except as disclosed in the
Prospectus, there is no outstanding option, warrant or other right calling for
the issuance of, and no commitment, plan or arrangement to issue any shares of
capital stock of the Company or any security convertible into or exchangeable
for capital stock of the Company.
(k) The financial statements of the Company in the Registration
Statement and the Prospectus present fairly the financial position of the
Company as of the dates indicated and the results of operations and cash flows
for the periods specified, all in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods specified. The
financial statement schedule included in the Registration Statement and the
amounts in the Prospectus under the captions "Selected Financial Data" fairly
present the information shown therein and have been compiled on a basis
consistent with the financial statements included in the Registration Statement
and the Prospectus. No other financial statements or schedules are required by
Form SB-2 or otherwise to be included in the Registration Statement or the
Prospectus. The unaudited pro forma combined financial information (including
the related notes) included in the Prospectus complies as to form in all
material respects to the applicable accounting requirements of the 1933 Act and
the 1933 Act Regulations and management of the Company believes that the
assumptions underlying the pro forma adjustments are reasonable. Such pro forma
adjustments have been properly applied to the historical amounts in the
compilation of the information and such information fairly presents with respect
to the Company the pro forma financial position, results of operations and other
information purported to be shown therein at the respective dates and for the
respective periods specified.
(l) KPMG, LLP, who have examined and are reporting upon the audited
financial statements and schedules included in the Registration Statement, are,
and were during the periods covered by their Reports included in the
Registration Statement and the Prospectus, independent public accountants, as
required by the 1933 Act and the 1933 Act Regulations.
(m) The Company has not sustained, since inception, any material loss
or interference with its business from fire, explosion, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or arbitrators' or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as otherwise stated in the Registration Statement
and Prospectus, there has not been (i) any material change in the capital stock
or partnership interests, as applicable, long-term debt, obligations under
capital leases or short-term borrowings of the Company, (ii) any material
adverse change, or any development which could reasonably be seen as involving a
prospective material adverse change, in or affecting the business prospects,
properties, assets, results of operations or condition (financial or other) of
the Company, (iii) any liability or obligation, direct or contingent, incurred
or undertaken by the Company, which is material to the business or condition
(financial or other) of the Company, except for liabilities or obligations
incurred in the ordinary course of business, (iv) any declaration or payment of
any dividend or distribution of any kind on or with respect to the capital stock
of the Company, or (v) any transaction that is material to the Company except
transactions in the ordinary course of business or as otherwise disclosed in the
Registration Statement and the Prospectus.
<PAGE>
(n) The Company is not in violation of its Articles of Incorporation or
by-laws, and no default exists, and no event has occurred, nor state of facts
exists, which, with notice or after the lapse of time to cure or both, would
constitute a default in the due performance and observance of any obligation,
agreement, term, covenant, consideration or condition contained in any
indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument to which the Company is a party or by which it or any of
its properties is subject. The Company is not in violation of, or in default
with respect to, any statute, law, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as is in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of the
Company.
(o) Except as described in the Prospectus, there is not pending or, to
the knowledge of the Company, threatened any action, suit, proceeding, inquiry
or investigation against the Company, its officers and directors or to which the
properties, assets or rights of the Company are subject, before or brought by
any court or governmental agency or body or board of arbitrators, which could
result in any material adverse change in the business, prospects, properties,
assets, results of operations or condition (financial or otherwise) of the
Company.
(p) The descriptions in the Registration Statement and the Prospectus
of the contracts, leases and other legal documents therein described present
fairly the information required to be shown, and there are no contracts, leases,
or other documents of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement which are not described or filed as required. To the best knowledge of
the Company, there are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus which have not been so disclosed and properly described therein. All
agreements between the Company and third parties expressly referenced in the
Prospectus are legal, valid and binding obligations of the Company enforceable
in accordance with their respective terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equitable principles.
(q) The Company owns, possesses or has obtained all material permits,
licenses, franchises, certificates, consents, orders, approvals and other
authorizations of governmental or regulatory authorities as are necessary to own
or lease, as the case may be, and to operate its properties and to carry on its
business as presently conducted, or as contemplated in the Prospectus to be
conducted, and the Company has not received any notice of proceedings relating
to revocation or modification of any such licenses, permits, certificates,
consents, orders, approvals or authorizations.
(r) The Company owns or possesses adequate license or other rights to
use all patents, trademarks, service marks, trade names, copyrights, software
and design licenses, trade secrets, manufacturing processes, other intangible
property rights and know-how (collectively "Intangibles") necessary to entitle
it to conduct its business now, and as proposed to be conducted or operated as
described in the Prospectus, and the Company has not received notice of
infringement or of conflict with (and knows of no such infringement of or
conflict with) asserted rights of others with respect to any Intangibles which
could materially and adversely affect its business, prospects, properties,
assets, results of operation or condition (financial or otherwise).
(s) The Company has not directly or indirectly, at any time (i) made
any contribution to any candidate for political office, or failed to disclose
fully any such contribution, in violation of law or (ii) made any payment to any
state, federal or foreign, governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. To the best knowledge of
the Company, the Company's internal accounting controls and procedures are
sufficient to cause such entities to comply in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(t) To the best of the Company's knowledge, the Company's systems of
internal accounting controls taken as a whole are sufficient to meet the broad
objectives of internal accounting control insofar as those objectives pertain to
the prevention or detection of errors or irregularities in amounts that would be
material in relation to the Company's financial statements; and, to the best of
the Company's knowledge, neither the Company, nor any employee or agent thereof,
has made any payment of funds of the Company or received or retained any funds
and no funds of the Company have been set aside to be used for any payment, in
each case in violation of any law, rule or regulation.
<PAGE>
(u) The Company has filed on a timely basis all necessary federal,
state, local and foreign income and franchise tax returns required to be filed
through the date hereof and have paid all taxes shown as due thereon; and no tax
deficiency has been asserted against the Company, nor does the Company know of
any tax deficiency which is likely to be asserted against the Company which if
determined adversely to the Company, could materially adversely affect the
business, prospects, properties, assets, results of operations or condition
(financial or otherwise) of any such entity, respectively. All tax liabilities
are adequately provided for on the respective books of such entities.
(v) The Company maintains insurance (issued by insurers of recognized
financial responsibility) of the types and in the amounts generally deemed
adequate for their respective businesses and, to the best of the Company's
knowledge, consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance covering real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(w) To the best of the Company's knowledge, no general labor problem
exists or is imminent with the employees of the Company which would have a
material adverse effect on the financial position, results of operations or
business of the Company.
(x) The Company and its officers, directors or affiliates have not
taken and will not take, directly or indirectly, any action designed to, or that
might reasonably be expected to, cause or result in or constitute the
stabilization or manipulation of any security of the Company or to facilitate
the sale or resale of the Shares in violation of any law, rule or regulation.
(y) The Company has not incurred any liability for a fee, commission or
other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than as
contemplated hereby.
(z) Except as otherwise disclosed in the Prospectus, the Company has
not authorized or conducted nor has knowledge of the generation, transportation,
storage, presence, use, treatment, disposal, release, or other handling of any
hazardous substance, hazardous waste, hazardous material, hazardous constituent,
toxic substance, pollutant, contaminant, asbestos, radon, polychlorinated
biphenyls ("PCBs"), petroleum product or waste (including crude oil or any
fraction thereof), natural gas, liquefied gas, synthetic gas or other material
defined, regulated, controlled or potentially subject to any remediation
requirement under any environmental law (collectively, "Hazardous Materials"),
on, in, under or affecting any real property currently leased or owned or by any
means controlled by the Company (the "Real Property") except as in material
compliance with applicable laws; to the knowledge of the Company, the Real
Property and the Company's operations with respect to the Real Property are in
compliance with all federal, state and local laws, ordinances, rules,
regulations and other governmental requirements relating to pollution, control
of chemicals, management of waste, discharges of materials into the environment,
health, safety, natural resources, and the environment (collectively,
"Environmental Laws"), and the Company has, and is in compliance with, all
licenses, permits, registrations and government authorizations necessary to
operate under all applicable Environmental Laws. Except as otherwise disclosed
in the Prospectus, the Company has not received any written or oral notice from
any governmental entity or any other person and there is no pending or
threatened claim, litigation or any administrative agency proceeding that:
alleges a violation of any Environmental Laws by the Company; alleges that the
Company is a liable party or a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
S 9601, et seq., or any state superfund law; has resulted in or could result in
the attachment of an environmental lien on any of the Real Property; or, alleges
that the Company is liable for any contamination of the environment,
contamination of the Real Property, damage to natural resources, property
damage, or personal injury based on their activities or the activities of their
predecessors or third parties (whether at the Real Property or elsewhere)
involving Hazardous Materials whether arising under the Environmental Laws,
common law principles or other legal standards.
(aa) The Company will not become as a result of the transactions
contemplated hereby, or will not conduct its business in a manner in which it
would become, "an investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended (the "Investment Company Act").
(bb) No relationship, direct or indirect, exists between or among any
of the Company or any affiliate of the Company, on the one hand, and any
director, officer, stockholder, customer or supplier of the Company or any
<PAGE>
affiliate of the Company, on the other hand, that is required by the 1933 Act or
by the 1933 Act Regulations to be described in the Registration Statement or the
Prospectus which is not so described or is not adequately described.
(cc) All offers and sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or
exempt from the registration requirements of the 1933 Act and were duly
registered in accordance with or the subject of an available exemption from
registration under the applicable blue sky laws. The Company has not effected
any sales of securities that would be required to be disclosed in response to
Item 701 of Regulation S-K that are not disclosed in the Registration Statement.
Any certificate signed by any officer of the Company on behalf of the
Company and delivered to you or to counsel for the Representative shall be
deemed a representation and warranty of the Company to the Representative as to
the matters covered thereby.
Section 2. Certain Covenants of the Company. The Company covenants and
agrees with Broker-Dealer, to use its best efforts to cause the Company to
perform as follows:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective (if not yet effective at the date and time that
this Agreement is executed and delivered by the parties hereto). The Company
will notify you immediately, and confirm the notice in writing, (i) when the
Registration Statement, or any post-effective amendment to the Registration
Statement, shall have become effective, or any supplement to the Prospectus or
any amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission to amend
the Registration Statement or amend or supplement the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution or threatening of any proceeding for any
such purposes. The Company will use every reasonable effort to prevent the
issuance of any such stop order or of any order preventing or suspending such
use and, if any such order is issued, to obtain the withdrawal thereof at the
earliest possible moment.
(b) The Company will not at any time file or make any amendment to the
Registration Statement, or any amendment or supplement to the Prospectus if you
shall not have previously been advised and furnished a copy thereof a reasonable
time prior to the proposed filing, or if you or your counsel reasonably object
to such amendment or supplement.
(c) The Company will deliver to you, at the Company's expense, from
time to time as requested, such number of copies of the Prospectus (as
supplemented or amended) as you may reasonably request. If the delivery of a
Prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Shares and if at such time any events shall have occurred as result of which
the Prospectus as then amended or supplemented would include an untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were made
when such Prospectus is delivered not misleading, or, if for any reason it shall
be necessary during such same period to amend or supplement the Prospectus in
order to comply with the 1933 Act, the Company will notify you and upon your
request prepare and furnish without charge to you and to any dealer in
securities as many copies, as you may from time to time reasonably request, of
an amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance.
(d) The Company will use its best efforts to qualify the Shares for
offering and sale under the applicable securities laws of such states and other
jurisdictions as you may designate and to maintain such qualifications in effect
for as long as may be necessary to complete the distribution of the Shares;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified or to make any undertakings in
respect of doing business in any jurisdiction in which it is not otherwise so
subject. The Company will file such statements and reports as may be required by
the laws of each jurisdiction in which the Shares have been qualified as above
provided.
(e) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the end of the fiscal
quarter first occurring after the first anniversary of the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the 1933 Act
Regulations), an earnings statement (in reasonable detail but which need not be
audited) complying with the provisions of Section 11(a) of the 1933 Act and
<PAGE>
Rule 158 thereunder and covering a period of at least 12 months beginning after
the effective date of the Registration Statement.
(f) The Company will use the net proceeds received by it from the sale
of the Shares substantially in the manner specified in the Prospectus under the
caption "Use of Proceeds."
(g) The Company will furnish to its security holders of record, as soon
as practicable after the end of each respective period, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year. During a period of five years after the date hereof, the
Company will furnish to you: (i) concurrently with furnishing such reports to
its security holders, statements of operations of the Company for each of the
first three quarters in the form furnished to the Company's security holders;
(ii) concurrently with furnishing to its security holders, a balance sheet of
the Company as of the end of such fiscal year, together with statements of
operations, of cash flows and of security holders, equity of the Company for
such fiscal year, accompanied by a copy of the certificate or report thereon of
independent public accountants; (iii) as soon as they are available, copies of
all reports (financial or otherwise) mailed to security holders; (iv) as soon as
they are available, copies of all reports and financial statements furnished to
or filed with the Commission, any securities exchange or the NASD; (v) every
material press release in respect of the Company or its affairs which is
released or prepared by the Company, and (vi) any additional information of a
public nature concerning the Company or its business that you may reasonably
request. During such five-year period, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts of the Company are
consolidated with any subsidiaries, and shall be accompanied by similar
financial statements for any significant subsidiary that is not so consolidated.
(h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(i) The Company will use its best efforts to acquire the inclusion of
its shares of Common Stock on the National Association of Securities Dealers
Automated Quotation system ("NASDAQ") and the American Stock Exchange ("AMEX")
within six months from the date hereof.
(j) The Company is familiar with the Investment Company Act and the
rules and regulations thereunder, and has in the past conducted its affairs, and
will in the future conduct its affairs, in such a manner so as to ensure that
the Company was not and will not be an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act.
(k) The Company will not, and will use its best efforts to cause its
officers, directors and affiliates not to, (i) take, directly or indirectly
prior to termination of the distribution of the Shares contemplated by this
Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which may cause or result in, or which might in the
future reasonably be expected to cause or result in, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of the Shares or (iii) pay or agree to pay
to any person any compensation for soliciting any order to purchase any other
securities of the Company which, in any such case, is in violation of any law,
rule or regulation.
(l) The Company will file timely and accurate reports on Form SR with
the Commission in accordance with Rule 463 of the 1933 Act Regulations or any
successor provision.
(m) Prior to the closing of the Offering, the Company will not, and
will use its best efforts to cause any affiliate of the Company not to issue a
press release or other official communication directly or indirectly, nor hold a
press conference with respect to the Company or with respect to the financial
condition, results of operations, business, properties, assets or liabilities of
the Company, or the offering of the Shares, without your prior written input
within 72 hours which consent shall not be unreasonably withheld.
(n) The Company will notify you promptly of any material adverse change
affecting any of its representations, warranties, agreements and indemnities
herein at any time prior to the closing of the Offering and take such steps as
may be reasonably requested by you either to remedy or publicize the same, or
both.
<PAGE>
(o) The Company will reserve and keep available that maximum number of
its authorized but unissued shares of Common Stock which are issuable upon
exercise of the Warrants outstanding from time to time.
(p) On the last day that this Agreement is in full force and effect
after the execution hereof, the Company shall execute and deliver to you the
Warrants you have earned. The Warrants will be substantially in the form of the
Stock Purchase Warrant filed as an exhibit to the Registration Statement, a copy
of which is attached hereto as Exhibit "A".
(q) For a period of five years from the Effective Date, the Company, at
its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit and without issuing any opinion thereon)
the Company's financial statements for each of the first three (3) fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's 10-Q quarterly report and the mailing of quarterly
financial information to Stockholders.
(r) As promptly as practicable after the closing of the Offering, the
Company will prepare, at its own expense, hard cover "bound volumes" relating to
the offering, and will distribute such volumes to the individuals designated by
you.
Section 3. Engagement & Allotment, Term, Reporting, Compensation and
Payment of Expenses.
(a) Engagement & Allotment.
(i) Subject to the terms and conditions of this Agreement, the
Company hereby engages Broker-Dealer, on a "best efforts" basis, as the
Company's nonexclusive agent in connection with the sale of up to 400,000 Shares
(the "Allotted Shares"). The number of Allotted Shares may be increased or
decreased at the sole discretion of the Company upon three (3) days written
notice to Broker-Dealer. Broker-Dealer will keep precise records of all
purchases of stock, including the amount of the purchase, the exact title in
which the Shares are to be issued and the address of the purchaser. The Shares
will be issued promptly by the Company and, in no event, later than fifteen (15)
days after notification by Broker-Dealer of the purchase with the information
set forth above. The maximum amount of each sale shall be 8,800 shares. The
minimum amount of each sale shall be 300 shares.
(ii) As to residents of the State of California who wish to
purchase in excess of $2,500 worth of the Shares, Broker-Dealer will take
appropriate measures to assure that the purchaser is "suitable" by having a
minimum net worth (excluding home equity, home furnishings and automobiles) of
at least $250,000 and a minimum gross income of $65,000 during the current tax
year; or, in the alternative, a minimum net worth of $500,000. In either case,
the amount of a purchaser's investment may not exceed ten percent (10%) of the
purchaser's net worth.
(iii) Broker-Dealer shall use its best efforts to assist the
Company in making sales of the shares pursuant to the Offering. Broker-Dealer
makes no representations as to the amount of Shares it will be able to sell.
There is no firm commitment to sell any certain amount of the Shares by
Broker-Dealer.
(iv) Broker-Dealer will only offer the Company's stock in
those states in which Broker-Dealer and its brokers are registered.
(v) Broker-Dealer agrees to become a market maker for the
Company when legally permitted by its restrictive agreement with the NASD and
the SEC and when approved by the Broker-Dealer's Board of Directors. At such
time, Broker-Dealer agrees to assist with any filing requirements. Broker-Dealer
does not currently act as a market maker and has no immediate plans to act as a
market maker.
(b) Term. The term of this Agreement shall commence as of the effective
date hereof (the "Effective Date") and shall continue in full force and effect
for a period of up to thirty (30) days from the Date of Registration as set
forth in Section 1(a), above. This Agreement may be extended for additional
period of 30 days upon the mutual written consent of both parties.
(c) Reporting. Broker-Dealer shall offer the Shares pursuant to the
Prospectus. Payment for the Shares shall be made by the Purchaser directly to
the Escrow Agent as set forth in the Prospectus. The commission, as set forth in
Section 3(d), will be paid by the Company or deducted from the proceeds of the
sale when subscriptions have been accepted for at least the Minimum amount as
set forth in the Prospectus and such Minimum subscriptions
23
<PAGE>
are fully paid. Said commission and any other amounts due to Broker-Dealer
hereunder shall be paid every Friday once the Minimum is reached. All amounts
due shall be calculated as of the close of business on the immediately prior
Thursday. If the Company or any other entity makes sales without Broker-Dealer,
no commission will be due to Broker-Dealer on such sales.
(d) Compensation.
The Company shall pay Broker-Dealer as follows:
(i) A commission of 7% based on the total offering amount of
the Allotted Shares as set forth in Section 3(a)(i). The commission will be paid
by the Company or deducted from the proceeds of the sale when subscriptions have
been accepted for at least the Minimum amount as set forth in the Prospectus and
such Minimum subscriptions are fully paid. If more than the Minimum is sold
during the offering then commissions relating to such additional Shares will be
paid out of escrow when monies for the Shares subscribed to are distributed to
the Issuer.
(ii) The Company reserves the right to review all
subscriptions for securities law compliance and to make the final determination
whether to accept or reject subscriptions. No selling commissions will be
payable with respect to subscriptions which are rejected by the Company.
(iii) As an additional incentive for Broker-Dealer to perform
its services in a timely manner, Warrants in the form attached hereto as Exhibit
"A" shall be issued to Broker-Dealer or its designees as follows:
1. A warrant to purchase up to five percent (5%) of the
Allotted Shares, equal to 20,000 shares of stock with
an exercise price of $9.90 - 14.85 per share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System.
2. In both instances, as set forth above, the Warrants
will be granted pro rata to the sale of the Shares by
Broker-Dealer. Assuming all 400,000 Shares available
for sale are sold by Broker-Dealer, 20,000 Warrants
will be issued. If less than 400,000 Shares are sold
by Broker-Dealer, Warrants will be issued on a pro
rata basis in accordance with the actual number of
Shares sold. For example, should 200,000 Shares be
sold, Broker-Dealer will be entitled to 10,000
Warrants at a price of $9.90 - 14.85 per Share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System. The Shares obtained upon exercise of the
Warrants will be "restricted" stock subject to the
trading provisions of Rule 144 promulgated by the
Commission.
(e) Payment of Expenses. The Company will pay and bear all costs, fees
and expenses incident to the performance of its obligations under this Agreement
(excluding fees and expenses of your counsel), including (a) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits), as originally filed and as amended, the Prospectus and
any amendments or supplements thereto, and the cost of furnishing copies thereof
to you, (b) the preparation of any Selected Dealers Agreement, the certificates
representing the Shares, the Blue Sky Memoranda and any instruments relating to
any of the foregoing, (c) the issuance and delivery of the Shares to the
purchasers, including any transfer taxes payable upon the sale of the Shares,
(d) the fees and disbursements of the Company's counsel and accountants, (e) the
qualification of the Shares under the applicable securities laws in accordance
with Section 2(e) of this Agreement and any filing for review of the Offering
with the NASD, including filing fees and fees and disbursements in connection
therewith and in connection with the Blue Sky Memoranda, (f) all costs, fees and
expenses in connection with the application for inclusion of the Shares on
NASDAQ, (g) costs related to travel and lodging incurred by the Company and its
representatives relating to meetings with and presentations to prospective
purchasers of the Shares reasonably determined by you to be necessary or
desirable to effect the sale of the Shares to the public and (i) all other costs
and expenses incident to the performance of the Company's obligations hereunder
that are not otherwise specifically provided for in this section.
<PAGE>
Section 4. Opinion of Counsel and Accountants and other Conditions.
(a) As a condition to the performance of your duties and obligations
hereunder, you shall have received a favorable opinion of Evers & Hendrickson,
LLP ("Evers & Hendrickson") counsel for the Company in form and substance
satisfactory to counsel for you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
California with all requisite corporate power and authority to own, lease and
operate its properties and the properties it proposes to own, lease and operate
as described in the Registration Statement and the Prospectus and to conduct its
business as now conducted and as proposed to be conducted as described in the
Registration Statement and the Prospectus. To the best of such counsel's
knowledge, there are no other jurisdictions in which the ownership or leasing of
the Company's properties or the nature or conduct of its business as now
conducted or proposed to be conducted as described in the Registration Statement
and the Prospectus requires such qualification, except where the failure to do
so would not have a material adverse effect on the Company. To such counsel's
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity (other than any indirect control that
may be implied by virtue of Mr. Yuan and certain other officers of the Company
serving as officers and/or directors of other companies).
(ii) The Company has full legal right, power and authority to
enter into, deliver and perform this Agreement, to issue, sell and deliver the
Shares as provided herein and to consummate the transactions contemplated
herein. This Agreement has been duly authorized, executed and delivered by the
Company and, assuming due authorization, execution and delivery by the other
parties hereto, constitutes a valid and binding agreement of the Company,
enforceable in accordance with its terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equity principles and except to the extent that enforcement of the
indemnification provisions set forth in Section 5 of this Agreement may be
limited by federal or state securities laws or the public policy underlying such
laws.
(iii) Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary for the valid authorization, issuance,
sale and delivery of the Shares and the execution, delivery and performance of
this Agreement has been made or obtained and is in full force and effect.
(iv) Neither the issuance, sale and delivery by the Company of
the Shares to purchasers thereof, nor the execution, delivery and performance of
this Agreement, nor the consummation of the transactions contemplated hereby or
thereby by the Company will violate any of the terms and provisions of, or
constitute a default under, any of the Articles of Incorporation or by-laws of
the Company, or, to such counsel's knowledge, under any material indenture,
mortgage, trust, deed of trust, loan agreement, note, lease or other agreement
or instrument to which the Company is a party or to which any of its properties
or other assets is subject; or, to such counsel's knowledge, violate any
applicable statute, judgment, decree, order, rule or regulation of any court or
governmental agency or body; or, to such counsel's knowledge, result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of any of the foregoing.
(v) The description of the Company's authorized capital stock
contained in the Registration Statement and the Prospectus under the caption
"Capital Stock" meets the requirements of Item 12 of Form SB-2 under the 1933
Act, and the Common Stock conforms in all material respects as to legal matters
to the description thereof contained in the Registration Statement and the
Prospectus.
(vi) The Shares to be issued pursuant to the Offering have
been validly authorized by the Company. When issued and delivered, the Shares
will be validly issued, fully paid and nonassessable. No preemptive rights of
shareholders exist with respect to any of the Shares. To such counsel's
knowledge, no person or entity holds a right to require or participate in the
registration under the 1933 Act of the Shares pursuant to the Registration
Statement; and, except as set forth in the Prospectus, no person holds a right
to require registration under the 1933 Act of any shares of Common Stock of the
Company at any other time. To such counsel's knowledge, no person or entity has
a right of participation or first refusal with respect to the sale of the Shares
by the Company. The form of certificates evidencing the Shares comply with all
applicable requirements of California law.
<PAGE>
(vii) The Company has an authorized capitalization as set
forth in the Prospectus under the caption "Capital Stock" as of the date
therein. At the date of this Agreement, after effecting a 1-for-2 reverse stock
split, the Company has 5,750,000 shares of issued and outstanding stock (and
250,000 shares of Common Stock reserved for issuance upon exercise of currently
exercisable stock options), all of which is Common Stock. The Common Stock
conforms in all material respects to the description of the Common Stock
contained in the Prospectus. To the knowledge of such counsel, except as
disclosed in the Prospectus, there is no outstanding option, warrant or other
right calling for the issuance of, and no commitment, plan or arrangement to
issue, any shares of capital stock of the Company or any security convertible
into or exchangeable for capital stock of the Company.
(viii) To the knowledge of such counsel, the Company is not in
violation of its Articles of Incorporation or by-laws, and no material default
exists and no event has occurred which, with notice or after the lapse of time
to cure or both, would constitute a material default in the due performance and
observance of any obligation, agreement, term, covenant or condition contained
in any indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument known to such counsel to which any such entity is a
party or by which any such entity or any of its properties is subject. To the
knowledge of such counsel, the Company is not in violation of, or in default
with respect to, any statute, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of each such
entity, respectively.
(ix) To such counsel's knowledge and except as described in
the Prospectus, there is not pending or threatened, any action, suit,
proceeding, inquiry or investigation against the Company or any of its officers
and directors or to which the properties, assets or rights of the Company or
such persons are subject, which, if determined adversely to the Company or any
such persons, would individually or in the aggregate have a material adverse
effect on the financial position, results of operations or business of any such
entity, respectively.
(x) The descriptions in the Registration Statement and the
Prospectus of the contracts, leases and other legal documents therein described
present fairly the information required to be shown and there are no contracts,
leases or other documents known to such counsel of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement which are not described or filed as
required. There are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company, known
to such counsel, of a character required to be disclosed in the Registration
Statement or the Prospectus which have not been so disclosed and properly
described therein. To such counsel's knowledge, all agreements between the
Company, and third parties expressly referenced in the Prospectus are legal,
valid and binding obligations of the Company, enforceable in accordance with
their respective terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, reorganization or other laws of general applicability
relating to or affecting creditors' rights and to general equitable principles.
(xi) The Registration Statement has become effective under the
1933 Act and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending or contemplated under the
1933 Act. Other than financial statements and other financial and operating data
and schedules contained therein, as to which counsel need express no opinion,
the Registration Statement, the Prospectus and any amendment or supplement
thereto, appear on their face to conform as to form in all material respects
with the requirements of Form SB-2 under the 1933 Act Regulations.
(xii) The Registration Statement, or any further amendment
thereto made prior to the date hereof, on its effective date, contained or
contains no untrue statement of a material fact and did not omit or does not
omit to state any material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made not misleading, or neither the Prospectus nor any amendment or supplement
thereto, as of its issue date, contained or contains any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading (provided that such counsel need express no belief regarding the
financial statements and related schedules and other financial data contained in
the Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
(xiii) The Company is not an "investment company," or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act.
<PAGE>
(xiv) The descriptions in the Prospectus of statutes,
regulations, legal or governmental proceedings are accurate and present fairly a
summary of the information required to be shown under the 1933 Act and the 1933
Act Regulations. The information in the Prospectus under the caption
"Capitalization," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel, is correct and presents fairly
the information required to be disclosed therein under the 1933 Act and the 1933
Act Regulations.
(xv) To such counsel's knowledge, no relationship, direct or
indirect, exists between or among any of the Company or any affiliate of the
Company, on the one hand, and any director, officer, stockholder, customer or
supplier of the Company or any affiliate of the Company, on the other hand, that
is required by the 1933 Act or by the 1933 Act Regulations to be described in
the Registration Statement or the Prospectus which is not so described or is not
adequately described.
(xvi) All sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or, to
the knowledge of such counsel, effected in a manner which was exempt from the
registration requirements of the 1933 Act and were duly registered in accordance
with or the subject of an available exemption from the registration requirements
of the applicable blue sky laws. To the knowledge of such counsel, the Company
has not effected any sales of securities that would be required to be disclosed
in response to Item 701 of Regulation S-K that are not disclosed in the
Registration Statement.
In rendering the foregoing opinion, such counsel may rely on the following:
(A) as to matters involving the application of laws other than
the laws of the United States and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the extent
specified in such opinion, upon an opinion or opinions (in form and
substance reasonably satisfactory to Underwriters' counsel) of other
counsel familiar with the applicable laws,
(B) as to matters of fact, to the extent they deem
appropriate, on certificates of responsible officers of the Company and
certificates or other written statements of officers or departments of
various jurisdictions having custody of documents respecting the
existence or good standing of the Company provided that copies of all
such opinions, statements or certificates shall be delivered to your
counsel. The opinion of counsel for the Company shall state that the
opinion of any other counsel, or certificate or written statement, on
which such counsel is relying is in form satisfactory to such counsel
and that you and they are justified in relying thereon.
(b) At the time that this Agreement is executed by the Company, you
shall have received from KPMG, LLP a letter, dated the date hereof, in form and
substance satisfactory to you, confirming that they are independent public
accountants with respect to the Company within the meanings of the 1933 Act and
1933 Act Regulations, and stating in effect that:
(i) in their opinion, the financial statements and any
supplementary financial information and schedule included in the Registration
Statement and covered by their opinion therein comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
1933 Act Regulations;
(ii) on the basis of limited procedures (set forth in detail
in such letter and made in accordance with such procedures as may be specified
by you) not constituting an audit in accordance with generally accepted auditing
standards, consisting of (but not limited to) a reading of the latest available
internal unaudited financial statements of the Company, a reading of the minute
books of the Company, inquiries of officials of the Company responsible for
financial and accounting matters, and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that caused them to
believe that:
(A) the unaudited financial statements and supporting schedule
and other unaudited financial data of the Company included in the
Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act
and the 1933 Act Regulations or are not presented in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited financial statements from which
such data and items were derived, and any such unaudited data and items
were not determined on a basis
<PAGE>
substantially consistent with the basis for the corresponding amounts
in the audited financial statements included in the Prospectus;
(C) any unaudited pro forma financial information included in
the Prospectus does not comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations or the pro forma adjustments have not been properly applied
to historical amounts in the compilation of that information; and
(D) at a specified date not more than five days prior to the
date of delivery of such letter, there was any change in the capital
stock or long-term debt or obligations under capital leases of the
Company, or there were any decreases in net current assets or net
assets, or shareholders' equity, from that set forth in the Company's
balance sheet at December 31, 1998, except as described in such letter;
and
(iii) in addition to the procedures referred to in clause (ii)
above and the examination referred to in their Reports included in the
Registration Statement, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information specified
by you which are derived from the general accounting records of the Company,
which appear in the Registration Statement or the exhibits or schedules thereto
and are specified by you, and have compared such amounts, percentages and
financial information with the accounting records of the Company and with
material derived from such records and have found them to be in agreement.
(c) At the time of the closing of the Offering, you shall have received
from KPMG, LLP, a letter, in form and substance satisfactory to you and dated as
of the date of the closing of the Offering, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (b) above, except
that the specified date referred to shall be a date not more than five days
prior to the date of closing of the Offering.
(d) The NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to such offering, such terms or your
participation in the same.
Section 5. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless Broker-Dealer and each
person, if any, who controls Broker-Dealer within the meaning of the 1933 Act or
the 1934 Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which it or such controlling person may become subject under the 1933
Act, the 1934 Act or insofar as such losses, claims, damages or liabilities in
respect thereof arise out of or are based upon any breach of any warranty or
covenant of the Company herein contained or by reason of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and will reimburse Broker-Dealer for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon and in conformity with written information furnished to the
Company by Broker-Dealer expressly for use therein. In addition to its other
obligations under this Section 5 (a), the Company agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5 (a), it will
reimburse Broker-Dealer on a monthly basis for all reasonable legal and other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse Broker-Dealer for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. Any such interim reimbursement payments that
are not made to Broker-Dealer within 30 days of a request for reimbursement
shall bear interest at the prime rate (or reference rate or other commercial
lending rate for borrowers of the highest credit standing) published from time
to time by The Wall Street Journal (the "Prime Rate") from the date of such
request.
<PAGE>
The Company will not, without the prior written consent of Broker-Dealer, settle
or compromise or consent to the entry of any judgment in any pending or
threatened action or claim or related cause of action or portion of such cause
of action in respect of which indemnification may be sought hereunder (whether
or not Broker-Dealer is a party to such action or claim), unless such
settlement, compromise or consent includes an unconditional release of
Broker-Dealer from all liability arising out of such action or claim (or related
cause of action or portion thereof).
The indemnity agreement in this Section 5(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls Broker-Dealer within the meaning of the 1933 Act or the 1934 Act to
the same extent as such agreement applies to Broker-Dealer.
(b) Broker-Dealer will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement or the Prospectus or
any such amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by Broker-Dealer expressly for use
therein; and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action. In addition to its other
obligations under this Section 5(b), Broker-Dealer agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5(b), it will reimburse
the Company on a monthly basis for all reasonable legal and other expenses
incurred in connection with investigating or defending any such claim, action
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of its obligation
to reimburse the Company for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. Any such interim reimbursement payments that are not made to the
Company within 30 days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request. This indemnity agreement shall be in
addition to any liabilities that Broker-Dealer may otherwise have.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; no indemnification provided for in Section 5(a) or 5(b)
shall be available to any party who shall fail to give notice as provided in
this Section 5(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by the
failure to give such notice, but the omission so to notify the indemnifying
party will not relieve the indemnifying party from any liability that it may
have to any indemnified party otherwise than under Section 5. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation, except
that if the indemnified party has been advised by counsel in writing that there
are one or more defenses available to the indemnified party which are different
from or additional to those available to the indemnifying party, then the
indemnified party shall have the right to employ separate counsel and in that
event the reasonable fees and expenses of such separate counsel for the
indemnified party shall be paid by the indemnifying party; provided, however,
that if the indemnifying party is the Company, the Company shall only be
obligated to pay the reasonable fees and expenses of a single law firm (and any
reasonably necessary local counsel) employed by all of the indemnified parties
and the persons referred to in Section 5(a) hereof. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
<PAGE>
(d) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Section 5(a) and 5(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the indemnifying parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the National
Association of Securities Dealers, Inc. Any such arbitration must be commenced
by service of a written demand for arbitration or a written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a) and 5(b) hereof
and will not resolve the ultimate propriety or enforceability of the obligation
to indemnify for expenses that is created by the provisions of Sections 5(a) and
5(b).
(e) In order to provide for just and equitable contribution in
circumstances under which the indemnity provided for in this Section 5 is for
any reason judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the right of appeal) to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Company on the one hand,
and Broker-Dealer on the other shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity incurred by the Company and Broker-Dealer, as incurred, in such
proportions that (a) Broker-Dealer is responsible pro rata for that portion
represented by the commission percentage appearing on the cover page of the
Prospectus bears to the initial public offering price (before deducting
expenses) appearing thereon, and (b) the Company is responsible for the balance,
provided, however, that no person guilty of fraudulent misrepresentations
(within the meaning of Section 12(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation; provided, further, that if the allocation provided above is
not permitted by applicable law, the Company, on the one hand and Broker-Dealer
on the other shall contribute to the aggregate losses in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company on the one hand, and Broker-Dealer on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
on the one hand, or by Broker-Dealer on the other hand, and the parties,
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and Broker-Dealer agree that it
would not be just and equitable if contributions pursuant to this Section 5(e)
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 5(e). The amount paid or payable by a party as a result of the
losses, claims, damages or liabilities referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending such action or claim.
Section 6. Representations, Warranties and Agreements to Survive
Delivery. The representations, warranties, indemnities, agreements and other
statements of the Company or their respective officers set forth in or made
pursuant to this Agreement will remain operative and in full force and effect
will survive the termination of this Agreement.
Section 7. Notices.
All notices or communications required or permitted hereunder shall be
in writing and shall be mailed or delivered as follows:
If to the Company: CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
320 S. Garfield Avenue, Suite 318
Alhambra, CA 91801
Attention: Frank Yuan
If to Broker-Dealer: (a) Ace Diversified Capital, Inc.
8855 E. Valley Blvd., Suite 205
Rosemead, CA 91770
Attention: Lynwood Jen
<PAGE>
Section 8. Miscellaneous. This Agreement contains and constitutes the
entire agreement between the parties hereto and supersedes all prior written or
oral and all contemporaneous agreements or negotiations with respect to the
subject matter hereof. The Agreement may only be amended, modified or waived in
writing signed by both parties hereto. This Agreement shall be governed in
accordance with the laws of the State of California; without reference to the
conflict of law provisions thereof. This Agreement may be executed in
counterparts.
Section 9. Governing Law and Time. This Agreement shall be governed by
the laws of the State of California. Specified time of the day refers to United
States Pacific Time. Time shall be of the essence of this Agreement.
Section 10. Counterparts. This Agreement may be executed in one or more
counterparts and when a counterpart has been executed by each party, all such
counterparts taken together shall constitute one and the same agreement.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument will become a binding agreement among the Company and Broker-Dealer
in accordance with its terms.
Very truly yours,
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
By: _______________________________________
Name: Frank Yuan
Title: President
Confirmed and accepted as of the date first above written:
Ace Diversified Capital, Inc.
By: ______________________________
Name: Lynwood Jen
Title: President
2,500,000 SHARES
CYBER MERCHANTS EXCHANGE, INC. d.b.a. C-ME.com
Common Stock
BEST EFFORTS COMPENSATION AGREEMENT
Alhambra, California
April 13, 1999
Jason Adelman
Drake & Co.
7 Hanover Square, 2FL
New York, NY 10004
Dear Mr. Adelman:
CYBER MERCHANTS EXCHANGE, INC.d.b.a. C-ME.Com, a California corporation (the
"Company"), proposes to issue and sell an aggregate of two million five hundred
thousand (2,500,000) shares of the Company's Common Stock, no par value per
share (the "Common Stock" or "Shares").
The Shares will be offered to the public by the Company at a price of
$6.00-$9.00 per share (the "Offering"). The purpose of this Agreement is to set
forth the understanding of the parties relating to the right of Drake & Co., a
New York Corporation ("Broker-Dealer") to participate in the sale of the Shares
as a broker-dealer exercising its best efforts to sell the Shares.
Section 1. Representations and Warranties of the Company . The Company
represents and warrants to and agrees with Broker-Dealer that:
(a) A registration statement on Form SB-2 (File No. 333-41411) with
respect to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the
applicable rules and regulations (the "1933 Act Regulations") of the Securities
and Exchange Commission (the "Commission"), and has been filed with the
Commission; and such amendments to such registration statement as may have been
required prior to the date hereof have been filed with the Commission, and such
amendments have been similarly prepared. Such registration statement went
effective with the Commission on _________________, 199__ (the "Date of
Registration"). Copies of such registration statement and amendment or
amendments of each related preliminary prospectus, and the exhibits, financial
statements and schedules, as finally amended and revised, have been delivered to
you.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement became
effective and, in the event any post-effective amendment thereto becomes
effective prior to the closing of the Offering, shall also mean such
registration statement as so amended. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Shares in the form in which
it is first filed with the Commission pursuant to Rule 424(b) of the 1933 Act
Regulations or, if no filing pursuant to Rule 424(b) of the 1933 Act Regulations
is required, shall mean the form of final prospectus included in the
Registration Statement at the time such Registration Statement becomes
effective.
(b) When the Registration Statement became effective, when the
Prospectus was first filed pursuant to Rule 424(b) of the 1933 Act Regulations,
when any amendment to the Registration Statement becomes effective,
<PAGE>
and when any supplement to the Prospectus is filed with the Commission, (i) the
Registration Statement, the Prospectus and any amendments thereof and
supplements thereto will conform in all material respects with the applicable
requirements of the 1933 Act and the 1933 Act Regulations, and (ii) neither the
Registration Statement, the Prospectus nor any amendment or supplement thereto
will contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by Broker-Dealer
expressly for use in the Registration Statement.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the state of California with all
requisite corporate power and authority to own, lease and operate its properties
and the properties it proposes to own, lease and operate as described in the
Registration Statement and the Prospectus and to conduct its business as now
conducted and as proposed to be conducted as described in the Registration
Statement and the Prospectus. The Company has been duly qualified to do business
and is in good standing as a foreign corporation in each other jurisdiction in
which the ownership or leasing of its properties or the nature or conduct of its
business as now conducted or proposed to be conducted as described in the
Registration Statement and the Prospectus requires such qualification, except
where the failure to do so would not have a material adverse effect on the
Company.
(d) The Company has full legal right, power and authority to enter into
this Agreement, to issue, sell and deliver the Shares as provided herein and to
consummate the transactions contemplated herein. This Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid and
binding agreement of the Company, enforceable in accordance with its terms,
except to the extent that enforceability may be limited by bankruptcy,
insolvency, reorganization or other laws of general applicability relating to or
affecting creditors, rights, or by general equity principles and except to the
extent the indemnification provisions set forth in Section 5 of this Agreement
may be limited by federal or state securities laws or the public policy
underlying such laws.
(e) Each consent, approval, authorization, order, license, certificate,
permit, registration, designation or filing by or with any governmental agency
or body necessary for the valid authorization, issuance, sale and delivery of
the Shares, the execution, delivery and performance of this Agreement and the
consummation by the Company of the transactions contemplated hereby, has been
made or obtained and is in full force and effect.
(f) Neither the issuance, sale and delivery by the Company of the
Shares, nor the execution, delivery and performance of this Agreement nor the
consummation of the transactions contemplated hereby by the Company will
conflict with or result in a breach or violation of any of the terms and
provisions of, or (with or without the giving of notice or the passage of time
or both) constitute a default under, the Articles of Incorporation, by-laws of
the Company; any indenture, mortgage, deed of trust, loan agreement, note, bond
or other agreement or instrument to which the Company, is a party or to which
it, any of its properties or other assets; or any applicable statute, law,
judgment, decree, order, rule or regulation of any court or governmental agency
or body applicable to the Company or its property; or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property or asset
of the Company.
(g) The Shares to be issued and sold hereunder have been validly
authorized by the Company. When issued and delivered against payment therefor,
the Shares will be duly and validly issued, fully paid and non-assessable. No
preemptive rights of shareholders exist with respect to any of the Shares. No
person or entity holds a right to require or participate in the registration
under the 1933 Act of the Shares pursuant to the Registration Statement; and,
except as set forth in the Prospectus, no person holds a right to require
registration under the 1933 Act of any shares of Common Stock of the Company at
any other time. No person or entity has a right of participation or first
refusal with respect to the sale of the Shares by the Company. The form of
certificates evidencing the Shares complies with all applicable requirements of
California law.
(h) The Common Stock to be issued upon exercise of the common stock
purchase warrants to be issued to Broker-Dealer (the "Warrants") are duly
authorized, and when issued and delivered pursuant to this Agreement, will be
duly authorized, validly issued, fully paid and non-assessable and free of
pre-emptive rights of any security holder of the Company. Neither the filing of
the Registration Statement nor the offering or sale of the Shares gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock, except as described
in the Registration Statement.
<PAGE>
(i) This Agreement has been duly and validly authorized, executed and
delivered by the Company. The Company has full power and lawful authority to
issue and sell the shares of Common Stock to be sold by it upon exercise of the
Warrants (the "Warrant Shares") on the terms and conditions set forth herein,
and no consent, approval, authorization or other order of any governmental
authority is required in connection with such authorization, execution and
delivery or with the authorization, issue and sale of the Warrant Shares or the
Warrants, except as may be required under the 1933 Act or state securities laws.
(j) The Company has 5,750,000 shares (and 250,000 shares of Common
Stock reserved for issuance upon exercise of currently exercisable stock
options) of issued and outstanding shares of Common Stock, after effecting a
1-for-2 reverse stock split. The Company has no other issued and outstanding
capital stock. The Company's authorized capitalization is as set forth in the
Prospectus under the caption "Capitalization." Except as disclosed in the
Prospectus, there is no outstanding option, warrant or other right calling for
the issuance of, and no commitment, plan or arrangement to issue any shares of
capital stock of the Company or any security convertible into or exchangeable
for capital stock of the Company.
(k) The financial statements of the Company in the Registration
Statement and the Prospectus present fairly the financial position of the
Company as of the dates indicated and the results of operations and cash flows
for the periods specified, all in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods specified. The
financial statement schedule included in the Registration Statement and the
amounts in the Prospectus under the captions "Selected Financial Data" fairly
present the information shown therein and have been compiled on a basis
consistent with the financial statements included in the Registration Statement
and the Prospectus. No other financial statements or schedules are required by
Form SB-2 or otherwise to be included in the Registration Statement or the
Prospectus. The unaudited pro forma combined financial information (including
the related notes) included in the Prospectus complies as to form in all
material respects to the applicable accounting requirements of the 1933 Act and
the 1933 Act Regulations and management of the Company believes that the
assumptions underlying the pro forma adjustments are reasonable. Such pro forma
adjustments have been properly applied to the historical amounts in the
compilation of the information and such information fairly presents with respect
to the Company the pro forma financial position, results of operations and other
information purported to be shown therein at the respective dates and for the
respective periods specified.
(l) KPMG, LLP, who have examined and are reporting upon the audited
financial statements and schedules included in the Registration Statement, are,
and were during the periods covered by their Reports included in the
Registration Statement and the Prospectus, independent public accountants, as
required by the 1933 Act and the 1933 Act Regulations.
(m) The Company has not sustained, since inception, any material loss
or interference with its business from fire, explosion, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or arbitrators' or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as otherwise stated in the Registration Statement
and Prospectus, there has not been (i) any material change in the capital stock
or partnership interests, as applicable, long-term debt, obligations under
capital leases or short-term borrowings of the Company, (ii) any material
adverse change, or any development which could reasonably be seen as involving a
prospective material adverse change, in or affecting the business prospects,
properties, assets, results of operations or condition (financial or other) of
the Company, (iii) any liability or obligation, direct or contingent, incurred
or undertaken by the Company, which is material to the business or condition
(financial or other) of the Company, except for liabilities or obligations
incurred in the ordinary course of business, (iv) any declaration or payment of
any dividend or distribution of any kind on or with respect to the capital stock
of the Company, or (v) any transaction that is material to the Company except
transactions in the ordinary course of business or as otherwise disclosed in the
Registration Statement and the Prospectus.
<PAGE>
(n) The Company is not in violation of its Articles of Incorporation or
by-laws, and no default exists, and no event has occurred, nor state of facts
exists, which, with notice or after the lapse of time to cure or both, would
constitute a default in the due performance and observance of any obligation,
agreement, term, covenant, consideration or condition contained in any
indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument to which the Company is a party or by which it or any of
its properties is subject. The Company is not in violation of, or in default
with respect to, any statute, law, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as is in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of the
Company.
(o) Except as described in the Prospectus, there is not pending or, to
the knowledge of the Company, threatened any action, suit, proceeding, inquiry
or investigation against the Company, its officers and directors or to which the
properties, assets or rights of the Company are subject, before or brought by
any court or governmental agency or body or board of arbitrators, which could
result in any material adverse change in the business, prospects, properties,
assets, results of operations or condition (financial or otherwise) of the
Company.
(p) The descriptions in the Registration Statement and the Prospectus
of the contracts, leases and other legal documents therein described present
fairly the information required to be shown, and there are no contracts, leases,
or other documents of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement which are not described or filed as required. To the best knowledge of
the Company, there are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus which have not been so disclosed and properly described therein. All
agreements between the Company and third parties expressly referenced in the
Prospectus are legal, valid and binding obligations of the Company enforceable
in accordance with their respective terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equitable principles.
(q) The Company owns, possesses or has obtained all material permits,
licenses, franchises, certificates, consents, orders, approvals and other
authorizations of governmental or regulatory authorities as are necessary to own
or lease, as the case may be, and to operate its properties and to carry on its
business as presently conducted, or as contemplated in the Prospectus to be
conducted, and the Company has not received any notice of proceedings relating
to revocation or modification of any such licenses, permits, certificates,
consents, orders, approvals or authorizations.
(r) The Company owns or possesses adequate license or other rights to
use all patents, trademarks, service marks, trade names, copyrights, software
and design licenses, trade secrets, manufacturing processes, other intangible
property rights and know-how (collectively "Intangibles") necessary to entitle
it to conduct its business now, and as proposed to be conducted or operated as
described in the Prospectus, and the Company has not received notice of
infringement or of conflict with (and knows of no such infringement of or
conflict with) asserted rights of others with respect to any Intangibles which
could materially and adversely affect its business, prospects, properties,
assets, results of operation or condition (financial or otherwise).
(s) The Company has not directly or indirectly, at any time (i) made
any contribution to any candidate for political office, or failed to disclose
fully any such contribution, in violation of law or (ii) made any payment to any
state, federal or foreign, governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. To the best knowledge of
the Company, the Company's internal accounting controls and procedures are
sufficient to cause such entities to comply in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(t) To the best of the Company's knowledge, the Company's systems of
internal accounting controls taken as a whole are sufficient to meet the broad
objectives of internal accounting control insofar as those objectives pertain to
the prevention or detection of errors or irregularities in amounts that would be
material in relation to the Company's financial statements; and, to the best of
the Company's knowledge, neither the Company, nor any employee or agent thereof,
has made any payment of funds of the Company or received or retained any funds
and no funds of the Company have been set aside to be used for any payment, in
each case in violation of any law, rule or regulation.
<PAGE>
(u) The Company has filed on a timely basis all necessary federal,
state, local and foreign income and franchise tax returns required to be filed
through the date hereof and have paid all taxes shown as due thereon; and no tax
deficiency has been asserted against the Company, nor does the Company know of
any tax deficiency which is likely to be asserted against the Company which if
determined adversely to the Company, could materially adversely affect the
business, prospects, properties, assets, results of operations or condition
(financial or otherwise) of any such entity, respectively. All tax liabilities
are adequately provided for on the respective books of such entities.
(v) The Company maintains insurance (issued by insurers of recognized
financial responsibility) of the types and in the amounts generally deemed
adequate for their respective businesses and, to the best of the Company's
knowledge, consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance covering real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(w) To the best of the Company's knowledge, no general labor problem
exists or is imminent with the employees of the Company which would have a
material adverse effect on the financial position, results of operations or
business of the Company.
(x) The Company and its officers, directors or affiliates have not
taken and will not take, directly or indirectly, any action designed to, or that
might reasonably be expected to, cause or result in or constitute the
stabilization or manipulation of any security of the Company or to facilitate
the sale or resale of the Shares in violation of any law, rule or regulation.
(y) The Company has not incurred any liability for a fee, commission or
other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than as
contemplated hereby.
(z) Except as otherwise disclosed in the Prospectus, the Company has
not authorized or conducted nor has knowledge of the generation, transportation,
storage, presence, use, treatment, disposal, release, or other handling of any
hazardous substance, hazardous waste, hazardous material, hazardous constituent,
toxic substance, pollutant, contaminant, asbestos, radon, polychlorinated
biphenyls ("PCBs"), petroleum product or waste (including crude oil or any
fraction thereof), natural gas, liquefied gas, synthetic gas or other material
defined, regulated, controlled or potentially subject to any remediation
requirement under any environmental law (collectively, "Hazardous Materials"),
on, in, under or affecting any real property currently leased or owned or by any
means controlled by the Company (the "Real Property") except as in material
compliance with applicable laws; to the knowledge of the Company, the Real
Property and the Company's operations with respect to the Real Property are in
compliance with all federal, state and local laws, ordinances, rules,
regulations and other governmental requirements relating to pollution, control
of chemicals, management of waste, discharges of materials into the environment,
health, safety, natural resources, and the environment (collectively,
"Environmental Laws"), and the Company has, and is in compliance with, all
licenses, permits, registrations and government authorizations necessary to
operate under all applicable Environmental Laws. Except as otherwise disclosed
in the Prospectus, the Company has not received any written or oral notice from
any governmental entity or any other person and there is no pending or
threatened claim, litigation or any administrative agency proceeding that:
alleges a violation of any Environmental Laws by the Company; alleges that the
Company is a liable party or a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
S 9601, et seq., or any state superfund law; has resulted in or could result in
the attachment of an environmental lien on any of the Real Property; or, alleges
that the Company is liable for any contamination of the environment,
contamination of the Real Property, damage to natural resources, property
damage, or personal injury based on their activities or the activities of their
predecessors or third parties (whether at the Real Property or elsewhere)
involving Hazardous Materials whether arising under the Environmental Laws,
common law principles or other legal standards.
(aa) The Company will not become as a result of the transactions
contemplated hereby, or will not conduct its business in a manner in which it
would become, "an investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended (the "Investment Company Act").
(bb) No relationship, direct or indirect, exists between or among any
of the Company or any affiliate of the Company, on the one hand, and any
director, officer, stockholder, customer or supplier of the Company or any
<PAGE>
affiliate of the Company, on the other hand, that is required by the 1933 Act or
by the 1933 Act Regulations to be described in the Registration Statement or the
Prospectus which is not so described or is not adequately described.
(cc) All offers and sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or
exempt from the registration requirements of the 1933 Act and were duly
registered in accordance with or the subject of an available exemption from
registration under the applicable blue sky laws. The Company has not effected
any sales of securities that would be required to be disclosed in response to
Item 701 of Regulation S-K that are not disclosed in the Registration Statement.
Any certificate signed by any officer of the Company on behalf of the
Company and delivered to you or to counsel for the Representative shall be
deemed a representation and warranty of the Company to the Representative as to
the matters covered thereby.
Section 2. Certain Covenants of the Company. The Company covenants and
agrees with Broker-Dealer, to use its best efforts to cause the Company to
perform as follows:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective (if not yet effective at the date and time that
this Agreement is executed and delivered by the parties hereto). The Company
will notify you immediately, and confirm the notice in writing, (i) when the
Registration Statement, or any post-effective amendment to the Registration
Statement, shall have become effective, or any supplement to the Prospectus or
any amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission to amend
the Registration Statement or amend or supplement the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution or threatening of any proceeding for any
such purposes. The Company will use every reasonable effort to prevent the
issuance of any such stop order or of any order preventing or suspending such
use and, if any such order is issued, to obtain the withdrawal thereof at the
earliest possible moment.
(b) The Company will not at any time file or make any amendment to the
Registration Statement, or any amendment or supplement to the Prospectus if you
shall not have previously been advised and furnished a copy thereof a reasonable
time prior to the proposed filing, or if you or your counsel reasonably object
to such amendment or supplement.
(c) The Company will deliver to you, at the Company's expense, from
time to time as requested, such number of copies of the Prospectus (as
supplemented or amended) as you may reasonably request. If the delivery of a
Prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Shares and if at such time any events shall have occurred as result of which
the Prospectus as then amended or supplemented would include an untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were made
when such Prospectus is delivered not misleading, or, if for any reason it shall
be necessary during such same period to amend or supplement the Prospectus in
order to comply with the 1933 Act, the Company will notify you and upon your
request prepare and furnish without charge to you and to any dealer in
securities as many copies, as you may from time to time reasonably request, of
an amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance.
(d) The Company will use its best efforts to qualify the Shares for
offering and sale under the applicable securities laws of such states and other
jurisdictions as you may designate and to maintain such qualifications in effect
for as long as may be necessary to complete the distribution of the Shares;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified or to make any undertakings in
respect of doing business in any jurisdiction in which it is not otherwise so
subject. The Company will file such statements and reports as may be required by
the laws of each jurisdiction in which the Shares have been qualified as above
provided.
(e) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the end of the fiscal
quarter first occurring after the first anniversary of the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the 1933 Act
Regulations), an earnings statement (in reasonable detail but which need not be
audited) complying with the provisions of Section 11(a) of the 1933 Act and
<PAGE>
Rule 158 thereunder and covering a period of at least 12 months beginning after
the effective date of the Registration Statement.
(f) The Company will use the net proceeds received by it from the sale
of the Shares substantially in the manner specified in the Prospectus under the
caption "Use of Proceeds."
(g) The Company will furnish to its security holders of record, as soon
as practicable after the end of each respective period, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year. During a period of five years after the date hereof, the
Company will furnish to you: (i) concurrently with furnishing such reports to
its security holders, statements of operations of the Company for each of the
first three quarters in the form furnished to the Company's security holders;
(ii) concurrently with furnishing to its security holders, a balance sheet of
the Company as of the end of such fiscal year, together with statements of
operations, of cash flows and of security holders, equity of the Company for
such fiscal year, accompanied by a copy of the certificate or report thereon of
independent public accountants; (iii) as soon as they are available, copies of
all reports (financial or otherwise) mailed to security holders; (iv) as soon as
they are available, copies of all reports and financial statements furnished to
or filed with the Commission, any securities exchange or the NASD; (v) every
material press release in respect of the Company or its affairs which is
released or prepared by the Company, and (vi) any additional information of a
public nature concerning the Company or its business that you may reasonably
request. During such five-year period, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts of the Company are
consolidated with any subsidiaries, and shall be accompanied by similar
financial statements for any significant subsidiary that is not so consolidated.
(h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(i) The Company will use its best efforts to acquire the inclusion of
its shares of Common Stock on the National Association of Securities Dealers
Automated Quotation system ("NASDAQ") and the American Stock Exchange ("AMEX")
within six months from the date hereof.
(j) The Company is familiar with the Investment Company Act and the
rules and regulations thereunder, and has in the past conducted its affairs, and
will in the future conduct its affairs, in such a manner so as to ensure that
the Company was not and will not be an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act.
(k) The Company will not, and will use its best efforts to cause its
officers, directors and affiliates not to, (i) take, directly or indirectly
prior to termination of the distribution of the Shares contemplated by this
Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which may cause or result in, or which might in the
future reasonably be expected to cause or result in, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of the Shares or (iii) pay or agree to pay
to any person any compensation for soliciting any order to purchase any other
securities of the Company which, in any such case, is in violation of any law,
rule or regulation.
(l) The Company will file timely and accurate reports on Form SR with
the Commission in accordance with Rule 463 of the 1933 Act Regulations or any
successor provision.
(m) Prior to the closing of the Offering, the Company will not, and
will use its best efforts to cause any affiliate of the Company not to issue a
press release or other official communication directly or indirectly, nor hold a
press conference with respect to the Company or with respect to the financial
condition, results of operations, business, properties, assets or liabilities of
the Company, or the offering of the Shares, without your prior written input
within 72 hours which consent shall not be unreasonably withheld.
(n) The Company will notify you promptly of any material adverse change
affecting any of its representations, warranties, agreements and indemnities
herein at any time prior to the closing of the Offering and take such steps as
may be reasonably requested by you either to remedy or publicize the same, or
both.
<PAGE>
(o) The Company will reserve and keep available that maximum number of
its authorized but unissued shares of Common Stock which are issuable upon
exercise of the Warrants outstanding from time to time.
(p) On the last day that this Agreement is in full force and effect
after the execution hereof, the Company shall execute and deliver to you the
Warrants you have earned. The Warrants will be substantially in the form of the
Stock Purchase Warrant filed as an exhibit to the Registration Statement, a copy
of which is attached hereto as Exhibit "A".
(q) For a period of five years from the Effective Date, the Company, at
its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit and without issuing any opinion thereon)
the Company's financial statements for each of the first three (3) fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's 10-Q quarterly report and the mailing of quarterly
financial information to Stockholders.
(r) As promptly as practicable after the closing of the Offering, the
Company will prepare, at its own expense, hard cover "bound volumes" relating to
the offering, and will distribute such volumes to the individuals designated by
you.
Section 3. Engagement & Allotment, Term, Reporting, Compensation and
Payment of Expenses.
(a) Engagement & Allotment.
(i) Subject to the terms and conditions of this Agreement, the
Company hereby engages Broker-Dealer, on a "best efforts" basis, as the
Company's nonexclusive agent in connection with the sale of up to 100,000 Shares
(the "Allotted Shares"). The number of Allotted Shares may be increased or
decreased at the sole discretion of the Company upon three (3) days written
notice to Broker-Dealer. Broker-Dealer will keep precise records of all
purchases of stock, including the amount of the purchase, the exact title in
which the Shares are to be issued and the address of the purchaser. The Shares
will be issued promptly by the Company and, in no event, later than fifteen (15)
days after notification by Broker-Dealer of the purchase with the information
set forth above. The maximum amount of each sale shall be 8,800 shares. The
minimum amount of each sale shall be 300 shares.
(ii) As to residents of the State of California who wish to
purchase in excess of $2,500 worth of the Shares, Broker-Dealer will take
appropriate measures to assure that the purchaser is "suitable" by having a
minimum net worth (excluding home equity, home furnishings and automobiles) of
at least $250,000 and a minimum gross income of $65,000 during the current tax
year; or, in the alternative, a minimum net worth of $500,000. In either case,
the amount of a purchaser's investment may not exceed ten percent (10%) of the
purchaser's net worth.
(iii) Broker-Dealer shall use its best efforts to assist the
Company in making sales of the shares pursuant to the Offering. Broker-Dealer
makes no representations as to the amount of Shares it will be able to sell.
There is no firm commitment to sell any certain amount of the Shares by
Broker-Dealer.
(vi) Broker-Dealer will only offer the Company's stock in
those states in which Broker-Dealer and its brokers are registered.
(vii) Broker-Dealer agrees to become a market maker for the
Company when legally permitted by its restrictive agreement with the NASD and
the SEC and when approved by the Broker-Dealer's Board of Directors. At such
time, Broker-Dealer agrees to assist with any filing requirements. Broker-Dealer
does not currently act as a market maker and has no immediate plans to act as a
market maker.
(b) Term. The term of this Agreement shall commence as of the effective
date hereof (the "Effective Date") and shall continue in full force and effect
for a period of up to thirty (30) days from the Date of Registration as set
forth in Section 1(a), above. This Agreement may be extended for additional
period of 30 days upon the mutual written consent of both parties.
(c) Reporting. Broker-Dealer shall offer the Shares pursuant to the
Prospectus. Payment for the Shares shall be made by the Purchaser directly to
the Escrow Agent as set forth in the Prospectus. The commission, as set forth in
Section 3(d), will be paid by the Company or deducted from the proceeds of the
sale when subscriptions have been accepted for at least the Minimum amount as
set forth in the Prospectus and such Minimum subscriptions
<PAGE>
are fully paid. Said commission and any other amounts due to Broker-Dealer
hereunder shall be paid every Friday once the Minimum is reached. All amounts
due shall be calculated as of the close of business on the immediately prior
Thursday. If the Company or any other entity makes sales without Broker-Dealer,
no commission will be due to Broker-Dealer on such sales.
(e) Compensation.
The Company shall pay Broker-Dealer as follows:
(i) A commission of 7% based on the total offering amount of
the Allotted Shares as set forth in Section 3(a)(i). The commission will be paid
by the Company or deducted from the proceeds of the sale when subscriptions have
been accepted for at least the Minimum amount as set forth in the Prospectus and
such Minimum subscriptions are fully paid. If more than the Minimum is sold
during the offering then commissions relating to such additional Shares will be
paid out of escrow when monies for the Shares subscribed to are distributed to
the Issuer.
(ii) The Company reserves the right to review all
subscriptions for securities law compliance and to make the final determination
whether to accept or reject subscriptions. No selling commissions will be
payable with respect to subscriptions which are rejected by the Company.
(iii) As an additional incentive for Broker-Dealer to perform
its services in a timely manner, Warrants in the form attached hereto as Exhibit
"A" shall be issued to Broker-Dealer or its designees as follows:
1. A warrant to purchase up to five percent (5%) of the
Allotted Shares, equal to 5,000 shares of stock with
an exercise price of $9.90 - 14.85 per share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System.
2. In both instances, as set forth above, the Warrants
will be granted pro rata to the sale of the Shares by
Broker-Dealer. Assuming all 100,000 Shares available
for sale are sold by Broker-Dealer, 5,000 Warrants
will be issued. If less than 100,000 Shares are sold
by Broker-Dealer, Warrants will be issued on a pro
rata basis in accordance with the actual number of
Shares sold. For example, should 50,000 Shares be
sold, Broker-Dealer will be entitled to 2,500
Warrants at a price of $9.90 - 14.85 per Share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System. The Shares obtained upon exercise of the
Warrants will be "restricted" stock subject to the
trading provisions of Rule 144 promulgated by the
Commission.
(e) Payment of Expenses. The Company will pay and bear all costs, fees
and expenses incident to the performance of its obligations under this Agreement
(excluding fees and expenses of your counsel), including (a) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits), as originally filed and as amended, the Prospectus and
any amendments or supplements thereto, and the cost of furnishing copies thereof
to you, (b) the preparation of any Selected Dealers Agreement, the certificates
representing the Shares, the Blue Sky Memoranda and any instruments relating to
any of the foregoing, (c) the issuance and delivery of the Shares to the
purchasers, including any transfer taxes payable upon the sale of the Shares,
(d) the fees and disbursements of the Company's counsel and accountants, (e) the
qualification of the Shares under the applicable securities laws in accordance
with Section 2(e) of this Agreement and any filing for review of the Offering
with the NASD, including filing fees and fees and disbursements in connection
therewith and in connection with the Blue Sky Memoranda, (f) all costs, fees and
expenses in connection with the application for inclusion of the Shares on
NASDAQ, (g) costs related to travel and lodging incurred by the Company and its
representatives relating to meetings with and presentations to prospective
purchasers of the Shares reasonably determined by you to be necessary or
desirable to effect the sale of the Shares to the public and (i) all other costs
and expenses incident to the performance of the Company's obligations hereunder
that are not otherwise specifically provided for in this section.
<PAGE>
Section 4. Opinion of Counsel and Accountants and other Conditions.
(a) As a condition to the performance of your duties and obligations
hereunder, you shall have received a favorable opinion of Evers & Hendrickson,
LLP ("Evers & Hendrickson") counsel for the Company in form and substance
satisfactory to counsel for you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
California with all requisite corporate power and authority to own, lease and
operate its properties and the properties it proposes to own, lease and operate
as described in the Registration Statement and the Prospectus and to conduct its
business as now conducted and as proposed to be conducted as described in the
Registration Statement and the Prospectus. To the best of such counsel's
knowledge, there are no other jurisdictions in which the ownership or leasing of
the Company's properties or the nature or conduct of its business as now
conducted or proposed to be conducted as described in the Registration Statement
and the Prospectus requires such qualification, except where the failure to do
so would not have a material adverse effect on the Company. To such counsel's
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity (other than any indirect control that
may be implied by virtue of Mr. Yuan and certain other officers of the Company
serving as officers and/or directors of other companies).
(ii) The Company has full legal right, power and authority to
enter into, deliver and perform this Agreement, to issue, sell and deliver the
Shares as provided herein and to consummate the transactions contemplated
herein. This Agreement has been duly authorized, executed and delivered by the
Company and, assuming due authorization, execution and delivery by the other
parties hereto, constitutes a valid and binding agreement of the Company,
enforceable in accordance with its terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equity principles and except to the extent that enforcement of the
indemnification provisions set forth in Section 5 of this Agreement may be
limited by federal or state securities laws or the public policy underlying such
laws.
(iii) Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary for the valid authorization, issuance,
sale and delivery of the Shares and the execution, delivery and performance of
this Agreement has been made or obtained and is in full force and effect.
(iv) Neither the issuance, sale and delivery by the Company of
the Shares to purchasers thereof, nor the execution, delivery and performance of
this Agreement, nor the consummation of the transactions contemplated hereby or
thereby by the Company will violate any of the terms and provisions of, or
constitute a default under, any of the Articles of Incorporation or by-laws of
the Company, or, to such counsel's knowledge, under any material indenture,
mortgage, trust, deed of trust, loan agreement, note, lease or other agreement
or instrument to which the Company is a party or to which any of its properties
or other assets is subject; or, to such counsel's knowledge, violate any
applicable statute, judgment, decree, order, rule or regulation of any court or
governmental agency or body; or, to such counsel's knowledge, result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of any of the foregoing.
(v) The description of the Company's authorized capital stock
contained in the Registration Statement and the Prospectus under the caption
"Capital Stock" meets the requirements of Item 12 of Form SB-2 under the 1933
Act, and the Common Stock conforms in all material respects as to legal matters
to the description thereof contained in the Registration Statement and the
Prospectus.
(vi) The Shares to be issued pursuant to the Offering have
been validly authorized by the Company. When issued and delivered, the Shares
will be validly issued, fully paid and nonassessable. No preemptive rights of
shareholders exist with respect to any of the Shares. To such counsel's
knowledge, no person or entity holds a right to require or participate in the
registration under the 1933 Act of the Shares pursuant to the Registration
Statement; and, except as set forth in the Prospectus, no person holds a right
to require registration under the 1933 Act of any shares of Common Stock of the
Company at any other time. To such counsel's knowledge, no person or entity has
a right of participation or first refusal with respect to the sale of the Shares
by the Company. The form of certificates evidencing the Shares comply with all
applicable requirements of California law.
<PAGE>
(vii) The Company has an authorized capitalization as set
forth in the Prospectus under the caption "Capital Stock" as of the date
therein. At the date of this Agreement, after effecting a 1-for-2 reverse stock
split, the Company has 5,750,000 shares of issued and outstanding stock (and
250,000 shares of Common Stock reserved for issuance upon exercise of currently
exercisable stock options), all of which is Common Stock. The Common Stock
conforms in all material respects to the description of the Common Stock
contained in the Prospectus. To the knowledge of such counsel, except as
disclosed in the Prospectus, there is no outstanding option, warrant or other
right calling for the issuance of, and no commitment, plan or arrangement to
issue, any shares of capital stock of the Company or any security convertible
into or exchangeable for capital stock of the Company.
(viii) To the knowledge of such counsel, the Company is not in
violation of its Articles of Incorporation or by-laws, and no material default
exists and no event has occurred which, with notice or after the lapse of time
to cure or both, would constitute a material default in the due performance and
observance of any obligation, agreement, term, covenant or condition contained
in any indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument known to such counsel to which any such entity is a
party or by which any such entity or any of its properties is subject. To the
knowledge of such counsel, the Company is not in violation of, or in default
with respect to, any statute, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of each such
entity, respectively.
(ix) To such counsel's knowledge and except as described in
the Prospectus, there is not pending or threatened, any action, suit,
proceeding, inquiry or investigation against the Company or any of its officers
and directors or to which the properties, assets or rights of the Company or
such persons are subject, which, if determined adversely to the Company or any
such persons, would individually or in the aggregate have a material adverse
effect on the financial position, results of operations or business of any such
entity, respectively.
(x) The descriptions in the Registration Statement and the
Prospectus of the contracts, leases and other legal documents therein described
present fairly the information required to be shown and there are no contracts,
leases or other documents known to such counsel of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement which are not described or filed as
required. There are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company, known
to such counsel, of a character required to be disclosed in the Registration
Statement or the Prospectus which have not been so disclosed and properly
described therein. To such counsel's knowledge, all agreements between the
Company, and third parties expressly referenced in the Prospectus are legal,
valid and binding obligations of the Company, enforceable in accordance with
their respective terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, reorganization or other laws of general applicability
relating to or affecting creditors' rights and to general equitable principles.
(xi) The Registration Statement has become effective under the
1933 Act and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending or contemplated under the
1933 Act. Other than financial statements and other financial and operating data
and schedules contained therein, as to which counsel need express no opinion,
the Registration Statement, the Prospectus and any amendment or supplement
thereto, appear on their face to conform as to form in all material respects
with the requirements of Form SB-2 under the 1933 Act Regulations.
(xii) The Registration Statement, or any further amendment
thereto made prior to the date hereof, on its effective date, contained or
contains no untrue statement of a material fact and did not omit or does not
omit to state any material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made not misleading, or neither the Prospectus nor any amendment or supplement
thereto, as of its issue date, contained or contains any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading (provided that such counsel need express no belief regarding the
financial statements and related schedules and other financial data contained in
the Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
(xiii) The Company is not an "investment company," or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act.
<PAGE>
(xiv) The descriptions in the Prospectus of statutes,
regulations, legal or governmental proceedings are accurate and present fairly a
summary of the information required to be shown under the 1933 Act and the 1933
Act Regulations. The information in the Prospectus under the caption
"Capitalization," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel, is correct and presents fairly
the information required to be disclosed therein under the 1933 Act and the 1933
Act Regulations.
(xv) To such counsel's knowledge, no relationship, direct or
indirect, exists between or among any of the Company or any affiliate of the
Company, on the one hand, and any director, officer, stockholder, customer or
supplier of the Company or any affiliate of the Company, on the other hand, that
is required by the 1933 Act or by the 1933 Act Regulations to be described in
the Registration Statement or the Prospectus which is not so described or is not
adequately described.
(xvi) All sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or, to
the knowledge of such counsel, effected in a manner which was exempt from the
registration requirements of the 1933 Act and were duly registered in accordance
with or the subject of an available exemption from the registration requirements
of the applicable blue sky laws. To the knowledge of such counsel, the Company
has not effected any sales of securities that would be required to be disclosed
in response to Item 701 of Regulation S-K that are not disclosed in the
Registration Statement.
In rendering the foregoing opinion, such counsel may rely on the following:
(A) as to matters involving the application of laws other than
the laws of the United States and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the extent
specified in such opinion, upon an opinion or opinions (in form and
substance reasonably satisfactory to Underwriters' counsel) of other
counsel familiar with the applicable laws,
(B) as to matters of fact, to the extent they deem
appropriate, on certificates of responsible officers of the Company and
certificates or other written statements of officers or departments of
various jurisdictions having custody of documents respecting the
existence or good standing of the Company provided that copies of all
such opinions, statements or certificates shall be delivered to your
counsel. The opinion of counsel for the Company shall state that the
opinion of any other counsel, or certificate or written statement, on
which such counsel is relying is in form satisfactory to such counsel
and that you and they are justified in relying thereon.
(b) At the time that this Agreement is executed by the Company, you
shall have received from KPMG, LLP a letter, dated the date hereof, in form and
substance satisfactory to you, confirming that they are independent public
accountants with respect to the Company within the meanings of the 1933 Act and
1933 Act Regulations, and stating in effect that:
(i) in their opinion, the financial statements and any
supplementary financial information and schedule included in the Registration
Statement and covered by their opinion therein comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
1933 Act Regulations;
(ii) on the basis of limited procedures (set forth in detail
in such letter and made in accordance with such procedures as may be specified
by you) not constituting an audit in accordance with generally accepted auditing
standards, consisting of (but not limited to) a reading of the latest available
internal unaudited financial statements of the Company, a reading of the minute
books of the Company, inquiries of officials of the Company responsible for
financial and accounting matters, and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that caused them to
believe that:
(A) the unaudited financial statements and supporting schedule
and other unaudited financial data of the Company included in the
Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act
and the 1933 Act Regulations or are not presented in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited financial statements from which
such data and items were derived, and any such unaudited data and items
were not determined on a basis
<PAGE>
substantially consistent with the basis for the corresponding amounts
in the audited financial statements included in the Prospectus;
(C) any unaudited pro forma financial information included in
the Prospectus does not comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations or the pro forma adjustments have not been properly applied
to historical amounts in the compilation of that information; and
(D) at a specified date not more than five days prior to the
date of delivery of such letter, there was any change in the capital
stock or long-term debt or obligations under capital leases of the
Company, or there were any decreases in net current assets or net
assets, or shareholders' equity, from that set forth in the Company's
balance sheet at December 31, 1998, except as described in such letter;
and
(iii) in addition to the procedures referred to in clause (ii)
above and the examination referred to in their Reports included in the
Registration Statement, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information specified
by you which are derived from the general accounting records of the Company,
which appear in the Registration Statement or the exhibits or schedules thereto
and are specified by you, and have compared such amounts, percentages and
financial information with the accounting records of the Company and with
material derived from such records and have found them to be in agreement.
(c) At the time of the closing of the Offering, you shall have received
from KPMG, LLP, a letter, in form and substance satisfactory to you and dated as
of the date of the closing of the Offering, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (b) above, except
that the specified date referred to shall be a date not more than five days
prior to the date of closing of the Offering.
(d) The NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to such offering, such terms or your
participation in the same.
Section 5. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless Broker-Dealer and each
person, if any, who controls Broker-Dealer within the meaning of the 1933 Act or
the 1934 Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which it or such controlling person may become subject under the 1933
Act, the 1934 Act or insofar as such losses, claims, damages or liabilities in
respect thereof arise out of or are based upon any breach of any warranty or
covenant of the Company herein contained or by reason of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and will reimburse Broker-Dealer for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon and in conformity with written information furnished to the
Company by Broker-Dealer expressly for use therein. In addition to its other
obligations under this Section 5 (a), the Company agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5 (a), it will
reimburse Broker-Dealer on a monthly basis for all reasonable legal and other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse Broker-Dealer for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. Any such interim reimbursement payments that
are not made to Broker-Dealer within 30 days of a request for reimbursement
shall bear interest at the prime rate (or reference rate or other commercial
lending rate for borrowers of the highest credit standing) published from time
to time by The Wall Street Journal (the "Prime Rate") from the date of such
request.
<PAGE>
The Company will not, without the prior written consent of Broker-Dealer, settle
or compromise or consent to the entry of any judgment in any pending or
threatened action or claim or related cause of action or portion of such cause
of action in respect of which indemnification may be sought hereunder (whether
or not Broker-Dealer is a party to such action or claim), unless such
settlement, compromise or consent includes an unconditional release of
Broker-Dealer from all liability arising out of such action or claim (or related
cause of action or portion thereof).
The indemnity agreement in this Section 5(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls Broker-Dealer within the meaning of the 1933 Act or the 1934 Act to
the same extent as such agreement applies to Broker-Dealer.
(b) Broker-Dealer will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement or the Prospectus or
any such amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by Broker-Dealer expressly for use
therein; and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action. In addition to its other
obligations under this Section 5(b), Broker-Dealer agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5(b), it will reimburse
the Company on a monthly basis for all reasonable legal and other expenses
incurred in connection with investigating or defending any such claim, action
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of its obligation
to reimburse the Company for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. Any such interim reimbursement payments that are not made to the
Company within 30 days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request. This indemnity agreement shall be in
addition to any liabilities that Broker-Dealer may otherwise have.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; no indemnification provided for in Section 5(a) or 5(b)
shall be available to any party who shall fail to give notice as provided in
this Section 5(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by the
failure to give such notice, but the omission so to notify the indemnifying
party will not relieve the indemnifying party from any liability that it may
have to any indemnified party otherwise than under Section 5. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation, except
that if the indemnified party has been advised by counsel in writing that there
are one or more defenses available to the indemnified party which are different
from or additional to those available to the indemnifying party, then the
indemnified party shall have the right to employ separate counsel and in that
event the reasonable fees and expenses of such separate counsel for the
indemnified party shall be paid by the indemnifying party; provided, however,
that if the indemnifying party is the Company, the Company shall only be
obligated to pay the reasonable fees and expenses of a single law firm (and any
reasonably necessary local counsel) employed by all of the indemnified parties
and the persons referred to in Section 5(a) hereof. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
<PAGE>
(d) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Section 5(a) and 5(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the indemnifying parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the National
Association of Securities Dealers, Inc. Any such arbitration must be commenced
by service of a written demand for arbitration or a written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a) and 5(b) hereof
and will not resolve the ultimate propriety or enforceability of the obligation
to indemnify for expenses that is created by the provisions of Sections 5(a) and
5(b).
(e) In order to provide for just and equitable contribution in
circumstances under which the indemnity provided for in this Section 5 is for
any reason judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the right of appeal) to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Company on the one hand,
and Broker-Dealer on the other shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity incurred by the Company and Broker-Dealer, as incurred, in such
proportions that (a) Broker-Dealer is responsible pro rata for that portion
represented by the commission percentage appearing on the cover page of the
Prospectus bears to the initial public offering price (before deducting
expenses) appearing thereon, and (b) the Company is responsible for the balance,
provided, however, that no person guilty of fraudulent misrepresentations
(within the meaning of Section 12(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation; provided, further, that if the allocation provided above is
not permitted by applicable law, the Company, on the one hand and Broker-Dealer
on the other shall contribute to the aggregate losses in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company on the one hand, and Broker-Dealer on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
on the one hand, or by Broker-Dealer on the other hand, and the parties,
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and Broker-Dealer agree that it
would not be just and equitable if contributions pursuant to this Section 5(e)
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 5(e). The amount paid or payable by a party as a result of the
losses, claims, damages or liabilities referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending such action or claim.
Section 6. Representations, Warranties and Agreements to Survive
Delivery. The representations, warranties, indemnities, agreements and other
statements of the Company or their respective officers set forth in or made
pursuant to this Agreement will remain operative and in full force and effect
will survive the termination of this Agreement.
Section 7. Notices.
All notices or communications required or permitted hereunder shall be
in writing and shall be mailed or delivered as follows:
If to the Company: CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
320 S. Garfield Avenue, Suite 318
Alhambra, CA 91801
Attention: Frank Yuan
If to Broker-Dealer: (a) Drake & Co.
7 Hanover Square, 2FL
New York, NY 10004
Attention: Jason Adelman
<PAGE>
Section 8. Miscellaneous. This Agreement contains and constitutes the
entire agreement between the parties hereto and supersedes all prior written or
oral and all contemporaneous agreements or negotiations with respect to the
subject matter hereof. The Agreement may only be amended, modified or waived in
writing signed by both parties hereto. This Agreement shall be governed in
accordance with the laws of the State of California; without reference to the
conflict of law provisions thereof. This Agreement may be executed in
counterparts.
Section 9. Governing Law and Time. This Agreement shall be governed by
the laws of the State of California. Specified time of the day refers to United
States Pacific Time. Time shall be of the essence of this Agreement.
Section 10. Counterparts. This Agreement may be executed in one or more
counterparts and when a counterpart has been executed by each party, all such
counterparts taken together shall constitute one and the same agreement.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument will become a binding agreement among the Company and Broker-Dealer
in accordance with its terms.
Very truly yours,
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
By: ____________________________________________
Name: Frank Yuan
Title: President
Confirmed and accepted as of the date first above written:
Drake & Co.
By: ______________________________
Name: Jason Adelman
Title:
2,500,000 SHARES
CYBER MERCHANTS EXCHANGE, INC. d.b.a. C-ME.com
Common Stock
BEST EFFORTS COMPENSATION AGREEMENT
Alhambra, California
March 18, 1999
Roger Fan
U.S. Pacific Financial Services
801 S. Garfield Ave., Suite #101
Alhambra, CA 91801
Dear Mr. Fan:
CYBER MERCHANTS EXCHANGE, INC.d.b.a. C-ME.Com, a California corporation (the
"Company"), proposes to issue and sell an aggregate of two million five hundred
thousand (2,500,000) shares of the Company's Common Stock, no par value per
share (the "Common Stock" or "Shares").
The Shares will be offered to the public by the Company at a price of
$6.00-$9.00 per share (the "Offering"). The purpose of this Agreement is to set
forth the understanding of the parties relating to the right of U.S. Pacific
Financial Services, a California Corporation ("Broker-Dealer") to participate in
the sale of the Shares as a broker-dealer exercising its best efforts to sell
the Shares.
Section 1. Representations and Warranties of the Company . The Company
represents and warrants to and agrees with Broker-Dealer that:
(a) A registration statement on Form SB-2 (File No. 333-41411) with
respect to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the
applicable rules and regulations (the "1933 Act Regulations") of the Securities
and Exchange Commission (the "Commission"), and has been filed with the
Commission; and such amendments to such registration statement as may have been
required prior to the date hereof have been filed with the Commission, and such
amendments have been similarly prepared. Such registration statement went
effective with the Commission on _________________, 199__ (the "Date of
Registration"). Copies of such registration statement and amendment or
amendments of each related preliminary prospectus, and the exhibits, financial
statements and schedules, as finally amended and revised, have been delivered to
you.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement became
effective and, in the event any post-effective amendment thereto becomes
effective prior to the closing of the Offering, shall also mean such
registration statement as so amended. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Shares in the form in which
it is first filed with the Commission pursuant to Rule 424(b) of the 1933 Act
Regulations or, if no filing pursuant to Rule 424(b) of the 1933 Act Regulations
is required, shall mean the form of final prospectus included in the
Registration Statement at the time such Registration Statement becomes
effective.
(b) When the Registration Statement became effective, when the
Prospectus was first filed pursuant to Rule 424(b) of the 1933 Act Regulations,
when any amendment to the Registration Statement becomes effective,
<PAGE>
and when any supplement to the Prospectus is filed with the Commission, (i) the
Registration Statement, the Prospectus and any amendments thereof and
supplements thereto will conform in all material respects with the applicable
requirements of the 1933 Act and the 1933 Act Regulations, and (ii) neither the
Registration Statement, the Prospectus nor any amendment or supplement thereto
will contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by Broker-Dealer
expressly for use in the Registration Statement.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the state of California with all
requisite corporate power and authority to own, lease and operate its properties
and the properties it proposes to own, lease and operate as described in the
Registration Statement and the Prospectus and to conduct its business as now
conducted and as proposed to be conducted as described in the Registration
Statement and the Prospectus. The Company has been duly qualified to do business
and is in good standing as a foreign corporation in each other jurisdiction in
which the ownership or leasing of its properties or the nature or conduct of its
business as now conducted or proposed to be conducted as described in the
Registration Statement and the Prospectus requires such qualification, except
where the failure to do so would not have a material adverse effect on the
Company.
(d) The Company has full legal right, power and authority to enter into
this Agreement, to issue, sell and deliver the Shares as provided herein and to
consummate the transactions contemplated herein. This Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid and
binding agreement of the Company, enforceable in accordance with its terms,
except to the extent that enforceability may be limited by bankruptcy,
insolvency, reorganization or other laws of general applicability relating to or
affecting creditors, rights, or by general equity principles and except to the
extent the indemnification provisions set forth in Section 5 of this Agreement
may be limited by federal or state securities laws or the public policy
underlying such laws.
(e) Each consent, approval, authorization, order, license, certificate,
permit, registration, designation or filing by or with any governmental agency
or body necessary for the valid authorization, issuance, sale and delivery of
the Shares, the execution, delivery and performance of this Agreement and the
consummation by the Company of the transactions contemplated hereby, has been
made or obtained and is in full force and effect.
(f) Neither the issuance, sale and delivery by the Company of the
Shares, nor the execution, delivery and performance of this Agreement nor the
consummation of the transactions contemplated hereby by the Company will
conflict with or result in a breach or violation of any of the terms and
provisions of, or (with or without the giving of notice or the passage of time
or both) constitute a default under, the Articles of Incorporation, by-laws of
the Company; any indenture, mortgage, deed of trust, loan agreement, note, bond
or other agreement or instrument to which the Company, is a party or to which
it, any of its properties or other assets; or any applicable statute, law,
judgment, decree, order, rule or regulation of any court or governmental agency
or body applicable to the Company or its property; or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property or asset
of the Company.
(g) The Shares to be issued and sold hereunder have been validly
authorized by the Company. When issued and delivered against payment therefor,
the Shares will be duly and validly issued, fully paid and non-assessable. No
preemptive rights of shareholders exist with respect to any of the Shares. No
person or entity holds a right to require or participate in the registration
under the 1933 Act of the Shares pursuant to the Registration Statement; and,
except as set forth in the Prospectus, no person holds a right to require
registration under the 1933 Act of any shares of Common Stock of the Company at
any other time. No person or entity has a right of participation or first
refusal with respect to the sale of the Shares by the Company. The form of
certificates evidencing the Shares complies with all applicable requirements of
California law.
(h) The Common Stock to be issued upon exercise of the common stock
purchase warrants to be issued to Broker-Dealer (the "Warrants") are duly
authorized, and when issued and delivered pursuant to this Agreement, will be
duly authorized, validly issued, fully paid and non-assessable and free of
pre-emptive rights of any security holder of the Company. Neither the filing of
the Registration Statement nor the offering or sale of the Shares gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock, except as described
in the Registration Statement.
<PAGE>
(i) This Agreement has been duly and validly authorized, executed and
delivered by the Company. The Company has full power and lawful authority to
issue and sell the shares of Common Stock to be sold by it upon exercise of the
Warrants (the "Warrant Shares") on the terms and conditions set forth herein,
and no consent, approval, authorization or other order of any governmental
authority is required in connection with such authorization, execution and
delivery or with the authorization, issue and sale of the Warrant Shares or the
Warrants, except as may be required under the 1933 Act or state securities laws.
(j) The Company has 5,750,000 shares (and 250,000 shares of Common
Stock reserved for issuance upon exercise of currently exercisable stock
options) of issued and outstanding shares of Common Stock, after effecting a
1-for-2 reverse stock split. The Company has no other issued and outstanding
capital stock. The Company's authorized capitalization is as set forth in the
Prospectus under the caption "Capitalization." Except as disclosed in the
Prospectus, there is no outstanding option, warrant or other right calling for
the issuance of, and no commitment, plan or arrangement to issue any shares of
capital stock of the Company or any security convertible into or exchangeable
for capital stock of the Company.
(k) The financial statements of the Company in the Registration
Statement and the Prospectus present fairly the financial position of the
Company as of the dates indicated and the results of operations and cash flows
for the periods specified, all in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods specified. The
financial statement schedule included in the Registration Statement and the
amounts in the Prospectus under the captions "Selected Financial Data" fairly
present the information shown therein and have been compiled on a basis
consistent with the financial statements included in the Registration Statement
and the Prospectus. No other financial statements or schedules are required by
Form SB-2 or otherwise to be included in the Registration Statement or the
Prospectus. The unaudited pro forma combined financial information (including
the related notes) included in the Prospectus complies as to form in all
material respects to the applicable accounting requirements of the 1933 Act and
the 1933 Act Regulations and management of the Company believes that the
assumptions underlying the pro forma adjustments are reasonable. Such pro forma
adjustments have been properly applied to the historical amounts in the
compilation of the information and such information fairly presents with respect
to the Company the pro forma financial position, results of operations and other
information purported to be shown therein at the respective dates and for the
respective periods specified.
(l) KPMG, LLP, who have examined and are reporting upon the audited
financial statements and schedules included in the Registration Statement, are,
and were during the periods covered by their Reports included in the
Registration Statement and the Prospectus, independent public accountants, as
required by the 1933 Act and the 1933 Act Regulations.
(m) The Company has not sustained, since inception, any material loss
or interference with its business from fire, explosion, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or arbitrators' or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as otherwise stated in the Registration Statement
and Prospectus, there has not been (i) any material change in the capital stock
or partnership interests, as applicable, long-term debt, obligations under
capital leases or short-term borrowings of the Company, (ii) any material
adverse change, or any development which could reasonably be seen as involving a
prospective material adverse change, in or affecting the business prospects,
properties, assets, results of operations or condition (financial or other) of
the Company, (iii) any liability or obligation, direct or contingent, incurred
or undertaken by the Company, which is material to the business or condition
(financial or other) of the Company, except for liabilities or obligations
incurred in the ordinary course of business, (iv) any declaration or payment of
any dividend or distribution of any kind on or with respect to the capital stock
of the Company, or (v) any transaction that is material to the Company except
transactions in the ordinary course of business or as otherwise disclosed in the
Registration Statement and the Prospectus.
<PAGE>
(n) The Company is not in violation of its Articles of Incorporation or
by-laws, and no default exists, and no event has occurred, nor state of facts
exists, which, with notice or after the lapse of time to cure or both, would
constitute a default in the due performance and observance of any obligation,
agreement, term, covenant, consideration or condition contained in any
indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument to which the Company is a party or by which it or any of
its properties is subject. The Company is not in violation of, or in default
with respect to, any statute, law, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as is in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of the
Company.
(o) Except as described in the Prospectus, there is not pending or, to
the knowledge of the Company, threatened any action, suit, proceeding, inquiry
or investigation against the Company, its officers and directors or to which the
properties, assets or rights of the Company are subject, before or brought by
any court or governmental agency or body or board of arbitrators, which could
result in any material adverse change in the business, prospects, properties,
assets, results of operations or condition (financial or otherwise) of the
Company.
(p) The descriptions in the Registration Statement and the Prospectus
of the contracts, leases and other legal documents therein described present
fairly the information required to be shown, and there are no contracts, leases,
or other documents of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement which are not described or filed as required. To the best knowledge of
the Company, there are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus which have not been so disclosed and properly described therein. All
agreements between the Company and third parties expressly referenced in the
Prospectus are legal, valid and binding obligations of the Company enforceable
in accordance with their respective terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equitable principles.
(q) The Company owns, possesses or has obtained all material permits,
licenses, franchises, certificates, consents, orders, approvals and other
authorizations of governmental or regulatory authorities as are necessary to own
or lease, as the case may be, and to operate its properties and to carry on its
business as presently conducted, or as contemplated in the Prospectus to be
conducted, and the Company has not received any notice of proceedings relating
to revocation or modification of any such licenses, permits, certificates,
consents, orders, approvals or authorizations.
(r) The Company owns or possesses adequate license or other rights to
use all patents, trademarks, service marks, trade names, copyrights, software
and design licenses, trade secrets, manufacturing processes, other intangible
property rights and know-how (collectively "Intangibles") necessary to entitle
it to conduct its business now, and as proposed to be conducted or operated as
described in the Prospectus, and the Company has not received notice of
infringement or of conflict with (and knows of no such infringement of or
conflict with) asserted rights of others with respect to any Intangibles which
could materially and adversely affect its business, prospects, properties,
assets, results of operation or condition (financial or otherwise).
(s) The Company has not directly or indirectly, at any time (i) made
any contribution to any candidate for political office, or failed to disclose
fully any such contribution, in violation of law or (ii) made any payment to any
state, federal or foreign, governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. To the best knowledge of
the Company, the Company's internal accounting controls and procedures are
sufficient to cause such entities to comply in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(t) To the best of the Company's knowledge, the Company's systems of
internal accounting controls taken as a whole are sufficient to meet the broad
objectives of internal accounting control insofar as those objectives pertain to
the prevention or detection of errors or irregularities in amounts that would be
material in relation to the Company's financial statements; and, to the best of
the Company's knowledge, neither the Company, nor any employee or agent thereof,
has made any payment of funds of the Company or received or retained any funds
and no funds of the Company have been set aside to be used for any payment, in
each case in violation of any law, rule or regulation.
<PAGE>
(u) The Company has filed on a timely basis all necessary federal,
state, local and foreign income and franchise tax returns required to be filed
through the date hereof and have paid all taxes shown as due thereon; and no tax
deficiency has been asserted against the Company, nor does the Company know of
any tax deficiency which is likely to be asserted against the Company which if
determined adversely to the Company, could materially adversely affect the
business, prospects, properties, assets, results of operations or condition
(financial or otherwise) of any such entity, respectively. All tax liabilities
are adequately provided for on the respective books of such entities.
(v) The Company maintains insurance (issued by insurers of recognized
financial responsibility) of the types and in the amounts generally deemed
adequate for their respective businesses and, to the best of the Company's
knowledge, consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance covering real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(w) To the best of the Company's knowledge, no general labor problem
exists or is imminent with the employees of the Company which would have a
material adverse effect on the financial position, results of operations or
business of the Company.
(x) The Company and its officers, directors or affiliates have not
taken and will not take, directly or indirectly, any action designed to, or that
might reasonably be expected to, cause or result in or constitute the
stabilization or manipulation of any security of the Company or to facilitate
the sale or resale of the Shares in violation of any law, rule or regulation.
(y) The Company has not incurred any liability for a fee, commission or
other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than as
contemplated hereby.
(z) Except as otherwise disclosed in the Prospectus, the Company has
not authorized or conducted nor has knowledge of the generation, transportation,
storage, presence, use, treatment, disposal, release, or other handling of any
hazardous substance, hazardous waste, hazardous material, hazardous constituent,
toxic substance, pollutant, contaminant, asbestos, radon, polychlorinated
biphenyls ("PCBs"), petroleum product or waste (including crude oil or any
fraction thereof), natural gas, liquefied gas, synthetic gas or other material
defined, regulated, controlled or potentially subject to any remediation
requirement under any environmental law (collectively, "Hazardous Materials"),
on, in, under or affecting any real property currently leased or owned or by any
means controlled by the Company (the "Real Property") except as in material
compliance with applicable laws; to the knowledge of the Company, the Real
Property and the Company's operations with respect to the Real Property are in
compliance with all federal, state and local laws, ordinances, rules,
regulations and other governmental requirements relating to pollution, control
of chemicals, management of waste, discharges of materials into the environment,
health, safety, natural resources, and the environment (collectively,
"Environmental Laws"), and the Company has, and is in compliance with, all
licenses, permits, registrations and government authorizations necessary to
operate under all applicable Environmental Laws. Except as otherwise disclosed
in the Prospectus, the Company has not received any written or oral notice from
any governmental entity or any other person and there is no pending or
threatened claim, litigation or any administrative agency proceeding that:
alleges a violation of any Environmental Laws by the Company; alleges that the
Company is a liable party or a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
S 9601, et seq., or any state superfund law; has resulted in or could result in
the attachment of an environmental lien on any of the Real Property; or, alleges
that the Company is liable for any contamination of the environment,
contamination of the Real Property, damage to natural resources, property
damage, or personal injury based on their activities or the activities of their
predecessors or third parties (whether at the Real Property or elsewhere)
involving Hazardous Materials whether arising under the Environmental Laws,
common law principles or other legal standards.
(aa) The Company will not become as a result of the transactions
contemplated hereby, or will not conduct its business in a manner in which it
would become, "an investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended (the "Investment Company Act").
(bb) No relationship, direct or indirect, exists between or among any
of the Company or any affiliate of the Company, on the one hand, and any
director, officer, stockholder, customer or supplier of the Company or any
<PAGE>
affiliate of the Company, on the other hand, that is required by the 1933 Act or
by the 1933 Act Regulations to be described in the Registration Statement or the
Prospectus which is not so described or is not adequately described.
(cc) All offers and sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or
exempt from the registration requirements of the 1933 Act and were duly
registered in accordance with or the subject of an available exemption from
registration under the applicable blue sky laws. The Company has not effected
any sales of securities that would be required to be disclosed in response to
Item 701 of Regulation S-K that are not disclosed in the Registration Statement.
Any certificate signed by any officer of the Company on behalf of the
Company and delivered to you or to counsel for the Representative shall be
deemed a representation and warranty of the Company to the Representative as to
the matters covered thereby.
Section 2. Certain Covenants of the Company. The Company covenants and
agrees with Broker-Dealer, to use its best efforts to cause the Company to
perform as follows:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective (if not yet effective at the date and time that
this Agreement is executed and delivered by the parties hereto). The Company
will notify you immediately, and confirm the notice in writing, (i) when the
Registration Statement, or any post-effective amendment to the Registration
Statement, shall have become effective, or any supplement to the Prospectus or
any amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission to amend
the Registration Statement or amend or supplement the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution or threatening of any proceeding for any
such purposes. The Company will use every reasonable effort to prevent the
issuance of any such stop order or of any order preventing or suspending such
use and, if any such order is issued, to obtain the withdrawal thereof at the
earliest possible moment.
(b) The Company will not at any time file or make any amendment to the
Registration Statement, or any amendment or supplement to the Prospectus if you
shall not have previously been advised and furnished a copy thereof a reasonable
time prior to the proposed filing, or if you or your counsel reasonably object
to such amendment or supplement.
(c) The Company will deliver to you, at the Company's expense, from
time to time as requested, such number of copies of the Prospectus (as
supplemented or amended) as you may reasonably request. If the delivery of a
Prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Shares and if at such time any events shall have occurred as result of which
the Prospectus as then amended or supplemented would include an untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were made
when such Prospectus is delivered not misleading, or, if for any reason it shall
be necessary during such same period to amend or supplement the Prospectus in
order to comply with the 1933 Act, the Company will notify you and upon your
request prepare and furnish without charge to you and to any dealer in
securities as many copies, as you may from time to time reasonably request, of
an amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance.
(d) The Company will use its best efforts to qualify the Shares for
offering and sale under the applicable securities laws of such states and other
jurisdictions as you may designate and to maintain such qualifications in effect
for as long as may be necessary to complete the distribution of the Shares;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified or to make any undertakings in
respect of doing business in any jurisdiction in which it is not otherwise so
subject. The Company will file such statements and reports as may be required by
the laws of each jurisdiction in which the Shares have been qualified as above
provided.
(e) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the end of the fiscal
quarter first occurring after the first anniversary of the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the 1933 Act
Regulations), an earnings statement (in reasonable detail but which need not be
audited) complying with the provisions of Section 11(a) of the 1933 Act and
<PAGE>
Rule 158 thereunder and covering a period of at least 12 months beginning after
the effective date of the Registration Statement.
(f) The Company will use the net proceeds received by it from the sale
of the Shares substantially in the manner specified in the Prospectus under the
caption "Use of Proceeds."
(g) The Company will furnish to its security holders of record, as soon
as practicable after the end of each respective period, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year. During a period of five years after the date hereof, the
Company will furnish to you: (i) concurrently with furnishing such reports to
its security holders, statements of operations of the Company for each of the
first three quarters in the form furnished to the Company's security holders;
(ii) concurrently with furnishing to its security holders, a balance sheet of
the Company as of the end of such fiscal year, together with statements of
operations, of cash flows and of security holders, equity of the Company for
such fiscal year, accompanied by a copy of the certificate or report thereon of
independent public accountants; (iii) as soon as they are available, copies of
all reports (financial or otherwise) mailed to security holders; (iv) as soon as
they are available, copies of all reports and financial statements furnished to
or filed with the Commission, any securities exchange or the NASD; (v) every
material press release in respect of the Company or its affairs which is
released or prepared by the Company, and (vi) any additional information of a
public nature concerning the Company or its business that you may reasonably
request. During such five-year period, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts of the Company are
consolidated with any subsidiaries, and shall be accompanied by similar
financial statements for any significant subsidiary that is not so consolidated.
(h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(i) The Company will use its best efforts to acquire the inclusion of
its shares of Common Stock on the National Association of Securities Dealers
Automated Quotation system ("NASDAQ") and the American Stock Exchange ("AMEX")
within six months from the date hereof.
(j) The Company is familiar with the Investment Company Act and the
rules and regulations thereunder, and has in the past conducted its affairs, and
will in the future conduct its affairs, in such a manner so as to ensure that
the Company was not and will not be an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act.
(k) The Company will not, and will use its best efforts to cause its
officers, directors and affiliates not to, (i) take, directly or indirectly
prior to termination of the distribution of the Shares contemplated by this
Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which may cause or result in, or which might in the
future reasonably be expected to cause or result in, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of the Shares or (iii) pay or agree to pay
to any person any compensation for soliciting any order to purchase any other
securities of the Company which, in any such case, is in violation of any law,
rule or regulation.
(l) The Company will file timely and accurate reports on Form SR with
the Commission in accordance with Rule 463 of the 1933 Act Regulations or any
successor provision.
(m) Prior to the closing of the Offering, the Company will not, and
will use its best efforts to cause any affiliate of the Company not to issue a
press release or other official communication directly or indirectly, nor hold a
press conference with respect to the Company or with respect to the financial
condition, results of operations, business, properties, assets or liabilities of
the Company, or the offering of the Shares, without your prior written input
within 72 hours which consent shall not be unreasonably withheld.
(n) The Company will notify you promptly of any material adverse change
affecting any of its representations, warranties, agreements and indemnities
herein at any time prior to the closing of the Offering and take such steps as
may be reasonably requested by you either to remedy or publicize the same, or
both.
<PAGE>
(o) The Company will reserve and keep available that maximum number of
its authorized but unissued shares of Common Stock which are issuable upon
exercise of the Warrants outstanding from time to time.
(p) On the last day that this Agreement is in full force and effect
after the execution hereof, the Company shall execute and deliver to you the
Warrants you have earned. The Warrants will be substantially in the form of the
Stock Purchase Warrant filed as an exhibit to the Registration Statement, a copy
of which is attached hereto as Exhibit "A".
(q) For a period of five years from the Effective Date, the Company, at
its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit and without issuing any opinion thereon)
the Company's financial statements for each of the first three (3) fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's 10-Q quarterly report and the mailing of quarterly
financial information to Stockholders.
(r) As promptly as practicable after the closing of the Offering, the
Company will prepare, at its own expense, hard cover "bound volumes" relating to
the offering, and will distribute such volumes to the individuals designated by
you.
Section 3. Engagement & Allotment, Term, Reporting, Compensation and
Payment of Expenses.
(a) Engagement & Allotment.
(i) Subject to the terms and conditions of this Agreement, the
Company hereby engages Broker-Dealer, on a "best efforts" basis, as the
Company's nonexclusive agent in connection with the sale of up to 300,000 Shares
(the "Allotted Shares"). The number of Allotted Shares may be increased or
decreased at the sole discretion of the Company upon three (3) days written
notice to Broker-Dealer. Broker-Dealer will keep precise records of all
purchases of stock, including the amount of the purchase, the exact title in
which the Shares are to be issued and the address of the purchaser. The Shares
will be issued promptly by the Company and, in no event, later than fifteen (15)
days after notification by Broker-Dealer of the purchase with the information
set forth above. The maximum amount of each sale shall be 8,800 shares. The
minimum amount of each sale shall be 300 shares.
(ii) As to residents of the State of California who wish to
purchase in excess of $2,500 worth of the Shares, Broker-Dealer will take
appropriate measures to assure that the purchaser is "suitable" by having a
minimum net worth (excluding home equity, home furnishings and automobiles) of
at least $250,000 and a minimum gross income of $65,000 during the current tax
year; or, in the alternative, a minimum net worth of $500,000. In either case,
the amount of a purchaser's investment may not exceed ten percent (10%) of the
purchaser's net worth.
(iii) Broker-Dealer shall use its best efforts to assist the
Company in making sales of the shares pursuant to the Offering. Broker-Dealer
makes no representations as to the amount of Shares it will be able to sell.
There is no firm commitment to sell any certain amount of the Shares by
Broker-Dealer.
(viii) Broker-Dealer will only offer the Company's stock in
those states in which Broker-Dealer and its brokers are registered.
(ix) Broker-Dealer agrees to become a market maker for the
Company when legally permitted by its restrictive agreement with the NASD and
the SEC and when approved by the Broker-Dealer's Board of Directors. At such
time, Broker-Dealer agrees to assist with any filing requirements. Broker-Dealer
does not currently act as a market maker and has no immediate plans to act as a
market maker.
(b) Term. The term of this Agreement shall commence as of the effective
date hereof (the "Effective Date") and shall continue in full force and effect
for a period of up to thirty (30) days from the Date of Registration as set
forth in Section 1(a), above. This Agreement may be extended for additional
period of 30 days upon the mutual written consent of both parties.
(c) Reporting. Broker-Dealer shall offer the Shares pursuant to the
Prospectus. Payment for the Shares shall be made by the Purchaser directly to
the Escrow Agent as set forth in the Prospectus. The commission, as set forth in
Section 3(d), will be paid by the Company or deducted from the proceeds of the
sale when subscriptions have been accepted for at least the Minimum amount as
set forth in the Prospectus and such Minimum subscriptions
<PAGE>
are fully paid. Said commission and any other amounts due to Broker-Dealer
hereunder shall be paid every Friday once the Minimum is reached. All amounts
due shall be calculated as of the close of business on the immediately prior
Thursday. If the Company or any other entity makes sales without Broker-Dealer,
no commission will be due to Broker-Dealer on such sales.
(f) Compensation.
The Company shall pay Broker-Dealer as follows:
(i) A commission of 7% based on the total offering amount of
the Allotted Shares as set forth in Section 3(a)(i). The commission will be paid
by the Company or deducted from the proceeds of the sale when subscriptions have
been accepted for at least the Minimum amount as set forth in the Prospectus and
such Minimum subscriptions are fully paid. If more than the Minimum is sold
during the offering then commissions relating to such additional Shares will be
paid out of escrow when monies for the Shares subscribed to are distributed to
the Issuer.
(ii) The Company reserves the right to review all
subscriptions for securities law compliance and to make the final determination
whether to accept or reject subscriptions. No selling commissions will be
payable with respect to subscriptions which are rejected by the Company.
(iii) As an additional incentive for Broker-Dealer to perform
its services in a timely manner, Warrants in the form attached hereto as Exhibit
"A" shall be issued to Broker-Dealer or its designees as follows:
1. A warrant to purchase up to five percent (5%) of the
Allotted Shares, equal to 15,000 shares of stock with
an exercise price of $9.90 - 14.85 per share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System.
2. In both instances, as set forth above, the Warrants
will be granted pro rata to the sale of the Shares by
Broker-Dealer. Assuming all 300,000 Shares available
for sale are sold by Broker-Dealer, 15,000 Warrants
will be issued. If less than 300,000 Shares are sold
by Broker-Dealer, Warrants will be issued on a pro
rata basis in accordance with the actual number of
Shares sold. For example, should 150,000 Shares be
sold, Broker-Dealer will be entitled to 7,500
Warrants at a price of $9.90 - 14.85 per Share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System. The Shares obtained upon exercise of the
Warrants will be "restricted" stock subject to the
trading provisions of Rule 144 promulgated by the
Commission.
(e) Payment of Expenses. The Company will pay and bear all costs, fees
and expenses incident to the performance of its obligations under this Agreement
(excluding fees and expenses of your counsel), including (a) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits), as originally filed and as amended, the Prospectus and
any amendments or supplements thereto, and the cost of furnishing copies thereof
to you, (b) the preparation of any Selected Dealers Agreement, the certificates
representing the Shares, the Blue Sky Memoranda and any instruments relating to
any of the foregoing, (c) the issuance and delivery of the Shares to the
purchasers, including any transfer taxes payable upon the sale of the Shares,
(d) the fees and disbursements of the Company's counsel and accountants, (e) the
qualification of the Shares under the applicable securities laws in accordance
with Section 2(e) of this Agreement and any filing for review of the Offering
with the NASD, including filing fees and fees and disbursements in connection
therewith and in connection with the Blue Sky Memoranda, (f) all costs, fees and
expenses in connection with the application for inclusion of the Shares on
NASDAQ, (g) costs related to travel and lodging incurred by the Company and its
representatives relating to meetings with and presentations to prospective
purchasers of the Shares reasonably determined by you to be necessary or
desirable to effect the sale of the Shares to the public and (i) all other costs
and expenses incident to the performance of the Company's obligations hereunder
that are not otherwise specifically provided for in this section.
<PAGE>
Section 4. Opinion of Counsel and Accountants and other Conditions.
(a) As a condition to the performance of your duties and obligations
hereunder, you shall have received a favorable opinion of Evers & Hendrickson,
LLP ("Evers & Hendrickson") counsel for the Company in form and substance
satisfactory to counsel for you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
California with all requisite corporate power and authority to own, lease and
operate its properties and the properties it proposes to own, lease and operate
as described in the Registration Statement and the Prospectus and to conduct its
business as now conducted and as proposed to be conducted as described in the
Registration Statement and the Prospectus. To the best of such counsel's
knowledge, there are no other jurisdictions in which the ownership or leasing of
the Company's properties or the nature or conduct of its business as now
conducted or proposed to be conducted as described in the Registration Statement
and the Prospectus requires such qualification, except where the failure to do
so would not have a material adverse effect on the Company. To such counsel's
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity (other than any indirect control that
may be implied by virtue of Mr. Yuan and certain other officers of the Company
serving as officers and/or directors of other companies).
(ii) The Company has full legal right, power and authority to
enter into, deliver and perform this Agreement, to issue, sell and deliver the
Shares as provided herein and to consummate the transactions contemplated
herein. This Agreement has been duly authorized, executed and delivered by the
Company and, assuming due authorization, execution and delivery by the other
parties hereto, constitutes a valid and binding agreement of the Company,
enforceable in accordance with its terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equity principles and except to the extent that enforcement of the
indemnification provisions set forth in Section 5 of this Agreement may be
limited by federal or state securities laws or the public policy underlying such
laws.
(iii) Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary for the valid authorization, issuance,
sale and delivery of the Shares and the execution, delivery and performance of
this Agreement has been made or obtained and is in full force and effect.
(iv) Neither the issuance, sale and delivery by the Company of
the Shares to purchasers thereof, nor the execution, delivery and performance of
this Agreement, nor the consummation of the transactions contemplated hereby or
thereby by the Company will violate any of the terms and provisions of, or
constitute a default under, any of the Articles of Incorporation or by-laws of
the Company, or, to such counsel's knowledge, under any material indenture,
mortgage, trust, deed of trust, loan agreement, note, lease or other agreement
or instrument to which the Company is a party or to which any of its properties
or other assets is subject; or, to such counsel's knowledge, violate any
applicable statute, judgment, decree, order, rule or regulation of any court or
governmental agency or body; or, to such counsel's knowledge, result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of any of the foregoing.
(v) The description of the Company's authorized capital stock
contained in the Registration Statement and the Prospectus under the caption
"Capital Stock" meets the requirements of Item 12 of Form SB-2 under the 1933
Act, and the Common Stock conforms in all material respects as to legal matters
to the description thereof contained in the Registration Statement and the
Prospectus.
(vi) The Shares to be issued pursuant to the Offering have
been validly authorized by the Company. When issued and delivered, the Shares
will be validly issued, fully paid and nonassessable. No preemptive rights of
shareholders exist with respect to any of the Shares. To such counsel's
knowledge, no person or entity holds a right to require or participate in the
registration under the 1933 Act of the Shares pursuant to the Registration
Statement; and, except as set forth in the Prospectus, no person holds a right
to require registration under the 1933 Act of any shares of Common Stock of the
Company at any other time. To such counsel's knowledge, no person or entity has
a right of participation or first refusal with respect to the sale of the Shares
by the Company. The form of certificates evidencing the Shares comply with all
applicable requirements of California law.
<PAGE>
(vii) The Company has an authorized capitalization as set
forth in the Prospectus under the caption "Capital Stock" as of the date
therein. At the date of this Agreement, after effecting a 1-for-2 reverse stock
split, the Company has 5,750,000 shares of issued and outstanding stock (and
250,000 shares of Common Stock reserved for issuance upon exercise of currently
exercisable stock options), all of which is Common Stock. The Common Stock
conforms in all material respects to the description of the Common Stock
contained in the Prospectus. To the knowledge of such counsel, except as
disclosed in the Prospectus, there is no outstanding option, warrant or other
right calling for the issuance of, and no commitment, plan or arrangement to
issue, any shares of capital stock of the Company or any security convertible
into or exchangeable for capital stock of the Company.
(viii) To the knowledge of such counsel, the Company is not in
violation of its Articles of Incorporation or by-laws, and no material default
exists and no event has occurred which, with notice or after the lapse of time
to cure or both, would constitute a material default in the due performance and
observance of any obligation, agreement, term, covenant or condition contained
in any indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument known to such counsel to which any such entity is a
party or by which any such entity or any of its properties is subject. To the
knowledge of such counsel, the Company is not in violation of, or in default
with respect to, any statute, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of each such
entity, respectively.
(ix) To such counsel's knowledge and except as described in
the Prospectus, there is not pending or threatened, any action, suit,
proceeding, inquiry or investigation against the Company or any of its officers
and directors or to which the properties, assets or rights of the Company or
such persons are subject, which, if determined adversely to the Company or any
such persons, would individually or in the aggregate have a material adverse
effect on the financial position, results of operations or business of any such
entity, respectively.
(x) The descriptions in the Registration Statement and the
Prospectus of the contracts, leases and other legal documents therein described
present fairly the information required to be shown and there are no contracts,
leases or other documents known to such counsel of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement which are not described or filed as
required. There are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company, known
to such counsel, of a character required to be disclosed in the Registration
Statement or the Prospectus which have not been so disclosed and properly
described therein. To such counsel's knowledge, all agreements between the
Company, and third parties expressly referenced in the Prospectus are legal,
valid and binding obligations of the Company, enforceable in accordance with
their respective terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, reorganization or other laws of general applicability
relating to or affecting creditors' rights and to general equitable principles.
(xi) The Registration Statement has become effective under the
1933 Act and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending or contemplated under the
1933 Act. Other than financial statements and other financial and operating data
and schedules contained therein, as to which counsel need express no opinion,
the Registration Statement, the Prospectus and any amendment or supplement
thereto, appear on their face to conform as to form in all material respects
with the requirements of Form SB-2 under the 1933 Act Regulations.
(xii) The Registration Statement, or any further amendment
thereto made prior to the date hereof, on its effective date, contained or
contains no untrue statement of a material fact and did not omit or does not
omit to state any material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made not misleading, or neither the Prospectus nor any amendment or supplement
thereto, as of its issue date, contained or contains any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading (provided that such counsel need express no belief regarding the
financial statements and related schedules and other financial data contained in
the Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
(xiii) The Company is not an "investment company," or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act.
<PAGE>
(xiv) The descriptions in the Prospectus of statutes,
regulations, legal or governmental proceedings are accurate and present fairly a
summary of the information required to be shown under the 1933 Act and the 1933
Act Regulations. The information in the Prospectus under the caption
"Capitalization," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel, is correct and presents fairly
the information required to be disclosed therein under the 1933 Act and the 1933
Act Regulations.
(xv) To such counsel's knowledge, no relationship, direct or
indirect, exists between or among any of the Company or any affiliate of the
Company, on the one hand, and any director, officer, stockholder, customer or
supplier of the Company or any affiliate of the Company, on the other hand, that
is required by the 1933 Act or by the 1933 Act Regulations to be described in
the Registration Statement or the Prospectus which is not so described or is not
adequately described.
(xvi) All sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or, to
the knowledge of such counsel, effected in a manner which was exempt from the
registration requirements of the 1933 Act and were duly registered in accordance
with or the subject of an available exemption from the registration requirements
of the applicable blue sky laws. To the knowledge of such counsel, the Company
has not effected any sales of securities that would be required to be disclosed
in response to Item 701 of Regulation S-K that are not disclosed in the
Registration Statement.
In rendering the foregoing opinion, such counsel may rely on the following:
(A) as to matters involving the application of laws other than
the laws of the United States and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the extent
specified in such opinion, upon an opinion or opinions (in form and
substance reasonably satisfactory to Underwriters' counsel) of other
counsel familiar with the applicable laws,
(B) as to matters of fact, to the extent they deem
appropriate, on certificates of responsible officers of the Company and
certificates or other written statements of officers or departments of
various jurisdictions having custody of documents respecting the
existence or good standing of the Company provided that copies of all
such opinions, statements or certificates shall be delivered to your
counsel. The opinion of counsel for the Company shall state that the
opinion of any other counsel, or certificate or written statement, on
which such counsel is relying is in form satisfactory to such counsel
and that you and they are justified in relying thereon.
(b) At the time that this Agreement is executed by the Company, you
shall have received from KPMG, LLP a letter, dated the date hereof, in form and
substance satisfactory to you, confirming that they are independent public
accountants with respect to the Company within the meanings of the 1933 Act and
1933 Act Regulations, and stating in effect that:
(i) in their opinion, the financial statements and any
supplementary financial information and schedule included in the Registration
Statement and covered by their opinion therein comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
1933 Act Regulations;
(ii) on the basis of limited procedures (set forth in detail
in such letter and made in accordance with such procedures as may be specified
by you) not constituting an audit in accordance with generally accepted auditing
standards, consisting of (but not limited to) a reading of the latest available
internal unaudited financial statements of the Company, a reading of the minute
books of the Company, inquiries of officials of the Company responsible for
financial and accounting matters, and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that caused them to
believe that:
(A) the unaudited financial statements and supporting schedule
and other unaudited financial data of the Company included in the
Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act
and the 1933 Act Regulations or are not presented in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited financial statements from which
such data and items were derived, and any such unaudited data and items
were not determined on a basis
<PAGE>
substantially consistent with the basis for the corresponding amounts
in the audited financial statements included in the Prospectus;
(C) any unaudited pro forma financial information included in
the Prospectus does not comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations or the pro forma adjustments have not been properly applied
to historical amounts in the compilation of that information; and
(D) at a specified date not more than five days prior to the
date of delivery of such letter, there was any change in the capital
stock or long-term debt or obligations under capital leases of the
Company, or there were any decreases in net current assets or net
assets, or shareholders' equity, from that set forth in the Company's
balance sheet at December 31, 1998, except as described in such letter;
and
(iii) in addition to the procedures referred to in clause (ii)
above and the examination referred to in their Reports included in the
Registration Statement, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information specified
by you which are derived from the general accounting records of the Company,
which appear in the Registration Statement or the exhibits or schedules thereto
and are specified by you, and have compared such amounts, percentages and
financial information with the accounting records of the Company and with
material derived from such records and have found them to be in agreement.
(c) At the time of the closing of the Offering, you shall have received
from KPMG, LLP, a letter, in form and substance satisfactory to you and dated as
of the date of the closing of the Offering, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (b) above, except
that the specified date referred to shall be a date not more than five days
prior to the date of closing of the Offering.
(d) The NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to such offering, such terms or your
participation in the same.
Section 5. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless Broker-Dealer and each
person, if any, who controls Broker-Dealer within the meaning of the 1933 Act or
the 1934 Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which it or such controlling person may become subject under the 1933
Act, the 1934 Act or insofar as such losses, claims, damages or liabilities in
respect thereof arise out of or are based upon any breach of any warranty or
covenant of the Company herein contained or by reason of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and will reimburse Broker-Dealer for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon and in conformity with written information furnished to the
Company by Broker-Dealer expressly for use therein. In addition to its other
obligations under this Section 5 (a), the Company agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5 (a), it will
reimburse Broker-Dealer on a monthly basis for all reasonable legal and other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse Broker-Dealer for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. Any such interim reimbursement payments that
are not made to Broker-Dealer within 30 days of a request for reimbursement
shall bear interest at the prime rate (or reference rate or other commercial
lending rate for borrowers of the highest credit standing) published from time
to time by The Wall Street Journal (the "Prime Rate") from the date of such
request.
<PAGE>
The Company will not, without the prior written consent of Broker-Dealer, settle
or compromise or consent to the entry of any judgment in any pending or
threatened action or claim or related cause of action or portion of such cause
of action in respect of which indemnification may be sought hereunder (whether
or not Broker-Dealer is a party to such action or claim), unless such
settlement, compromise or consent includes an unconditional release of
Broker-Dealer from all liability arising out of such action or claim (or related
cause of action or portion thereof).
The indemnity agreement in this Section 5(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls Broker-Dealer within the meaning of the 1933 Act or the 1934 Act to
the same extent as such agreement applies to Broker-Dealer.
(b) Broker-Dealer will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement or the Prospectus or
any such amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by Broker-Dealer expressly for use
therein; and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action. In addition to its other
obligations under this Section 5(b), Broker-Dealer agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5(b), it will reimburse
the Company on a monthly basis for all reasonable legal and other expenses
incurred in connection with investigating or defending any such claim, action
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of its obligation
to reimburse the Company for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. Any such interim reimbursement payments that are not made to the
Company within 30 days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request. This indemnity agreement shall be in
addition to any liabilities that Broker-Dealer may otherwise have.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; no indemnification provided for in Section 5(a) or 5(b)
shall be available to any party who shall fail to give notice as provided in
this Section 5(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by the
failure to give such notice, but the omission so to notify the indemnifying
party will not relieve the indemnifying party from any liability that it may
have to any indemnified party otherwise than under Section 5. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation, except
that if the indemnified party has been advised by counsel in writing that there
are one or more defenses available to the indemnified party which are different
from or additional to those available to the indemnifying party, then the
indemnified party shall have the right to employ separate counsel and in that
event the reasonable fees and expenses of such separate counsel for the
indemnified party shall be paid by the indemnifying party; provided, however,
that if the indemnifying party is the Company, the Company shall only be
obligated to pay the reasonable fees and expenses of a single law firm (and any
reasonably necessary local counsel) employed by all of the indemnified parties
and the persons referred to in Section 5(a) hereof. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
<PAGE>
(d) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Section 5(a) and 5(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the indemnifying parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the National
Association of Securities Dealers, Inc. Any such arbitration must be commenced
by service of a written demand for arbitration or a written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a) and 5(b) hereof
and will not resolve the ultimate propriety or enforceability of the obligation
to indemnify for expenses that is created by the provisions of Sections 5(a) and
5(b).
(e) In order to provide for just and equitable contribution in
circumstances under which the indemnity provided for in this Section 5 is for
any reason judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the right of appeal) to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Company on the one hand,
and Broker-Dealer on the other shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity incurred by the Company and Broker-Dealer, as incurred, in such
proportions that (a) Broker-Dealer is responsible pro rata for that portion
represented by the commission percentage appearing on the cover page of the
Prospectus bears to the initial public offering price (before deducting
expenses) appearing thereon, and (b) the Company is responsible for the balance,
provided, however, that no person guilty of fraudulent misrepresentations
(within the meaning of Section 12(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation; provided, further, that if the allocation provided above is
not permitted by applicable law, the Company, on the one hand and Broker-Dealer
on the other shall contribute to the aggregate losses in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company on the one hand, and Broker-Dealer on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
on the one hand, or by Broker-Dealer on the other hand, and the parties,
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and Broker-Dealer agree that it
would not be just and equitable if contributions pursuant to this Section 5(e)
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 5(e). The amount paid or payable by a party as a result of the
losses, claims, damages or liabilities referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending such action or claim.
Section 6. Representations, Warranties and Agreements to Survive
Delivery. The representations, warranties, indemnities, agreements and other
statements of the Company or their respective officers set forth in or made
pursuant to this Agreement will remain operative and in full force and effect
will survive the termination of this Agreement.
Section 7. Notices.
All notices or communications required or permitted hereunder shall be
in writing and shall be mailed or delivered as follows:
If to the Company: CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
320 S. Garfield Avenue, Suite 318
Alhambra, CA 91801
Attention: Frank Yuan
If to Broker-Dealer: (a) U.S. Pacific Financial Services
801 S. Garfield Ave., Suite #101
Alhambra, CA 91801
Attention: Roger Fan
<PAGE>
Section 8. Miscellaneous. This Agreement contains and constitutes the
entire agreement between the parties hereto and supersedes all prior written or
oral and all contemporaneous agreements or negotiations with respect to the
subject matter hereof. The Agreement may only be amended, modified or waived in
writing signed by both parties hereto. This Agreement shall be governed in
accordance with the laws of the State of California; without reference to the
conflict of law provisions thereof. This Agreement may be executed in
counterparts.
Section 9. Governing Law and Time. This Agreement shall be governed by
the laws of the State of California. Specified time of the day refers to United
States Pacific Time. Time shall be of the essence of this Agreement.
Section 10. Counterparts. This Agreement may be executed in one or more
counterparts and when a counterpart has been executed by each party, all such
counterparts taken together shall constitute one and the same agreement.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument will become a binding agreement among the Company and Broker-Dealer
in accordance with its terms.
Very truly yours,
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
By: ____________________________________________
Name: Frank Yuan
Title: President
Confirmed and accepted as of the date first above written:
U.S. Pacific Financial Services
By: _____________________________________
Name: Roger Fan
Title: President
2,500,000 SHARES
CYBER MERCHANTS EXCHANGE, INC. d.b.a. C-ME.com
Common Stock
BEST EFFORTS COMPENSATION AGREEMENT
Alhambra, California
April 13, 1999
Marcus Hurlburt
Travis Morgan Securities
18952 MacArthur Blvd., Suite 315
Irvine, CA 92612
Dear Mr. Hurlburt:
CYBER MERCHANTS EXCHANGE, INC.d.b.a. C-ME.Com, a California corporation (the
"Company"), proposes to issue and sell an aggregate of two million five hundred
thousand (2,500,000) shares of the Company's Common Stock, no par value per
share (the "Common Stock" or "Shares").
The Shares will be offered to the public by the Company at a price of
$6.00-$9.00 per share (the "Offering"). The purpose of this Agreement is to set
forth the understanding of the parties relating to the right of Travis Morgan
Securities, a California Corporation ("Broker-Dealer") to participate in the
sale of the Shares as a broker-dealer exercising its best efforts to sell the
Shares.
Section 1. Representations and Warranties of the Company . The Company
represents and warrants to and agrees with Broker-Dealer that:
(a) A registration statement on Form SB-2 (File No. 333-41411) with
respect to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the
applicable rules and regulations (the "1933 Act Regulations") of the Securities
and Exchange Commission (the "Commission"), and has been filed with the
Commission; and such amendments to such registration statement as may have been
required prior to the date hereof have been filed with the Commission, and such
amendments have been similarly prepared. Such registration statement went
effective with the Commission on _________________, 199__ (the "Date of
Registration"). Copies of such registration statement and amendment or
amendments of each related preliminary prospectus, and the exhibits, financial
statements and schedules, as finally amended and revised, have been delivered to
you.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement became
effective and, in the event any post-effective amendment thereto becomes
effective prior to the closing of the Offering, shall also mean such
registration statement as so amended. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Shares in the form in which
it is first filed with the Commission pursuant to Rule 424(b) of the 1933 Act
Regulations or, if no filing pursuant to Rule 424(b) of the 1933 Act Regulations
is required, shall mean the form of final prospectus included in the
Registration Statement at the time such Registration Statement becomes
effective.
<PAGE>
(b) When the Registration Statement became effective, when the
Prospectus was first filed pursuant to Rule 424(b) of the 1933 Act Regulations,
when any amendment to the Registration Statement becomes effective, and when any
supplement to the Prospectus is filed with the Commission, (i) the Registration
Statement, the Prospectus and any amendments thereof and supplements thereto
will conform in all material respects with the applicable requirements of the
1933 Act and the 1933 Act Regulations, and (ii) neither the Registration
Statement, the Prospectus nor any amendment or supplement thereto will contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by Broker-Dealer
expressly for use in the Registration Statement.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the state of California with all
requisite corporate power and authority to own, lease and operate its properties
and the properties it proposes to own, lease and operate as described in the
Registration Statement and the Prospectus and to conduct its business as now
conducted and as proposed to be conducted as described in the Registration
Statement and the Prospectus. The Company has been duly qualified to do business
and is in good standing as a foreign corporation in each other jurisdiction in
which the ownership or leasing of its properties or the nature or conduct of its
business as now conducted or proposed to be conducted as described in the
Registration Statement and the Prospectus requires such qualification, except
where the failure to do so would not have a material adverse effect on the
Company.
(d) The Company has full legal right, power and authority to enter into
this Agreement, to issue, sell and deliver the Shares as provided herein and to
consummate the transactions contemplated herein. This Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid and
binding agreement of the Company, enforceable in accordance with its terms,
except to the extent that enforceability may be limited by bankruptcy,
insolvency, reorganization or other laws of general applicability relating to or
affecting creditors, rights, or by general equity principles and except to the
extent the indemnification provisions set forth in Section 5 of this Agreement
may be limited by federal or state securities laws or the public policy
underlying such laws.
(e) Each consent, approval, authorization, order, license, certificate,
permit, registration, designation or filing by or with any governmental agency
or body necessary for the valid authorization, issuance, sale and delivery of
the Shares, the execution, delivery and performance of this Agreement and the
consummation by the Company of the transactions contemplated hereby, has been
made or obtained and is in full force and effect.
(f) Neither the issuance, sale and delivery by the Company of the
Shares, nor the execution, delivery and performance of this Agreement nor the
consummation of the transactions contemplated hereby by the Company will
conflict with or result in a breach or violation of any of the terms and
provisions of, or (with or without the giving of notice or the passage of time
or both) constitute a default under, the Articles of Incorporation, by-laws of
the Company; any indenture, mortgage, deed of trust, loan agreement, note, bond
or other agreement or instrument to which the Company, is a party or to which
it, any of its properties or other assets; or any applicable statute, law,
judgment, decree, order, rule or regulation of any court or governmental agency
or body applicable to the Company or its property; or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property or asset
of the Company.
(g) The Shares to be issued and sold hereunder have been validly
authorized by the Company. When issued and delivered against payment therefor,
the Shares will be duly and validly issued, fully paid and non-assessable. No
preemptive rights of shareholders exist with respect to any of the Shares. No
person or entity holds a right to require or participate in the registration
under the 1933 Act of the Shares pursuant to the Registration Statement; and,
except as set forth in the Prospectus, no person holds a right to require
registration under the 1933 Act of any shares of Common Stock of the Company at
any other time. No person or entity has a right of participation or first
refusal with respect to the sale of the Shares by the Company. The form of
certificates evidencing the Shares complies with all applicable requirements of
California law.
(h) The Common Stock to be issued upon exercise of the common stock
purchase warrants to be issued to Broker-Dealer (the "Warrants") are duly
authorized, and when issued and delivered pursuant to this Agreement, will be
duly authorized, validly issued, fully paid and non-assessable and free of
pre-emptive rights of any security holder of the Company. Neither the filing of
the Registration Statement nor the offering or sale of the
<PAGE>
Shares gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any shares of Common Stock,
except as described in the Registration Statement.
(i) This Agreement has been duly and validly authorized, executed and
delivered by the Company. The Company has full power and lawful authority to
issue and sell the shares of Common Stock to be sold by it upon exercise of the
Warrants (the "Warrant Shares") on the terms and conditions set forth herein,
and no consent, approval, authorization or other order of any governmental
authority is required in connection with such authorization, execution and
delivery or with the authorization, issue and sale of the Warrant Shares or the
Warrants, except as may be required under the 1933 Act or state securities laws.
(j) The Company has 5,750,000 shares (and 250,000 shares of Common
Stock reserved for issuance upon exercise of currently exercisable stock
options) of issued and outstanding shares of Common Stock, after effecting a
1-for-2 reverse stock split. The Company has no other issued and outstanding
capital stock. The Company's authorized capitalization is as set forth in the
Prospectus under the caption "Capitalization." Except as disclosed in the
Prospectus, there is no outstanding option, warrant or other right calling for
the issuance of, and no commitment, plan or arrangement to issue any shares of
capital stock of the Company or any security convertible into or exchangeable
for capital stock of the Company.
(k) The financial statements of the Company in the Registration
Statement and the Prospectus present fairly the financial position of the
Company as of the dates indicated and the results of operations and cash flows
for the periods specified, all in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods specified. The
financial statement schedule included in the Registration Statement and the
amounts in the Prospectus under the captions "Selected Financial Data" fairly
present the information shown therein and have been compiled on a basis
consistent with the financial statements included in the Registration Statement
and the Prospectus. No other financial statements or schedules are required by
Form SB-2 or otherwise to be included in the Registration Statement or the
Prospectus. The unaudited pro forma combined financial information (including
the related notes) included in the Prospectus complies as to form in all
material respects to the applicable accounting requirements of the 1933 Act and
the 1933 Act Regulations and management of the Company believes that the
assumptions underlying the pro forma adjustments are reasonable. Such pro forma
adjustments have been properly applied to the historical amounts in the
compilation of the information and such information fairly presents with respect
to the Company the pro forma financial position, results of operations and other
information purported to be shown therein at the respective dates and for the
respective periods specified.
(l) KPMG, LLP, who have examined and are reporting upon the audited
financial statements and schedules included in the Registration Statement, are,
and were during the periods covered by their Reports included in the
Registration Statement and the Prospectus, independent public accountants, as
required by the 1933 Act and the 1933 Act Regulations.
(m) The Company has not sustained, since inception, any material loss
or interference with its business from fire, explosion, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or arbitrators' or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as otherwise stated in the Registration Statement
and Prospectus, there has not been (i) any material change in the capital stock
or partnership interests, as applicable, long-term debt, obligations under
capital leases or short-term borrowings of the Company, (ii) any material
adverse change, or any development which could reasonably be seen as involving a
prospective material adverse change, in or affecting the business prospects,
properties, assets, results of operations or condition (financial or other) of
the Company, (iii) any liability or obligation, direct or contingent, incurred
or undertaken by the Company, which is material to the business or condition
(financial or other) of the Company, except for liabilities or obligations
incurred in the ordinary course of business, (iv) any declaration or payment of
any dividend or distribution of any kind on or with respect to the capital stock
of the Company, or (v) any transaction that is material to the Company except
transactions in the ordinary course of business or as otherwise disclosed in the
Registration Statement and the Prospectus.
<PAGE>
(n) The Company is not in violation of its Articles of Incorporation or
by-laws, and no default exists, and no event has occurred, nor state of facts
exists, which, with notice or after the lapse of time to cure or both, would
constitute a default in the due performance and observance of any obligation,
agreement, term, covenant, consideration or condition contained in any
indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument to which the Company is a party or by which it or any of
its properties is subject. The Company is not in violation of, or in default
with respect to, any statute, law, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as is in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of the
Company.
(o) Except as described in the Prospectus, there is not pending or, to
the knowledge of the Company, threatened any action, suit, proceeding, inquiry
or investigation against the Company, its officers and directors or to which the
properties, assets or rights of the Company are subject, before or brought by
any court or governmental agency or body or board of arbitrators, which could
result in any material adverse change in the business, prospects, properties,
assets, results of operations or condition (financial or otherwise) of the
Company.
(p) The descriptions in the Registration Statement and the Prospectus
of the contracts, leases and other legal documents therein described present
fairly the information required to be shown, and there are no contracts, leases,
or other documents of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement which are not described or filed as required. To the best knowledge of
the Company, there are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus which have not been so disclosed and properly described therein. All
agreements between the Company and third parties expressly referenced in the
Prospectus are legal, valid and binding obligations of the Company enforceable
in accordance with their respective terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equitable principles.
(q) The Company owns, possesses or has obtained all material permits,
licenses, franchises, certificates, consents, orders, approvals and other
authorizations of governmental or regulatory authorities as are necessary to own
or lease, as the case may be, and to operate its properties and to carry on its
business as presently conducted, or as contemplated in the Prospectus to be
conducted, and the Company has not received any notice of proceedings relating
to revocation or modification of any such licenses, permits, certificates,
consents, orders, approvals or authorizations.
(r) The Company owns or possesses adequate license or other rights to
use all patents, trademarks, service marks, trade names, copyrights, software
and design licenses, trade secrets, manufacturing processes, other intangible
property rights and know-how (collectively "Intangibles") necessary to entitle
it to conduct its business now, and as proposed to be conducted or operated as
described in the Prospectus, and the Company has not received notice of
infringement or of conflict with (and knows of no such infringement of or
conflict with) asserted rights of others with respect to any Intangibles which
could materially and adversely affect its business, prospects, properties,
assets, results of operation or condition (financial or otherwise).
(s) The Company has not directly or indirectly, at any time (i) made
any contribution to any candidate for political office, or failed to disclose
fully any such contribution, in violation of law or (ii) made any payment to any
state, federal or foreign, governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. To the best knowledge of
the Company, the Company's internal accounting controls and procedures are
sufficient to cause such entities to comply in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(t) To the best of the Company's knowledge, the Company's systems of
internal accounting controls taken as a whole are sufficient to meet the broad
objectives of internal accounting control insofar as those objectives pertain to
the prevention or detection of errors or irregularities in amounts that would be
material in relation to the Company's financial statements; and, to the best of
the Company's knowledge, neither the Company, nor any employee or agent thereof,
has made any payment of funds of the Company or received or retained any funds
and no funds of the Company have been set aside to be used for any payment, in
each case in violation of any law, rule or regulation.
<PAGE>
(u) The Company has filed on a timely basis all necessary federal,
state, local and foreign income and franchise tax returns required to be filed
through the date hereof and have paid all taxes shown as due thereon; and no tax
deficiency has been asserted against the Company, nor does the Company know of
any tax deficiency which is likely to be asserted against the Company which if
determined adversely to the Company, could materially adversely affect the
business, prospects, properties, assets, results of operations or condition
(financial or otherwise) of any such entity, respectively. All tax liabilities
are adequately provided for on the respective books of such entities.
(v) The Company maintains insurance (issued by insurers of recognized
financial responsibility) of the types and in the amounts generally deemed
adequate for their respective businesses and, to the best of the Company's
knowledge, consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance covering real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(w) To the best of the Company's knowledge, no general labor problem
exists or is imminent with the employees of the Company which would have a
material adverse effect on the financial position, results of operations or
business of the Company.
(x) The Company and its officers, directors or affiliates have not
taken and will not take, directly or indirectly, any action designed to, or that
might reasonably be expected to, cause or result in or constitute the
stabilization or manipulation of any security of the Company or to facilitate
the sale or resale of the Shares in violation of any law, rule or regulation.
(y) The Company has not incurred any liability for a fee, commission or
other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than as
contemplated hereby.
(z) Except as otherwise disclosed in the Prospectus, the Company has
not authorized or conducted nor has knowledge of the generation, transportation,
storage, presence, use, treatment, disposal, release, or other handling of any
hazardous substance, hazardous waste, hazardous material, hazardous constituent,
toxic substance, pollutant, contaminant, asbestos, radon, polychlorinated
biphenyls ("PCBs"), petroleum product or waste (including crude oil or any
fraction thereof), natural gas, liquefied gas, synthetic gas or other material
defined, regulated, controlled or potentially subject to any remediation
requirement under any environmental law (collectively, "Hazardous Materials"),
on, in, under or affecting any real property currently leased or owned or by any
means controlled by the Company (the "Real Property") except as in material
compliance with applicable laws; to the knowledge of the Company, the Real
Property and the Company's operations with respect to the Real Property are in
compliance with all federal, state and local laws, ordinances, rules,
regulations and other governmental requirements relating to pollution, control
of chemicals, management of waste, discharges of materials into the environment,
health, safety, natural resources, and the environment (collectively,
"Environmental Laws"), and the Company has, and is in compliance with, all
licenses, permits, registrations and government authorizations necessary to
operate under all applicable Environmental Laws. Except as otherwise disclosed
in the Prospectus, the Company has not received any written or oral notice from
any governmental entity or any other person and there is no pending or
threatened claim, litigation or any administrative agency proceeding that:
alleges a violation of any Environmental Laws by the Company; alleges that the
Company is a liable party or a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
S 9601, et seq., or any state superfund law; has resulted in or could result in
the attachment of an environmental lien on any of the Real Property; or, alleges
that the Company is liable for any contamination of the environment,
contamination of the Real Property, damage to natural resources, property
damage, or personal injury based on their activities or the activities of their
predecessors or third parties (whether at the Real Property or elsewhere)
involving Hazardous Materials whether arising under the Environmental Laws,
common law principles or other legal standards.
(aa) The Company will not become as a result of the transactions
contemplated hereby, or will not conduct its business in a manner in which it
would become, "an investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended (the "Investment Company Act").
(bb) No relationship, direct or indirect, exists between or among any
of the Company or any affiliate of the Company, on the one hand, and any
director, officer, stockholder, customer or supplier of the Company or any
<PAGE>
affiliate of the Company, on the other hand, that is required by the 1933 Act or
by the 1933 Act Regulations to be described in the Registration Statement or the
Prospectus which is not so described or is not adequately described.
(cc) All offers and sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or
exempt from the registration requirements of the 1933 Act and were duly
registered in accordance with or the subject of an available exemption from
registration under the applicable blue sky laws. The Company has not effected
any sales of securities that would be required to be disclosed in response to
Item 701 of Regulation S-K that are not disclosed in the Registration Statement.
Any certificate signed by any officer of the Company on behalf of the
Company and delivered to you or to counsel for the Representative shall be
deemed a representation and warranty of the Company to the Representative as to
the matters covered thereby.
Section 2. Certain Covenants of the Company. The Company covenants and
agrees with Broker-Dealer, to use its best efforts to cause the Company to
perform as follows:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective (if not yet effective at the date and time that
this Agreement is executed and delivered by the parties hereto). The Company
will notify you immediately, and confirm the notice in writing, (i) when the
Registration Statement, or any post-effective amendment to the Registration
Statement, shall have become effective, or any supplement to the Prospectus or
any amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission to amend
the Registration Statement or amend or supplement the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution or threatening of any proceeding for any
such purposes. The Company will use every reasonable effort to prevent the
issuance of any such stop order or of any order preventing or suspending such
use and, if any such order is issued, to obtain the withdrawal thereof at the
earliest possible moment.
(b) The Company will not at any time file or make any amendment to the
Registration Statement, or any amendment or supplement to the Prospectus if you
shall not have previously been advised and furnished a copy thereof a reasonable
time prior to the proposed filing, or if you or your counsel reasonably object
to such amendment or supplement.
(c) The Company will deliver to you, at the Company's expense, from
time to time as requested, such number of copies of the Prospectus (as
supplemented or amended) as you may reasonably request. If the delivery of a
Prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Shares and if at such time any events shall have occurred as result of which
the Prospectus as then amended or supplemented would include an untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were made
when such Prospectus is delivered not misleading, or, if for any reason it shall
be necessary during such same period to amend or supplement the Prospectus in
order to comply with the 1933 Act, the Company will notify you and upon your
request prepare and furnish without charge to you and to any dealer in
securities as many copies, as you may from time to time reasonably request, of
an amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance.
(d) The Company will use its best efforts to qualify the Shares for
offering and sale under the applicable securities laws of such states and other
jurisdictions as you may designate and to maintain such qualifications in effect
for as long as may be necessary to complete the distribution of the Shares;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified or to make any undertakings in
respect of doing business in any jurisdiction in which it is not otherwise so
subject. The Company will file such statements and reports as may be required by
the laws of each jurisdiction in which the Shares have been qualified as above
provided.
(e) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the end of the fiscal
quarter first occurring after the first anniversary of the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the 1933 Act
Regulations), an earnings statement (in reasonable detail but which need not be
audited) complying with the provisions of Section 11(a) of the 1933 Act and
<PAGE>
Rule 158 thereunder and covering a period of at least 12 months beginning after
the effective date of the Registration Statement.
(f) The Company will use the net proceeds received by it from the sale
of the Shares substantially in the manner specified in the Prospectus under the
caption "Use of Proceeds."
(g) The Company will furnish to its security holders of record, as soon
as practicable after the end of each respective period, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year. During a period of five years after the date hereof, the
Company will furnish to you: (i) concurrently with furnishing such reports to
its security holders, statements of operations of the Company for each of the
first three quarters in the form furnished to the Company's security holders;
(ii) concurrently with furnishing to its security holders, a balance sheet of
the Company as of the end of such fiscal year, together with statements of
operations, of cash flows and of security holders, equity of the Company for
such fiscal year, accompanied by a copy of the certificate or report thereon of
independent public accountants; (iii) as soon as they are available, copies of
all reports (financial or otherwise) mailed to security holders; (iv) as soon as
they are available, copies of all reports and financial statements furnished to
or filed with the Commission, any securities exchange or the NASD; (v) every
material press release in respect of the Company or its affairs which is
released or prepared by the Company, and (vi) any additional information of a
public nature concerning the Company or its business that you may reasonably
request. During such five-year period, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts of the Company are
consolidated with any subsidiaries, and shall be accompanied by similar
financial statements for any significant subsidiary that is not so consolidated.
(h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(i) The Company will use its best efforts to acquire the inclusion of
its shares of Common Stock on the National Association of Securities Dealers
Automated Quotation system ("NASDAQ") and the American Stock Exchange ("AMEX")
within six months from the date hereof.
(j) The Company is familiar with the Investment Company Act and the
rules and regulations thereunder, and has in the past conducted its affairs, and
will in the future conduct its affairs, in such a manner so as to ensure that
the Company was not and will not be an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act.
(k) The Company will not, and will use its best efforts to cause its
officers, directors and affiliates not to, (i) take, directly or indirectly
prior to termination of the distribution of the Shares contemplated by this
Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which may cause or result in, or which might in the
future reasonably be expected to cause or result in, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of the Shares or (iii) pay or agree to pay
to any person any compensation for soliciting any order to purchase any other
securities of the Company which, in any such case, is in violation of any law,
rule or regulation.
(l) The Company will file timely and accurate reports on Form SR with
the Commission in accordance with Rule 463 of the 1933 Act Regulations or any
successor provision.
(m) Prior to the closing of the Offering, the Company will not, and
will use its best efforts to cause any affiliate of the Company not to issue a
press release or other official communication directly or indirectly, nor hold a
press conference with respect to the Company or with respect to the financial
condition, results of operations, business, properties, assets or liabilities of
the Company, or the offering of the Shares, without your prior written input
within 72 hours which consent shall not be unreasonably withheld.
(n) The Company will notify you promptly of any material adverse change
affecting any of its representations, warranties, agreements and indemnities
herein at any time prior to the closing of the Offering and take such steps as
may be reasonably requested by you either to remedy or publicize the same, or
both.
<PAGE>
(o) The Company will reserve and keep available that maximum number of
its authorized but unissued shares of Common Stock which are issuable upon
exercise of the Warrants outstanding from time to time.
(p) On the last day that this Agreement is in full force and effect
after the execution hereof, the Company shall execute and deliver to you the
Warrants you have earned. The Warrants will be substantially in the form of the
Stock Purchase Warrant filed as an exhibit to the Registration Statement, a copy
of which is attached hereto as Exhibit "A".
(q) For a period of five years from the Effective Date, the Company, at
its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit and without issuing any opinion thereon)
the Company's financial statements for each of the first three (3) fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's 10-Q quarterly report and the mailing of quarterly
financial information to Stockholders.
(r) As promptly as practicable after the closing of the Offering, the
Company will prepare, at its own expense, hard cover "bound volumes" relating to
the offering, and will distribute such volumes to the individuals designated by
you.
Section 3. Engagement & Allotment, Term, Reporting, Compensation and
Payment of Expenses.
(a) Engagement & Allotment.
(i) Subject to the terms and conditions of this Agreement, the
Company hereby engages Broker-Dealer, on a "best efforts" basis, as the
Company's nonexclusive agent in connection with the sale of up to 100,000 Shares
(the "Allotted Shares"). The number of Allotted Shares may be increased or
decreased at the sole discretion of the Company upon three (3) days written
notice to Broker-Dealer. Broker-Dealer will keep precise records of all
purchases of stock, including the amount of the purchase, the exact title in
which the Shares are to be issued and the address of the purchaser. The Shares
will be issued promptly by the Company and, in no event, later than fifteen (15)
days after notification by Broker-Dealer of the purchase with the information
set forth above. The maximum amount of each sale shall be 8,800 shares. The
minimum amount of each sale shall be 300 shares.
(ii) As to residents of the State of California who wish to
purchase in excess of $2,500 worth of the Shares, Broker-Dealer will take
appropriate measures to assure that the purchaser is "suitable" by having a
minimum net worth (excluding home equity, home furnishings and automobiles) of
at least $250,000 and a minimum gross income of $65,000 during the current tax
year; or, in the alternative, a minimum net worth of $500,000. In either case,
the amount of a purchaser's investment may not exceed ten percent (10%) of the
purchaser's net worth.
(iii) Broker-Dealer shall use its best efforts to assist the
Company in making sales of the shares pursuant to the Offering. Broker-Dealer
makes no representations as to the amount of Shares it will be able to sell.
There is no firm commitment to sell any certain amount of the Shares by
Broker-Dealer.
(x) Broker-Dealer will only offer the Company's stock in those
states in which Broker-Dealer and its brokers are registered.
(xi) Broker-Dealer agrees to become a market maker for the
Company when legally permitted by its restrictive agreement with the NASD and
the SEC and when approved by the Broker-Dealer's Board of Directors. At such
time, Broker-Dealer agrees to assist with any filing requirements. Broker-Dealer
does not currently act as a market maker and has no immediate plans to act as a
market maker.
(b) Term. The term of this Agreement shall commence as of the effective
date hereof (the "Effective Date") and shall continue in full force and effect
for a period of up to thirty (30) days from the Date of Registration as set
forth in Section 1(a), above. This Agreement may be extended for additional
period of 30 days upon the mutual written consent of both parties.
(c) Reporting. Broker-Dealer shall offer the Shares pursuant to the
Prospectus. Payment for the Shares shall be made by the Purchaser directly to
the Escrow Agent as set forth in the Prospectus. The commission, as set forth in
Section 3(d), will be paid by the Company or deducted from the proceeds of the
sale when subscriptions have been accepted for at least the Minimum amount as
set forth in the Prospectus and such Minimum subscriptions
<PAGE>
are fully paid. Said commission and any other amounts due to Broker-Dealer
hereunder shall be paid every Friday once the Minimum is reached. All amounts
due shall be calculated as of the close of business on the immediately prior
Thursday. If the Company or any other entity makes sales without Broker-Dealer,
no commission will be due to Broker-Dealer on such sales.
(g) Compensation.
The Company shall pay Broker-Dealer as follows:
(i) A commission of 7% based on the total offering amount of
the Allotted Shares as set forth in Section 3(a)(i). The commission will be paid
by the Company or deducted from the proceeds of the sale when subscriptions have
been accepted for at least the Minimum amount as set forth in the Prospectus and
such Minimum subscriptions are fully paid. If more than the Minimum is sold
during the offering then commissions relating to such additional Shares will be
paid out of escrow when monies for the Shares subscribed to are distributed to
the Issuer.
(ii) The Company reserves the right to review all
subscriptions for securities law compliance and to make the final determination
whether to accept or reject subscriptions. No selling commissions will be
payable with respect to subscriptions which are rejected by the Company.
(iii) As an additional incentive for Broker-Dealer to perform
its services in a timely manner, Warrants in the form attached hereto as Exhibit
"A" shall be issued to Broker-Dealer or its designees as follows:
1. A warrant to purchase up to five percent (5%) of the
Allotted Shares, equal to 5,000 shares of stock with
an exercise price of $9.90 - 14.85 per share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System.
2. In both instances, as set forth above, the Warrants
will be granted pro rata to the sale of the Shares by
Broker-Dealer. Assuming all 100,000 Shares available
for sale are sold by Broker-Dealer, 5,000 Warrants
will be issued. If less than 100,000 Shares are sold
by Broker-Dealer, Warrants will be issued on a pro
rata basis in accordance with the actual number of
Shares sold. For example, should 50,000 Shares be
sold, Broker-Dealer will be entitled to 2,500
Warrants at a price of $9.90 - 14.85 per Share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System. The Shares obtained upon exercise of the
Warrants will be "restricted" stock subject to the
trading provisions of Rule 144 promulgated by the
Commission.
(e) Payment of Expenses. The Company will pay and bear all costs, fees
and expenses incident to the performance of its obligations under this Agreement
(excluding fees and expenses of your counsel), including (a) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits), as originally filed and as amended, the Prospectus and
any amendments or supplements thereto, and the cost of furnishing copies thereof
to you, (b) the preparation of any Selected Dealers Agreement, the certificates
representing the Shares, the Blue Sky Memoranda and any instruments relating to
any of the foregoing, (c) the issuance and delivery of the Shares to the
purchasers, including any transfer taxes payable upon the sale of the Shares,
(d) the fees and disbursements of the Company's counsel and accountants, (e) the
qualification of the Shares under the applicable securities laws in accordance
with Section 2(e) of this Agreement and any filing for review of the Offering
with the NASD, including filing fees and fees and disbursements in connection
therewith and in connection with the Blue Sky Memoranda, (f) all costs, fees and
expenses in connection with the application for inclusion of the Shares on
NASDAQ, (g) costs related to travel and lodging incurred by the Company and its
representatives relating to meetings with and presentations to prospective
purchasers of the Shares reasonably determined by you to be necessary or
desirable to effect the sale of the Shares to the public and (i) all other costs
and expenses incident to the performance of the Company's obligations hereunder
that are not otherwise specifically provided for in this section.
<PAGE>
Section 4. Opinion of Counsel and Accountants and other Conditions.
(a) As a condition to the performance of your duties and obligations
hereunder, you shall have received a favorable opinion of Evers & Hendrickson,
LLP ("Evers & Hendrickson") counsel for the Company in form and substance
satisfactory to counsel for you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
California with all requisite corporate power and authority to own, lease and
operate its properties and the properties it proposes to own, lease and operate
as described in the Registration Statement and the Prospectus and to conduct its
business as now conducted and as proposed to be conducted as described in the
Registration Statement and the Prospectus. To the best of such counsel's
knowledge, there are no other jurisdictions in which the ownership or leasing of
the Company's properties or the nature or conduct of its business as now
conducted or proposed to be conducted as described in the Registration Statement
and the Prospectus requires such qualification, except where the failure to do
so would not have a material adverse effect on the Company. To such counsel's
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity (other than any indirect control that
may be implied by virtue of Mr. Yuan and certain other officers of the Company
serving as officers and/or directors of other companies).
(ii) The Company has full legal right, power and authority to
enter into, deliver and perform this Agreement, to issue, sell and deliver the
Shares as provided herein and to consummate the transactions contemplated
herein. This Agreement has been duly authorized, executed and delivered by the
Company and, assuming due authorization, execution and delivery by the other
parties hereto, constitutes a valid and binding agreement of the Company,
enforceable in accordance with its terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equity principles and except to the extent that enforcement of the
indemnification provisions set forth in Section 5 of this Agreement may be
limited by federal or state securities laws or the public policy underlying such
laws.
(iii) Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary for the valid authorization, issuance,
sale and delivery of the Shares and the execution, delivery and performance of
this Agreement has been made or obtained and is in full force and effect.
(iv) Neither the issuance, sale and delivery by the Company of
the Shares to purchasers thereof, nor the execution, delivery and performance of
this Agreement, nor the consummation of the transactions contemplated hereby or
thereby by the Company will violate any of the terms and provisions of, or
constitute a default under, any of the Articles of Incorporation or by-laws of
the Company, or, to such counsel's knowledge, under any material indenture,
mortgage, trust, deed of trust, loan agreement, note, lease or other agreement
or instrument to which the Company is a party or to which any of its properties
or other assets is subject; or, to such counsel's knowledge, violate any
applicable statute, judgment, decree, order, rule or regulation of any court or
governmental agency or body; or, to such counsel's knowledge, result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of any of the foregoing.
(v) The description of the Company's authorized capital stock
contained in the Registration Statement and the Prospectus under the caption
"Capital Stock" meets the requirements of Item 12 of Form SB-2 under the 1933
Act, and the Common Stock conforms in all material respects as to legal matters
to the description thereof contained in the Registration Statement and the
Prospectus.
(vi) The Shares to be issued pursuant to the Offering have
been validly authorized by the Company. When issued and delivered, the Shares
will be validly issued, fully paid and nonassessable. No preemptive rights of
shareholders exist with respect to any of the Shares. To such counsel's
knowledge, no person or entity holds a right to require or participate in the
registration under the 1933 Act of the Shares pursuant to the Registration
Statement; and, except as set forth in the Prospectus, no person holds a right
to require registration under the 1933 Act of any shares of Common Stock of the
Company at any other time. To such counsel's knowledge, no person or entity has
a right of participation or first refusal with respect to the sale of the Shares
by the Company. The form of certificates evidencing the Shares comply with all
applicable requirements of California law.
<PAGE>
(vii) The Company has an authorized capitalization as set
forth in the Prospectus under the caption "Capital Stock" as of the date
therein. At the date of this Agreement, after effecting a 1-for-2 reverse stock
split, the Company has 5,750,000 shares of issued and outstanding stock (and
250,000 shares of Common Stock reserved for issuance upon exercise of currently
exercisable stock options), all of which is Common Stock. The Common Stock
conforms in all material respects to the description of the Common Stock
contained in the Prospectus. To the knowledge of such counsel, except as
disclosed in the Prospectus, there is no outstanding option, warrant or other
right calling for the issuance of, and no commitment, plan or arrangement to
issue, any shares of capital stock of the Company or any security convertible
into or exchangeable for capital stock of the Company.
(viii) To the knowledge of such counsel, the Company is not in
violation of its Articles of Incorporation or by-laws, and no material default
exists and no event has occurred which, with notice or after the lapse of time
to cure or both, would constitute a material default in the due performance and
observance of any obligation, agreement, term, covenant or condition contained
in any indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument known to such counsel to which any such entity is a
party or by which any such entity or any of its properties is subject. To the
knowledge of such counsel, the Company is not in violation of, or in default
with respect to, any statute, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of each such
entity, respectively.
(ix) To such counsel's knowledge and except as described in
the Prospectus, there is not pending or threatened, any action, suit,
proceeding, inquiry or investigation against the Company or any of its officers
and directors or to which the properties, assets or rights of the Company or
such persons are subject, which, if determined adversely to the Company or any
such persons, would individually or in the aggregate have a material adverse
effect on the financial position, results of operations or business of any such
entity, respectively.
(x) The descriptions in the Registration Statement and the
Prospectus of the contracts, leases and other legal documents therein described
present fairly the information required to be shown and there are no contracts,
leases or other documents known to such counsel of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement which are not described or filed as
required. There are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company, known
to such counsel, of a character required to be disclosed in the Registration
Statement or the Prospectus which have not been so disclosed and properly
described therein. To such counsel's knowledge, all agreements between the
Company, and third parties expressly referenced in the Prospectus are legal,
valid and binding obligations of the Company, enforceable in accordance with
their respective terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, reorganization or other laws of general applicability
relating to or affecting creditors' rights and to general equitable principles.
(xi) The Registration Statement has become effective under the
1933 Act and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending or contemplated under the
1933 Act. Other than financial statements and other financial and operating data
and schedules contained therein, as to which counsel need express no opinion,
the Registration Statement, the Prospectus and any amendment or supplement
thereto, appear on their face to conform as to form in all material respects
with the requirements of Form SB-2 under the 1933 Act Regulations.
(xii) The Registration Statement, or any further amendment
thereto made prior to the date hereof, on its effective date, contained or
contains no untrue statement of a material fact and did not omit or does not
omit to state any material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made not misleading, or neither the Prospectus nor any amendment or supplement
thereto, as of its issue date, contained or contains any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading (provided that such counsel need express no belief regarding the
financial statements and related schedules and other financial data contained in
the Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
(xiii) The Company is not an "investment company," or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act.
<PAGE>
(xiv) The descriptions in the Prospectus of statutes,
regulations, legal or governmental proceedings are accurate and present fairly a
summary of the information required to be shown under the 1933 Act and the 1933
Act Regulations. The information in the Prospectus under the caption
"Capitalization," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel, is correct and presents fairly
the information required to be disclosed therein under the 1933 Act and the 1933
Act Regulations.
(xv) To such counsel's knowledge, no relationship, direct or
indirect, exists between or among any of the Company or any affiliate of the
Company, on the one hand, and any director, officer, stockholder, customer or
supplier of the Company or any affiliate of the Company, on the other hand, that
is required by the 1933 Act or by the 1933 Act Regulations to be described in
the Registration Statement or the Prospectus which is not so described or is not
adequately described.
(xvi) All sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or, to
the knowledge of such counsel, effected in a manner which was exempt from the
registration requirements of the 1933 Act and were duly registered in accordance
with or the subject of an available exemption from the registration requirements
of the applicable blue sky laws. To the knowledge of such counsel, the Company
has not effected any sales of securities that would be required to be disclosed
in response to Item 701 of Regulation S-K that are not disclosed in the
Registration Statement.
In rendering the foregoing opinion, such counsel may rely on the following:
(A) as to matters involving the application of laws other than
the laws of the United States and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the extent
specified in such opinion, upon an opinion or opinions (in form and
substance reasonably satisfactory to Underwriters' counsel) of other
counsel familiar with the applicable laws,
(B) as to matters of fact, to the extent they deem
appropriate, on certificates of responsible officers of the Company and
certificates or other written statements of officers or departments of
various jurisdictions having custody of documents respecting the
existence or good standing of the Company provided that copies of all
such opinions, statements or certificates shall be delivered to your
counsel. The opinion of counsel for the Company shall state that the
opinion of any other counsel, or certificate or written statement, on
which such counsel is relying is in form satisfactory to such counsel
and that you and they are justified in relying thereon.
(b) At the time that this Agreement is executed by the Company, you
shall have received from KPMG, LLP a letter, dated the date hereof, in form and
substance satisfactory to you, confirming that they are independent public
accountants with respect to the Company within the meanings of the 1933 Act and
1933 Act Regulations, and stating in effect that:
(i) in their opinion, the financial statements and any
supplementary financial information and schedule included in the Registration
Statement and covered by their opinion therein comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
1933 Act Regulations;
(ii) on the basis of limited procedures (set forth in detail
in such letter and made in accordance with such procedures as may be specified
by you) not constituting an audit in accordance with generally accepted auditing
standards, consisting of (but not limited to) a reading of the latest available
internal unaudited financial statements of the Company, a reading of the minute
books of the Company, inquiries of officials of the Company responsible for
financial and accounting matters, and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that caused them to
believe that:
(A) the unaudited financial statements and supporting schedule
and other unaudited financial data of the Company included in the
Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act
and the 1933 Act Regulations or are not presented in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited financial statements from which
such data and items were derived, and any such unaudited data and items
were not determined on a basis
<PAGE>
substantially consistent with the basis for the corresponding amounts
in the audited financial statements included in the Prospectus;
(C) any unaudited pro forma financial information included in
the Prospectus does not comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations or the pro forma adjustments have not been properly applied
to historical amounts in the compilation of that information; and
(D) at a specified date not more than five days prior to the
date of delivery of such letter, there was any change in the capital
stock or long-term debt or obligations under capital leases of the
Company, or there were any decreases in net current assets or net
assets, or shareholders' equity, from that set forth in the Company's
balance sheet at December 31, 1998, except as described in such letter;
and
(iii) in addition to the procedures referred to in clause (ii)
above and the examination referred to in their Reports included in the
Registration Statement, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information specified
by you which are derived from the general accounting records of the Company,
which appear in the Registration Statement or the exhibits or schedules thereto
and are specified by you, and have compared such amounts, percentages and
financial information with the accounting records of the Company and with
material derived from such records and have found them to be in agreement.
(c) At the time of the closing of the Offering, you shall have received
from KPMG, LLP, a letter, in form and substance satisfactory to you and dated as
of the date of the closing of the Offering, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (b) above, except
that the specified date referred to shall be a date not more than five days
prior to the date of closing of the Offering.
(d) The NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to such offering, such terms or your
participation in the same.
Section 5. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless Broker-Dealer and each
person, if any, who controls Broker-Dealer within the meaning of the 1933 Act or
the 1934 Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which it or such controlling person may become subject under the 1933
Act, the 1934 Act or insofar as such losses, claims, damages or liabilities in
respect thereof arise out of or are based upon any breach of any warranty or
covenant of the Company herein contained or by reason of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and will reimburse Broker-Dealer for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon and in conformity with written information furnished to the
Company by Broker-Dealer expressly for use therein. In addition to its other
obligations under this Section 5 (a), the Company agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5 (a), it will
reimburse Broker-Dealer on a monthly basis for all reasonable legal and other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse Broker-Dealer for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. Any such interim reimbursement payments that
are not made to Broker-Dealer within 30 days of a request for reimbursement
shall bear interest at the prime rate (or reference rate or other commercial
lending rate for borrowers of the highest credit standing) published from time
to time by The Wall Street Journal (the "Prime Rate") from the date of such
request.
<PAGE>
The Company will not, without the prior written consent of Broker-Dealer, settle
or compromise or consent to the entry of any judgment in any pending or
threatened action or claim or related cause of action or portion of such cause
of action in respect of which indemnification may be sought hereunder (whether
or not Broker-Dealer is a party to such action or claim), unless such
settlement, compromise or consent includes an unconditional release of
Broker-Dealer from all liability arising out of such action or claim (or related
cause of action or portion thereof).
The indemnity agreement in this Section 5(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls Broker-Dealer within the meaning of the 1933 Act or the 1934 Act to
the same extent as such agreement applies to Broker-Dealer.
(b) Broker-Dealer will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement or the Prospectus or
any such amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by Broker-Dealer expressly for use
therein; and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action. In addition to its other
obligations under this Section 5(b), Broker-Dealer agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5(b), it will reimburse
the Company on a monthly basis for all reasonable legal and other expenses
incurred in connection with investigating or defending any such claim, action
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of its obligation
to reimburse the Company for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. Any such interim reimbursement payments that are not made to the
Company within 30 days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request. This indemnity agreement shall be in
addition to any liabilities that Broker-Dealer may otherwise have.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; no indemnification provided for in Section 5(a) or 5(b)
shall be available to any party who shall fail to give notice as provided in
this Section 5(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by the
failure to give such notice, but the omission so to notify the indemnifying
party will not relieve the indemnifying party from any liability that it may
have to any indemnified party otherwise than under Section 5. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation, except
that if the indemnified party has been advised by counsel in writing that there
are one or more defenses available to the indemnified party which are different
from or additional to those available to the indemnifying party, then the
indemnified party shall have the right to employ separate counsel and in that
event the reasonable fees and expenses of such separate counsel for the
indemnified party shall be paid by the indemnifying party; provided, however,
that if the indemnifying party is the Company, the Company shall only be
obligated to pay the reasonable fees and expenses of a single law firm (and any
reasonably necessary local counsel) employed by all of the indemnified parties
and the persons referred to in Section 5(a) hereof. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
<PAGE>
(d) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Section 5(a) and 5(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the indemnifying parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the National
Association of Securities Dealers, Inc. Any such arbitration must be commenced
by service of a written demand for arbitration or a written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a) and 5(b) hereof
and will not resolve the ultimate propriety or enforceability of the obligation
to indemnify for expenses that is created by the provisions of Sections 5(a) and
5(b).
(e) In order to provide for just and equitable contribution in
circumstances under which the indemnity provided for in this Section 5 is for
any reason judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the right of appeal) to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Company on the one hand,
and Broker-Dealer on the other shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity incurred by the Company and Broker-Dealer, as incurred, in such
proportions that (a) Broker-Dealer is responsible pro rata for that portion
represented by the commission percentage appearing on the cover page of the
Prospectus bears to the initial public offering price (before deducting
expenses) appearing thereon, and (b) the Company is responsible for the balance,
provided, however, that no person guilty of fraudulent misrepresentations
(within the meaning of Section 12(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation; provided, further, that if the allocation provided above is
not permitted by applicable law, the Company, on the one hand and Broker-Dealer
on the other shall contribute to the aggregate losses in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company on the one hand, and Broker-Dealer on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
on the one hand, or by Broker-Dealer on the other hand, and the parties,
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and Broker-Dealer agree that it
would not be just and equitable if contributions pursuant to this Section 5(e)
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 5(e). The amount paid or payable by a party as a result of the
losses, claims, damages or liabilities referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending such action or claim.
Section 6. Representations, Warranties and Agreements to Survive
Delivery. The representations, warranties, indemnities, agreements and other
statements of the Company or their respective officers set forth in or made
pursuant to this Agreement will remain operative and in full force and effect
will survive the termination of this Agreement.
Section 7. Notices.
All notices or communications required or permitted hereunder shall be
in writing and shall be mailed or delivered as follows:
If to the Company: CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
320 S. Garfield Avenue, Suite 318
Alhambra, CA 91801
Attention: Frank Yuan
If to Broker-Dealer: (a) TRAVIS MORGAN SECURITIES
18952 MacArthur Blvd., Suite 315
Irvine, CA 92612
Attention: Marcus Hurlburt
<PAGE>
Section 8. Miscellaneous. This Agreement contains and constitutes the
entire agreement between the parties hereto and supersedes all prior written or
oral and all contemporaneous agreements or negotiations with respect to the
subject matter hereof. The Agreement may only be amended, modified or waived in
writing signed by both parties hereto. This Agreement shall be governed in
accordance with the laws of the State of California; without reference to the
conflict of law provisions thereof. This Agreement may be executed in
counterparts.
Section 9. Governing Law and Time. This Agreement shall be governed by
the laws of the State of California. Specified time of the day refers to United
States Pacific Time. Time shall be of the essence of this Agreement.
Section 10. Counterparts. This Agreement may be executed in one or more
counterparts and when a counterpart has been executed by each party, all such
counterparts taken together shall constitute one and the same agreement.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument will become a binding agreement among the Company and Broker-Dealer
in accordance with its terms.
Very truly yours,
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
By: ____________________________________________
Name: Frank Yuan
Title: President
Confirmed and accepted as of the date first above written:
TRAVIS MORGAN SECURITIES
By: ____________________________________________
Name: Marcus Hurlburt
Title: Executive Vice-President
2,500,000 SHARES
CYBER MERCHANTS EXCHANGE, INC. d.b.a. C-ME.com
Common Stock
BEST EFFORTS COMPENSATION AGREEMENT
Alhambra, California
April 6, 1999
Andy Lam
Corporate Investment Group
175 W. Jackson Blvd., Suite #A-1951
Chicago, IL 60604
Dear Mr. Lam:
CYBER MERCHANTS EXCHANGE, INC.d.b.a. C-ME.Com, a California corporation (the
"Company"), proposes to issue and sell an aggregate of two million five hundred
thousand (2,500,000) shares of the Company's Common Stock, no par value per
share (the "Common Stock" or "Shares").
The Shares will be offered to the public by the Company at a price of
$6.00-$9.00 per share (the "Offering"). The purpose of this Agreement is to set
forth the understanding of the parties relating to the right of Corporate
Securities Group, a Chicago Corporation ("Broker-Dealer") to participate in the
sale of the Shares as a broker-dealer exercising its best efforts to sell the
Shares.
Section 1. Representations and Warranties of the Company . The Company
represents and warrants to and agrees with Broker-Dealer that:
(a) A registration statement on Form SB-2 (File No. 333-41411) with
respect to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the
applicable rules and regulations (the "1933 Act Regulations") of the Securities
and Exchange Commission (the "Commission"), and has been filed with the
Commission; and such amendments to such registration statement as may have been
required prior to the date hereof have been filed with the Commission, and such
amendments have been similarly prepared. Such registration statement went
effective with the Commission on _________________, 199__ (the "Date of
Registration"). Copies of such registration statement and amendment or
amendments of each related preliminary prospectus, and the exhibits, financial
statements and schedules, as finally amended and revised, have been delivered to
you.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement became
effective and, in the event any post-effective amendment thereto becomes
effective prior to the closing of the Offering, shall also mean such
registration statement as so amended. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Shares in the form in which
it is first filed with the Commission pursuant to Rule 424(b) of the 1933 Act
Regulations or, if no filing pursuant to Rule 424(b) of the 1933 Act Regulations
is required, shall mean the form of final prospectus included in the
Registration Statement at the time such Registration Statement becomes
effective.
(3)
<PAGE>
(b) When the Registration Statement became effective, when the
Prospectus was first filed pursuant to Rule 424(b) of the 1933 Act Regulations,
when any amendment to the Registration Statement becomes effective, and when any
supplement to the Prospectus is filed with the Commission, (i) the Registration
Statement, the Prospectus and any amendments thereof and supplements thereto
will conform in all material respects with the applicable requirements of the
1933 Act and the 1933 Act Regulations, and (ii) neither the Registration
Statement, the Prospectus nor any amendment or supplement thereto will contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by Broker-Dealer
expressly for use in the Registration Statement.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the state of California with all
requisite corporate power and authority to own, lease and operate its properties
and the properties it proposes to own, lease and operate as described in the
Registration Statement and the Prospectus and to conduct its business as now
conducted and as proposed to be conducted as described in the Registration
Statement and the Prospectus. The Company has been duly qualified to do business
and is in good standing as a foreign corporation in each other jurisdiction in
which the ownership or leasing of its properties or the nature or conduct of its
business as now conducted or proposed to be conducted as described in the
Registration Statement and the Prospectus requires such qualification, except
where the failure to do so would not have a material adverse effect on the
Company.
(d) The Company has full legal right, power and authority to enter into
this Agreement, to issue, sell and deliver the Shares as provided herein and to
consummate the transactions contemplated herein. This Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid and
binding agreement of the Company, enforceable in accordance with its terms,
except to the extent that enforceability may be limited by bankruptcy,
insolvency, reorganization or other laws of general applicability relating to or
affecting creditors, rights, or by general equity principles and except to the
extent the indemnification provisions set forth in Section 5 of this Agreement
may be limited by federal or state securities laws or the public policy
underlying such laws.
(e) Each consent, approval, authorization, order, license, certificate,
permit, registration, designation or filing by or with any governmental agency
or body necessary for the valid authorization, issuance, sale and delivery of
the Shares, the execution, delivery and performance of this Agreement and the
consummation by the Company of the transactions contemplated hereby, has been
made or obtained and is in full force and effect.
(f) Neither the issuance, sale and delivery by the Company of the
Shares, nor the execution, delivery and performance of this Agreement nor the
consummation of the transactions contemplated hereby by the Company will
conflict with or result in a breach or violation of any of the terms and
provisions of, or (with or without the giving of notice or the passage of time
or both) constitute a default under, the Articles of Incorporation, by-laws of
the Company; any indenture, mortgage, deed of trust, loan agreement, note, bond
or other agreement or instrument to which the Company, is a party or to which
it, any of its properties or other assets; or any applicable statute, law,
judgment, decree, order, rule or regulation of any court or governmental agency
or body applicable to the Company or its property; or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property or asset
of the Company.
(g) The Shares to be issued and sold hereunder have been validly
authorized by the Company. When issued and delivered against payment therefor,
the Shares will be duly and validly issued, fully paid and non-assessable. No
preemptive rights of shareholders exist with respect to any of the Shares. No
person or entity holds a right to require or participate in the registration
under the 1933 Act of the Shares pursuant to the Registration Statement; and,
except as set forth in the Prospectus, no person holds a right to require
registration under the 1933 Act of any shares of Common Stock of the Company at
any other time. No person or entity has a right of participation or first
refusal with respect to the sale of the Shares by the Company. The form of
certificates evidencing the Shares complies with all applicable requirements of
California law.
(h) The Common Stock to be issued upon exercise of the common stock
purchase warrants to be issued to Broker-Dealer (the "Warrants") are duly
authorized, and when issued and delivered pursuant to this Agreement, will be
duly authorized, validly issued, fully paid and non-assessable and free of
pre-emptive rights of any security holder of the Company. Neither the filing of
the Registration Statement nor the offering or sale of the
(4)
<PAGE>
Shares gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any shares of Common Stock,
except as described in the Registration Statement.
(i) This Agreement has been duly and validly authorized, executed and
delivered by the Company. The Company has full power and lawful authority to
issue and sell the shares of Common Stock to be sold by it upon exercise of the
Warrants (the "Warrant Shares") on the terms and conditions set forth herein,
and no consent, approval, authorization or other order of any governmental
authority is required in connection with such authorization, execution and
delivery or with the authorization, issue and sale of the Warrant Shares or the
Warrants, except as may be required under the 1933 Act or state securities laws.
(j) The Company has 5,750,000 shares (and 250,000 shares of Common
Stock reserved for issuance upon exercise of currently exercisable stock
options) of issued and outstanding shares of Common Stock, after effecting a
1-for-2 reverse stock split. The Company has no other issued and outstanding
capital stock. The Company's authorized capitalization is as set forth in the
Prospectus under the caption "Capitalization." Except as disclosed in the
Prospectus, there is no outstanding option, warrant or other right calling for
the issuance of, and no commitment, plan or arrangement to issue any shares of
capital stock of the Company or any security convertible into or exchangeable
for capital stock of the Company.
(k) The financial statements of the Company in the Registration
Statement and the Prospectus present fairly the financial position of the
Company as of the dates indicated and the results of operations and cash flows
for the periods specified, all in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods specified. The
financial statement schedule included in the Registration Statement and the
amounts in the Prospectus under the captions "Selected Financial Data" fairly
present the information shown therein and have been compiled on a basis
consistent with the financial statements included in the Registration Statement
and the Prospectus. No other financial statements or schedules are required by
Form SB-2 or otherwise to be included in the Registration Statement or the
Prospectus. The unaudited pro forma combined financial information (including
the related notes) included in the Prospectus complies as to form in all
material respects to the applicable accounting requirements of the 1933 Act and
the 1933 Act Regulations and management of the Company believes that the
assumptions underlying the pro forma adjustments are reasonable. Such pro forma
adjustments have been properly applied to the historical amounts in the
compilation of the information and such information fairly presents with respect
to the Company the pro forma financial position, results of operations and other
information purported to be shown therein at the respective dates and for the
respective periods specified.
(l) KPMG, LLP, who have examined and are reporting upon the audited
financial statements and schedules included in the Registration Statement, are,
and were during the periods covered by their Reports included in the
Registration Statement and the Prospectus, independent public accountants, as
required by the 1933 Act and the 1933 Act Regulations.
(m) The Company has not sustained, since inception, any material loss
or interference with its business from fire, explosion, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or arbitrators' or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as otherwise stated in the Registration Statement
and Prospectus, there has not been (i) any material change in the capital stock
or partnership interests, as applicable, long-term debt, obligations under
capital leases or short-term borrowings of the Company, (ii) any material
adverse change, or any development which could reasonably be seen as involving a
prospective material adverse change, in or affecting the business prospects,
properties, assets, results of operations or condition (financial or other) of
the Company, (iii) any liability or obligation, direct or contingent, incurred
or undertaken by the Company, which is material to the business or condition
(financial or other) of the Company, except for liabilities or obligations
incurred in the ordinary course of business, (iv) any declaration or payment of
any dividend or distribution of any kind on or with respect to the capital stock
of the Company, or (v) any transaction that is material to the Company except
transactions in the ordinary course of business or as otherwise disclosed in the
Registration Statement and the Prospectus.
(n) The Company is not in violation of its Articles of Incorporation or
by-laws, and no default exists, and no event has occurred, nor state of facts
exists, which, with notice or after the lapse of time to cure or both, would
constitute a default in the due performance and observance of any obligation,
agreement, term, covenant, consideration or condition contained in any
indenture, mortgage, deed of trust, loan agreement, note, lease or other
(5)
<PAGE>
agreement or instrument to which the Company is a party or by which it or any of
its properties is subject. The Company is not in violation of, or in default
with respect to, any statute, law, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as is in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of the
Company.
(o) Except as described in the Prospectus, there is not pending or, to
the knowledge of the Company, threatened any action, suit, proceeding, inquiry
or investigation against the Company, its officers and directors or to which the
properties, assets or rights of the Company are subject, before or brought by
any court or governmental agency or body or board of arbitrators, which could
result in any material adverse change in the business, prospects, properties,
assets, results of operations or condition (financial or otherwise) of the
Company.
(p) The descriptions in the Registration Statement and the Prospectus
of the contracts, leases and other legal documents therein described present
fairly the information required to be shown, and there are no contracts, leases,
or other documents of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement which are not described or filed as required. To the best knowledge of
the Company, there are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus which have not been so disclosed and properly described therein. All
agreements between the Company and third parties expressly referenced in the
Prospectus are legal, valid and binding obligations of the Company enforceable
in accordance with their respective terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equitable principles.
(q) The Company owns, possesses or has obtained all material permits,
licenses, franchises, certificates, consents, orders, approvals and other
authorizations of governmental or regulatory authorities as are necessary to own
or lease, as the case may be, and to operate its properties and to carry on its
business as presently conducted, or as contemplated in the Prospectus to be
conducted, and the Company has not received any notice of proceedings relating
to revocation or modification of any such licenses, permits, certificates,
consents, orders, approvals or authorizations.
(6)
<PAGE>
(r) The Company owns or possesses adequate license or other rights to
use all patents, trademarks, service marks, trade names, copyrights, software
and design licenses, trade secrets, manufacturing processes, other intangible
property rights and know-how (collectively "Intangibles") necessary to entitle
it to conduct its business now, and as proposed to be conducted or operated as
described in the Prospectus, and the Company has not received notice of
infringement or of conflict with (and knows of no such infringement of or
conflict with) asserted rights of others with respect to any Intangibles which
could materially and adversely affect its business, prospects, properties,
assets, results of operation or condition (financial or otherwise).
(s) The Company has not directly or indirectly, at any time (i) made
any contribution to any candidate for political office, or failed to disclose
fully any such contribution, in violation of law or (ii) made any payment to any
state, federal or foreign, governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. To the best knowledge of
the Company, the Company's internal accounting controls and procedures are
sufficient to cause such entities to comply in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(t) To the best of the Company's knowledge, the Company's systems of
internal accounting controls taken as a whole are sufficient to meet the broad
objectives of internal accounting control insofar as those objectives pertain to
the prevention or detection of errors or irregularities in amounts that would be
material in relation to the Company's financial statements; and, to the best of
the Company's knowledge, neither the Company, nor any employee or agent thereof,
has made any payment of funds of the Company or received or retained any funds
and no funds of the Company have been set aside to be used for any payment, in
each case in violation of any law, rule or regulation.
(u) The Company has filed on a timely basis all necessary federal,
state, local and foreign income and franchise tax returns required to be filed
through the date hereof and have paid all taxes shown as due thereon; and no tax
deficiency has been asserted against the Company, nor does the Company know of
any tax deficiency which is likely to be asserted against the Company which if
determined adversely to the Company, could materially adversely affect the
business, prospects, properties, assets, results of operations or condition
(financial or otherwise) of any such entity, respectively. All tax liabilities
are adequately provided for on the respective books of such entities.
(v) The Company maintains insurance (issued by insurers of recognized
financial responsibility) of the types and in the amounts generally deemed
adequate for their respective businesses and, to the best of the Company's
knowledge, consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance covering real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(w) To the best of the Company's knowledge, no general labor problem
exists or is imminent with the employees of the Company which would have a
material adverse effect on the financial position, results of operations or
business of the Company.
(x) The Company and its officers, directors or affiliates have not
taken and will not take, directly or indirectly, any action designed to, or that
might reasonably be expected to, cause or result in or constitute the
stabilization or manipulation of any security of the Company or to facilitate
the sale or resale of the Shares in violation of any law, rule or regulation.
(y) The Company has not incurred any liability for a fee, commission or
other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than as
contemplated hereby.
(7)
<PAGE>
(z) Except as otherwise disclosed in the Prospectus, the Company has
not authorized or conducted nor has knowledge of the generation, transportation,
storage, presence, use, treatment, disposal, release, or other handling of any
hazardous substance, hazardous waste, hazardous material, hazardous constituent,
toxic substance, pollutant, contaminant, asbestos, radon, polychlorinated
biphenyls ("PCBs"), petroleum product or waste (including crude oil or any
fraction thereof), natural gas, liquefied gas, synthetic gas or other material
defined, regulated, controlled or potentially subject to any remediation
requirement under any environmental law (collectively, "Hazardous Materials"),
on, in, under or affecting any real property currently leased or owned or by any
means controlled by the Company (the "Real Property") except as in material
compliance with applicable laws; to the knowledge of the Company, the Real
Property and the Company's operations with respect to the Real Property are in
compliance with all federal, state and local laws, ordinances, rules,
regulations and other governmental requirements relating to pollution, control
of chemicals, management of waste, discharges of materials into the environment,
health, safety, natural resources, and the environment (collectively,
"Environmental Laws"), and the Company has, and is in compliance with, all
licenses, permits, registrations and government authorizations necessary to
operate under all applicable Environmental Laws. Except as otherwise disclosed
in the Prospectus, the Company has not received any written or oral notice from
any governmental entity or any other person and there is no pending or
threatened claim, litigation or any administrative agency proceeding that:
alleges a violation of any Environmental Laws by the Company; alleges that the
Company is a liable party or a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
S 9601, et seq., or any state superfund law; has resulted in or could result in
the attachment of an environmental lien on any of the Real Property; or, alleges
that the Company is liable for any contamination of the environment,
contamination of the Real Property, damage to natural resources, property
damage, or personal injury based on their activities or the activities of their
predecessors or third parties (whether at the Real Property or elsewhere)
involving Hazardous Materials whether arising under the Environmental Laws,
common law principles or other legal standards.
(aa) The Company will not become as a result of the transactions
contemplated hereby, or will not conduct its business in a manner in which it
would become, "an investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended (the "Investment Company Act").
(bb) No relationship, direct or indirect, exists between or among any
of the Company or any affiliate of the Company, on the one hand, and any
director, officer, stockholder, customer or supplier of the Company or any
affiliate of the Company, on the other hand, that is required by the 1933 Act or
by the 1933 Act Regulations to be described in the Registration Statement or the
Prospectus which is not so described or is not adequately described.
(cc) All offers and sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or
exempt from the registration requirements of the 1933 Act and were duly
registered in accordance with or the subject of an available exemption from
registration under the applicable blue sky laws. The Company has not effected
any sales of securities that would be required to be disclosed in response to
Item 701 of Regulation S-K that are not disclosed in the Registration Statement.
Any certificate signed by any officer of the Company on behalf of the
Company and delivered to you or to counsel for the Representative shall be
deemed a representation and warranty of the Company to the Representative as to
the matters covered thereby.
Section 2. Certain Covenants of the Company. The Company covenants and
agrees with Broker-Dealer, to use its best efforts to cause the Company to
perform as follows:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective (if not yet effective at the date and time that
this Agreement is executed and delivered by the parties hereto). The Company
will notify you immediately, and confirm the notice in writing, (i) when the
Registration Statement, or any post-effective amendment to the Registration
Statement, shall have become effective, or any supplement to the Prospectus or
any amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission to amend
the Registration Statement or amend or supplement the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution or threatening of any proceeding for any
such purposes. The Company will use every reasonable effort to prevent the
issuance of any such stop order or of any order preventing or suspending such
use and, if any such order is issued, to obtain the withdrawal thereof at the
earliest possible moment.
(8)
<PAGE>
(b) The Company will not at any time file or make any amendment to the
Registration Statement, or any amendment or supplement to the Prospectus if you
shall not have previously been advised and furnished a copy thereof a reasonable
time prior to the proposed filing, or if you or your counsel reasonably object
to such amendment or supplement.
(c) The Company will deliver to you, at the Company's expense, from
time to time as requested, such number of copies of the Prospectus (as
supplemented or amended) as you may reasonably request. If the delivery of a
Prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Shares and if at such time any events shall have occurred as result of which
the Prospectus as then amended or supplemented would include an untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were made
when such Prospectus is delivered not misleading, or, if for any reason it shall
be necessary during such same period to amend or supplement the Prospectus in
order to comply with the 1933 Act, the Company will notify you and upon your
request prepare and furnish without charge to you and to any dealer in
securities as many copies, as you may from time to time reasonably request, of
an amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance.
(d) The Company will use its best efforts to qualify the Shares for
offering and sale under the applicable securities laws of such states and other
jurisdictions as you may designate and to maintain such qualifications in effect
for as long as may be necessary to complete the distribution of the Shares;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified or to make any undertakings in
respect of doing business in any jurisdiction in which it is not otherwise so
subject. The Company will file such statements and reports as may be required by
the laws of each jurisdiction in which the Shares have been qualified as above
provided.
(e) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the end of the fiscal
quarter first occurring after the first anniversary of the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the 1933 Act
Regulations), an earnings statement (in reasonable detail but which need not be
audited) complying with the provisions of Section 11(a) of the 1933 Act and Rule
158 thereunder and covering a period of at least 12 months beginning after the
effective date of the Registration Statement.
(f) The Company will use the net proceeds received by it from the sale
of the Shares substantially in the manner specified in the Prospectus under the
caption "Use of Proceeds."
(g) The Company will furnish to its security holders of record, as soon
as practicable after the end of each respective period, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year. During a period of five years after the date hereof, the
Company will furnish to you: (i) concurrently with furnishing such reports to
its security holders, statements of operations of the Company for each of the
first three quarters in the form furnished to the Company's security holders;
(ii) concurrently with furnishing to its security holders, a balance sheet of
the Company as of the end of such fiscal year, together with statements of
operations, of cash flows and of security holders, equity of the Company for
such fiscal year, accompanied by a copy of the certificate or report thereon of
independent public accountants; (iii) as soon as they are available, copies of
all reports (financial or otherwise) mailed to security holders; (iv) as soon as
they are available, copies of all reports and financial statements furnished to
or filed with the Commission, any securities exchange or the NASD; (v) every
material press release in respect of the Company or its affairs which is
released or prepared by the Company, and (vi) any additional information of a
public nature concerning the Company or its business that you may reasonably
request. During such five-year period, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts of the Company are
consolidated with any subsidiaries, and shall be accompanied by similar
financial statements for any significant subsidiary that is not so consolidated.
(h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(9)
<PAGE>
(i) The Company will use its best efforts to acquire the inclusion of
its shares of Common Stock on the National Association of Securities Dealers
Automated Quotation system ("NASDAQ") and the American Stock Exchange ("AMEX")
within six months from the date hereof.
(j) The Company is familiar with the Investment Company Act and the
rules and regulations thereunder, and has in the past conducted its affairs, and
will in the future conduct its affairs, in such a manner so as to ensure that
the Company was not and will not be an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act.
(k) The Company will not, and will use its best efforts to cause its
officers, directors and affiliates not to, (i) take, directly or indirectly
prior to termination of the distribution of the Shares contemplated by this
Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which may cause or result in, or which might in the
future reasonably be expected to cause or result in, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of the Shares or (iii) pay or agree to pay
to any person any compensation for soliciting any order to purchase any other
securities of the Company which, in any such case, is in violation of any law,
rule or regulation.
(l) The Company will file timely and accurate reports on Form SR with
the Commission in accordance with Rule 463 of the 1933 Act Regulations or any
successor provision.
(m) Prior to the closing of the Offering, the Company will not, and
will use its best efforts to cause any affiliate of the Company not to issue a
press release or other official communication directly or indirectly, nor hold a
press conference with respect to the Company or with respect to the financial
condition, results of operations, business, properties, assets or liabilities of
the Company, or the offering of the Shares, without your prior written input
within 72 hours which consent shall not be unreasonably withheld.
(n) The Company will notify you promptly of any material adverse change
affecting any of its representations, warranties, agreements and indemnities
herein at any time prior to the closing of the Offering and take such steps as
may be reasonably requested by you either to remedy or publicize the same, or
both.
(o) The Company will reserve and keep available that maximum number of
its authorized but unissued shares of Common Stock which are issuable upon
exercise of the Warrants outstanding from time to time.
(p) On the last day that this Agreement is in full force and effect
after the execution hereof, the Company shall execute and deliver to you the
Warrants you have earned. The Warrants will be substantially in the form of the
Stock Purchase Warrant filed as an exhibit to the Registration Statement, a copy
of which is attached hereto as Exhibit "A".
(q) For a period of five years from the Effective Date, the Company, at
its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit and without issuing any opinion thereon)
the Company's financial statements for each of the first three (3) fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's 10-Q quarterly report and the mailing of quarterly
financial information to Stockholders.
(r) As promptly as practicable after the closing of the Offering, the
Company will prepare, at its own expense, hard cover "bound volumes" relating to
the offering, and will distribute such volumes to the individuals designated by
you.
Section 3. Engagement & Allotment, Term, Reporting, Compensation and
Payment of Expenses.
(a) Engagement & Allotment.
(i) Subject to the terms and conditions of this Agreement, the
Company hereby engages Broker-Dealer, on a "best efforts" basis, as the
Company's nonexclusive agent in connection with the sale of up to 50,000 Shares
(the "Allotted Shares"). The number of Allotted Shares may be increased or
decreased at the sole discretion of the Company upon three (3) days written
notice to Broker-Dealer. Broker-Dealer will keep precise records of all
purchases of stock, including the amount of the purchase, the exact title in
which the Shares are to be issued and the address of the purchaser. The Shares
will be issued promptly by the Company and, in no event, later than fifteen
(10)
<PAGE>
(15) days after notification by Broker-Dealer of the purchase with the
information set forth above. The maximum amount of each sale shall be 8,800
shares. The minimum amount of each sale shall be 300 shares.
(ii) As to residents of the State of California who wish to
purchase in excess of $2,500 worth of the Shares, Broker-Dealer will take
appropriate measures to assure that the purchaser is "suitable" by having a
minimum net worth (excluding home equity, home furnishings and automobiles) of
at least $250,000 and a minimum gross income of $65,000 during the current tax
year; or, in the alternative, a minimum net worth of $500,000. In either case,
the amount of a purchaser's investment may not exceed ten percent (10%) of the
purchaser's net worth.
(iii) Broker-Dealer shall use its best efforts to assist the
Company in making sales of the shares pursuant to the Offering. Broker-Dealer
makes no representations as to the amount of Shares it will be able to sell.
There is no firm commitment to sell any certain amount of the Shares by
Broker-Dealer.
(iv) Broker-Dealer will only offer the Company's stock in
those states in which Broker-Dealer and its brokers are registered.
(v) Broker-Dealer agrees to become a market maker for the
Company when legally permitted by its restrictive agreement with the NASD and
the SEC and when approved by the Broker-Dealer's Board of Directors. At such
time, Broker-Dealer agrees to assist with any filing requirements. Broker-Dealer
does not currently act as a market maker and has no immediate plans to act as a
market maker.
(b) Term. The term of this Agreement shall commence as of the effective
date hereof (the "Effective Date") and shall continue in full force and effect
for a period of up to thirty (30) days from the Date of Registration as set
forth in Section 1(a), above. This Agreement may be extended for additional
period of 30 days upon the mutual written consent of both parties.
(c) Reporting. Broker-Dealer shall offer the Shares pursuant to the
Prospectus. Payment for the Shares shall be made by the Purchaser directly to
the Escrow Agent as set forth in the Prospectus. The commission, as set forth in
Section 3(d), will be paid by the Company or deducted from the proceeds of the
sale when subscriptions have been accepted for at least the Minimum amount as
set forth in the Prospectus and such Minimum subscriptions are fully paid. Said
commission and any other amounts due to Broker-Dealer hereunder shall be paid
every Friday once the Minimum is reached. All amounts due shall be calculated as
of the close of business on the immediately prior Thursday. If the Company or
any other entity makes sales without Broker-Dealer, no commission will be due to
Broker-Dealer on such sales.
(d) Compensation.
The Company shall pay Broker-Dealer as follows:
(i) A commission of 7% based on the total offering amount of
the Allotted Shares as set forth in Section 3(a)(i). The commission will be paid
by the Company or deducted from the proceeds of the sale when subscriptions have
been accepted for at least the Minimum amount as set forth in the Prospectus and
such Minimum subscriptions are fully paid. If more than the Minimum is sold
during the offering then commissions relating to such additional Shares will be
paid out of escrow when monies for the Shares subscribed to are distributed to
the Issuer.
(ii) The Company reserves the right to review all
subscriptions for securities law compliance and to make the final determination
whether to accept or reject subscriptions. No selling commissions will be
payable with respect to subscriptions which are rejected by the Company.
(iii) As an additional incentive for Broker-Dealer to perform
its services in a timely manner, Warrants in the form attached hereto as Exhibit
"A" shall be issued to Broker-Dealer or its designees as follows:
1. A warrant to purchase up to five percent (5%) of the
Allotted Shares, equal to 2,500 shares of stock with
an exercise price of $9.90 - 14.85 per share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of
(11)
<PAGE>
the Common Stock of the Company on the American Stock
Exchange, or the NASDAQ System.
2. In both instances, as set forth above, the Warrants
will be granted pro rata to the sale of the Shares by
Broker-Dealer. Assuming all 50,000 Shares available
for sale are sold by Broker-Dealer, 2,500 Warrants
will be issued. If less than 50,000 Shares are sold
by Broker-Dealer, Warrants will be issued on a pro
rata basis in accordance with the actual number of
Shares sold. For example, should 25,000 Shares be
sold, Broker-Dealer will be entitled to 1,250
Warrants at a price of $9.90 - 14.85 per Share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System. The Shares obtained upon exercise of the
Warrants will be "restricted" stock subject to the
trading provisions of Rule 144 promulgated by the
Commission.
(e) Payment of Expenses. The Company will pay and bear all costs, fees
and expenses incident to the performance of its obligations under this Agreement
(excluding fees and expenses of your counsel), including (a) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits), as originally filed and as amended, the Prospectus and
any amendments or supplements thereto, and the cost of furnishing copies thereof
to you, (b) the preparation of any Selected Dealers Agreement, the certificates
representing the Shares, the Blue Sky Memoranda and any instruments relating to
any of the foregoing, (c) the issuance and delivery of the Shares to the
purchasers, including any transfer taxes payable upon the sale of the Shares,
(d) the fees and disbursements of the Company's counsel and accountants, (e) the
qualification of the Shares under the applicable securities laws in accordance
with Section 2(e) of this Agreement and any filing for review of the Offering
with the NASD, including filing fees and fees and disbursements in connection
therewith and in connection with the Blue Sky Memoranda, (f) all costs, fees and
expenses in connection with the application for inclusion of the Shares on
NASDAQ, (g) costs related to travel and lodging incurred by the Company and its
representatives relating to meetings with and presentations to prospective
purchasers of the Shares reasonably determined by you to be necessary or
desirable to effect the sale of the Shares to the public and (i) all other costs
and expenses incident to the performance of the Company's obligations hereunder
that are not otherwise specifically provided for in this section.
Section 4. Opinion of Counsel and Accountants and other Conditions.
(a) As a condition to the performance of your duties and obligations
hereunder, you shall have received a favorable opinion of Evers & Hendrickson,
LLP ("Evers & Hendrickson") counsel for the Company in form and substance
satisfactory to counsel for you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
California with all requisite corporate power and authority to own, lease and
operate its properties and the properties it proposes to own, lease and operate
as described in the Registration Statement and the Prospectus and to conduct its
business as now conducted and as proposed to be conducted as described in the
Registration Statement and the Prospectus. To the best of such counsel's
knowledge, there are no other jurisdictions in which the ownership or leasing of
the Company's properties or the nature or conduct of its business as now
conducted or proposed to be conducted as described in the Registration Statement
and the Prospectus requires such qualification, except where the failure to do
so would not have a material adverse effect on the Company. To such counsel's
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity (other than any indirect control that
may be implied by virtue of Mr. Yuan and certain other officers of the Company
serving as officers and/or directors of other companies).
(ii) The Company has full legal right, power and authority to
enter into, deliver and perform this Agreement, to issue, sell and deliver the
Shares as provided herein and to consummate the transactions contemplated
herein. This Agreement has been duly authorized, executed and delivered by the
Company and, assuming due authorization, execution and delivery by the other
parties hereto, constitutes a valid and binding agreement of the Company,
enforceable in accordance with its terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equity principles and except to the extent that enforcement of the
indemnification provisions set forth in Section 5 of this Agreement may be
limited by federal or state securities laws or the public policy underlying such
laws.
(12)
<PAGE>
(iii) Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary for the valid authorization, issuance,
sale and delivery of the Shares and the execution, delivery and performance of
this Agreement has been made or obtained and is in full force and effect.
(iv) Neither the issuance, sale and delivery by the Company of
the Shares to purchasers thereof, nor the execution, delivery and performance of
this Agreement, nor the consummation of the transactions contemplated hereby or
thereby by the Company will violate any of the terms and provisions of, or
constitute a default under, any of the Articles of Incorporation or by-laws of
the Company, or, to such counsel's knowledge, under any material indenture,
mortgage, trust, deed of trust, loan agreement, note, lease or other agreement
or instrument to which the Company is a party or to which any of its properties
or other assets is subject; or, to such counsel's knowledge, violate any
applicable statute, judgment, decree, order, rule or regulation of any court or
governmental agency or body; or, to such counsel's knowledge, result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of any of the foregoing.
(v) The description of the Company's authorized capital stock
contained in the Registration Statement and the Prospectus under the caption
"Capital Stock" meets the requirements of Item 12 of Form SB-2 under the 1933
Act, and the Common Stock conforms in all material respects as to legal matters
to the description thereof contained in the Registration Statement and the
Prospectus.
(vi) The Shares to be issued pursuant to the Offering have
been validly authorized by the Company. When issued and delivered, the Shares
will be validly issued, fully paid and nonassessable. No preemptive rights of
shareholders exist with respect to any of the Shares. To such counsel's
knowledge, no person or entity holds a right to require or participate in the
registration under the 1933 Act of the Shares pursuant to the Registration
Statement; and, except as set forth in the Prospectus, no person holds a right
to require registration under the 1933 Act of any shares of Common Stock of the
Company at any other time. To such counsel's knowledge, no person or entity has
a right of participation or first refusal with respect to the sale of the Shares
by the Company. The form of certificates evidencing the Shares comply with all
applicable requirements of California law.
(vii) The Company has an authorized capitalization as set
forth in the Prospectus under the caption "Capital Stock" as of the date
therein. At the date of this Agreement, after effecting a 1-for-2 reverse stock
split, the Company has 5,750,000 shares of issued and outstanding stock (and
250,000 shares of Common Stock reserved for issuance upon exercise of currently
exercisable stock options), all of which is Common Stock. The Common Stock
conforms in all material respects to the description of the Common Stock
contained in the Prospectus. To the knowledge of such counsel, except as
disclosed in the Prospectus, there is no outstanding option, warrant or other
right calling for the issuance of, and no commitment, plan or arrangement to
issue, any shares of capital stock of the Company or any security convertible
into or exchangeable for capital stock of the Company.
(viii) To the knowledge of such counsel, the Company is not in
violation of its Articles of Incorporation or by-laws, and no material default
exists and no event has occurred which, with notice or after the lapse of time
to cure or both, would constitute a material default in the due performance and
observance of any obligation, agreement, term, covenant or condition contained
in any indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument known to such counsel to which any such entity is a
party or by which any such entity or any of its properties is subject. To the
knowledge of such counsel, the Company is not in violation of, or in default
with respect to, any statute, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of each such
entity, respectively.
(ix) To such counsel's knowledge and except as described in
the Prospectus, there is not pending or threatened, any action, suit,
proceeding, inquiry or investigation against the Company or any of its officers
and directors or to which the properties, assets or rights of the Company or
such persons are subject, which, if determined adversely to the Company or any
such persons, would individually or in the aggregate have a material adverse
effect on the financial position, results of operations or business of any such
entity, respectively.
(x) The descriptions in the Registration Statement and the
Prospectus of the contracts, leases and other legal documents therein described
present fairly the information required to be shown and there are no contracts,
leases or other documents known to such counsel of a character required to be
described in the
(13)
<PAGE>
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement which are not described or filed as required. There are
no statutes or regulations applicable to the Company or certificates, permits or
other authorizations from governmental regulatory officials or bodies required
to be obtained or maintained by the Company, known to such counsel, of a
character required to be disclosed in the Registration Statement or the
Prospectus which have not been so disclosed and properly described therein. To
such counsel's knowledge, all agreements between the Company, and third parties
expressly referenced in the Prospectus are legal, valid and binding obligations
of the Company, enforceable in accordance with their respective terms, except to
the extent enforceability may be limited by bankruptcy, insolvency,
reorganization or other laws of general applicability relating to or affecting
creditors' rights and to general equitable principles.
(xi) The Registration Statement has become effective under the
1933 Act and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending or contemplated under the
1933 Act. Other than financial statements and other financial and operating data
and schedules contained therein, as to which counsel need express no opinion,
the Registration Statement, the Prospectus and any amendment or supplement
thereto, appear on their face to conform as to form in all material respects
with the requirements of Form SB-2 under the 1933 Act Regulations.
(xii) The Registration Statement, or any further amendment
thereto made prior to the date hereof, on its effective date, contained or
contains no untrue statement of a material fact and did not omit or does not
omit to state any material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made not misleading, or neither the Prospectus nor any amendment or supplement
thereto, as of its issue date, contained or contains any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading (provided that such counsel need express no belief regarding the
financial statements and related schedules and other financial data contained in
the Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
(xiii) The Company is not an "investment company," or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act.
(xiv) The descriptions in the Prospectus of statutes,
regulations, legal or governmental proceedings are accurate and present fairly a
summary of the information required to be shown under the 1933 Act and the 1933
Act Regulations. The information in the Prospectus under the caption
"Capitalization," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel, is correct and presents fairly
the information required to be disclosed therein under the 1933 Act and the 1933
Act Regulations.
(xv) To such counsel's knowledge, no relationship, direct or
indirect, exists between or among any of the Company or any affiliate of the
Company, on the one hand, and any director, officer, stockholder, customer or
supplier of the Company or any affiliate of the Company, on the other hand, that
is required by the 1933 Act or by the 1933 Act Regulations to be described in
the Registration Statement or the Prospectus which is not so described or is not
adequately described.
(xvi) All sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or, to
the knowledge of such counsel, effected in a manner which was exempt from the
registration requirements of the 1933 Act and were duly registered in accordance
with or the subject of an available exemption from the registration requirements
of the applicable blue sky laws. To the knowledge of such counsel, the Company
has not effected any sales of securities that would be required to be disclosed
in response to Item 701 of Regulation S-K that are not disclosed in the
Registration Statement.
In rendering the foregoing opinion, such counsel may rely on the following:
(A) as to matters involving the application of laws other than
the laws of the United States and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the extent
specified in such opinion, upon an opinion or opinions (in form and
substance reasonably satisfactory to Underwriters' counsel) of other
counsel familiar with the applicable laws,
(B) as to matters of fact, to the extent they deem
appropriate, on certificates of responsible officers of the Company and
certificates or other written statements of officers or departments of
various
(14)
<PAGE>
jurisdictions having custody of documents respecting the existence or
good standing of the Company provided that copies of all such opinions,
statements or certificates shall be delivered to your counsel. The
opinion of counsel for the Company shall state that the opinion of any
other counsel, or certificate or written statement, on which such
counsel is relying is in form satisfactory to such counsel and that you
and they are justified in relying thereon.
(b) At the time that this Agreement is executed by the Company, you
shall have received from KPMG, LLP a letter, dated the date hereof, in form and
substance satisfactory to you, confirming that they are independent public
accountants with respect to the Company within the meanings of the 1933 Act and
1933 Act Regulations, and stating in effect that:
(i) in their opinion, the financial statements and any
supplementary financial information and schedule included in the Registration
Statement and covered by their opinion therein comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
1933 Act Regulations;
(ii) on the basis of limited procedures (set forth in detail
in such letter and made in accordance with such procedures as may be specified
by you) not constituting an audit in accordance with generally accepted auditing
standards, consisting of (but not limited to) a reading of the latest available
internal unaudited financial statements of the Company, a reading of the minute
books of the Company, inquiries of officials of the Company responsible for
financial and accounting matters, and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that caused them to
believe that:
(A) the unaudited financial statements and supporting schedule
and other unaudited financial data of the Company included in the
Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act
and the 1933 Act Regulations or are not presented in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited financial statements from which
such data and items were derived, and any such unaudited data and items
were not determined on a basis substantially consistent with the basis
for the corresponding amounts in the audited financial statements
included in the Prospectus;
(C) any unaudited pro forma financial information included in
the Prospectus does not comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations or the pro forma adjustments have not been properly applied
to historical amounts in the compilation of that information; and
(D) at a specified date not more than five days prior to the
date of delivery of such letter, there was any change in the capital
stock or long-term debt or obligations under capital leases of the
Company, or there were any decreases in net current assets or net
assets, or shareholders' equity, from that set forth in the Company's
balance sheet at December 31, 1998, except as described in such letter;
and
(iii) in addition to the procedures referred to in clause (ii)
above and the examination referred to in their Reports included in the
Registration Statement, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information specified
by you which are derived from the general accounting records of the Company,
which appear in the Registration Statement or the exhibits or schedules thereto
and are specified by you, and have compared such amounts, percentages and
financial information with the accounting records of the Company and with
material derived from such records and have found them to be in agreement.
(c) At the time of the closing of the Offering, you shall have received
from KPMG, LLP, a letter, in form and substance satisfactory to you and dated as
of the date of the closing of the Offering, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (b) above, except
that the specified date referred to shall be a date not more than five days
prior to the date of closing of the Offering.
(d) The NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to such offering, such terms or your
participation in the same.
(15)
<PAGE>
Section 5. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless Broker-Dealer and each
person, if any, who controls Broker-Dealer within the meaning of the 1933 Act or
the 1934 Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which it or such controlling person may become subject under the 1933
Act, the 1934 Act or insofar as such losses, claims, damages or liabilities in
respect thereof arise out of or are based upon any breach of any warranty or
covenant of the Company herein contained or by reason of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and will reimburse Broker-Dealer for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon and in conformity with written information furnished to the
Company by Broker-Dealer expressly for use therein. In addition to its other
obligations under this Section 5 (a), the Company agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5 (a), it will
reimburse Broker-Dealer on a monthly basis for all reasonable legal and other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse Broker-Dealer for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. Any such interim reimbursement payments that
are not made to Broker-Dealer within 30 days of a request for reimbursement
shall bear interest at the prime rate (or reference rate or other commercial
lending rate for borrowers of the highest credit standing) published from time
to time by The Wall Street Journal (the "Prime Rate") from the date of such
request. The Company will not, without the prior written consent of
Broker-Dealer, settle or compromise or consent to the entry of any judgment in
any pending or threatened action or claim or related cause of action or portion
of such cause of action in respect of which indemnification may be sought
hereunder (whether or not Broker-Dealer is a party to such action or claim),
unless such settlement, compromise or consent includes an unconditional release
of Broker-Dealer from all liability arising out of such action or claim (or
related cause of action or portion thereof).
The indemnity agreement in this Section 5(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls Broker-Dealer within the meaning of the 1933 Act or the 1934 Act to
the same extent as such agreement applies to Broker-Dealer.
(b) Broker-Dealer will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement or the Prospectus or
any such amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by Broker-Dealer expressly for use
therein; and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action. In addition to its other
obligations under this Section 5(b), Broker-Dealer agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5(b), it will reimburse
the Company on a monthly basis for all reasonable legal and other expenses
incurred in connection with investigating or defending any such claim, action
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of its obligation
to reimburse the Company for such expenses and the possibility that such
(16)
<PAGE>
payments might later be held to have been improper by a court of competent
jurisdiction. Any such interim reimbursement payments that are not made to the
Company within 30 days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request. This indemnity agreement shall be in
addition to any liabilities that Broker-Dealer may otherwise have.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; no indemnification provided for in Section 5(a) or 5(b)
shall be available to any party who shall fail to give notice as provided in
this Section 5(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by the
failure to give such notice, but the omission so to notify the indemnifying
party will not relieve the indemnifying party from any liability that it may
have to any indemnified party otherwise than under Section 5. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation, except
that if the indemnified party has been advised by counsel in writing that there
are one or more defenses available to the indemnified party which are different
from or additional to those available to the indemnifying party, then the
indemnified party shall have the right to employ separate counsel and in that
event the reasonable fees and expenses of such separate counsel for the
indemnified party shall be paid by the indemnifying party; provided, however,
that if the indemnifying party is the Company, the Company shall only be
obligated to pay the reasonable fees and expenses of a single law firm (and any
reasonably necessary local counsel) employed by all of the indemnified parties
and the persons referred to in Section 5(a) hereof. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
(d) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Section 5(a) and 5(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the indemnifying parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the National
Association of Securities Dealers, Inc. Any such arbitration must be commenced
by service of a written demand for arbitration or a written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a) and 5(b) hereof
and will not resolve the ultimate propriety or enforceability of the obligation
to indemnify for expenses that is created by the provisions of Sections 5(a) and
5(b).
(e) In order to provide for just and equitable contribution in
circumstances under which the indemnity provided for in this Section 5 is for
any reason judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the right of appeal) to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Company on the one hand,
and Broker-Dealer on the other shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity incurred by the Company and Broker-Dealer, as incurred, in such
proportions that (a) Broker-Dealer is responsible pro rata for that portion
represented by the commission percentage appearing on the cover page of the
Prospectus bears to the initial public offering price (before deducting
expenses) appearing thereon, and (b) the Company is responsible for the balance,
provided, however, that no person guilty of fraudulent misrepresentations
(within the meaning of Section 12(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation; provided, further, that if the allocation provided above is
not permitted by applicable law, the Company, on the one hand and Broker-Dealer
on the other shall contribute to the aggregate losses in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company on the one hand, and Broker-Dealer on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. Relative fault shall be determined by reference to, among other
(17)
<PAGE>
things, whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
on the one hand, or by Broker-Dealer on the other hand, and the parties,
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and Broker-Dealer agree that it
would not be just and equitable if contributions pursuant to this Section 5(e)
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 5(e). The amount paid or payable by a party as a result of the
losses, claims, damages or liabilities referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending such action or claim.
Section 6. Representations, Warranties and Agreements to Survive
Delivery. The representations, warranties, indemnities, agreements and other
statements of the Company or their respective officers set forth in or made
pursuant to this Agreement will remain operative and in full force and effect
will survive the termination of this Agreement.
Section 7. Notices.
All notices or communications required or permitted hereunder shall be
in writing and shall be mailed or delivered as follows:
If to the Company: CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
320 S. Garfield Avenue, Suite 318
Alhambra, CA 91801
Attention: Frank Yuan
If to Broker-Dealer: (a) Corporate Securities Group
175 W. Jackson Blvd., Suite #A-1951
Chicago, IL 60604
Attention: Andy Lam
Section 8. Miscellaneous. This Agreement contains and constitutes the
entire agreement between the parties hereto and supersedes all prior written or
oral and all contemporaneous agreements or negotiations with respect to the
subject matter hereof. The Agreement may only be amended, modified or waived in
writing signed by both parties hereto. This Agreement shall be governed in
accordance with the laws of the State of California; without reference to the
conflict of law provisions thereof. This Agreement may be executed in
counterparts.
Section 9. Governing Law and Time. This Agreement shall be governed by
the laws of the State of California. Specified time of the day refers to United
States Pacific Time. Time shall be of the essence of this Agreement.
Section 10. Counterparts. This Agreement may be executed in one or more
counterparts and when a counterpart has been executed by each party, all such
counterparts taken together shall constitute one and the same agreement.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument will become a binding agreement among the Company and Broker-Dealer
in accordance with its terms.
Very truly yours,
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
By: ________________________________
(18)
<PAGE>
Name: Frank Yuan
Title: President
Confirmed and accepted as of
the date first above written:
CORPORATE INVESTMENT GROUP
By: _____________________________________
Name: Andy Lam
Title:
2,500,000 SHARES
CYBER MERCHANTS EXCHANGE, INC. d.b.a. C-ME.com
Common Stock
BEST EFFORTS COMPENSATION AGREEMENT
Alhambra, California
April 16, 1999
Andrew M. Razo
AM Razo & Company Securities, Inc.
Lakeshore Tower, Suite 350
18101 Von Karman Ave.
Irvine, CA 92612
Dear Mr. Razo:
CYBER MERCHANTS EXCHANGE, INC.d.b.a. C-ME.Com, a California corporation (the
"Company"), proposes to issue and sell an aggregate of two million five hundred
thousand (2,500,000) shares of the Company's Common Stock, no par value per
share (the "Common Stock" or "Shares").
The Shares will be offered to the public by the Company at a price of
$6.00-$9.00 per share (the "Offering"). The purpose of this Agreement is to set
forth the understanding of the parties relating to the right of AM Razo &
Company Securities, Inc., a California Corporation ("Broker-Dealer") to
participate in the sale of the Shares as a broker-dealer exercising its best
efforts to sell the Shares.
Section 1. Representations and Warranties of the Company . The Company
represents and warrants to and agrees with Broker-Dealer that:
(19)
<PAGE>
(a) A registration statement on Form SB-2 (File No. 333-41411) with
respect to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the
applicable rules and regulations (the "1933 Act Regulations") of the Securities
and Exchange Commission (the "Commission"), and has been filed with the
Commission; and such amendments to such registration statement as may have been
required prior to the date hereof have been filed with the Commission, and such
amendments have been similarly prepared. Such registration statement went
effective with the Commission on _________________, 199__ (the "Date of
Registration"). Copies of such registration statement and amendment or
amendments of each related preliminary prospectus, and the exhibits, financial
statements and schedules, as finally amended and revised, have been delivered to
you.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement became
effective and, in the event any post-effective amendment thereto becomes
effective prior to the closing of the Offering, shall also mean such
registration statement as so amended. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Shares in the form in which
it is first filed with the Commission pursuant to Rule 424(b) of the 1933 Act
Regulations or, if no filing pursuant to Rule 424(b) of the 1933 Act Regulations
is required, shall mean the form of final prospectus included in the
Registration Statement at the time such Registration Statement becomes
effective.
(b) When the Registration Statement became effective, when the
Prospectus was first filed pursuant to Rule 424(b) of the 1933 Act Regulations,
when any amendment to the Registration Statement becomes effective, and when any
supplement to the Prospectus is filed with the Commission, (i) the Registration
Statement, the Prospectus and any amendments thereof and supplements thereto
will conform in all material respects with the applicable requirements of the
1933 Act and the 1933 Act Regulations, and (ii) neither the Registration
Statement, the Prospectus nor any amendment or supplement thereto will contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by Broker-Dealer
expressly for use in the Registration Statement.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the state of California with all
requisite corporate power and authority to own, lease and operate its properties
and the properties it proposes to own, lease and operate as described in the
Registration Statement and the Prospectus and to conduct its business as now
conducted and as proposed to be conducted as described in the Registration
Statement and the Prospectus. The Company has been duly qualified to do business
and is in good standing as a foreign corporation in each other jurisdiction in
which the ownership or leasing of its properties or the nature or conduct of its
business as now conducted or proposed to be conducted as described in the
Registration Statement and the Prospectus requires such qualification, except
where the failure to do so would not have a material adverse effect on the
Company.
(d) The Company has full legal right, power and authority to enter into
this Agreement, to issue, sell and deliver the Shares as provided herein and to
consummate the transactions contemplated herein. This Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid and
binding agreement of the Company, enforceable in accordance with its terms,
except to the extent that enforceability may be limited by bankruptcy,
insolvency, reorganization or other laws of general applicability relating to or
affecting creditors, rights, or by general equity principles and except to the
extent the indemnification provisions set forth in Section 5 of this Agreement
may be limited by federal or state securities laws or the public policy
underlying such laws.
(e) Each consent, approval, authorization, order, license, certificate,
permit, registration, designation or filing by or with any governmental agency
or body necessary for the valid authorization, issuance, sale and delivery of
the Shares, the execution, delivery and performance of this Agreement and the
consummation by the Company of the transactions contemplated hereby, has been
made or obtained and is in full force and effect.
(20)
<PAGE>
(f) Neither the issuance, sale and delivery by the Company of the
Shares, nor the execution, delivery and performance of this Agreement nor the
consummation of the transactions contemplated hereby by the Company will
conflict with or result in a breach or violation of any of the terms and
provisions of, or (with or without the giving of notice or the passage of time
or both) constitute a default under, the Articles of Incorporation, by-laws of
the Company; any indenture, mortgage, deed of trust, loan agreement, note, bond
or other agreement or instrument to which the Company, is a party or to which
it, any of its properties or other assets; or any applicable statute, law,
judgment, decree, order, rule or regulation of any court or governmental agency
or body applicable to the Company or its property; or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property or asset
of the Company.
(g) The Shares to be issued and sold hereunder have been validly
authorized by the Company. When issued and delivered against payment therefor,
the Shares will be duly and validly issued, fully paid and non-assessable. No
preemptive rights of shareholders exist with respect to any of the Shares. No
person or entity holds a right to require or participate in the registration
under the 1933 Act of the Shares pursuant to the Registration Statement; and,
except as set forth in the Prospectus, no person holds a right to require
registration under the 1933 Act of any shares of Common Stock of the Company at
any other time. No person or entity has a right of participation or first
refusal with respect to the sale of the Shares by the Company. The form of
certificates evidencing the Shares complies with all applicable requirements of
California law.
(h) The Common Stock to be issued upon exercise of the common stock
purchase warrants to be issued to Broker-Dealer (the "Warrants") are duly
authorized, and when issued and delivered pursuant to this Agreement, will be
duly authorized, validly issued, fully paid and non-assessable and free of
pre-emptive rights of any security holder of the Company. Neither the filing of
the Registration Statement nor the offering or sale of the Shares gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock, except as described
in the Registration Statement.
(i) This Agreement has been duly and validly authorized, executed and
delivered by the Company. The Company has full power and lawful authority to
issue and sell the shares of Common Stock to be sold by it upon exercise of the
Warrants (the "Warrant Shares") on the terms and conditions set forth herein,
and no consent, approval, authorization or other order of any governmental
authority is required in connection with such authorization, execution and
delivery or with the authorization, issue and sale of the Warrant Shares or the
Warrants, except as may be required under the 1933 Act or state securities laws.
(j) The Company has 5,750,000 shares (and 250,000 shares of Common
Stock reserved for issuance upon exercise of currently exercisable stock
options) of issued and outstanding shares of Common Stock, after effecting a
1-for-2 reverse stock split. The Company has no other issued and outstanding
capital stock. The Company's authorized capitalization is as set forth in the
Prospectus under the caption "Capitalization." Except as disclosed in the
Prospectus, there is no outstanding option, warrant or other right calling for
the issuance of, and no commitment, plan or arrangement to issue any shares of
capital stock of the Company or any security convertible into or exchangeable
for capital stock of the Company.
(k) The financial statements of the Company in the Registration
Statement and the Prospectus present fairly the financial position of the
Company as of the dates indicated and the results of operations and cash flows
for the periods specified, all in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods specified. The
financial statement schedule included in the Registration Statement and the
amounts in the Prospectus under the captions "Selected Financial Data" fairly
present the information shown therein and have been compiled on a basis
consistent with the financial statements included in the Registration Statement
and the Prospectus. No other financial statements or schedules are required by
Form SB-2 or otherwise to be included in the Registration Statement or the
Prospectus. The unaudited pro forma combined financial information (including
the related notes) included in the Prospectus complies as to form in all
material respects to the applicable accounting requirements of the 1933 Act and
the 1933 Act Regulations and management of the Company believes that the
assumptions underlying the pro forma adjustments are reasonable. Such pro forma
adjustments have been properly applied to the historical amounts in the
compilation of the information and such information fairly presents with respect
to the Company the pro forma financial position, results of operations and other
information purported to be shown therein at the respective dates and for the
respective periods specified.
(l) KPMG, LLP, who have examined and are reporting upon the audited
financial statements and schedules included in the Registration Statement, are,
and were during the periods covered by their Reports included
(21)
<PAGE>
in the Registration Statement and the Prospectus, independent public
accountants, as required by the 1933 Act and the 1933 Act Regulations.
(m) The Company has not sustained, since inception, any material loss
or interference with its business from fire, explosion, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or arbitrators' or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as otherwise stated in the Registration Statement
and Prospectus, there has not been (i) any material change in the capital stock
or partnership interests, as applicable, long-term debt, obligations under
capital leases or short-term borrowings of the Company, (ii) any material
adverse change, or any development which could reasonably be seen as involving a
prospective material adverse change, in or affecting the business prospects,
properties, assets, results of operations or condition (financial or other) of
the Company, (iii) any liability or obligation, direct or contingent, incurred
or undertaken by the Company, which is material to the business or condition
(financial or other) of the Company, except for liabilities or obligations
incurred in the ordinary course of business, (iv) any declaration or payment of
any dividend or distribution of any kind on or with respect to the capital stock
of the Company, or (v) any transaction that is material to the Company except
transactions in the ordinary course of business or as otherwise disclosed in the
Registration Statement and the Prospectus.
(n) The Company is not in violation of its Articles of Incorporation or
by-laws, and no default exists, and no event has occurred, nor state of facts
exists, which, with notice or after the lapse of time to cure or both, would
constitute a default in the due performance and observance of any obligation,
agreement, term, covenant, consideration or condition contained in any
indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument to which the Company is a party or by which it or any of
its properties is subject. The Company is not in violation of, or in default
with respect to, any statute, law, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as is in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of the
Company.
(o) Except as described in the Prospectus, there is not pending or, to
the knowledge of the Company, threatened any action, suit, proceeding, inquiry
or investigation against the Company, its officers and directors or to which the
properties, assets or rights of the Company are subject, before or brought by
any court or governmental agency or body or board of arbitrators, which could
result in any material adverse change in the business, prospects, properties,
assets, results of operations or condition (financial or otherwise) of the
Company.
(p) The descriptions in the Registration Statement and the Prospectus
of the contracts, leases and other legal documents therein described present
fairly the information required to be shown, and there are no contracts, leases,
or other documents of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement which are not described or filed as required. To the best knowledge of
the Company, there are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus which have not been so disclosed and properly described therein. All
agreements between the Company and third parties expressly referenced in the
Prospectus are legal, valid and binding obligations of the Company enforceable
in accordance with their respective terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equitable principles.
(q) The Company owns, possesses or has obtained all material permits,
licenses, franchises, certificates, consents, orders, approvals and other
authorizations of governmental or regulatory authorities as are necessary to own
or lease, as the case may be, and to operate its properties and to carry on its
business as presently conducted, or as contemplated in the Prospectus to be
conducted, and the Company has not received any notice of proceedings relating
to revocation or modification of any such licenses, permits, certificates,
consents, orders, approvals or authorizations.
(22)
<PAGE>
(r) The Company owns or possesses adequate license or other rights to
use all patents, trademarks, service marks, trade names, copyrights, software
and design licenses, trade secrets, manufacturing processes, other intangible
property rights and know-how (collectively "Intangibles") necessary to entitle
it to conduct its business now, and as proposed to be conducted or operated as
described in the Prospectus, and the Company has not received notice of
infringement or of conflict with (and knows of no such infringement of or
conflict with) asserted rights of others with respect to any Intangibles which
could materially and adversely affect its business, prospects, properties,
assets, results of operation or condition (financial or otherwise).
(s) The Company has not directly or indirectly, at any time (i) made
any contribution to any candidate for political office, or failed to disclose
fully any such contribution, in violation of law or (ii) made any payment to any
state, federal or foreign, governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. To the best knowledge of
the Company, the Company's internal accounting controls and procedures are
sufficient to cause such entities to comply in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(t) To the best of the Company's knowledge, the Company's systems of
internal accounting controls taken as a whole are sufficient to meet the broad
objectives of internal accounting control insofar as those objectives pertain to
the prevention or detection of errors or irregularities in amounts that would be
material in relation to the Company's financial statements; and, to the best of
the Company's knowledge, neither the Company, nor any employee or agent thereof,
has made any payment of funds of the Company or received or retained any funds
and no funds of the Company have been set aside to be used for any payment, in
each case in violation of any law, rule or regulation.
(u) The Company has filed on a timely basis all necessary federal,
state, local and foreign income and franchise tax returns required to be filed
through the date hereof and have paid all taxes shown as due thereon; and no tax
deficiency has been asserted against the Company, nor does the Company know of
any tax deficiency which is likely to be asserted against the Company which if
determined adversely to the Company, could materially adversely affect the
business, prospects, properties, assets, results of operations or condition
(financial or otherwise) of any such entity, respectively. All tax liabilities
are adequately provided for on the respective books of such entities.
(v) The Company maintains insurance (issued by insurers of recognized
financial responsibility) of the types and in the amounts generally deemed
adequate for their respective businesses and, to the best of the Company's
knowledge, consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance covering real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(w) To the best of the Company's knowledge, no general labor problem
exists or is imminent with the employees of the Company which would have a
material adverse effect on the financial position, results of operations or
business of the Company.
(x) The Company and its officers, directors or affiliates have not
taken and will not take, directly or indirectly, any action designed to, or that
might reasonably be expected to, cause or result in or constitute the
stabilization or manipulation of any security of the Company or to facilitate
the sale or resale of the Shares in violation of any law, rule or regulation.
(y) The Company has not incurred any liability for a fee, commission or
other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than as
contemplated hereby.
(23)
<PAGE>
(z) Except as otherwise disclosed in the Prospectus, the Company has
not authorized or conducted nor has knowledge of the generation, transportation,
storage, presence, use, treatment, disposal, release, or other handling of any
hazardous substance, hazardous waste, hazardous material, hazardous constituent,
toxic substance, pollutant, contaminant, asbestos, radon, polychlorinated
biphenyls ("PCBs"), petroleum product or waste (including crude oil or any
fraction thereof), natural gas, liquefied gas, synthetic gas or other material
defined, regulated, controlled or potentially subject to any remediation
requirement under any environmental law (collectively, "Hazardous Materials"),
on, in, under or affecting any real property currently leased or owned or by any
means controlled by the Company (the "Real Property") except as in material
compliance with applicable laws; to the knowledge of the Company, the Real
Property and the Company's operations with respect to the Real Property are in
compliance with all federal, state and local laws, ordinances, rules,
regulations and other governmental requirements relating to pollution, control
of chemicals, management of waste, discharges of materials into the environment,
health, safety, natural resources, and the environment (collectively,
"Environmental Laws"), and the Company has, and is in compliance with, all
licenses, permits, registrations and government authorizations necessary to
operate under all applicable Environmental Laws. Except as otherwise disclosed
in the Prospectus, the Company has not received any written or oral notice from
any governmental entity or any other person and there is no pending or
threatened claim, litigation or any administrative agency proceeding that:
alleges a violation of any Environmental Laws by the Company; alleges that the
Company is a liable party or a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
S 9601, et seq., or any state superfund law; has resulted in or could result in
the attachment of an environmental lien on any of the Real Property; or, alleges
that the Company is liable for any contamination of the environment,
contamination of the Real Property, damage to natural resources, property
damage, or personal injury based on their activities or the activities of their
predecessors or third parties (whether at the Real Property or elsewhere)
involving Hazardous Materials whether arising under the Environmental Laws,
common law principles or other legal standards.
(aa) The Company will not become as a result of the transactions
contemplated hereby, or will not conduct its business in a manner in which it
would become, "an investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended (the "Investment Company Act").
(bb) No relationship, direct or indirect, exists between or among any
of the Company or any affiliate of the Company, on the one hand, and any
director, officer, stockholder, customer or supplier of the Company or any
affiliate of the Company, on the other hand, that is required by the 1933 Act or
by the 1933 Act Regulations to be described in the Registration Statement or the
Prospectus which is not so described or is not adequately described.
(cc) All offers and sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or
exempt from the registration requirements of the 1933 Act and were duly
registered in accordance with or the subject of an available exemption from
registration under the applicable blue sky laws. The Company has not effected
any sales of securities that would be required to be disclosed in response to
Item 701 of Regulation S-K that are not disclosed in the Registration Statement.
Any certificate signed by any officer of the Company on behalf of the
Company and delivered to you or to counsel for the Representative shall be
deemed a representation and warranty of the Company to the Representative as to
the matters covered thereby.
Section 2. Certain Covenants of the Company. The Company covenants and
agrees with Broker-Dealer, to use its best efforts to cause the Company to
perform as follows:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective (if not yet effective at the date and time that
this Agreement is executed and delivered by the parties hereto). The Company
will notify you immediately, and confirm the notice in writing, (i) when the
Registration Statement, or any post-effective amendment to the Registration
Statement, shall have become effective, or any supplement to the Prospectus or
any amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission to amend
the Registration Statement or amend or supplement the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution or threatening of any proceeding for any
such purposes. The Company will use every reasonable effort to prevent the
issuance of any such stop order or of any order preventing or suspending such
use and, if any such order is issued, to obtain the withdrawal thereof at the
earliest possible moment.
(24)
<PAGE>
(b) The Company will not at any time file or make any amendment to the
Registration Statement, or any amendment or supplement to the Prospectus if you
shall not have previously been advised and furnished a copy thereof a reasonable
time prior to the proposed filing, or if you or your counsel reasonably object
to such amendment or supplement.
(c) The Company will deliver to you, at the Company's expense, from
time to time as requested, such number of copies of the Prospectus (as
supplemented or amended) as you may reasonably request. If the delivery of a
Prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Shares and if at such time any events shall have occurred as result of which
the Prospectus as then amended or supplemented would include an untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were made
when such Prospectus is delivered not misleading, or, if for any reason it shall
be necessary during such same period to amend or supplement the Prospectus in
order to comply with the 1933 Act, the Company will notify you and upon your
request prepare and furnish without charge to you and to any dealer in
securities as many copies, as you may from time to time reasonably request, of
an amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance.
(d) The Company will use its best efforts to qualify the Shares for
offering and sale under the applicable securities laws of such states and other
jurisdictions as you may designate and to maintain such qualifications in effect
for as long as may be necessary to complete the distribution of the Shares;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified or to make any undertakings in
respect of doing business in any jurisdiction in which it is not otherwise so
subject. The Company will file such statements and reports as may be required by
the laws of each jurisdiction in which the Shares have been qualified as above
provided.
(e) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the end of the fiscal
quarter first occurring after the first anniversary of the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the 1933 Act
Regulations), an earnings statement (in reasonable detail but which need not be
audited) complying with the provisions of Section 11(a) of the 1933 Act and Rule
158 thereunder and covering a period of at least 12 months beginning after the
effective date of the Registration Statement.
(f) The Company will use the net proceeds received by it from the sale
of the Shares substantially in the manner specified in the Prospectus under the
caption "Use of Proceeds."
(g) The Company will furnish to its security holders of record, as soon
as practicable after the end of each respective period, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year. During a period of five years after the date hereof, the
Company will furnish to you: (i) concurrently with furnishing such reports to
its security holders, statements of operations of the Company for each of the
first three quarters in the form furnished to the Company's security holders;
(ii) concurrently with furnishing to its security holders, a balance sheet of
the Company as of the end of such fiscal year, together with statements of
operations, of cash flows and of security holders, equity of the Company for
such fiscal year, accompanied by a copy of the certificate or report thereon of
independent public accountants; (iii) as soon as they are available, copies of
all reports (financial or otherwise) mailed to security holders; (iv) as soon as
they are available, copies of all reports and financial statements furnished to
or filed with the Commission, any securities exchange or the NASD; (v) every
material press release in respect of the Company or its affairs which is
released or prepared by the Company, and (vi) any additional information of a
public nature concerning the Company or its business that you may reasonably
request. During such five-year period, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts of the Company are
consolidated with any subsidiaries, and shall be accompanied by similar
financial statements for any significant subsidiary that is not so consolidated.
(h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
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(i) The Company will use its best efforts to acquire the inclusion of
its shares of Common Stock on the National Association of Securities Dealers
Automated Quotation system ("NASDAQ") and the American Stock Exchange ("AMEX")
within six months from the date hereof.
(j) The Company is familiar with the Investment Company Act and the
rules and regulations thereunder, and has in the past conducted its affairs, and
will in the future conduct its affairs, in such a manner so as to ensure that
the Company was not and will not be an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act.
(k) The Company will not, and will use its best efforts to cause its
officers, directors and affiliates not to, (i) take, directly or indirectly
prior to termination of the distribution of the Shares contemplated by this
Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which may cause or result in, or which might in the
future reasonably be expected to cause or result in, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of the Shares or (iii) pay or agree to pay
to any person any compensation for soliciting any order to purchase any other
securities of the Company which, in any such case, is in violation of any law,
rule or regulation.
(l) The Company will file timely and accurate reports on Form SR with
the Commission in accordance with Rule 463 of the 1933 Act Regulations or any
successor provision.
(m) Prior to the closing of the Offering, the Company will not, and
will use its best efforts to cause any affiliate of the Company not to issue a
press release or other official communication directly or indirectly, nor hold a
press conference with respect to the Company or with respect to the financial
condition, results of operations, business, properties, assets or liabilities of
the Company, or the offering of the Shares, without your prior written input
within 72 hours which consent shall not be unreasonably withheld.
(n) The Company will notify you promptly of any material adverse change
affecting any of its representations, warranties, agreements and indemnities
herein at any time prior to the closing of the Offering and take such steps as
may be reasonably requested by you either to remedy or publicize the same, or
both.
(o) The Company will reserve and keep available that maximum number of
its authorized but unissued shares of Common Stock which are issuable upon
exercise of the Warrants outstanding from time to time.
(p) On the last day that this Agreement is in full force and effect
after the execution hereof, the Company shall execute and deliver to you the
Warrants you have earned. The Warrants will be substantially in the form of the
Stock Purchase Warrant filed as an exhibit to the Registration Statement, a copy
of which is attached hereto as Exhibit "A".
(q) For a period of five years from the Effective Date, the Company, at
its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit and without issuing any opinion thereon)
the Company's financial statements for each of the first three (3) fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's 10-Q quarterly report and the mailing of quarterly
financial information to Stockholders.
(r) As promptly as practicable after the closing of the Offering, the
Company will prepare, at its own expense, hard cover "bound volumes" relating to
the offering, and will distribute such volumes to the individuals designated by
you.
Section 3. Engagement & Allotment, Term, Reporting, Compensation and
Payment of Expenses.
(a) Engagement & Allotment.
(i) Subject to the terms and conditions of this Agreement, the
Company hereby engages Broker-Dealer, on a "best efforts" basis, as the
Company's nonexclusive agent in connection with the sale of up to 50,000 Shares
(the "Allotted Shares"). The number of Allotted Shares may be increased or
decreased at the sole discretion of the Company upon three (3) days written
notice to Broker-Dealer. Broker-Dealer will keep precise records of all
purchases of stock, including the amount of the purchase, the exact title in
which the Shares are to be issued and the address of the purchaser. The Shares
will be issued promptly by the Company and, in no event, later than fifteen
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(15) days after notification by Broker-Dealer of the purchase with the
information set forth above. The maximum amount of each sale shall be 8,800
shares. The minimum amount of each sale shall be 300 shares.
(ii) As to residents of the State of California who wish to
purchase in excess of $2,500 worth of the Shares, Broker-Dealer will take
appropriate measures to assure that the purchaser is "suitable" by having a
minimum net worth (excluding home equity, home furnishings and automobiles) of
at least $250,000 and a minimum gross income of $65,000 during the current tax
year; or, in the alternative, a minimum net worth of $500,000. In either case,
the amount of a purchaser's investment may not exceed ten percent (10%) of the
purchaser's net worth.
(iii) Broker-Dealer shall use its best efforts to assist the
Company in making sales of the shares pursuant to the Offering. Broker-Dealer
makes no representations as to the amount of Shares it will be able to sell.
There is no firm commitment to sell any certain amount of the Shares by
Broker-Dealer.
(vi) Broker-Dealer will only offer the Company's stock in
those states in which Broker-Dealer and its brokers are registered.
(vii) Broker-Dealer agrees to become a market maker for the
Company when legally permitted by its restrictive agreement with the NASD and
the SEC and when approved by the Broker-Dealer's Board of Directors. At such
time, Broker-Dealer agrees to assist with any filing requirements. Broker-Dealer
does not currently act as a market maker and has no immediate plans to act as a
market maker.
(b) Term. The term of this Agreement shall commence as of the effective
date hereof (the "Effective Date") and shall continue in full force and effect
for a period of up to thirty (30) days from the Date of Registration as set
forth in Section 1(a), above. This Agreement may be extended for additional
period of 30 days upon the mutual written consent of both parties.
(c) Reporting. Broker-Dealer shall offer the Shares pursuant to the
Prospectus. Payment for the Shares shall be made by the Purchaser directly to
the Escrow Agent as set forth in the Prospectus. The commission, as set forth in
Section 3(d), will be paid by the Company or deducted from the proceeds of the
sale when subscriptions have been accepted for at least the Minimum amount as
set forth in the Prospectus and such Minimum subscriptions are fully paid. Said
commission and any other amounts due to Broker-Dealer hereunder shall be paid
every Friday once the Minimum is reached. All amounts due shall be calculated as
of the close of business on the immediately prior Thursday. If the Company or
any other entity makes sales without Broker-Dealer, no commission will be due to
Broker-Dealer on such sales.
(e) Compensation.
The Company shall pay Broker-Dealer as follows:
(i) A commission of 7% based on the total offering amount of
the Allotted Shares as set forth in Section 3(a)(i). The commission will be paid
by the Company or deducted from the proceeds of the sale when subscriptions have
been accepted for at least the Minimum amount as set forth in the Prospectus and
such Minimum subscriptions are fully paid. If more than the Minimum is sold
during the offering then commissions relating to such additional Shares will be
paid out of escrow when monies for the Shares subscribed to are distributed to
the Issuer.
(ii) The Company reserves the right to review all
subscriptions for securities law compliance and to make the final determination
whether to accept or reject subscriptions. No selling commissions will be
payable with respect to subscriptions which are rejected by the Company.
(iii) As an additional incentive for Broker-Dealer to perform
its services in a timely manner, Warrants in the form attached hereto as Exhibit
"A" shall be issued to Broker-Dealer or its designees as follows:
1. A warrant to purchase up to five percent (5%) of the
Allotted Shares, equal to 2,500 shares of stock with
an exercise price of $9.90 - 14.85 per share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of
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the Common Stock of the Company on the American Stock
Exchange, or the NASDAQ System.
2. In both instances, as set forth above, the Warrants
will be granted pro rata to the sale of the Shares by
Broker-Dealer. Assuming all 50,000 Shares available
for sale are sold by Broker-Dealer, 2,500 Warrants
will be issued. If less than 50,000 Shares are sold
by Broker-Dealer, Warrants will be issued on a pro
rata basis in accordance with the actual number of
Shares sold. For example, should 25,000 Shares be
sold, Broker-Dealer will be entitled to 1,250
Warrants at a price of $9.90 - 14.85 per Share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System. The Shares obtained upon exercise of the
Warrants will be "restricted" stock subject to the
trading provisions of Rule 144 promulgated by the
Commission.
(e) Payment of Expenses. The Company will pay and bear all costs, fees
and expenses incident to the performance of its obligations under this Agreement
(excluding fees and expenses of your counsel), including (a) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits), as originally filed and as amended, the Prospectus and
any amendments or supplements thereto, and the cost of furnishing copies thereof
to you, (b) the preparation of any Selected Dealers Agreement, the certificates
representing the Shares, the Blue Sky Memoranda and any instruments relating to
any of the foregoing, (c) the issuance and delivery of the Shares to the
purchasers, including any transfer taxes payable upon the sale of the Shares,
(d) the fees and disbursements of the Company's counsel and accountants, (e) the
qualification of the Shares under the applicable securities laws in accordance
with Section 2(e) of this Agreement and any filing for review of the Offering
with the NASD, including filing fees and fees and disbursements in connection
therewith and in connection with the Blue Sky Memoranda, (f) all costs, fees and
expenses in connection with the application for inclusion of the Shares on
NASDAQ, (g) costs related to travel and lodging incurred by the Company and its
representatives relating to meetings with and presentations to prospective
purchasers of the Shares reasonably determined by you to be necessary or
desirable to effect the sale of the Shares to the public and (i) all other costs
and expenses incident to the performance of the Company's obligations hereunder
that are not otherwise specifically provided for in this section.
Section 4. Opinion of Counsel and Accountants and other Conditions.
(a) As a condition to the performance of your duties and obligations
hereunder, you shall have received a favorable opinion of Evers & Hendrickson,
LLP ("Evers & Hendrickson") counsel for the Company in form and substance
satisfactory to counsel for you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
California with all requisite corporate power and authority to own, lease and
operate its properties and the properties it proposes to own, lease and operate
as described in the Registration Statement and the Prospectus and to conduct its
business as now conducted and as proposed to be conducted as described in the
Registration Statement and the Prospectus. To the best of such counsel's
knowledge, there are no other jurisdictions in which the ownership or leasing of
the Company's properties or the nature or conduct of its business as now
conducted or proposed to be conducted as described in the Registration Statement
and the Prospectus requires such qualification, except where the failure to do
so would not have a material adverse effect on the Company. To such counsel's
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity (other than any indirect control that
may be implied by virtue of Mr. Yuan and certain other officers of the Company
serving as officers and/or directors of other companies).
(ii) The Company has full legal right, power and authority to
enter into, deliver and perform this Agreement, to issue, sell and deliver the
Shares as provided herein and to consummate the transactions contemplated
herein. This Agreement has been duly authorized, executed and delivered by the
Company and, assuming due authorization, execution and delivery by the other
parties hereto, constitutes a valid and binding agreement of the Company,
enforceable in accordance with its terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equity principles and except to the extent that enforcement of the
indemnification provisions set forth in Section 5 of this Agreement may be
limited by federal or state securities laws or the public policy underlying such
laws.
(28)
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(iii) Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary for the valid authorization, issuance,
sale and delivery of the Shares and the execution, delivery and performance of
this Agreement has been made or obtained and is in full force and effect.
(iv) Neither the issuance, sale and delivery by the Company of
the Shares to purchasers thereof, nor the execution, delivery and performance of
this Agreement, nor the consummation of the transactions contemplated hereby or
thereby by the Company will violate any of the terms and provisions of, or
constitute a default under, any of the Articles of Incorporation or by-laws of
the Company, or, to such counsel's knowledge, under any material indenture,
mortgage, trust, deed of trust, loan agreement, note, lease or other agreement
or instrument to which the Company is a party or to which any of its properties
or other assets is subject; or, to such counsel's knowledge, violate any
applicable statute, judgment, decree, order, rule or regulation of any court or
governmental agency or body; or, to such counsel's knowledge, result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of any of the foregoing.
(v) The description of the Company's authorized capital stock
contained in the Registration Statement and the Prospectus under the caption
"Capital Stock" meets the requirements of Item 12 of Form SB-2 under the 1933
Act, and the Common Stock conforms in all material respects as to legal matters
to the description thereof contained in the Registration Statement and the
Prospectus.
(vi) The Shares to be issued pursuant to the Offering have
been validly authorized by the Company. When issued and delivered, the Shares
will be validly issued, fully paid and nonassessable. No preemptive rights of
shareholders exist with respect to any of the Shares. To such counsel's
knowledge, no person or entity holds a right to require or participate in the
registration under the 1933 Act of the Shares pursuant to the Registration
Statement; and, except as set forth in the Prospectus, no person holds a right
to require registration under the 1933 Act of any shares of Common Stock of the
Company at any other time. To such counsel's knowledge, no person or entity has
a right of participation or first refusal with respect to the sale of the Shares
by the Company. The form of certificates evidencing the Shares comply with all
applicable requirements of California law.
(vii) The Company has an authorized capitalization as set
forth in the Prospectus under the caption "Capital Stock" as of the date
therein. At the date of this Agreement, after effecting a 1-for-2 reverse stock
split, the Company has 5,750,000 shares of issued and outstanding stock (and
250,000 shares of Common Stock reserved for issuance upon exercise of currently
exercisable stock options), all of which is Common Stock. The Common Stock
conforms in all material respects to the description of the Common Stock
contained in the Prospectus. To the knowledge of such counsel, except as
disclosed in the Prospectus, there is no outstanding option, warrant or other
right calling for the issuance of, and no commitment, plan or arrangement to
issue, any shares of capital stock of the Company or any security convertible
into or exchangeable for capital stock of the Company.
(viii) To the knowledge of such counsel, the Company is not in
violation of its Articles of Incorporation or by-laws, and no material default
exists and no event has occurred which, with notice or after the lapse of time
to cure or both, would constitute a material default in the due performance and
observance of any obligation, agreement, term, covenant or condition contained
in any indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument known to such counsel to which any such entity is a
party or by which any such entity or any of its properties is subject. To the
knowledge of such counsel, the Company is not in violation of, or in default
with respect to, any statute, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of each such
entity, respectively.
(ix) To such counsel's knowledge and except as described in
the Prospectus, there is not pending or threatened, any action, suit,
proceeding, inquiry or investigation against the Company or any of its officers
and directors or to which the properties, assets or rights of the Company or
such persons are subject, which, if determined adversely to the Company or any
such persons, would individually or in the aggregate have a material adverse
effect on the financial position, results of operations or business of any such
entity, respectively.
(x) The descriptions in the Registration Statement and the
Prospectus of the contracts, leases and other legal documents therein described
present fairly the information required to be shown and there are no contracts,
leases or other documents known to such counsel of a character required to be
described in the
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Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement which are not described or filed as required. There are
no statutes or regulations applicable to the Company or certificates, permits or
other authorizations from governmental regulatory officials or bodies required
to be obtained or maintained by the Company, known to such counsel, of a
character required to be disclosed in the Registration Statement or the
Prospectus which have not been so disclosed and properly described therein. To
such counsel's knowledge, all agreements between the Company, and third parties
expressly referenced in the Prospectus are legal, valid and binding obligations
of the Company, enforceable in accordance with their respective terms, except to
the extent enforceability may be limited by bankruptcy, insolvency,
reorganization or other laws of general applicability relating to or affecting
creditors' rights and to general equitable principles.
(xi) The Registration Statement has become effective under the
1933 Act and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending or contemplated under the
1933 Act. Other than financial statements and other financial and operating data
and schedules contained therein, as to which counsel need express no opinion,
the Registration Statement, the Prospectus and any amendment or supplement
thereto, appear on their face to conform as to form in all material respects
with the requirements of Form SB-2 under the 1933 Act Regulations.
(xii) The Registration Statement, or any further amendment
thereto made prior to the date hereof, on its effective date, contained or
contains no untrue statement of a material fact and did not omit or does not
omit to state any material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made not misleading, or neither the Prospectus nor any amendment or supplement
thereto, as of its issue date, contained or contains any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading (provided that such counsel need express no belief regarding the
financial statements and related schedules and other financial data contained in
the Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
(xiii) The Company is not an "investment company," or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act.
(xiv) The descriptions in the Prospectus of statutes,
regulations, legal or governmental proceedings are accurate and present fairly a
summary of the information required to be shown under the 1933 Act and the 1933
Act Regulations. The information in the Prospectus under the caption
"Capitalization," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel, is correct and presents fairly
the information required to be disclosed therein under the 1933 Act and the 1933
Act Regulations.
(xv) To such counsel's knowledge, no relationship, direct or
indirect, exists between or among any of the Company or any affiliate of the
Company, on the one hand, and any director, officer, stockholder, customer or
supplier of the Company or any affiliate of the Company, on the other hand, that
is required by the 1933 Act or by the 1933 Act Regulations to be described in
the Registration Statement or the Prospectus which is not so described or is not
adequately described.
(xvi) All sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or, to
the knowledge of such counsel, effected in a manner which was exempt from the
registration requirements of the 1933 Act and were duly registered in accordance
with or the subject of an available exemption from the registration requirements
of the applicable blue sky laws. To the knowledge of such counsel, the Company
has not effected any sales of securities that would be required to be disclosed
in response to Item 701 of Regulation S-K that are not disclosed in the
Registration Statement.
In rendering the foregoing opinion, such counsel may rely on the following:
(A) as to matters involving the application of laws other than
the laws of the United States and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the extent
specified in such opinion, upon an opinion or opinions (in form and
substance reasonably satisfactory to Underwriters' counsel) of other
counsel familiar with the applicable laws,
(B) as to matters of fact, to the extent they deem
appropriate, on certificates of responsible officers of the Company and
certificates or other written statements of officers or departments of
various
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jurisdictions having custody of documents respecting the existence or
good standing of the Company provided that copies of all such opinions,
statements or certificates shall be delivered to your counsel. The
opinion of counsel for the Company shall state that the opinion of any
other counsel, or certificate or written statement, on which such
counsel is relying is in form satisfactory to such counsel and that you
and they are justified in relying thereon.
(b) At the time that this Agreement is executed by the Company, you
shall have received from KPMG, LLP a letter, dated the date hereof, in form and
substance satisfactory to you, confirming that they are independent public
accountants with respect to the Company within the meanings of the 1933 Act and
1933 Act Regulations, and stating in effect that:
(i) in their opinion, the financial statements and any
supplementary financial information and schedule included in the Registration
Statement and covered by their opinion therein comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
1933 Act Regulations;
(ii) on the basis of limited procedures (set forth in detail
in such letter and made in accordance with such procedures as may be specified
by you) not constituting an audit in accordance with generally accepted auditing
standards, consisting of (but not limited to) a reading of the latest available
internal unaudited financial statements of the Company, a reading of the minute
books of the Company, inquiries of officials of the Company responsible for
financial and accounting matters, and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that caused them to
believe that:
(A) the unaudited financial statements and supporting schedule
and other unaudited financial data of the Company included in the
Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act
and the 1933 Act Regulations or are not presented in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited financial statements from which
such data and items were derived, and any such unaudited data and items
were not determined on a basis substantially consistent with the basis
for the corresponding amounts in the audited financial statements
included in the Prospectus;
(C) any unaudited pro forma financial information included in
the Prospectus does not comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations or the pro forma adjustments have not been properly applied
to historical amounts in the compilation of that information; and
(D) at a specified date not more than five days prior to the
date of delivery of such letter, there was any change in the capital
stock or long-term debt or obligations under capital leases of the
Company, or there were any decreases in net current assets or net
assets, or shareholders' equity, from that set forth in the Company's
balance sheet at December 31, 1998, except as described in such letter;
and
(iii) in addition to the procedures referred to in clause (ii)
above and the examination referred to in their Reports included in the
Registration Statement, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information specified
by you which are derived from the general accounting records of the Company,
which appear in the Registration Statement or the exhibits or schedules thereto
and are specified by you, and have compared such amounts, percentages and
financial information with the accounting records of the Company and with
material derived from such records and have found them to be in agreement.
(c) At the time of the closing of the Offering, you shall have received
from KPMG, LLP, a letter, in form and substance satisfactory to you and dated as
of the date of the closing of the Offering, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (b) above, except
that the specified date referred to shall be a date not more than five days
prior to the date of closing of the Offering.
(d) The NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to such offering, such terms or your
participation in the same.
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Section 5. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless Broker-Dealer and each
person, if any, who controls Broker-Dealer within the meaning of the 1933 Act or
the 1934 Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which it or such controlling person may become subject under the 1933
Act, the 1934 Act or insofar as such losses, claims, damages or liabilities in
respect thereof arise out of or are based upon any breach of any warranty or
covenant of the Company herein contained or by reason of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and will reimburse Broker-Dealer for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon and in conformity with written information furnished to the
Company by Broker-Dealer expressly for use therein. In addition to its other
obligations under this Section 5 (a), the Company agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5 (a), it will
reimburse Broker-Dealer on a monthly basis for all reasonable legal and other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse Broker-Dealer for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. Any such interim reimbursement payments that
are not made to Broker-Dealer within 30 days of a request for reimbursement
shall bear interest at the prime rate (or reference rate or other commercial
lending rate for borrowers of the highest credit standing) published from time
to time by The Wall Street Journal (the "Prime Rate") from the date of such
request. The Company will not, without the prior written consent of
Broker-Dealer, settle or compromise or consent to the entry of any judgment in
any pending or threatened action or claim or related cause of action or portion
of such cause of action in respect of which indemnification may be sought
hereunder (whether or not Broker-Dealer is a party to such action or claim),
unless such settlement, compromise or consent includes an unconditional release
of Broker-Dealer from all liability arising out of such action or claim (or
related cause of action or portion thereof).
The indemnity agreement in this Section 5(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls Broker-Dealer within the meaning of the 1933 Act or the 1934 Act to
the same extent as such agreement applies to Broker-Dealer.
(b) Broker-Dealer will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement or the Prospectus or
any such amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by Broker-Dealer expressly for use
therein; and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action. In addition to its other
obligations under this Section 5(b), Broker-Dealer agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5(b), it will reimburse
the Company on a monthly basis for all reasonable legal and other expenses
incurred in connection with investigating or defending any such claim, action
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of its obligation
to reimburse the Company for such expenses and the possibility that such
(32)
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payments might later be held to have been improper by a court of competent
jurisdiction. Any such interim reimbursement payments that are not made to the
Company within 30 days of a request for reimbursement shall bear interest at the
Prime Rate from the date of such request. This indemnity agreement shall be in
addition to any liabilities that Broker-Dealer may otherwise have.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; no indemnification provided for in Section 5(a) or 5(b)
shall be available to any party who shall fail to give notice as provided in
this Section 5(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by the
failure to give such notice, but the omission so to notify the indemnifying
party will not relieve the indemnifying party from any liability that it may
have to any indemnified party otherwise than under Section 5. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation, except
that if the indemnified party has been advised by counsel in writing that there
are one or more defenses available to the indemnified party which are different
from or additional to those available to the indemnifying party, then the
indemnified party shall have the right to employ separate counsel and in that
event the reasonable fees and expenses of such separate counsel for the
indemnified party shall be paid by the indemnifying party; provided, however,
that if the indemnifying party is the Company, the Company shall only be
obligated to pay the reasonable fees and expenses of a single law firm (and any
reasonably necessary local counsel) employed by all of the indemnified parties
and the persons referred to in Section 5(a) hereof. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
(d) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Section 5(a) and 5(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the indemnifying parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the National
Association of Securities Dealers, Inc. Any such arbitration must be commenced
by service of a written demand for arbitration or a written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a) and 5(b) hereof
and will not resolve the ultimate propriety or enforceability of the obligation
to indemnify for expenses that is created by the provisions of Sections 5(a) and
5(b).
(e) In order to provide for just and equitable contribution in
circumstances under which the indemnity provided for in this Section 5 is for
any reason judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the right of appeal) to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Company on the one hand,
and Broker-Dealer on the other shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity incurred by the Company and Broker-Dealer, as incurred, in such
proportions that (a) Broker-Dealer is responsible pro rata for that portion
represented by the commission percentage appearing on the cover page of the
Prospectus bears to the initial public offering price (before deducting
expenses) appearing thereon, and (b) the Company is responsible for the balance,
provided, however, that no person guilty of fraudulent misrepresentations
(within the meaning of Section 12(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation; provided, further, that if the allocation provided above is
not permitted by applicable law, the Company, on the one hand and Broker-Dealer
on the other shall contribute to the aggregate losses in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company on the one hand, and Broker-Dealer on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. Relative fault shall be determined by reference to, among other
(33)
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things, whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
on the one hand, or by Broker-Dealer on the other hand, and the parties,
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and Broker-Dealer agree that it
would not be just and equitable if contributions pursuant to this Section 5(e)
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 5(e). The amount paid or payable by a party as a result of the
losses, claims, damages or liabilities referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending such action or claim.
Section 6. Representations, Warranties and Agreements to Survive
Delivery. The representations, warranties, indemnities, agreements and other
statements of the Company or their respective officers set forth in or made
pursuant to this Agreement will remain operative and in full force and effect
will survive the termination of this Agreement.
Section 7. Notices.
All notices or communications required or permitted hereunder shall be
in writing and shall be mailed or delivered as follows:
If to the Company: CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
320 S. Garfield Avenue, Suite 318
Alhambra, CA 91801
Attention: Frank Yuan
If to Broker-Dealer: (a) Am Razo & Company securities, inc.
Lakeshore Tower, Suite 350
18101 Von Karman Ave.
Irvine, CA 92612
Attention: Andrew M. Razo
Section 8. Miscellaneous. This Agreement contains and constitutes the
entire agreement between the parties hereto and supersedes all prior written or
oral and all contemporaneous agreements or negotiations with respect to the
subject matter hereof. The Agreement may only be amended, modified or waived in
writing signed by both parties hereto. This Agreement shall be governed in
accordance with the laws of the State of California; without reference to the
conflict of law provisions thereof. This Agreement may be executed in
counterparts.
Section 9. Governing Law and Time. This Agreement shall be governed by
the laws of the State of California. Specified time of the day refers to United
States Pacific Time. Time shall be of the essence of this Agreement.
Section 10. Counterparts. This Agreement may be executed in one or more
counterparts and when a counterpart has been executed by each party, all such
counterparts taken together shall constitute one and the same agreement.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument will become a binding agreement among the Company and Broker-Dealer
in accordance with its terms.
Very truly yours,
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
By: ________________________________
(34)
<PAGE>
Name: Frank Yuan
Title: President
Confirmed and accepted as of
the date first above written:
AM RAZO & COMPANY SECURITIES, INC.
By: ____________________________________
Name: Andrew M. Razo
Title: President
2,500,000 SHARES
CYBER MERCHANTS EXCHANGE, INC. d.b.a. C-ME.com
Common Stock
BEST EFFORTS COMPENSATION AGREEMENT
Alhambra, California
April 16, 1999
Tom Diggs
Malachi Group, Inc.
12 Piedmont Center, #410
Atlanta, GA 30305
Dear Mr. Diggs:
CYBER MERCHANTS EXCHANGE, INC.d.b.a. C-ME.Com, a California corporation (the
"Company"), proposes to issue and sell an aggregate of two million five hundred
thousand (2,500,000) shares of the Company's Common Stock, no par value per
share (the "Common Stock" or "Shares").
The Shares will be offered to the public by the Company at a price of
$6.00-$9.00 per share (the "Offering"). The purpose of this Agreement is to set
forth the understanding of the parties relating to the right of Malachi Group,
Inc., a Georgia Corporation ("Broker-Dealer") to participate in the sale of the
Shares as a broker-dealer exercising its best efforts to sell the Shares.
Section 1. Representations and Warranties of the Company . The Company
represents and warrants to and agrees with Broker-Dealer that:
(a) A registration statement on Form SB-2 (File No. 333-41411) with
respect to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the
applicable rules and regulations (the "1933 Act Regulations") of the Securities
and Exchange Commission (the "Commission"), and has been filed with the
Commission; and such amendments to such registration statement as may have been
required prior to the date hereof have been filed with the Commission, and such
amendments have been similarly prepared. Such registration statement went
effective with the Commission on _________________, 199__ (the "Date of
Registration"). Copies of such registration statement and amendment or
amendments of each related preliminary prospectus,
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and the exhibits, financial statements and schedules, as finally amended and
revised, have been delivered to you.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement became
effective and, in the event any post-effective amendment thereto becomes
effective prior to the closing of the Offering, shall also mean such
registration statement as so amended. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Shares in the form in which
it is first filed with the Commission pursuant to Rule 424(b) of the 1933 Act
Regulations or, if no filing pursuant to Rule 424(b) of the 1933 Act Regulations
is required, shall mean the form of final prospectus included in the
Registration Statement at the time such Registration Statement becomes
effective.
(b) When the Registration Statement became effective, when the
Prospectus was first filed pursuant to Rule 424(b) of the 1933 Act Regulations,
when any amendment to the Registration Statement becomes effective, and when any
supplement to the Prospectus is filed with the Commission, (i) the Registration
Statement, the Prospectus and any amendments thereof and supplements thereto
will conform in all material respects with the applicable requirements of the
1933 Act and the 1933 Act Regulations, and (ii) neither the Registration
Statement, the Prospectus nor any amendment or supplement thereto will contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by Broker-Dealer
expressly for use in the Registration Statement.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the state of California with all
requisite corporate power and authority to own, lease and operate its properties
and the properties it proposes to own, lease and operate as described in the
Registration Statement and the Prospectus and to conduct its business as now
conducted and as proposed to be conducted as described in the Registration
Statement and the Prospectus. The Company has been duly qualified to do business
and is in good standing as a foreign corporation in each other jurisdiction in
which the ownership or leasing of its properties or the nature or conduct of its
business as now conducted or proposed to be conducted as described in the
Registration Statement and the Prospectus requires such qualification, except
where the failure to do so would not have a material adverse effect on the
Company.
(d) The Company has full legal right, power and authority to enter into
this Agreement, to issue, sell and deliver the Shares as provided herein and to
consummate the transactions contemplated herein. This Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid and
binding agreement of the Company, enforceable in accordance with its terms,
except to the extent that enforceability may be limited by bankruptcy,
insolvency, reorganization or other laws of general applicability relating to or
affecting creditors, rights, or by general equity principles and except to the
extent the indemnification provisions set forth in Section 5 of this Agreement
may be limited by federal or state securities laws or the public policy
underlying such laws.
(e) Each consent, approval, authorization, order, license, certificate,
permit, registration, designation or filing by or with any governmental agency
or body necessary for the
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<PAGE>
valid authorization, issuance, sale and delivery of the Shares, the execution,
delivery and performance of this Agreement and the consummation by the Company
of the transactions contemplated hereby, has been made or obtained and is in
full force and effect.
(f) Neither the issuance, sale and delivery by the Company of the
Shares, nor the execution, delivery and performance of this Agreement nor the
consummation of the transactions contemplated hereby by the Company will
conflict with or result in a breach or violation of any of the terms and
provisions of, or (with or without the giving of notice or the passage of time
or both) constitute a default under, the Articles of Incorporation, by-laws of
the Company; any indenture, mortgage, deed of trust, loan agreement, note, bond
or other agreement or instrument to which the Company, is a party or to which
it, any of its properties or other assets; or any applicable statute, law,
judgment, decree, order, rule or regulation of any court or governmental agency
or body applicable to the Company or its property; or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property or asset
of the Company.
(g) The Shares to be issued and sold hereunder have been validly
authorized by the Company. When issued and delivered against payment therefor,
the Shares will be duly and validly issued, fully paid and non-assessable. No
preemptive rights of shareholders exist with respect to any of the Shares. No
person or entity holds a right to require or participate in the registration
under the 1933 Act of the Shares pursuant to the Registration Statement; and,
except as set forth in the Prospectus, no person holds a right to require
registration under the 1933 Act of any shares of Common Stock of the Company at
any other time. No person or entity has a right of participation or first
refusal with respect to the sale of the Shares by the Company. The form of
certificates evidencing the Shares complies with all applicable requirements of
California law.
(h) The Common Stock to be issued upon exercise of the common stock
purchase warrants to be issued to Broker-Dealer (the "Warrants") are duly
authorized, and when issued and delivered pursuant to this Agreement, will be
duly authorized, validly issued, fully paid and non-assessable and free of
pre-emptive rights of any security holder of the Company. Neither the filing of
the Registration Statement nor the offering or sale of the Shares gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock, except as described
in the Registration Statement.
(i) This Agreement has been duly and validly authorized, executed and
delivered by the Company. The Company has full power and lawful authority to
issue and sell the shares of Common Stock to be sold by it upon exercise of the
Warrants (the "Warrant Shares") on the terms and conditions set forth herein,
and no consent, approval, authorization or other order of any governmental
authority is required in connection with such authorization, execution and
delivery or with the authorization, issue and sale of the Warrant Shares or the
Warrants, except as may be required under the 1933 Act or state securities laws.
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<PAGE>
(j) The Company has 5,750,000 shares (and 250,000 shares of Common
Stock reserved for issuance upon exercise of currently exercisable stock
options) of issued and outstanding shares of Common Stock, after effecting a
1-for-2 reverse stock split. The Company has no other issued and outstanding
capital stock. The Company's authorized capitalization is as set forth in the
Prospectus under the caption "Capitalization." Except as disclosed in the
Prospectus, there is no outstanding option, warrant or other right calling for
the issuance of, and no commitment, plan or arrangement to issue any shares of
capital stock of the Company or any security convertible into or exchangeable
for capital stock of the Company.
(k) The financial statements of the Company in the Registration
Statement and the Prospectus present fairly the financial position of the
Company as of the dates indicated and the results of operations and cash flows
for the periods specified, all in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods specified. The
financial statement schedule included in the Registration Statement and the
amounts in the Prospectus under the captions "Selected Financial Data" fairly
present the information shown therein and have been compiled on a basis
consistent with the financial statements included in the Registration Statement
and the Prospectus. No other financial statements or schedules are required by
Form SB-2 or otherwise to be included in the Registration Statement or the
Prospectus. The unaudited pro forma combined financial information (including
the related notes) included in the Prospectus complies as to form in all
material respects to the applicable accounting requirements of the 1933 Act and
the 1933 Act Regulations and management of the Company believes that the
assumptions underlying the pro forma adjustments are reasonable. Such pro forma
adjustments have been properly applied to the historical amounts in the
compilation of the information and such information fairly presents with respect
to the Company the pro forma financial position, results of operations and other
information purported to be shown therein at the respective dates and for the
respective periods specified.
(l) KPMG, LLP, who have examined and are reporting upon the audited
financial statements and schedules included in the Registration Statement, are,
and were during the periods covered by their Reports included in the
Registration Statement and the Prospectus, independent public accountants, as
required by the 1933 Act and the 1933 Act Regulations.
(m) The Company has not sustained, since inception, any material loss
or interference with its business from fire, explosion, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or arbitrators' or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as otherwise stated in the Registration Statement
and Prospectus, there has not been (i) any material change in the capital stock
or partnership interests, as applicable, long-term debt, obligations under
capital leases or short-term borrowings of the Company, (ii) any material
adverse change, or any development which could reasonably be seen as involving a
prospective material adverse change, in or affecting the business prospects,
properties, assets, results of operations or condition (financial or other) of
the Company, (iii) any liability or obligation, direct or contingent, incurred
or undertaken by the Company, which is material to the business or condition
(financial or other) of the Company, except for liabilities or obligations
incurred in the ordinary course of business, (iv) any declaration or payment of
any dividend or distribution of any kind on or with respect to the capital stock
of the Company, or (v) any
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<PAGE>
transaction that is material to the Company except transactions in the ordinary
course of business or as otherwise disclosed in the Registration Statement and
the Prospectus.
(n) The Company is not in violation of its Articles of Incorporation or
by-laws, and no default exists, and no event has occurred, nor state of facts
exists, which, with notice or after the lapse of time to cure or both, would
constitute a default in the due performance and observance of any obligation,
agreement, term, covenant, consideration or condition contained in any
indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument to which the Company is a party or by which it or any of
its properties is subject. The Company is not in violation of, or in default
with respect to, any statute, law, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as is in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of the
Company.
(o) Except as described in the Prospectus, there is not pending or, to
the knowledge of the Company, threatened any action, suit, proceeding, inquiry
or investigation against the Company, its officers and directors or to which the
properties, assets or rights of the Company are subject, before or brought by
any court or governmental agency or body or board of arbitrators, which could
result in any material adverse change in the business, prospects, properties,
assets, results of operations or condition (financial or otherwise) of the
Company.
(p) The descriptions in the Registration Statement and the Prospectus
of the contracts, leases and other legal documents therein described present
fairly the information required to be shown, and there are no contracts, leases,
or other documents of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement which are not described or filed as required. To the best knowledge of
the Company, there are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus which have not been so disclosed and properly described therein. All
agreements between the Company and third parties expressly referenced in the
Prospectus are legal, valid and binding obligations of the Company enforceable
in accordance with their respective terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equitable principles.
(q) The Company owns, possesses or has obtained all material permits,
licenses, franchises, certificates, consents, orders, approvals and other
authorizations of governmental or regulatory authorities as are necessary to own
or lease, as the case may be, and to operate its properties and to carry on its
business as presently conducted, or as contemplated in the Prospectus to be
conducted, and the Company has not received any notice of proceedings relating
to revocation or modification of any such licenses, permits, certificates,
consents, orders, approvals or authorizations.
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(r) The Company owns or possesses adequate license or other rights to
use all patents, trademarks, service marks, trade names, copyrights, software
and design licenses, trade secrets, manufacturing processes, other intangible
property rights and know-how (collectively "Intangibles") necessary to entitle
it to conduct its business now, and as proposed to be conducted or operated as
described in the Prospectus, and the Company has not received notice of
infringement or of conflict with (and knows of no such infringement of or
conflict with) asserted rights of others with respect to any Intangibles which
could materially and adversely affect its business, prospects, properties,
assets, results of operation or condition (financial or otherwise).
(s) The Company has not directly or indirectly, at any time (i) made
any contribution to any candidate for political office, or failed to disclose
fully any such contribution, in violation of law or (ii) made any payment to any
state, federal or foreign, governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. To the best knowledge of
the Company, the Company's internal accounting controls and procedures are
sufficient to cause such entities to comply in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(t) To the best of the Company's knowledge, the Company's systems of
internal accounting controls taken as a whole are sufficient to meet the broad
objectives of internal accounting control insofar as those objectives pertain to
the prevention or detection of errors or irregularities in amounts that would be
material in relation to the Company's financial statements; and, to the best of
the Company's knowledge, neither the Company, nor any employee or agent thereof,
has made any payment of funds of the Company or received or retained any funds
and no funds of the Company have been set aside to be used for any payment, in
each case in violation of any law, rule or regulation.
(u) The Company has filed on a timely basis all necessary federal,
state, local and foreign income and franchise tax returns required to be filed
through the date hereof and have paid all taxes shown as due thereon; and no tax
deficiency has been asserted against the Company, nor does the Company know of
any tax deficiency which is likely to be asserted against the Company which if
determined adversely to the Company, could materially adversely affect the
business, prospects, properties, assets, results of operations or condition
(financial or otherwise) of any such entity, respectively. All tax liabilities
are adequately provided for on the respective books of such entities.
(v) The Company maintains insurance (issued by insurers of recognized
financial responsibility) of the types and in the amounts generally deemed
adequate for their respective businesses and, to the best of the Company's
knowledge, consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance covering real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(w) To the best of the Company's knowledge, no general labor problem
exists or is imminent with the employees of the Company which would have a
material adverse effect on the financial position, results of operations or
business of the Company.
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(x) The Company and its officers, directors or affiliates have not
taken and will not take, directly or indirectly, any action designed to, or that
might reasonably be expected to, cause or result in or constitute the
stabilization or manipulation of any security of the Company or to facilitate
the sale or resale of the Shares in violation of any law, rule or regulation.
(y) The Company has not incurred any liability for a fee, commission or
other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than as
contemplated hereby.
(z) Except as otherwise disclosed in the Prospectus, the Company has
not authorized or conducted nor has knowledge of the generation, transportation,
storage, presence, use, treatment, disposal, release, or other handling of any
hazardous substance, hazardous waste, hazardous material, hazardous constituent,
toxic substance, pollutant, contaminant, asbestos, radon, polychlorinated
biphenyls ("PCBs"), petroleum product or waste (including crude oil or any
fraction thereof), natural gas, liquefied gas, synthetic gas or other material
defined, regulated, controlled or potentially subject to any remediation
requirement under any environmental law (collectively, "Hazardous Materials"),
on, in, under or affecting any real property currently leased or owned or by any
means controlled by the Company (the "Real Property") except as in material
compliance with applicable laws; to the knowledge of the Company, the Real
Property and the Company's operations with respect to the Real Property are in
compliance with all federal, state and local laws, ordinances, rules,
regulations and other governmental requirements relating to pollution, control
of chemicals, management of waste, discharges of materials into the environment,
health, safety, natural resources, and the environment (collectively,
"Environmental Laws"), and the Company has, and is in compliance with, all
licenses, permits, registrations and government authorizations necessary to
operate under all applicable Environmental Laws. Except as otherwise disclosed
in the Prospectus, the Company has not received any written or oral notice from
any governmental entity or any other person and there is no pending or
threatened claim, litigation or any administrative agency proceeding that:
alleges a violation of any Environmental Laws by the Company; alleges that the
Company is a liable party or a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
S 9601, et seq., or any state superfund law; has resulted in or could result in
the attachment of an environmental lien on any of the Real Property; or, alleges
that the Company is liable for any contamination of the environment,
contamination of the Real Property, damage to natural resources, property
damage, or personal injury based on their activities or the activities of their
predecessors or third parties (whether at the Real Property or elsewhere)
involving Hazardous Materials whether arising under the Environmental Laws,
common law principles or other legal standards.
(aa) The Company will not become as a result of the transactions
contemplated hereby, or will not conduct its business in a manner in which it
would become, "an investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended (the "Investment Company Act").
(bb) No relationship, direct or indirect, exists between or among any
of the Company or any affiliate of the Company, on the one hand, and any
director, officer, stockholder, customer or supplier of the Company or any
affiliate of the Company, on the other hand, that is required by the 1933 Act or
by the 1933 Act Regulations to be described in the Registration Statement or the
Prospectus which is not so described or is not adequately described.
(8)
<PAGE>
(cc) All offers and sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or
exempt from the registration requirements of the 1933 Act and were duly
registered in accordance with or the subject of an available exemption from
registration under the applicable blue sky laws. The Company has not effected
any sales of securities that would be required to be disclosed in response to
Item 701 of Regulation S-K that are not disclosed in the Registration Statement.
Any certificate signed by any officer of the Company on behalf of the
Company and delivered to you or to counsel for the Representative shall be
deemed a representation and warranty of the Company to the Representative as to
the matters covered thereby.
Section 2. Certain Covenants of the Company. The Company covenants and
agrees with Broker-Dealer, to use its best efforts to cause the Company to
perform as follows:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective (if not yet effective at the date and time that
this Agreement is executed and delivered by the parties hereto). The Company
will notify you immediately, and confirm the notice in writing, (i) when the
Registration Statement, or any post-effective amendment to the Registration
Statement, shall have become effective, or any supplement to the Prospectus or
any amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission to amend
the Registration Statement or amend or supplement the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution or threatening of any proceeding for any
such purposes. The Company will use every reasonable effort to prevent the
issuance of any such stop order or of any order preventing or suspending such
use and, if any such order is issued, to obtain the withdrawal thereof at the
earliest possible moment.
(b) The Company will not at any time file or make any amendment to the
Registration Statement, or any amendment or supplement to the Prospectus if you
shall not have previously been advised and furnished a copy thereof a reasonable
time prior to the proposed filing, or if you or your counsel reasonably object
to such amendment or supplement.
(c) The Company will deliver to you, at the Company's expense, from
time to time as requested, such number of copies of the Prospectus (as
supplemented or amended) as you may reasonably request. If the delivery of a
Prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Shares and if at such time any events shall have occurred as result of which
the Prospectus as then amended or supplemented would include an untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were made
when such Prospectus is delivered not misleading, or, if for any reason it shall
be necessary during such same period to amend or supplement the Prospectus in
order to comply with the 1933 Act, the Company will notify you and upon your
request prepare and furnish without charge to you and to any dealer in
securities as many copies, as you may from time to time reasonably request, of
an amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance.
(9)
<PAGE>
(d) The Company will use its best efforts to qualify the Shares for
offering and sale under the applicable securities laws of such states and other
jurisdictions as you may designate and to maintain such qualifications in effect
for as long as may be necessary to complete the distribution of the Shares;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified or to make any undertakings in
respect of doing business in any jurisdiction in which it is not otherwise so
subject. The Company will file such statements and reports as may be required by
the laws of each jurisdiction in which the Shares have been qualified as above
provided.
(e) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the end of the fiscal
quarter first occurring after the first anniversary of the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the 1933 Act
Regulations), an earnings statement (in reasonable detail but which need not be
audited) complying with the provisions of Section 11(a) of the 1933 Act and Rule
158 thereunder and covering a period of at least 12 months beginning after the
effective date of the Registration Statement.
(f) The Company will use the net proceeds received by it from the sale
of the Shares substantially in the manner specified in the Prospectus under the
caption "Use of Proceeds."
(g) The Company will furnish to its security holders of record, as soon
as practicable after the end of each respective period, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year. During a period of five years after the date hereof, the
Company will furnish to you: (i) concurrently with furnishing such reports to
its security holders, statements of operations of the Company for each of the
first three quarters in the form furnished to the Company's security holders;
(ii) concurrently with furnishing to its security holders, a balance sheet of
the Company as of the end of such fiscal year, together with statements of
operations, of cash flows and of security holders, equity of the Company for
such fiscal year, accompanied by a copy of the certificate or report thereon of
independent public accountants; (iii) as soon as they are available, copies of
all reports (financial or otherwise) mailed to security holders; (iv) as soon as
they are available, copies of all reports and financial statements furnished to
or filed with the Commission, any securities exchange or the NASD; (v) every
material press release in respect of the Company or its affairs which is
released or prepared by the Company, and (vi) any additional information of a
public nature concerning the Company or its business that you may reasonably
request. During such five-year period, the foregoing financial statements shall
be on a consolidated basis to the extent that the accounts of the Company are
consolidated with any subsidiaries, and shall be accompanied by similar
financial statements for any significant subsidiary that is not so consolidated.
(h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(10)
<PAGE>
(i) The Company will use its best efforts to acquire the inclusion of
its shares of Common Stock on the National Association of Securities Dealers
Automated Quotation system ("NASDAQ") and the American Stock Exchange ("AMEX")
within six months from the date hereof.
(j) The Company is familiar with the Investment Company Act and the
rules and regulations thereunder, and has in the past conducted its affairs, and
will in the future conduct its affairs, in such a manner so as to ensure that
the Company was not and will not be an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act.
(k) The Company will not, and will use its best efforts to cause its
officers, directors and affiliates not to, (i) take, directly or indirectly
prior to termination of the distribution of the Shares contemplated by this
Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which may cause or result in, or which might in the
future reasonably be expected to cause or result in, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of the Shares or (iii) pay or agree to pay
to any person any compensation for soliciting any order to purchase any other
securities of the Company which, in any such case, is in violation of any law,
rule or regulation.
(l) The Company will file timely and accurate reports on Form SR with
the Commission in accordance with Rule 463 of the 1933 Act Regulations or any
successor provision.
(m) Prior to the closing of the Offering, the Company will not, and
will use its best efforts to cause any affiliate of the Company not to issue a
press release or other official communication directly or indirectly, nor hold a
press conference with respect to the Company or with respect to the financial
condition, results of operations, business, properties, assets or liabilities of
the Company, or the offering of the Shares, without your prior written input
within 72 hours which consent shall not be unreasonably withheld.
(n) The Company will notify you promptly of any material adverse change
affecting any of its representations, warranties, agreements and indemnities
herein at any time prior to the closing of the Offering and take such steps as
may be reasonably requested by you either to remedy or publicize the same, or
both.
(o) The Company will reserve and keep available that maximum number of
its authorized but unissued shares of Common Stock which are issuable upon
exercise of the Warrants outstanding from time to time.
(p) On the last day that this Agreement is in full force and effect
after the execution hereof, the Company shall execute and deliver to you the
Warrants you have earned. The Warrants will be substantially in the form of the
Stock Purchase Warrant filed as an exhibit to the Registration Statement, a copy
of which is attached hereto as Exhibit "A".
(11)
<PAGE>
(q) For a period of five years from the Effective Date, the Company, at
its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit and without issuing any opinion thereon)
the Company's financial statements for each of the first three (3) fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's 10-Q quarterly report and the mailing of quarterly
financial information to Stockholders.
(r) As promptly as practicable after the closing of the Offering, the
Company will prepare, at its own expense, hard cover "bound volumes" relating to
the offering, and will distribute such volumes to the individuals designated by
you.
Section 3. Engagement & Allotment, Term, Reporting, Compensation and
Payment of Expenses.
(a) Engagement & Allotment.
(i) Subject to the terms and conditions of this Agreement, the
Company hereby engages Broker-Dealer, on a "best efforts" basis, as the
Company's nonexclusive agent in connection with the sale of up to 100,000 Shares
(the "Allotted Shares"). The number of Allotted Shares may be increased or
decreased at the sole discretion of the Company upon three (3) days written
notice to Broker-Dealer. Broker-Dealer will keep precise records of all
purchases of stock, including the amount of the purchase, the exact title in
which the Shares are to be issued and the address of the purchaser. The Shares
will be issued promptly by the Company and, in no event, later than fifteen (15)
days after notification by Broker-Dealer of the purchase with the information
set forth above. The maximum amount of each sale shall be 8,800 shares. The
minimum amount of each sale shall be 300 shares.
(ii) As to residents of the State of California who wish to
purchase in excess of $2,500 worth of the Shares, Broker-Dealer will take
appropriate measures to assure that the purchaser is "suitable" by having a
minimum net worth (excluding home equity, home furnishings and automobiles) of
at least $250,000 and a minimum gross income of $65,000 during the current tax
year; or, in the alternative, a minimum net worth of $500,000. In either case,
the amount of a purchaser's investment may not exceed ten percent (10%) of the
purchaser's net worth.
(iii) Broker-Dealer shall use its best efforts to assist the
Company in making sales of the shares pursuant to the Offering. Broker-Dealer
makes no representations as to the amount of Shares it will be able to sell.
There is no firm commitment to sell any certain amount of the Shares by
Broker-Dealer.
(iv) Broker-Dealer will only offer the Company's stock in
those states in which Broker-Dealer and its brokers are registered.
(v) Broker-Dealer agrees to become a market maker for the
Company when legally permitted by its restrictive agreement with the NASD and
the SEC and when approved by the Broker-Dealer's Board of Directors. At such
time, Broker-Dealer agrees to assist with any filing requirements. Broker-Dealer
does not currently act as a market maker and has no immediate plans to act as a
market maker.
(12)
<PAGE>
(b) Term. The term of this Agreement shall commence as of the
effective date hereof (the "Effective Date") and shall continue in full force
and effect for a period of up to thirty (30) days from the Date of Registration
as set forth in Section 1(a), above. This Agreement may be extended for
additional period of 30 days upon the mutual written consent of both parties.
(c) Reporting. Broker-Dealer shall offer the Shares pursuant to
the Prospectus. Payment for the Shares shall be made by the Purchaser directly
to the Escrow Agent as set forth in the Prospectus. The commission, as set forth
in Section 3(d), will be paid by the Company or deducted from the proceeds of
the sale when subscriptions have been accepted for at least the Minimum amount
as set forth in the Prospectus and such Minimum subscriptions are fully paid.
Said commission and any other amounts due to Broker-Dealer hereunder shall be
paid every Friday once the Minimum is reached. All amounts due shall be
calculated as of the close of business on the immediately prior Thursday. If the
Company or any other entity makes sales without Broker-Dealer, no commission
will be due to Broker-Dealer on such sales.
(d) Compensation.
The Company shall pay Broker-Dealer as follows:
(i) A commission of 7% based on the total offering amount of
the Allotted Shares as set forth in Section 3(a)(i). The commission will be paid
by the Company or deducted from the proceeds of the sale when subscriptions have
been accepted for at least the Minimum amount as set forth in the Prospectus and
such Minimum subscriptions are fully paid. If more than the Minimum is sold
during the offering then commissions relating to such additional Shares will be
paid out of escrow when monies for the Shares subscribed to are distributed to
the Issuer.
(ii) The Company reserves the right to review all
subscriptions for securities law compliance and to make the final determination
whether to accept or reject subscriptions. No selling commissions will be
payable with respect to subscriptions which are rejected by the Company.
(iii) As an additional incentive for Broker-Dealer to perform
its services in a timely manner, Warrants in the form attached hereto as Exhibit
"A" shall be issued to Broker-Dealer or its designees as follows:
1. A warrant to purchase up to five percent (5%) of the
Allotted Shares, equal to 5,000 shares of stock with
an exercise price of $9.90 - 14.85 per share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System.
2. In both instances, as set forth above, the Warrants
will be granted pro rata to the sale of the Shares by
Broker-Dealer. Assuming all 100,000 Shares available
for sale are sold by Broker-Dealer, 5,000 Warrants
will be issued. If less than 100,000 Shares are sold
by Broker-Dealer, Warrants will be issued on a pro
rata basis in accordance with the actual number of
(13)
<PAGE>
Shares sold. For example, should 50,000 Shares be
sold, Broker-Dealer will be entitled to 2,500
Warrants at a price of $9.90 - 14.85 per Share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System. The Shares obtained upon exercise of the
Warrants will be "restricted" stock subject to the
trading provisions of Rule 144 promulgated by the
Commission.
(e) Payment of Expenses. The Company will pay and bear all costs, fees
and expenses incident to the performance of its obligations under this Agreement
(excluding fees and expenses of your counsel), including (a) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits), as originally filed and as amended, the Prospectus and
any amendments or supplements thereto, and the cost of furnishing copies thereof
to you, (b) the preparation of any Selected Dealers Agreement, the certificates
representing the Shares, the Blue Sky Memoranda and any instruments relating to
any of the foregoing, (c) the issuance and delivery of the Shares to the
purchasers, including any transfer taxes payable upon the sale of the Shares,
(d) the fees and disbursements of the Company's counsel and accountants, (e) the
qualification of the Shares under the applicable securities laws in accordance
with Section 2(e) of this Agreement and any filing for review of the Offering
with the NASD, including filing fees and fees and disbursements in connection
therewith and in connection with the Blue Sky Memoranda, (f) all costs, fees and
expenses in connection with the application for inclusion of the Shares on
NASDAQ, (g) costs related to travel and lodging incurred by the Company and its
representatives relating to meetings with and presentations to prospective
purchasers of the Shares reasonably determined by you to be necessary or
desirable to effect the sale of the Shares to the public and (i) all other costs
and expenses incident to the performance of the Company's obligations hereunder
that are not otherwise specifically provided for in this section.
Section 4. Opinion of Counsel and Accountants and other Conditions.
(a) As a condition to the performance of your duties and obligations
hereunder, you shall have received a favorable opinion of Evers & Hendrickson,
LLP ("Evers & Hendrickson") counsel for the Company in form and substance
satisfactory to counsel for you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
California with all requisite corporate power and authority to own, lease and
operate its properties and the properties it proposes to own, lease and operate
as described in the Registration Statement and the Prospectus and to conduct its
business as now conducted and as proposed to be conducted as described in the
Registration Statement and the Prospectus. To the best of such counsel's
knowledge, there are no other jurisdictions in which the ownership or leasing of
the Company's properties or the nature or conduct of its business as now
conducted or proposed to be conducted as described in the Registration Statement
and the Prospectus requires such qualification, except where the failure to do
so would not have a material adverse effect on the Company. To such counsel's
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity (other than any indirect control that
may be implied by virtue of Mr. Yuan and certain other officers of the Company
serving as officers and/or directors of other companies).
(14)
<PAGE>
(ii) The Company has full legal right, power and authority to
enter into, deliver and perform this Agreement, to issue, sell and deliver the
Shares as provided herein and to consummate the transactions contemplated
herein. This Agreement has been duly authorized, executed and delivered by the
Company and, assuming due authorization, execution and delivery by the other
parties hereto, constitutes a valid and binding agreement of the Company,
enforceable in accordance with its terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equity principles and except to the extent that enforcement of the
indemnification provisions set forth in Section 5 of this Agreement may be
limited by federal or state securities laws or the public policy underlying such
laws.
(iii) Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary for the valid authorization, issuance,
sale and delivery of the Shares and the execution, delivery and performance of
this Agreement has been made or obtained and is in full force and effect.
(iv) Neither the issuance, sale and delivery by the Company of
the Shares to purchasers thereof, nor the execution, delivery and performance of
this Agreement, nor the consummation of the transactions contemplated hereby or
thereby by the Company will violate any of the terms and provisions of, or
constitute a default under, any of the Articles of Incorporation or by-laws of
the Company, or, to such counsel's knowledge, under any material indenture,
mortgage, trust, deed of trust, loan agreement, note, lease or other agreement
or instrument to which the Company is a party or to which any of its properties
or other assets is subject; or, to such counsel's knowledge, violate any
applicable statute, judgment, decree, order, rule or regulation of any court or
governmental agency or body; or, to such counsel's knowledge, result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of any of the foregoing.
(v) The description of the Company's authorized capital stock
contained in the Registration Statement and the Prospectus under the caption
"Capital Stock" meets the requirements of Item 12 of Form SB-2 under the 1933
Act, and the Common Stock conforms in all material respects as to legal matters
to the description thereof contained in the Registration Statement and the
Prospectus.
(vi) The Shares to be issued pursuant to the Offering have
been validly authorized by the Company. When issued and delivered, the Shares
will be validly issued, fully paid and nonassessable. No preemptive rights of
shareholders exist with respect to any of the Shares. To such counsel's
knowledge, no person or entity holds a right to require or participate in the
registration under the 1933 Act of the Shares pursuant to the Registration
Statement; and, except as set forth in the Prospectus, no person holds a right
to require registration under the 1933 Act of any shares of Common Stock of the
Company at any other time. To such counsel's knowledge, no person or entity has
a right of participation or first refusal with respect to the sale of the Shares
by the Company. The form of certificates evidencing the Shares comply with all
applicable requirements of California law.
(vii) The Company has an authorized capitalization as set
forth in the Prospectus under the caption "Capital Stock" as of the date
therein. At the date of this Agreement, after effecting a 1-for-2 reverse stock
split, the Company has 5,750,000 shares of issued and
(15)
<PAGE>
outstanding stock (and 250,000 shares of Common Stock reserved for issuance upon
exercise of currently exercisable stock options), all of which is Common Stock.
The Common Stock conforms in all material respects to the description of the
Common Stock contained in the Prospectus. To the knowledge of such counsel,
except as disclosed in the Prospectus, there is no outstanding option, warrant
or other right calling for the issuance of, and no commitment, plan or
arrangement to issue, any shares of capital stock of the Company or any security
convertible into or exchangeable for capital stock of the Company.
(viii) To the knowledge of such counsel, the Company is not in
violation of its Articles of Incorporation or by-laws, and no material default
exists and no event has occurred which, with notice or after the lapse of time
to cure or both, would constitute a material default in the due performance and
observance of any obligation, agreement, term, covenant or condition contained
in any indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument known to such counsel to which any such entity is a
party or by which any such entity or any of its properties is subject. To the
knowledge of such counsel, the Company is not in violation of, or in default
with respect to, any statute, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of each such
entity, respectively.
(ix) To such counsel's knowledge and except as described in
the Prospectus, there is not pending or threatened, any action, suit,
proceeding, inquiry or investigation against the Company or any of its officers
and directors or to which the properties, assets or rights of the Company or
such persons are subject, which, if determined adversely to the Company or any
such persons, would individually or in the aggregate have a material adverse
effect on the financial position, results of operations or business of any such
entity, respectively.
(x) The descriptions in the Registration Statement and the
Prospectus of the contracts, leases and other legal documents therein described
present fairly the information required to be shown and there are no contracts,
leases or other documents known to such counsel of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement which are not described or filed as
required. There are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company, known
to such counsel, of a character required to be disclosed in the Registration
Statement or the Prospectus which have not been so disclosed and properly
described therein. To such counsel's knowledge, all agreements between the
Company, and third parties expressly referenced in the Prospectus are legal,
valid and binding obligations of the Company, enforceable in accordance with
their respective terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, reorganization or other laws of general applicability
relating to or affecting creditors' rights and to general equitable principles.
(16)
<PAGE>
(xi) The Registration Statement has become effective under the
1933 Act and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending or contemplated under the
1933 Act. Other than financial statements and other financial and operating data
and schedules contained therein, as to which counsel need express no opinion,
the Registration Statement, the Prospectus and any amendment or supplement
thereto, appear on their face to conform as to form in all material respects
with the requirements of Form SB-2 under the 1933 Act Regulations.
(xii) The Registration Statement, or any further amendment
thereto made prior to the date hereof, on its effective date, contained or
contains no untrue statement of a material fact and did not omit or does not
omit to state any material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made not misleading, or neither the Prospectus nor any amendment or supplement
thereto, as of its issue date, contained or contains any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading (provided that such counsel need express no belief regarding the
financial statements and related schedules and other financial data contained in
the Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
(xiii) The Company is not an "investment company," or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act.
(xiv) The descriptions in the Prospectus of statutes,
regulations, legal or governmental proceedings are accurate and present fairly a
summary of the information required to be shown under the 1933 Act and the 1933
Act Regulations. The information in the Prospectus under the caption
"Capitalization," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel, is correct and presents fairly
the information required to be disclosed therein under the 1933 Act and the 1933
Act Regulations.
(xv) To such counsel's knowledge, no relationship, direct or
indirect, exists between or among any of the Company or any affiliate of the
Company, on the one hand, and any director, officer, stockholder, customer or
supplier of the Company or any affiliate of the Company, on the other hand, that
is required by the 1933 Act or by the 1933 Act Regulations to be described in
the Registration Statement or the Prospectus which is not so described or is not
adequately described.
(xvi) All sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or, to
the knowledge of such counsel, effected in a manner which was exempt from the
registration requirements of the 1933 Act and were duly registered in accordance
with or the subject of an available exemption from the registration requirements
of the applicable blue sky laws. To the knowledge of such counsel, the Company
has not effected any sales of securities that would be required to be disclosed
in response to Item 701 of Regulation S-K that are not disclosed in the
Registration Statement.
In rendering the foregoing opinion, such counsel may rely on the following:
(17)
<PAGE>
(A) as to matters involving the application of laws other than
the laws of the United States and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the extent
specified in such opinion, upon an opinion or opinions (in form and
substance reasonably satisfactory to Underwriters' counsel) of other
counsel familiar with the applicable laws,
(B) as to matters of fact, to the extent they deem
appropriate, on certificates of responsible officers of the Company and
certificates or other written statements of officers or departments of
various jurisdictions having custody of documents respecting the
existence or good standing of the Company provided that copies of all
such opinions, statements or certificates shall be delivered to your
counsel. The opinion of counsel for the Company shall state that the
opinion of any other counsel, or certificate or written statement, on
which such counsel is relying is in form satisfactory to such counsel
and that you and they are justified in relying thereon.
(b) At the time that this Agreement is executed by the Company, you
shall have received from KPMG, LLP a letter, dated the date hereof, in form and
substance satisfactory to you, confirming that they are independent public
accountants with respect to the Company within the meanings of the 1933 Act and
1933 Act Regulations, and stating in effect that:
(i) in their opinion, the financial statements and any
supplementary financial information and schedule included in the Registration
Statement and covered by their opinion therein comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
1933 Act Regulations;
(ii) on the basis of limited procedures (set forth in detail
in such letter and made in accordance with such procedures as may be specified
by you) not constituting an audit in accordance with generally accepted auditing
standards, consisting of (but not limited to) a reading of the latest available
internal unaudited financial statements of the Company, a reading of the minute
books of the Company, inquiries of officials of the Company responsible for
financial and accounting matters, and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that caused them to
believe that:
(A) the unaudited financial statements and supporting schedule
and other unaudited financial data of the Company included in the
Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act
and the 1933 Act Regulations or are not presented in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited financial statements from which
such data and items were derived, and any such unaudited data and items
were not determined on a basis substantially consistent with the basis
for the corresponding amounts in the audited financial statements
included in the Prospectus;
(C) any unaudited pro forma financial information included in
the Prospectus does not comply as to form in all material respects with
the applicable accounting
(18)
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requirements of the 1933 Act and the 1933 Act Regulations or the pro
forma adjustments have not been properly applied to historical amounts
in the compilation of that information; and
(D) at a specified date not more than five days prior to the
date of delivery of such letter, there was any change in the capital
stock or long-term debt or obligations under capital leases of the
Company, or there were any decreases in net current assets or net
assets, or shareholders' equity, from that set forth in the Company's
balance sheet at December 31, 1998, except as described in such letter;
and
(iii) in addition to the procedures referred to in clause (ii)
above and the examination referred to in their Reports included in the
Registration Statement, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information specified
by you which are derived from the general accounting records of the Company,
which appear in the Registration Statement or the exhibits or schedules thereto
and are specified by you, and have compared such amounts, percentages and
financial information with the accounting records of the Company and with
material derived from such records and have found them to be in agreement.
(c) At the time of the closing of the Offering, you shall have received
from KPMG, LLP, a letter, in form and substance satisfactory to you and dated as
of the date of the closing of the Offering, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (b) above, except
that the specified date referred to shall be a date not more than five days
prior to the date of closing of the Offering.
(d) The NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to such offering, such terms or your
participation in the same.
Section 5. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless Broker-Dealer and each
person, if any, who controls Broker-Dealer within the meaning of the 1933 Act or
the 1934 Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which it or such controlling person may become subject under the 1933
Act, the 1934 Act or insofar as such losses, claims, damages or liabilities in
respect thereof arise out of or are based upon any breach of any warranty or
covenant of the Company herein contained or by reason of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and will reimburse Broker-Dealer for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or
(19)
<PAGE>
omission or alleged omission made in the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by Broker-Dealer
expressly for use therein. In addition to its other obligations under this
Section 5 (a), the Company agrees that, as an interim measure during the
pendency of any such claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in this Section 5 (a), it will reimburse Broker-Dealer on
a monthly basis for all reasonable legal and other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse Broker-Dealer for such expenses and the possibility that
such payments might later be held to have been improper by a court of competent
jurisdiction. Any such interim reimbursement payments that are not made to
Broker-Dealer within 30 days of a request for reimbursement shall bear interest
at the prime rate (or reference rate or other commercial lending rate for
borrowers of the highest credit standing) published from time to time by The
Wall Street Journal (the "Prime Rate") from the date of such request. The
Company will not, without the prior written consent of Broker-Dealer, settle or
compromise or consent to the entry of any judgment in any pending or threatened
action or claim or related cause of action or portion of such cause of action in
respect of which indemnification may be sought hereunder (whether or not
Broker-Dealer is a party to such action or claim), unless such settlement,
compromise or consent includes an unconditional release of Broker-Dealer from
all liability arising out of such action or claim (or related cause of action or
portion thereof).
The indemnity agreement in this Section 5(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls Broker-Dealer within the meaning of the 1933 Act or the 1934 Act to
the same extent as such agreement applies to Broker-Dealer.
(b) Broker-Dealer will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement or the Prospectus or
any such amendment or supplement thereto in reliance upon and in conformity with
written information furnished to the Company by Broker-Dealer expressly for use
therein; and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action. In addition to its other
obligations under this Section 5(b), Broker-Dealer agrees that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 5(b), it will reimburse
the Company on a monthly basis for all reasonable legal and other expenses
incurred in connection with investigating or defending any such claim, action
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of its obligation
to reimburse the Company
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for such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. Any such interim
reimbursement payments that are not made to the Company within 30 days of a
request for reimbursement shall bear interest at the Prime Rate from the date of
such request. This indemnity agreement shall be in addition to any liabilities
that Broker-Dealer may otherwise have.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; no indemnification provided for in Section 5(a) or 5(b)
shall be available to any party who shall fail to give notice as provided in
this Section 5(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by the
failure to give such notice, but the omission so to notify the indemnifying
party will not relieve the indemnifying party from any liability that it may
have to any indemnified party otherwise than under Section 5. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation, except
that if the indemnified party has been advised by counsel in writing that there
are one or more defenses available to the indemnified party which are different
from or additional to those available to the indemnifying party, then the
indemnified party shall have the right to employ separate counsel and in that
event the reasonable fees and expenses of such separate counsel for the
indemnified party shall be paid by the indemnifying party; provided, however,
that if the indemnifying party is the Company, the Company shall only be
obligated to pay the reasonable fees and expenses of a single law firm (and any
reasonably necessary local counsel) employed by all of the indemnified parties
and the persons referred to in Section 5(a) hereof. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
(d) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Section 5(a) and 5(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the indemnifying parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the National
Association of Securities Dealers, Inc. Any such arbitration must be commenced
by service of a written demand for arbitration or a written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a) and 5(b) hereof
and will not resolve the
(21)
<PAGE>
ultimate propriety or enforceability of the obligation to indemnify for expenses
that is created by the provisions of Sections 5(a) and 5(b).
(e) In order to provide for just and equitable contribution in
circumstances under which the indemnity provided for in this Section 5 is for
any reason judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the right of appeal) to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Company on the one hand,
and Broker-Dealer on the other shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity incurred by the Company and Broker-Dealer, as incurred, in such
proportions that (a) Broker-Dealer is responsible pro rata for that portion
represented by the commission percentage appearing on the cover page of the
Prospectus bears to the initial public offering price (before deducting
expenses) appearing thereon, and (b) the Company is responsible for the balance,
provided, however, that no person guilty of fraudulent misrepresentations
(within the meaning of Section 12(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation; provided, further, that if the allocation provided above is
not permitted by applicable law, the Company, on the one hand and Broker-Dealer
on the other shall contribute to the aggregate losses in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company on the one hand, and Broker-Dealer on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
on the one hand, or by Broker-Dealer on the other hand, and the parties,
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and Broker-Dealer agree that it
would not be just and equitable if contributions pursuant to this Section 5(e)
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 5(e). The amount paid or payable by a party as a result of the
losses, claims, damages or liabilities referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending such action or claim.
Section 6. Representations, Warranties and Agreements to Survive
Delivery. The representations, warranties, indemnities, agreements and other
statements of the Company or their respective officers set forth in or made
pursuant to this Agreement will remain operative and in full force and effect
will survive the termination of this Agreement.
Section 7. Notices.
All notices or communications required or permitted hereunder shall be
in writing and shall be mailed or delivered as follows:
If to the Company: CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
320 S. Garfield Avenue, Suite 318
Alhambra, CA 91801
Attention: Frank Yuan
(22)
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If to Broker-Dealer: (a) MALACHI GROUP, INC.
12 Piedmont Center, #410
Atlanta, GA 30305
Attention: Tom Diggs
Section 8. Miscellaneous. This Agreement contains and constitutes the
entire agreement between the parties hereto and supersedes all prior written or
oral and all contemporaneous agreements or negotiations with respect to the
subject matter hereof. The Agreement may only be amended, modified or waived in
writing signed by both parties hereto. This Agreement shall be governed in
accordance with the laws of the State of California; without reference to the
conflict of law provisions thereof. This Agreement may be executed in
counterparts.
Section 9. Governing Law and Time. This Agreement shall be governed by
the laws of the State of California. Specified time of the day refers to United
States Pacific Time. Time shall be of the essence of this Agreement.
Section 10. Counterparts. This Agreement may be executed in one or more
counterparts and when a counterpart has been executed by each party, all such
counterparts taken together shall constitute one and the same agreement.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument will become a binding agreement among the Company and Broker-Dealer
in accordance with its terms.
Very truly yours,
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
By: _______________________________
Name: Frank Yuan
Title: President
Confirmed and accepted as of
the date first above written:
MALACHI GROUP, INC.
By: _____________________________
Name: Tom Diggs
Title: Chief Operating Officer
(23)
2,500,000 SHARES
CYBER MERCHANTS EXCHANGE, INC. d.b.a. C-ME.com
Common Stock
BEST EFFORTS COMPENSATION AGREEMENT
Alhambra, California
April 21, 1999
Bob Guiltinan
Tradeway Securities Group, Inc.
5875 Avenida Encinas
Carlsbad, CA 92008
Dear Mr. Guiltinan:
CYBER MERCHANTS EXCHANGE, INC.d.b.a. C-ME.Com, a California corporation (the
"Company"), proposes to issue and sell an aggregate of two million five hundred
thousand (2,500,000) shares of the Company's Common Stock, no par value per
share (the "Common Stock" or "Shares").
The Shares will be offered to the public by the Company at a price of
$6.00-$9.00 per share (the "Offering"). The purpose of this Agreement is to set
forth the understanding of the parties relating to the right of Tradeway
Securities Group, Inc., a California Corporation ("Broker-Dealer") to
participate in the sale of the Shares as a broker-dealer exercising its best
efforts to sell the Shares.
Section 1. Representations and Warranties of the Company . The Company
represents and warrants to and agrees with Broker-Dealer that:
(a) A registration statement on Form SB-2 (File No. 333-41411) with
respect to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the
applicable rules and regulations (the "1933 Act Regulations") of the Securities
and Exchange Commission (the "Commission"), and has been filed with the
Commission; and such amendments to such registration statement as may have been
required prior to the date hereof have been filed with the Commission, and such
amendments have been similarly prepared. Such registration statement went
effective with the Commission on _________________, 199__ (the "Date of
Registration"). Copies of such registration statement and amendment or
amendments of each related preliminary prospectus,
(24)
<PAGE>
and the exhibits, financial statements and schedules, as finally amended and
revised, have been delivered to you.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement became
effective and, in the event any post-effective amendment thereto becomes
effective prior to the closing of the Offering, shall also mean such
registration statement as so amended. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Shares in the form in which
it is first filed with the Commission pursuant to Rule 424(b) of the 1933 Act
Regulations or, if no filing pursuant to Rule 424(b) of the 1933 Act Regulations
is required, shall mean the form of final prospectus included in the
Registration Statement at the time such Registration Statement becomes
effective.
(b) When the Registration Statement became effective, when the
Prospectus was first filed pursuant to Rule 424(b) of the 1933 Act Regulations,
when any amendment to the Registration Statement becomes effective, and when any
supplement to the Prospectus is filed with the Commission, (i) the Registration
Statement, the Prospectus and any amendments thereof and supplements thereto
will conform in all material respects with the applicable requirements of the
1933 Act and the 1933 Act Regulations, and (ii) neither the Registration
Statement, the Prospectus nor any amendment or supplement thereto will contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by Broker-Dealer
expressly for use in the Registration Statement.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the state of California with all
requisite corporate power and authority to own, lease and operate its properties
and the properties it proposes to own, lease and operate as described in the
Registration Statement and the Prospectus and to conduct its business as now
conducted and as proposed to be conducted as described in the Registration
Statement and the Prospectus. The Company has been duly qualified to do business
and is in good standing as a foreign corporation in each other jurisdiction in
which the ownership or leasing of its properties or the nature or conduct of its
business as now conducted or proposed to be conducted as described in the
Registration Statement and the Prospectus requires such qualification, except
where the failure to do so would not have a material adverse effect on the
Company.
(d) The Company has full legal right, power and authority to enter into
this Agreement, to issue, sell and deliver the Shares as provided herein and to
consummate the transactions contemplated herein. This Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid and
binding agreement of the Company, enforceable in accordance with its terms,
except to the extent that enforceability may be limited by bankruptcy,
insolvency, reorganization or other laws of general applicability relating to or
affecting creditors, rights, or by general equity principles and except to the
extent the indemnification provisions set forth in Section 5 of this Agreement
may be limited by federal or state securities laws or the public policy
underlying such laws.
(e) Each consent, approval, authorization, order, license, certificate,
permit, registration, designation or filing by or with any governmental agency
or body necessary for the
(25)
<PAGE>
valid authorization, issuance, sale and delivery of the Shares, the execution,
delivery and performance of this Agreement and the consummation by the Company
of the transactions contemplated hereby, has been made or obtained and is in
full force and effect.
(f) Neither the issuance, sale and delivery by the Company of the
Shares, nor the execution, delivery and performance of this Agreement nor the
consummation of the transactions contemplated hereby by the Company will
conflict with or result in a breach or violation of any of the terms and
provisions of, or (with or without the giving of notice or the passage of time
or both) constitute a default under, the Articles of Incorporation, by-laws of
the Company; any indenture, mortgage, deed of trust, loan agreement, note, bond
or other agreement or instrument to which the Company, is a party or to which
it, any of its properties or other assets; or any applicable statute, law,
judgment, decree, order, rule or regulation of any court or governmental agency
or body applicable to the Company or its property; or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property or asset
of the Company.
(g) The Shares to be issued and sold hereunder have been validly
authorized by the Company. When issued and delivered against payment therefor,
the Shares will be duly and validly issued, fully paid and non-assessable. No
preemptive rights of shareholders exist with respect to any of the Shares. No
person or entity holds a right to require or participate in the registration
under the 1933 Act of the Shares pursuant to the Registration Statement; and,
except as set forth in the Prospectus, no person holds a right to require
registration under the 1933 Act of any shares of Common Stock of the Company at
any other time. No person or entity has a right of participation or first
refusal with respect to the sale of the Shares by the Company. The form of
certificates evidencing the Shares complies with all applicable requirements of
California law.
(h) The Common Stock to be issued upon exercise of the common stock
purchase warrants to be issued to Broker-Dealer (the "Warrants") are duly
authorized, and when issued and delivered pursuant to this Agreement, will be
duly authorized, validly issued, fully paid and non-assessable and free of
pre-emptive rights of any security holder of the Company. Neither the filing of
the Registration Statement nor the offering or sale of the Shares gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock, except as described
in the Registration Statement.
(i) This Agreement has been duly and validly authorized, executed and
delivered by the Company. The Company has full power and lawful authority to
issue and sell the shares of Common Stock to be sold by it upon exercise of the
Warrants (the "Warrant Shares") on the terms and conditions set forth herein,
and no consent, approval, authorization or other order of any governmental
authority is required in connection with such authorization, execution and
delivery or with the authorization, issue and sale of the Warrant Shares or the
Warrants, except as may be required under the 1933 Act or state securities laws.
(26)
<PAGE>
(j) The Company has 5,750,000 shares (and 250,000 shares of Common
Stock reserved for issuance upon exercise of currently exercisable stock
options) of issued and outstanding shares of Common Stock, after effecting a
1-for-2 reverse stock split. The Company has no other issued and outstanding
capital stock. The Company's authorized capitalization is as set forth in the
Prospectus under the caption "Capitalization." Except as disclosed in the
Prospectus, there is no outstanding option, warrant or other right calling for
the issuance of, and no commitment, plan or arrangement to issue any shares of
capital stock of the Company or any security convertible into or exchangeable
for capital stock of the Company.
(k) The financial statements of the Company in the Registration
Statement and the Prospectus present fairly the financial position of the
Company as of the dates indicated and the results of operations and cash flows
for the periods specified, all in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods specified. The
financial statement schedule included in the Registration Statement and the
amounts in the Prospectus under the captions "Selected Financial Data" fairly
present the information shown therein and have been compiled on a basis
consistent with the financial statements included in the Registration Statement
and the Prospectus. No other financial statements or schedules are required by
Form SB-2 or otherwise to be included in the Registration Statement or the
Prospectus. The unaudited pro forma combined financial information (including
the related notes) included in the Prospectus complies as to form in all
material respects to the applicable accounting requirements of the 1933 Act and
the 1933 Act Regulations and management of the Company believes that the
assumptions underlying the pro forma adjustments are reasonable. Such pro forma
adjustments have been properly applied to the historical amounts in the
compilation of the information and such information fairly presents with respect
to the Company the pro forma financial position, results of operations and other
information purported to be shown therein at the respective dates and for the
respective periods specified.
(l) KPMG, LLP, who have examined and are reporting upon the audited
financial statements and schedules included in the Registration Statement, are,
and were during the periods covered by their Reports included in the
Registration Statement and the Prospectus, independent public accountants, as
required by the 1933 Act and the 1933 Act Regulations.
(m) The Company has not sustained, since inception, any material loss
or interference with its business from fire, explosion, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or arbitrators' or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as otherwise stated in the Registration Statement
and Prospectus, there has not been (i) any material change in the capital stock
or partnership interests, as applicable, long-term debt, obligations under
capital leases or short-term borrowings of the Company, (ii) any material
adverse change, or any development which could reasonably be seen as involving a
prospective material adverse change, in or affecting the business prospects,
properties, assets, results of operations or condition (financial or other) of
the Company, (iii) any liability or obligation, direct or contingent, incurred
or undertaken by the Company, which is material to the business or condition
(financial or other) of the Company, except for liabilities or obligations
incurred in the ordinary course of business, (iv) any declaration or payment of
any dividend or distribution of any kind on or with respect to the capital stock
of the Company, or (v) any
(27)
<PAGE>
transaction that is material to the Company except transactions in the ordinary
course of business or as otherwise disclosed in the Registration Statement and
the Prospectus.
(n) The Company is not in violation of its Articles of Incorporation or
by-laws, and no default exists, and no event has occurred, nor state of facts
exists, which, with notice or after the lapse of time to cure or both, would
constitute a default in the due performance and observance of any obligation,
agreement, term, covenant, consideration or condition contained in any
indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument to which the Company is a party or by which it or any of
its properties is subject. The Company is not in violation of, or in default
with respect to, any statute, law, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as is in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of the
Company.
(o) Except as described in the Prospectus, there is not pending or, to
the knowledge of the Company, threatened any action, suit, proceeding, inquiry
or investigation against the Company, its officers and directors or to which the
properties, assets or rights of the Company are subject, before or brought by
any court or governmental agency or body or board of arbitrators, which could
result in any material adverse change in the business, prospects, properties,
assets, results of operations or condition (financial or otherwise) of the
Company.
(p) The descriptions in the Registration Statement and the Prospectus
of the contracts, leases and other legal documents therein described present
fairly the information required to be shown, and there are no contracts, leases,
or other documents of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement which are not described or filed as required. To the best knowledge of
the Company, there are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus which have not been so disclosed and properly described therein. All
agreements between the Company and third parties expressly referenced in the
Prospectus are legal, valid and binding obligations of the Company enforceable
in accordance with their respective terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equitable principles.
(q) The Company owns, possesses or has obtained all material permits,
licenses, franchises, certificates, consents, orders, approvals and other
authorizations of governmental or regulatory authorities as are necessary to own
or lease, as the case may be, and to operate its properties and to carry on its
business as presently conducted, or as contemplated in the Prospectus to be
conducted, and the Company has not received any notice of proceedings relating
to revocation or modification of any such licenses, permits, certificates,
consents, orders, approvals or authorizations.
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(r) The Company owns or possesses adequate license or other rights to
use all patents, trademarks, service marks, trade names, copyrights, software
and design licenses, trade secrets, manufacturing processes, other intangible
property rights and know-how (collectively "Intangibles") necessary to entitle
it to conduct its business now, and as proposed to be conducted or operated as
described in the Prospectus, and the Company has not received notice of
infringement or of conflict with (and knows of no such infringement of or
conflict with) asserted rights of others with respect to any Intangibles which
could materially and adversely affect its business, prospects, properties,
assets, results of operation or condition (financial or otherwise).
(s) The Company has not directly or indirectly, at any time (i) made
any contribution to any candidate for political office, or failed to disclose
fully any such contribution, in violation of law or (ii) made any payment to any
state, federal or foreign, governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. To the best knowledge of
the Company, the Company's internal accounting controls and procedures are
sufficient to cause such entities to comply in all material respects with the
Foreign Corrupt Practices Act of 1977, as amended.
(t) To the best of the Company's knowledge, the Company's systems of
internal accounting controls taken as a whole are sufficient to meet the broad
objectives of internal accounting control insofar as those objectives pertain to
the prevention or detection of errors or irregularities in amounts that would be
material in relation to the Company's financial statements; and, to the best of
the Company's knowledge, neither the Company, nor any employee or agent thereof,
has made any payment of funds of the Company or received or retained any funds
and no funds of the Company have been set aside to be used for any payment, in
each case in violation of any law, rule or regulation.
(u) The Company has filed on a timely basis all necessary federal,
state, local and foreign income and franchise tax returns required to be filed
through the date hereof and have paid all taxes shown as due thereon; and no tax
deficiency has been asserted against the Company, nor does the Company know of
any tax deficiency which is likely to be asserted against the Company which if
determined adversely to the Company, could materially adversely affect the
business, prospects, properties, assets, results of operations or condition
(financial or otherwise) of any such entity, respectively. All tax liabilities
are adequately provided for on the respective books of such entities.
(v) The Company maintains insurance (issued by insurers of recognized
financial responsibility) of the types and in the amounts generally deemed
adequate for their respective businesses and, to the best of the Company's
knowledge, consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance covering real and
personal property owned or leased by the Company against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
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(w) To the best of the Company's knowledge, no general labor problem
exists or is imminent with the employees of the Company which would have a
material adverse effect on the financial position, results of operations or
business of the Company.
(x) The Company and its officers, directors or affiliates have not
taken and will not take, directly or indirectly, any action designed to, or that
might reasonably be expected to, cause or result in or constitute the
stabilization or manipulation of any security of the Company or to facilitate
the sale or resale of the Shares in violation of any law, rule or regulation.
(y) The Company has not incurred any liability for a fee, commission or
other compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement other than as
contemplated hereby.
(z) Except as otherwise disclosed in the Prospectus, the Company has
not authorized or conducted nor has knowledge of the generation, transportation,
storage, presence, use, treatment, disposal, release, or other handling of any
hazardous substance, hazardous waste, hazardous material, hazardous constituent,
toxic substance, pollutant, contaminant, asbestos, radon, polychlorinated
biphenyls ("PCBs"), petroleum product or waste (including crude oil or any
fraction thereof), natural gas, liquefied gas, synthetic gas or other material
defined, regulated, controlled or potentially subject to any remediation
requirement under any environmental law (collectively, "Hazardous Materials"),
on, in, under or affecting any real property currently leased or owned or by any
means controlled by the Company (the "Real Property") except as in material
compliance with applicable laws; to the knowledge of the Company, the Real
Property and the Company's operations with respect to the Real Property are in
compliance with all federal, state and local laws, ordinances, rules,
regulations and other governmental requirements relating to pollution, control
of chemicals, management of waste, discharges of materials into the environment,
health, safety, natural resources, and the environment (collectively,
"Environmental Laws"), and the Company has, and is in compliance with, all
licenses, permits, registrations and government authorizations necessary to
operate under all applicable Environmental Laws. Except as otherwise disclosed
in the Prospectus, the Company has not received any written or oral notice from
any governmental entity or any other person and there is no pending or
threatened claim, litigation or any administrative agency proceeding that:
alleges a violation of any Environmental Laws by the Company; alleges that the
Company is a liable party or a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
S 9601, et seq., or any state superfund law; has resulted in or could result in
the attachment of an environmental lien on any of the Real Property; or, alleges
that the Company is liable for any contamination of the environment,
contamination of the Real Property, damage to natural resources, property
damage, or personal injury based on their activities or the activities of their
predecessors or third parties (whether at the Real Property or elsewhere)
involving Hazardous Materials whether arising under the Environmental Laws,
common law principles or other legal standards.
(aa) The Company will not become as a result of the transactions
contemplated hereby, or will not conduct its business in a manner in which it
would become, "an investment
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company," or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended (the "Investment
Company Act").
(bb) No relationship, direct or indirect, exists between or among any
of the Company or any affiliate of the Company, on the one hand, and any
director, officer, stockholder, customer or supplier of the Company or any
affiliate of the Company, on the other hand, that is required by the 1933 Act or
by the 1933 Act Regulations to be described in the Registration Statement or the
Prospectus which is not so described or is not adequately described.
(cc) All offers and sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or
exempt from the registration requirements of the 1933 Act and were duly
registered in accordance with or the subject of an available exemption from
registration under the applicable blue sky laws. The Company has not effected
any sales of securities that would be required to be disclosed in response to
Item 701 of Regulation S-K that are not disclosed in the Registration Statement.
Any certificate signed by any officer of the Company on behalf of the
Company and delivered to you or to counsel for the Representative shall be
deemed a representation and warranty of the Company to the Representative as to
the matters covered thereby.
Section 2. Certain Covenants of the Company. The Company covenants and
agrees with Broker-Dealer, to use its best efforts to cause the Company to
perform as follows:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective (if not yet effective at the date and time that
this Agreement is executed and delivered by the parties hereto). The Company
will notify you immediately, and confirm the notice in writing, (i) when the
Registration Statement, or any post-effective amendment to the Registration
Statement, shall have become effective, or any supplement to the Prospectus or
any amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission to amend
the Registration Statement or amend or supplement the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution or threatening of any proceeding for any
such purposes. The Company will use every reasonable effort to prevent the
issuance of any such stop order or of any order preventing or suspending such
use and, if any such order is issued, to obtain the withdrawal thereof at the
earliest possible moment.
(b) The Company will not at any time file or make any amendment to the
Registration Statement, or any amendment or supplement to the Prospectus if you
shall not have previously been advised and furnished a copy thereof a reasonable
time prior to the proposed filing, or if you or your counsel reasonably object
to such amendment or supplement.
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(c) The Company will deliver to you, at the Company's expense, from
time to time as requested, such number of copies of the Prospectus (as
supplemented or amended) as you may reasonably request. If the delivery of a
Prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Shares and if at such time any events shall have occurred as result of which
the Prospectus as then amended or supplemented would include an untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were made
when such Prospectus is delivered not misleading, or, if for any reason it shall
be necessary during such same period to amend or supplement the Prospectus in
order to comply with the 1933 Act, the Company will notify you and upon your
request prepare and furnish without charge to you and to any dealer in
securities as many copies, as you may from time to time reasonably request, of
an amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance.
(d) The Company will use its best efforts to qualify the Shares for
offering and sale under the applicable securities laws of such states and other
jurisdictions as you may designate and to maintain such qualifications in effect
for as long as may be necessary to complete the distribution of the Shares;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified or to make any undertakings in
respect of doing business in any jurisdiction in which it is not otherwise so
subject. The Company will file such statements and reports as may be required by
the laws of each jurisdiction in which the Shares have been qualified as above
provided.
(e) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the end of the fiscal
quarter first occurring after the first anniversary of the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the 1933 Act
Regulations), an earnings statement (in reasonable detail but which need not be
audited) complying with the provisions of Section 11(a) of the 1933 Act and Rule
158 thereunder and covering a period of at least 12 months beginning after the
effective date of the Registration Statement.
(f) The Company will use the net proceeds received by it from the sale
of the Shares substantially in the manner specified in the Prospectus under the
caption "Use of Proceeds."
(g) The Company will furnish to its security holders of record, as soon
as practicable after the end of each respective period, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year. During a period of five years after the date hereof, the
Company will furnish to you: (i) concurrently with furnishing such reports to
its security holders, statements of operations of the Company for each of the
first three quarters in the form furnished to the Company's security holders;
(ii) concurrently with furnishing to its security holders, a balance sheet of
the Company as of the end of such fiscal year, together with statements of
operations, of cash flows and of security holders, equity of the Company for
such fiscal year,
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accompanied by a copy of the certificate or report thereon of independent public
accountants; (iii) as soon as they are available, copies of all reports
(financial or otherwise) mailed to security holders; (iv) as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission, any securities exchange or the NASD; (v) every material
press release in respect of the Company or its affairs which is released or
prepared by the Company, and (vi) any additional information of a public nature
concerning the Company or its business that you may reasonably request. During
such five-year period, the foregoing financial statements shall be on a
consolidated basis to the extent that the accounts of the Company are
consolidated with any subsidiaries, and shall be accompanied by similar
financial statements for any significant subsidiary that is not so consolidated.
(h) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(i) The Company will use its best efforts to acquire the inclusion of
its shares of Common Stock on the National Association of Securities Dealers
Automated Quotation system ("NASDAQ") and the American Stock Exchange ("AMEX")
within six months from the date hereof.
(j) The Company is familiar with the Investment Company Act and the
rules and regulations thereunder, and has in the past conducted its affairs, and
will in the future conduct its affairs, in such a manner so as to ensure that
the Company was not and will not be an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act.
(k) The Company will not, and will use its best efforts to cause its
officers, directors and affiliates not to, (i) take, directly or indirectly
prior to termination of the distribution of the Shares contemplated by this
Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which may cause or result in, or which might in the
future reasonably be expected to cause or result in, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of the Shares or (iii) pay or agree to pay
to any person any compensation for soliciting any order to purchase any other
securities of the Company which, in any such case, is in violation of any law,
rule or regulation.
(l) The Company will file timely and accurate reports on Form SR with
the Commission in accordance with Rule 463 of the 1933 Act Regulations or any
successor provision.
(m) Prior to the closing of the Offering, the Company will not, and
will use its best efforts to cause any affiliate of the Company not to issue a
press release or other official communication directly or indirectly, nor hold a
press conference with respect to the Company or with respect to the financial
condition, results of operations, business, properties, assets or
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liabilities of the Company, or the offering of the Shares, without your prior
written input within 72 hours which consent shall not be unreasonably withheld.
(n) The Company will notify you promptly of any material adverse change
affecting any of its representations, warranties, agreements and indemnities
herein at any time prior to the closing of the Offering and take such steps as
may be reasonably requested by you either to remedy or publicize the same, or
both.
(o) The Company will reserve and keep available that maximum number of
its authorized but unissued shares of Common Stock which are issuable upon
exercise of the Warrants outstanding from time to time.
(p) On the last day that this Agreement is in full force and effect
after the execution hereof, the Company shall execute and deliver to you the
Warrants you have earned. The Warrants will be substantially in the form of the
Stock Purchase Warrant filed as an exhibit to the Registration Statement, a copy
of which is attached hereto as Exhibit "A".
(q) For a period of five years from the Effective Date, the Company, at
its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit and without issuing any opinion thereon)
the Company's financial statements for each of the first three (3) fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's 10-Q quarterly report and the mailing of quarterly
financial information to Stockholders.
(r) As promptly as practicable after the closing of the Offering, the
Company will prepare, at its own expense, hard cover "bound volumes" relating to
the offering, and will distribute such volumes to the individuals designated by
you.
Section 3. Engagement & Allotment, Term, Reporting, Compensation and
Payment of Expenses.
(a) Engagement & Allotment.
(i) Subject to the terms and conditions of this Agreement, the
Company hereby engages Broker-Dealer, on a "best efforts" basis, as the
Company's nonexclusive agent in connection with the sale of up to 50,000 Shares
(the "Allotted Shares"). The number of Allotted Shares may be increased or
decreased at the sole discretion of the Company upon three (3) days written
notice to Broker-Dealer. Broker-Dealer will keep precise records of all
purchases of stock, including the amount of the purchase, the exact title in
which the Shares are to be issued and the address of the purchaser. The Shares
will be issued promptly by the Company and, in no event, later than fifteen (15)
days after notification by Broker-Dealer of the purchase with the information
set forth above. The maximum amount of each sale shall be 8,800 shares. The
minimum amount of each sale shall be 300 shares.
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(ii) As to residents of the State of California who wish to
purchase in excess of $2,500 worth of the Shares, Broker-Dealer will take
appropriate measures to assure that the purchaser is "suitable" by having a
minimum net worth (excluding home equity, home furnishings and automobiles) of
at least $250,000 and a minimum gross income of $65,000 during the current tax
year; or, in the alternative, a minimum net worth of $500,000. In either case,
the amount of a purchaser's investment may not exceed ten percent (10%) of the
purchaser's net worth.
(iii) Broker-Dealer shall use its best efforts to assist the
Company in making sales of the shares pursuant to the Offering. Broker-Dealer
makes no representations as to the amount of Shares it will be able to sell.
There is no firm commitment to sell any certain amount of the Shares by
Broker-Dealer.
(vi) Broker-Dealer will only offer the Company's stock in
those states in which Broker-Dealer and its brokers are registered.
(vii) Broker-Dealer agrees to become a market maker for the
Company when legally permitted by its restrictive agreement with the NASD and
the SEC and when approved by the Broker-Dealer's Board of Directors. At such
time, Broker-Dealer agrees to assist with any filing requirements. Broker-Dealer
does not currently act as a market maker and has no immediate plans to act as a
market maker.
(b) Term. The term of this Agreement shall commence as of the effective
date hereof (the "Effective Date") and shall continue in full force and effect
for a period of up to thirty (30) days from the Date of Registration as set
forth in Section 1(a), above. This Agreement may be extended for additional
period of 30 days upon the mutual written consent of both parties.
(c) Reporting. Broker-Dealer shall offer the Shares pursuant to the
Prospectus. Payment for the Shares shall be made by the Purchaser directly to
the Escrow Agent as set forth in the Prospectus. The commission, as set forth in
Section 3(d), will be paid by the Company or deducted from the proceeds of the
sale when subscriptions have been accepted for at least the Minimum amount as
set forth in the Prospectus and such Minimum subscriptions are fully paid. Said
commission and any other amounts due to Broker-Dealer hereunder shall be paid
every Friday once the Minimum is reached. All amounts due shall be calculated as
of the close of business on the immediately prior Thursday. If the Company or
any other entity makes sales without Broker-Dealer, no commission will be due to
Broker-Dealer on such sales.
(e) Compensation.
The Company shall pay Broker-Dealer as follows:
(i) A commission of 7% based on the total offering amount of
the Allotted Shares as set forth in Section 3(a)(i). The commission will be paid
by the Company or deducted from the proceeds of the sale when subscriptions have
been accepted for at least the Minimum amount
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as set forth in the Prospectus and such Minimum subscriptions are fully paid. If
more than the Minimum is sold during the offering then commissions relating to
such additional Shares will be paid out of escrow when monies for the Shares
subscribed to are distributed to the Issuer.
(ii) The Company reserves the right to review all
subscriptions for securities law compliance and to make the final determination
whether to accept or reject subscriptions. No selling commissions will be
payable with respect to subscriptions which are rejected by the Company.
(iii) As an additional incentive for Broker-Dealer to perform
its services in a timely manner, Warrants in the form attached hereto as Exhibit
"A" shall be issued to Broker-Dealer or its designees as follows:
1. A warrant to purchase up to five percent (5%) of the
Allotted Shares, equal to 2,500 shares of stock with
an exercise price of $9.90 - 14.85 per share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System.
2. In both instances, as set forth above, the Warrants
will be granted pro rata to the sale of the Shares by
Broker-Dealer. Assuming all 50,000 Shares available
for sale are sold by Broker-Dealer, 2,500 Warrants
will be issued. If less than 50,000 Shares are sold
by Broker-Dealer, Warrants will be issued on a pro
rata basis in accordance with the actual number of
Shares sold. For example, should 25,000 Shares be
sold, Broker-Dealer will be entitled to 1,250
Warrants at a price of $9.90 - 14.85 per Share, which
shall not be less than one-hundred sixty-five percent
(165%) of the Offering Price of the Shares. The
warrant shall be in standard form (see Exhibit A) and
shall be assignable, shall contain a net exercise
provision, and shall expire no sooner than three (3)
years after the listing of the Common Stock of the
Company on the American Stock Exchange, or the NASDAQ
System. The Shares obtained upon exercise of the
Warrants will be "restricted" stock subject to the
trading provisions of Rule 144 promulgated by the
Commission.
(e) Payment of Expenses. The Company will pay and bear all costs, fees
and expenses incident to the performance of its obligations under this Agreement
(excluding fees and expenses of your counsel), including (a) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits), as originally filed and as amended, the Prospectus and
any amendments or supplements thereto, and the cost of furnishing copies thereof
to you, (b) the preparation of any Selected Dealers Agreement, the certificates
representing the
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Shares, the Blue Sky Memoranda and any instruments relating to any of the
foregoing, (c) the issuance and delivery of the Shares to the purchasers,
including any transfer taxes payable upon the sale of the Shares, (d) the fees
and disbursements of the Company's counsel and accountants, (e) the
qualification of the Shares under the applicable securities laws in accordance
with Section 2(e) of this Agreement and any filing for review of the Offering
with the NASD, including filing fees and fees and disbursements in connection
therewith and in connection with the Blue Sky Memoranda, (f) all costs, fees and
expenses in connection with the application for inclusion of the Shares on
NASDAQ, (g) costs related to travel and lodging incurred by the Company and its
representatives relating to meetings with and presentations to prospective
purchasers of the Shares reasonably determined by you to be necessary or
desirable to effect the sale of the Shares to the public and (i) all other costs
and expenses incident to the performance of the Company's obligations hereunder
that are not otherwise specifically provided for in this section.
Section 4. Opinion of Counsel and Accountants and other Conditions.
(a) As a condition to the performance of your duties and obligations
hereunder, you shall have received a favorable opinion of Evers & Hendrickson,
LLP ("Evers & Hendrickson") counsel for the Company in form and substance
satisfactory to counsel for you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
California with all requisite corporate power and authority to own, lease and
operate its properties and the properties it proposes to own, lease and operate
as described in the Registration Statement and the Prospectus and to conduct its
business as now conducted and as proposed to be conducted as described in the
Registration Statement and the Prospectus. To the best of such counsel's
knowledge, there are no other jurisdictions in which the ownership or leasing of
the Company's properties or the nature or conduct of its business as now
conducted or proposed to be conducted as described in the Registration Statement
and the Prospectus requires such qualification, except where the failure to do
so would not have a material adverse effect on the Company. To such counsel's
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity (other than any indirect control that
may be implied by virtue of Mr. Yuan and certain other officers of the Company
serving as officers and/or directors of other companies).
(ii) The Company has full legal right, power and authority to
enter into, deliver and perform this Agreement, to issue, sell and deliver the
Shares as provided herein and to consummate the transactions contemplated
herein. This Agreement has been duly authorized, executed and delivered by the
Company and, assuming due authorization, execution and delivery by the other
parties hereto, constitutes a valid and binding agreement of the Company,
enforceable in accordance with its terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization or other laws of
general applicability relating to or affecting creditors' rights and by general
equity principles and except to the extent that enforcement of the
indemnification provisions set forth in Section 5 of this Agreement may be
limited by federal or state securities laws or the public policy underlying such
laws.
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(iii) Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary for the valid authorization, issuance,
sale and delivery of the Shares and the execution, delivery and performance of
this Agreement has been made or obtained and is in full force and effect.
(iv) Neither the issuance, sale and delivery by the Company of
the Shares to purchasers thereof, nor the execution, delivery and performance of
this Agreement, nor the consummation of the transactions contemplated hereby or
thereby by the Company will violate any of the terms and provisions of, or
constitute a default under, any of the Articles of Incorporation or by-laws of
the Company, or, to such counsel's knowledge, under any material indenture,
mortgage, trust, deed of trust, loan agreement, note, lease or other agreement
or instrument to which the Company is a party or to which any of its properties
or other assets is subject; or, to such counsel's knowledge, violate any
applicable statute, judgment, decree, order, rule or regulation of any court or
governmental agency or body; or, to such counsel's knowledge, result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of any of the foregoing.
(v) The description of the Company's authorized capital stock
contained in the Registration Statement and the Prospectus under the caption
"Capital Stock" meets the requirements of Item 12 of Form SB-2 under the 1933
Act, and the Common Stock conforms in all material respects as to legal matters
to the description thereof contained in the Registration Statement and the
Prospectus.
(vi) The Shares to be issued pursuant to the Offering have
been validly authorized by the Company. When issued and delivered, the Shares
will be validly issued, fully paid and nonassessable. No preemptive rights of
shareholders exist with respect to any of the Shares. To such counsel's
knowledge, no person or entity holds a right to require or participate in the
registration under the 1933 Act of the Shares pursuant to the Registration
Statement; and, except as set forth in the Prospectus, no person holds a right
to require registration under the 1933 Act of any shares of Common Stock of the
Company at any other time. To such counsel's knowledge, no person or entity has
a right of participation or first refusal with respect to the sale of the Shares
by the Company. The form of certificates evidencing the Shares comply with all
applicable requirements of California law.
(vii) The Company has an authorized capitalization as set
forth in the Prospectus under the caption "Capital Stock" as of the date
therein. At the date of this Agreement, after effecting a 1-for-2 reverse stock
split, the Company has 5,750,000 shares of issued and outstanding stock (and
250,000 shares of Common Stock reserved for issuance upon exercise of currently
exercisable stock options), all of which is Common Stock. The Common Stock
conforms in all material respects to the description of the Common Stock
contained in the Prospectus. To the knowledge of such counsel, except as
disclosed in the Prospectus, there is no outstanding option, warrant or other
right calling for the issuance of, and no commitment, plan or arrangement to
issue, any shares of capital stock of the Company or any security convertible
into or exchangeable for capital stock of the Company.
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(viii) To the knowledge of such counsel, the Company is not in
violation of its Articles of Incorporation or by-laws, and no material default
exists and no event has occurred which, with notice or after the lapse of time
to cure or both, would constitute a material default in the due performance and
observance of any obligation, agreement, term, covenant or condition contained
in any indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument known to such counsel to which any such entity is a
party or by which any such entity or any of its properties is subject. To the
knowledge of such counsel, the Company is not in violation of, or in default
with respect to, any statute, rule, regulation, order, judgment or decree,
except as may be properly described in the Prospectus or such as in the
aggregate does not now have and will not in the future have a material adverse
effect on the financial position, results of operations or business of each such
entity, respectively.
(ix) To such counsel's knowledge and except as described in
the Prospectus, there is not pending or threatened, any action, suit,
proceeding, inquiry or investigation against the Company or any of its officers
and directors or to which the properties, assets or rights of the Company or
such persons are subject, which, if determined adversely to the Company or any
such persons, would individually or in the aggregate have a material adverse
effect on the financial position, results of operations or business of any such
entity, respectively.
(x) The descriptions in the Registration Statement and the
Prospectus of the contracts, leases and other legal documents therein described
present fairly the information required to be shown and there are no contracts,
leases or other documents known to such counsel of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement which are not described or filed as
required. There are no statutes or regulations applicable to the Company or
certificates, permits or other authorizations from governmental regulatory
officials or bodies required to be obtained or maintained by the Company, known
to such counsel, of a character required to be disclosed in the Registration
Statement or the Prospectus which have not been so disclosed and properly
described therein. To such counsel's knowledge, all agreements between the
Company, and third parties expressly referenced in the Prospectus are legal,
valid and binding obligations of the Company, enforceable in accordance with
their respective terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, reorganization or other laws of general applicability
relating to or affecting creditors' rights and to general equitable principles.
(xi) The Registration Statement has become effective under the
1933 Act and, to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending or contemplated under the
1933 Act. Other than financial statements and other financial and operating data
and schedules contained therein, as to which counsel need express no opinion,
the Registration Statement, the Prospectus and any amendment or supplement
thereto, appear on their face to conform as to form in all material respects
with the requirements of Form SB-2 under the 1933 Act Regulations.
-39-
<PAGE>
(xii) The Registration Statement, or any further amendment
thereto made prior to the date hereof, on its effective date, contained or
contains no untrue statement of a material fact and did not omit or does not
omit to state any material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made not misleading, or neither the Prospectus nor any amendment or supplement
thereto, as of its issue date, contained or contains any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading (provided that such counsel need express no belief regarding the
financial statements and related schedules and other financial data contained in
the Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
(xiii) The Company is not an "investment company," or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act.
(xiv) The descriptions in the Prospectus of statutes,
regulations, legal or governmental proceedings are accurate and present fairly a
summary of the information required to be shown under the 1933 Act and the 1933
Act Regulations. The information in the Prospectus under the caption
"Capitalization," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel, is correct and presents fairly
the information required to be disclosed therein under the 1933 Act and the 1933
Act Regulations.
(xv) To such counsel's knowledge, no relationship, direct or
indirect, exists between or among any of the Company or any affiliate of the
Company, on the one hand, and any director, officer, stockholder, customer or
supplier of the Company or any affiliate of the Company, on the other hand, that
is required by the 1933 Act or by the 1933 Act Regulations to be described in
the Registration Statement or the Prospectus which is not so described or is not
adequately described.
(xvi) All sales by the Company of the Company's securities
prior to the date hereof were at all relevant times duly registered under or, to
the knowledge of such counsel, effected in a manner which was exempt from the
registration requirements of the 1933 Act and were duly registered in accordance
with or the subject of an available exemption from the registration requirements
of the applicable blue sky laws. To the knowledge of such counsel, the Company
has not effected any sales of securities that would be required to be disclosed
in response to Item 701 of Regulation S-K that are not disclosed in the
Registration Statement.
In rendering the foregoing opinion, such counsel may rely on the following:
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<PAGE>
(A) as to matters involving the application of laws other than
the laws of the United States and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the extent
specified in such opinion, upon an opinion or opinions (in form and
substance reasonably satisfactory to Underwriters' counsel) of other
counsel familiar with the applicable laws,
(B) as to matters of fact, to the extent they deem
appropriate, on certificates of responsible officers of the Company and
certificates or other written statements of officers or departments of
various jurisdictions having custody of documents respecting the
existence or good standing of the Company provided that copies of all
such opinions, statements or certificates shall be delivered to your
counsel. The opinion of counsel for the Company shall state that the
opinion of any other counsel, or certificate or written statement, on
which such counsel is relying is in form satisfactory to such counsel
and that you and they are justified in relying thereon.
(b) At the time that this Agreement is executed by the Company, you
shall have received from KPMG, LLP a letter, dated the date hereof, in form and
substance satisfactory to you, confirming that they are independent public
accountants with respect to the Company within the meanings of the 1933 Act and
1933 Act Regulations, and stating in effect that:
(i) in their opinion, the financial statements and any
supplementary financial information and schedule included in the Registration
Statement and covered by their opinion therein comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
1933 Act Regulations;
(ii) on the basis of limited procedures (set forth in detail
in such letter and made in accordance with such procedures as may be specified
by you) not constituting an audit in accordance with generally accepted auditing
standards, consisting of (but not limited to) a reading of the latest available
internal unaudited financial statements of the Company, a reading of the minute
books of the Company, inquiries of officials of the Company responsible for
financial and accounting matters, and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that caused them to
believe that:
(A) the unaudited financial statements and supporting schedule
and other unaudited financial data of the Company included in the
Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act
and the 1933 Act Regulations or are not presented in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited financial statements from which
such data and items were derived, and any such unaudited data and items
were not determined on a basis substantially consistent with the
-41-
<PAGE>
basis for the corresponding amounts in the audited financial statements
included in the Prospectus;
(C) any unaudited pro forma financial information included in
the Prospectus does not comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations or the pro forma adjustments have not been properly applied
to historical amounts in the compilation of that information; and
(D) at a specified date not more than five days prior to the
date of delivery of such letter, there was any change in the capital
stock or long-term debt or obligations under capital leases of the
Company, or there were any decreases in net current assets or net
assets, or shareholders' equity, from that set forth in the Company's
balance sheet at December 31, 1998, except as described in such letter;
and
(iii) in addition to the procedures referred to in clause (ii)
above and the examination referred to in their Reports included in the
Registration Statement, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information specified
by you which are derived from the general accounting records of the Company,
which appear in the Registration Statement or the exhibits or schedules thereto
and are specified by you, and have compared such amounts, percentages and
financial information with the accounting records of the Company and with
material derived from such records and have found them to be in agreement.
(c) At the time of the closing of the Offering, you shall have received
from KPMG, LLP, a letter, in form and substance satisfactory to you and dated as
of the date of the closing of the Offering, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (b) above, except
that the specified date referred to shall be a date not more than five days
prior to the date of closing of the Offering.
(d) The NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to such offering, such terms or your
participation in the same.
Section 5. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless Broker-Dealer and each
person, if any, who controls Broker-Dealer within the meaning of the 1933 Act or
the 1934 Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which it or such controlling person may become subject under the 1933
Act, the 1934 Act or insofar as such losses, claims, damages or liabilities in
respect thereof arise
-42-
<PAGE>
out of or are based upon any breach of any warranty or covenant of the Company
herein contained or by reason of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, and will reimburse
Broker-Dealer for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by Broker-Dealer
expressly for use therein. In addition to its other obligations under this
Section 5 (a), the Company agrees that, as an interim measure during the
pendency of any such claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in this Section 5 (a), it will reimburse Broker-Dealer on
a monthly basis for all reasonable legal and other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse Broker-Dealer for such expenses and the possibility that
such payments might later be held to have been improper by a court of competent
jurisdiction. Any such interim reimbursement payments that are not made to
Broker-Dealer within 30 days of a request for reimbursement shall bear interest
at the prime rate (or reference rate or other commercial lending rate for
borrowers of the highest credit standing) published from time to time by The
Wall Street Journal (the "Prime Rate") from the date of such request. The
Company will not, without the prior written consent of Broker-Dealer, settle or
compromise or consent to the entry of any judgment in any pending or threatened
action or claim or related cause of action or portion of such cause of action in
respect of which indemnification may be sought hereunder (whether or not
Broker-Dealer is a party to such action or claim), unless such settlement,
compromise or consent includes an unconditional release of Broker-Dealer from
all liability arising out of such action or claim (or related cause of action or
portion thereof).
The indemnity agreement in this Section 5(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each person, if any,
who controls Broker-Dealer within the meaning of the 1933 Act or the 1934 Act to
the same extent as such agreement applies to Broker-Dealer.
(b) Broker-Dealer will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state
-43-
<PAGE>
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in the Registration Statement or the Prospectus or any such amendment or
supplement thereto in reliance upon and in conformity with written information
furnished to the Company by Broker-Dealer expressly for use therein; and will
reimburse the Company for any legal or other expenses reasonably incurred by the
Company in connection with investigating or defending any such loss, claim,
damage, liability or action. In addition to its other obligations under this
Section 5(b), Broker-Dealer agrees that, as an interim measure during the
pendency of any such claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in this Section 5(b), it will reimburse the Company on a
monthly basis for all reasonable legal and other expenses incurred in connection
with investigating or defending any such claim, action investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of its obligation to reimburse the Company for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. Any such interim
reimbursement payments that are not made to the Company within 30 days of a
request for reimbursement shall bear interest at the Prime Rate from the date of
such request. This indemnity agreement shall be in addition to any liabilities
that Broker-Dealer may otherwise have.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; no indemnification provided for in Section 5(a) or 5(b)
shall be available to any party who shall fail to give notice as provided in
this Section 5(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by the
failure to give such notice, but the omission so to notify the indemnifying
party will not relieve the indemnifying party from any liability that it may
have to any indemnified party otherwise than under Section 5. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation, except
that if the indemnified party has been advised by counsel in writing that there
are one or more defenses available to the indemnified party which are different
from or additional to those available to the indemnifying party, then the
indemnified party shall have the right to employ separate counsel and in that
event the reasonable fees and expenses of such separate counsel for the
indemnified party shall be paid by the indemnifying party; provided,
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<PAGE>
however, that if the indemnifying party is the Company, the Company shall only
be obligated to pay the reasonable fees and expenses of a single law firm (and
any reasonably necessary local counsel) employed by all of the indemnified
parties and the persons referred to in Section 5(a) hereof. The indemnifying
party shall not be liable for any settlement of any proceeding effected without
its written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment.
(d) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Section 5(a) and 5(b)
hereof, including the amounts of any requested reimbursement payments, the
method of determining such amounts and the basis on which such amounts shall be
apportioned among the indemnifying parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the National
Association of Securities Dealers, Inc. Any such arbitration must be commenced
by service of a written demand for arbitration or a written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a) and 5(b) hereof
and will not resolve the ultimate propriety or enforceability of the obligation
to indemnify for expenses that is created by the provisions of Sections 5(a) and
5(b).
(e) In order to provide for just and equitable contribution in
circumstances under which the indemnity provided for in this Section 5 is for
any reason judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the right of appeal) to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Company on the one hand,
and Broker-Dealer on the other shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity incurred by the Company and Broker-Dealer, as incurred, in such
proportions that (a) Broker-Dealer is responsible pro rata for that portion
represented by the commission percentage appearing on the cover page of the
Prospectus bears to the initial public offering price (before deducting
expenses) appearing thereon, and (b) the Company is responsible for the balance,
provided, however, that no person guilty of fraudulent misrepresentations
(within the meaning of Section 12(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation; provided, further, that if the allocation provided above is
not permitted by applicable law, the Company, on the one hand and Broker-Dealer
on the other shall contribute to the aggregate losses in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company on the one hand, and Broker-Dealer on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. Relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
on the one hand, or by Broker-Dealer on the other hand, and the parties,
relative
-45-
<PAGE>
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and Broker-Dealer agree that it would
not be just and equitable if contributions pursuant to this Section 5(e) were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to above in this
Section 5(e). The amount paid or payable by a party as a result of the losses,
claims, damages or liabilities referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending such action or claim.
Section 6. Representations, Warranties and Agreements to Survive
Delivery. The representations, warranties, indemnities, agreements and other
statements of the Company or their respective officers set forth in or made
pursuant to this Agreement will remain operative and in full force and effect
will survive the termination of this Agreement.
Section 7. Notices.
All notices or communications required or permitted hereunder shall be
in writing and shall be mailed or delivered as follows:
If to the Company: CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
320 S. Garfield Avenue, Suite 318
Alhambra, CA 91801
Attention: Frank Yuan
If to Broker-Dealer: (a) TRADEWAY SECURITIES GROUP, INC.
5875 Avenida Encinas
Carlsbad, CA 92008.
Attention: Bob Guiltinan
Section 8. Miscellaneous. This Agreement contains and constitutes the
entire agreement between the parties hereto and supersedes all prior written or
oral and all contemporaneous agreements or negotiations with respect to the
subject matter hereof. The Agreement may only be amended, modified or waived in
writing signed by both parties hereto. This Agreement shall be governed in
accordance with the laws of the State of California; without reference to the
conflict of law provisions thereof. This Agreement may be executed in
counterparts.
Section 9. Governing Law and Time. This Agreement shall be governed by
the laws of the State of California. Specified time of the day refers to United
States Pacific Time. Time shall be of the essence of this Agreement.
-46-
<PAGE>
Section 10. Counterparts. This Agreement may be executed in one or more
counterparts and when a counterpart has been executed by each party, all such
counterparts taken together shall constitute one and the same agreement.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument will become a binding agreement among the Company and Broker-Dealer
in accordance with its terms.
Very truly yours,
CYBER MERCHANTS EXCHANGE, INC.
d.b.a. C-ME.com
By: _______________________________
Name: Frank Yuan
Title: President
Confirmed and accepted as of
the date first above written:
TRADEWAY SECURITIES GROUP, INC.
By: ________________________________
Name: Bob Guiltinan
Title: CFO
-47-
SUPPLEMENT TO
BEST EFFORTS COMPENSATION
AGREEMENT
Alhambra, California
Date: April 30, 1999
Jason Adelman
Drake & Co.
7 Hanover Square, 2nd Floor
New York, NY 10004
Dear Mr. Adelman:
The following supplemental or substitutional provisions shall be
construed as part of, and included in, the Best Efforts Compensation Agreement
(the "Compensation Agreement") that was entered into between Cyber Merchants
Exchange, Inc., d.b.a. C-ME.com and the undersigned on or about March 16, 1999.
Reference is made to the specific provision in the Compensation Agreement that
are being supplemented/substituted.
Sections 3 (d)(iii)(1)
The second sentence of this paragraph will now read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision and shall expire four (4) years after the effective date
of the registration statement."
Section 3(d)(iii)(2)
The fourth sentence should read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision, and shall expire four (4) years after the effective date
of the registration statement."
Paragraph 3 is added:
"The Warrant or the underlying securities shall not be sold,
transferred, assigned, pledged or hypothecated, except by operation of law or
pursuant to a reorganization for a period of one (1) year following the
effective date of the registration statement. However, the Warrant or the
underlying securities may be transferred to other broker-dealers participating
in the offering, or their respective officers or partners.
1
<PAGE>
The Warrant or the certificates, if exercised, shall bear a legend
describing the specific restriction and the applicable time period."
Very truly yours,
CYBER MERCHANTS EXHANGE, INC
d.b.a. C-ME.com
By:______________________________
Frank Yuan, President
Confirmed and accepted as of
the date first above written:
______________________________
By: __________________________
Name: ________________________
Title: _______________________
2
<PAGE>
SUPPLEMENT TO
BEST EFFORTS COMPENSATION
AGREEMENT
Alhambra, California
Date: April 30, 1999
Marcus Hurlburt
Travis Morgan Securities
18952 Macarthur Blvd., Suite 315
Irvine, CA 92612
Dear Mr. Hurlburt:
The following supplemental or substitutional provisions shall be
construed as part of, and included in, the Best Efforts Compensation Agreement
(the "Compensation Agreement") that was entered into between Cyber Merchants
Exchange, Inc., d.b.a. C-ME.com and the undersigned on or about April 20, 1999.
Reference is made to the specific provision in the Compensation Agreement that
are being supplemented/substituted.
Sections 3 (d)(iii)(1)
The second sentence of this paragraph will now read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision and shall expire four (4) years after the effective date
of the registration statement."
Section 3(d)(iii)(2)
The fourth sentence should read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision, and shall expire four (4) years after the effective date
of the registration statement."
Paragraph 3 is added:
"The Warrant or the underlying securities shall not be sold,
transferred, assigned, pledged or hypothecated, except by operation of law or
pursuant to a reorganization for a period of one (1) year following the
effective date of the registration statement. However, the Warrant or the
1
<PAGE>
underlying securities may be transferred to other broker-dealers participating
in the offering, or their respective officers or partners.
The Warrant or the certificates, if exercised, shall bear a legend
describing the specific restriction and the applicable time period."
Very truly yours,
CYBER MERCHANTS EXHANGE, INC
d.b.a. C-ME.com
By:______________________________
Frank Yuan, President
Confirmed and accepted as of
the date first above written:
______________________________
By: __________________________
Name: ________________________
Title: _______________________
2
<PAGE>
SUPPLEMENT TO
BEST EFFORTS COMPENSATION
AGREEMENT
Alhambra, California
Date: April 30, 1999
Roger Fan
U.S. Pacific Financial Services
801 S. Garfield Ave., Suite 101
Alhambra, California 91801
Dear Mr. Fan:
The following supplemental or substitutional provisions shall be
construed as part of, and included in, the Best Efforts Compensation Agreement
(the "Compensation Agreement") that was entered into between Cyber Merchants
Exchange, Inc., d.b.a. C-ME.com and the undersigned on or about March 18, 1999.
Reference is made to the specific provision in the Compensation Agreement that
are being supplemented/substituted.
Sections 3 (d)(iii)(1)
The second sentence of this paragraph will now read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision and shall expire four (4) years after the effective date
of the registration statement."
Section 3(d)(iii)(2)
The fourth sentence should read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision, and shall expire four (4) years after the effective date
of the registration statement."
Paragraph 3 is added:
"The Warrant or the underlying securities shall not be sold,
transferred, assigned, pledged or hypothecated, except by operation of law or
pursuant to a reorganization for a period of one (1) year following the
effective date of the registration statement. However, the Warrant or the
1
<PAGE>
underlying securities may be transferred to other broker-dealers participating
in the offering, or their respective officers or partners.
The Warrant or the certificates, if exercised, shall bear a legend
describing the specific restriction and the applicable time period."
Very truly yours,
CYBER MERCHANTS EXHANGE, INC
d.b.a. C-ME.com
By:______________________________
Frank Yuan, President
Confirmed and accepted as of
the date first above written:
______________________________
By: __________________________
Name: ________________________
Title: _______________________
2
<PAGE>
SUPPLEMENT TO
BEST EFFORTS COMPENSATION
AGREEMENT
Alhambra, California
Date: April 30, 1999
Tom Diggs
Malachi Group
12 Piedmont Center, #410
Atlanta, GA 30305
Dear Mr. Diggs:
The following supplemental or substitutional provisions shall be
construed as part of, and included in, the Best Efforts Compensation Agreement
(the "Compensation Agreement") that was entered into between Cyber Merchants
Exchange, Inc., d.b.a. C-ME.com and the undersigned on or about April 22, 1999.
Reference is made to the specific provision in the Compensation Agreement that
are being supplemented/substituted.
Sections 3 (d)(iii)(1)
The second sentence of this paragraph will now read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision and shall expire four (4) years after the effective date
of the registration statement."
Section 3(d)(iii)(2)
The fourth sentence should read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision, and shall expire four (4) years after the effective date
of the registration statement."
Paragraph 3 is added:
"The Warrant or the underlying securities shall not be sold,
transferred, assigned, pledged or hypothecated, except by operation of law or
pursuant to a reorganization for a period of one (1) year following the
effective date of the registration statement. However, the Warrant or the
1
<PAGE>
underlying securities may be transferred to other broker-dealers participating
in the offering, or their respective officers or partners.
The Warrant or the certificates, if exercised, the shares shall bear a
legend describing the specific restriction and the applicable time period."
Very truly yours,
CYBER MERCHANTS EXHANGE, INC
d.b.a. C-ME.com
By:______________________________
Frank Yuan, President
Confirmed and accepted as of
the date first above written:
______________________________
By: __________________________
Name: ________________________
Title: _______________________
2
<PAGE>
SUPPLEMENT TO
BEST EFFORTS COMPENSATION
AGREEMENT
Alhambra, California
Date: April 30, 1999
Bob Guiltinan
Tradeway Securities Group
5875 Avenida Encinas
Carlsbad, CA 92008
Dear Mr. Guiltinan:
The following supplemental or substitutional provisions shall be
construed as part of, and included in, the Best Efforts Compensation Agreement
(the "Compensation Agreement") that was entered into between Cyber Merchants
Exchange, Inc., d.b.a. C-ME.com and the undersigned on or about April 21, 1999.
Reference is made to the specific provision in the Compensation Agreement that
are being supplemented/substituted.
Sections 3 (d)(iii)(1)
The second sentence of this paragraph will now read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision and shall expire four (4) years after the effective date
of the registration statement."
Section 3(d)(iii)(2)
The fourth sentence should read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision, and shall expire four (4) years after the effective date
of the registration statement."
Paragraph 3 is added:
"The Warrant or the underlying securities shall not be sold,
transferred, assigned, pledged or hypothecated, except by operation of law or
pursuant to a reorganization for a period of one (1) year following the
effective date of the registration statement. However, the Warrant or the
1
<PAGE>
underlying securities may be transferred to other broker-dealers participating
in the offering, or their respective officers or partners.
The Warrant or the certificates, if exercised, the shares shall bear a
legend describing the specific restriction and the applicable time period."
Very truly yours,
CYBER MERCHANTS EXHANGE, INC
d.b.a. C-ME.com
By:______________________________
Frank Yuan, President
Confirmed and accepted as of
the date first above written:
______________________________
By: __________________________
Name: ________________________
Title: _______________________
2
<PAGE>
SUPPLEMENT TO
BEST EFFORTS COMPENSATION
AGREEMENT
Alhambra, California
Date: April 30, 1999
Andy Lam
Corporate Investment Group
175 W. Jackson Blvd.
Suite A-1951
Chicago, IL 60604
Dear Mr. Lam:
The following supplemental or substitutional provisions shall be
construed as part of, and included in, the Best Efforts Compensation Agreement
(the "Compensation Agreement") that was entered into between Cyber Merchants
Exchange, Inc., d.b.a. C-ME.com and the undersigned on or about April 6, 1999.
Reference is made to the specific provision in the Compensation Agreement that
are being supplemented/substituted.
Sections 3 (d)(iii)(1)
The second sentence of this paragraph will now read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision and shall expire four (4) years after the effective date
of the registration statement."
Section 3(d)(iii)(2)
The fourth sentence should read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision, and shall expire four (4) years after the effective date
of the registration statement."
Paragraph 3 is added:
"The Warrant or the underlying securities shall not be sold,
transferred, assigned, pledged or hypothecated, except by operation of law or
pursuant to a reorganization for a period of one (1) year following the
effective date of the registration statement. However, the Warrant or the
1
<PAGE>
underlying securities may be transferred to other broker-dealers participating
in the offering, or their respective officers or partners.
The Warrant or the Certificates, if exercised, the shares shall bear a
legend describing the specific restriction and the applicable time period."
Very truly yours,
CYBER MERCHANTS EXHANGE, INC
d.b.a. C-ME.com
By:______________________________
Frank Yuan, President
Confirmed and accepted as of
the date first above written:
______________________________
By: __________________________
Name: ________________________
Title: _______________________
2
<PAGE>
SUPPLEMENT TO
BEST EFFORTS COMPENSATION
AGREEMENT
Alhambra, California
Date: April 30, 1999
Andrew M. Razo
AM Razo & Company Securities, Inc.
Lakeshore Tower, Suite 350
18101 Von Karman Ave.
Irvine, CA 92612
Dear Mr. Razo:
The following supplemental or substitutional provisions shall be
construed as part of, and included in, the Best Efforts Compensation Agreement
(the "Compensation Agreement") that was entered into between Cyber Merchants
Exchange, Inc., d.b.a. C-ME.com and the undersigned on or about April 20, 1999.
Reference is made to the specific provision in the Compensation Agreement that
are being supplemented/substituted.
Sections 3 (d)(iii)(1)
The second sentence of this paragraph will now read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision and shall expire four (4) years after the effective date
of the registration statement."
Section 3(d)(iii)(2)
The fourth sentence should read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision, and shall expire four (4) years after the effective date
of the registration statement."
Paragraph 3 is added:
"The Warrant or the underlying securities shall not be sold,
transferred, assigned, pledged or hypothecated, except by operation of law or
pursuant to a reorganization for a period of one (1) year following the
effective date of the registration statement. However, the Warrant or the
1
<PAGE>
underlying securities may be transferred to other broker-dealers participating
in the offering, or their respective officers or partners.
The Warrant or the certificates, if exercised, shall bear a legend
describing the specific restriction and the applicable time period."
Very truly yours,
CYBER MERCHANTS EXHANGE, INC
d.b.a. C-ME.com
By:______________________________
Frank Yuan, President
Confirmed and accepted as of
the date first above written:
______________________________
By: __________________________
Name: ________________________
Title: _______________________
2
<PAGE>
SUPPLEMENT TO
BEST EFFORTS COMPENSATION
AGREEMENT
Alhambra, California
Date: April 30, 1999
Lynwood Jen
Ace Diversified Capital, Inc.
8855 E. Valley Blvd., Suite 205
Rosemead, CA 91770
Dear Mr. Jen:
The following supplemental or substitutional provisions shall be
construed as part of, and included in, the Best Efforts Compensation Agreement
(the "Compensation Agreement") that was entered into between Cyber Merchants
Exchange, Inc., d.b.a. C-ME.com and the undersigned on or about March 16, 1999.
Reference is made to the specific provision in the Compensation Agreement that
are being supplemented/substituted.
Sections 3 (d)(iii)(1)
The second sentence of this paragraph will now read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision and shall expire four (4) years after the effective date
of the registration statement."
Section 3(d)(iii)(2)
The fourth sentence should read:
"The Warrant shall be in standard form (see Exhibit A) and shall be
assignable (subject to the limitations provided in paragraph 3), shall contain a
net exercise provision, and shall expire four (4) years after the effective date
of the registration statement."
Paragraph 3 is added:
"The Warrant or the underlying securities shall not be sold,
transferred, assigned, pledged or hypothecated, except by operation of law or
pursuant to a reorganization for a period of one (1) year following the
effective date of the registration statement. However, the Warrant or the
1
<PAGE>
underlying securities may be transferred to other broker-dealers participating
in the offering, or their respective officers or partners.
The Warrant or the Certificates, if exercised, the shares shall bear a
legend describing the specific restriction and the applicable time period."
Very truly yours,
CYBER MERCHANTS EXHANGE, INC
d.b.a. C-ME.com
By:______________________________
Frank Yuan, President
Confirmed and accepted as of
the date first above written:
______________________________
By: __________________________
Name: ________________________
Title: _______________________
2
CYBER MERCHANTS EXCHANGE, INC. d.b.a C-ME.com
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER
THE SECURITIES ACT OF 1933 ("ACT") OR THE SECURITIES LAWS OR BLUE SKY LAWS OF
CALIFORNIA OR ANY OTHER STATE. ANY TRANSFER OF SUCH SECURITIES WILL BE INVALID
UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH TRANSFER
OR IN THE OPINION OF COUNSEL FOR THE COMPANY REGISTRATION UNDER THE ACT IS
UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT.
VOID AFTER 5:00 p.m., California Time, on _________________, 200__.
Warrant to Purchase _____________
Shares of Common Stock
Exercise Price: $13.20 per share which shall not be less than one-hundred
sixty-five percent (165%) of the Offering Price of the Shares
FORM OF
WARRANT TO PURCHASE COMMON STOCK
This is to certify that, for value received, _________________ (the
"Holder") is entitled to purchase, subject to the provisions of this Warrant,
from Cyber Merchants Exchange, Inc. d.b.a C-ME.com, a California corporation
(the "Company"), ________________ shares of Common Stock (the "Stock"), at the
exercise price of $13.20 per share which shall not be less than one-hundred
sixty-five percent (165%) of the Offering Price of the Shares at any time, or
from time to time on or before the expiration of this Warrant pursuant to
Section 1 hereof. The number of shares of Stock to be received upon the exercise
of this Warrant and the exercise price per share of Stock shall be adjusted from
time to time as hereinafter set forth. The shares of Stock or other securities
or property deliverable upon such exercise, as adjusted from time to time are
hereinafter sometimes referred to as "Warrant Shares" and the exercise price per
share of Stock in effect at any time, as adjusted from time to time, is
hereinafter sometimes referred to as the "Exercise Price." Unless the context
otherwise requires, the term "Warrant" or "Warrants" as used herein includes
this Warrant and any other Warrant or Warrants which may be issued pursuant to
the provisions of this Warrant, whether upon transfer, assignment, partial
exercise, divisions, combinations or otherwise, and the term "Holder" includes
any transferee or transferees or assignee or assignees of the Holder named
above, all of whom shall be subject to the provisions of this Warrant, and, when
used with reference to Warrant Shares, means the holder or holders of such
Warrant Shares.
-48-
<PAGE>
Section 1. Exercise of Warrant. This Warrant may be exercised by the
holder hereof, or its permitted assigns, in whole or in part (but not as to a
fractional share of Common Stock and in no event for less than 100 shares) at
any time or from time to time during the period ending at 5:00 p.m., California
time, on _______________, 200_ or if such date is a date on which federal or
state chartered banking institutions located in the State of California are
authorized by law to close, then on the next succeeding day which shall not be
such a day (the "Expiration Date"), by presentation and surrender hereof to the
Company at its principal office of this Warrant and the Exercise Form (the
"Warrant Exercise Date") annexed hereto duly executed, and by payment to the
Company of the Exercise Price, in cash or by certified or official bank check,
for each share being purchased. Upon and as of such receipt of this Warrant and
the Exercise form by the Company at its principal office, in proper form for
exercise, the Holder shall be deemed to be the holder of record of the number of
shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such shares of Stock shall not then be actually delivered to the
Holder.
Section 2. Net Exercise and Procedure.
(a) Net Exercise. Notwithstanding anything to the contrary contained in
Subsection 1, the Holder may elect to exercise this Warrant and receive shares
on a "net exercise" basis in an amount equal to the value of this Warrant by
delivery of the subscription form attached hereto and surrender of this Warrant
at the principal office of the Company, in which event the Company shall issue
to Holder a number of shares computed using the following formula:
X = (P)(Y)(A-B)
-----------
A
Where: X = the number of shares of Common Stock to be
issued to Holder.
P = the portion of the Warrant being exercised.
Y = the number of shares of Common Stock issuable upon exercise
of this Warrant.
A = the Current Market Price (as determined pursuant to Subsection
2(c)) of one share of Common Stock.
B = Warrant Price.
(b) Procedure for Exercise. In the event of any exercise of the rights
represented by this Warrant, a certificate or certificates for the total number
of whole shares of Common Stock so purchased, registered in the name of the
Holder, shall be delivered to the Holder within a reasonable time, not exceeding
five Business Days, after the rights represented by this Warrant shall have been
so exercised; and, unless this Warrant has expired, a new Warrant representing
the number of shares (except a remaining fractional share), if any, with respect
to which this Warrant shall not then have been exercised shall also be issued to
the Holder within such time. With respect to any such exercise, the Holder shall
for all purposes be deemed to have become the holder of record of the number of
shares of Common Stock evidenced by such certificate or certificates from the
date on which this Warrant was surrendered and if exercised pursuant to Section
1, payment of the Exercise Price was made, irrespective of the date of delivery
of such certificate, except that, if the date of such surrender and payment is a
date on which the stock
49
<PAGE>
transfer books of the Company are closed, such person shall be deemed to have
been the Holder of such shares at the close of business on the next succeeding
date on which the stock transfer books are open.
(c) Current Market Price. For any computation hereunder, the current
market price per share of Common Stock on any date shall be deemed to be the
average of the daily market price per share for the 30 consecutive Trading Days
commencing 45 Trading Days before the date in question. "Market Price" is
defined as the closing sale price (or, if no closing sale price is reported, the
closing bid price) of the Common Stock in the over-the-counter market, and
reported by the National Association of Securities Dealers Automated Quotation
System ("Nasdaq"), or, if the Common Stock is not quoted on Nasdaq, as reported
by the National Quotation Bureau Incorporated. In the event that the Common
Stock is hereafter listed for trading on one or more United States national or
regional securities exchanges, market price shall be the closing price on the
exchange or system designated by the Board of Directors of the Company as the
principal United States market in which the Common Stock is traded. If market
price cannot be established as described above, market price shall be the fair
market value of the Common Stock as determined in good faith by the Board of
Directors. The term "Trading Day" shall mean a day on which Nasdaq or the
principal national securities exchange on which the Common Stock is listed or
admitted to trading is open for the transaction of business.
(d) Fractional Shares. No fractional shares shall be issued upon
exercise of this Warrant and no payment or adjustment shall be made upon any
exercise on account of any cash dividends on the Common Stock issued upon such
exercise. If any fractional interest in a share of Common Stock would, except
for the provisions of this Section 2, be delivered upon any such exercise, the
Company, in lieu of delivering the fractional share thereof, shall pay to the
Holder an amount in cash equal to the current market price of such fractional
interest, as determined in Section 2(c).
Section 3. Rights of Holder. Any Holder of this Warrant shall not, by
virtue hereof, be entitled to any rights of a stockholder in the Company, either
at law or in equity, and the rights of any such Holder are limited to those
expressed in this Warrant and are not enforceable against the Company except to
the extent set forth herein.
Section 4. Exercise Price, Adjustment in Exercise Price and the Number
of Warrant Shares Purchasable. The number of Warrant Shares shall be subject to
adjustment from time to time as hereinafter set forth in this Section 4.
(a) Exercise Price. The exercise price, prior to any adjustments as
provided for herein, shall be $13.20 per share which shall not be less than
one-hundred sixty-five percent (165%) of the Offering Price of the Shares.
(b) Stock Splits, Etc. The number of Warrant Shares covered by this
Warrant shall be proportionately adjusted in the event of any change or increase
or decrease in the number of issued shares of Stock in the Company, without
receipt of consideration by the Company, which results from a split-up or
consolidation of shares, payment of a share dividend, or a recapitalization,
combination of shares or other like capital adjustment, so that, upon exercise
of this Warrant, the Holder shall receive the number and class of shares it
would have received had it been the holder of the number of shares of Common
Stock of the Company for which this Warrant is being exercised on the date of
such change or increase or decrease in the number of issued shares of the Common
Stock of the Company.
50
<PAGE>
(c) Capital Reorganizations, Etc. In case of any capital reorganization
or any reclassification of the Common Stock of the Corporation or in case of the
consolidation or merger of the Corporation with another corporation (other than
a consolidation or merger in which the Corporation is the surviving
corporation), or in case of any sale, transfer or other disposition to another
corporation of all or substantially all the property, assets, business and
goodwill of the Corporation, the Holder shall thereafter be entitled to receive
the kind and amount of shares of Common Stock and/or other securities and
property receivable in such transactions to which the Holder would have been
entitled immediately prior to such capital reorganization, reclassification of
Common Stock, consolidation, merger, sale, transfer or other disposition; and in
any such case, appropriate adjustments shall be made in the application of the
provisions of this Section with respect to rights and interests thereafter of
the Holder to the end that the Holder shall be in the same relative position of
ownership of the equity of the Corporation, after any adjustment, as the Holder
would have been prior to the adjustment.
Section 5. Reserved Shares; Valid Issuance. The Company covenants that
it will at all times from and after the date hereof reserve and keep available
such number of its authorized shares of Common Stock as will be sufficient to
permit the exercise of this Warrant. The Company further covenants that such
Shares as may be issued pursuant to such exercise will, upon issuance, be duly
and validly issued, fully paid and nonassessable and free from all taxes (other
than income taxes), liens and charges with respect to the issuance thereof.
Section 6. Representations, Warranties and Covenants. This Warrant is
issued and delivered by the Company and accepted by each Holder on the basis of
the following representations, warranties and covenants made by the Company:
(a) The Company has all necessary authority to issue, execute and
deliver this Warrant and to perform its obligations hereunder. This Warrant has
been duly authorized, issued, executed and delivered by the Company and is the
valid and binding obligation of the Company, enforceable in accordance with its
terms, except to the extent that such enforcement may be subject to applicable
federal or state bankruptcy, insolvency, reorganization, arrangement,
moratorium, fraudulent conveyance or other laws or court decisions relating to
or affecting the rights of creditors generally, and such enforcement may be
limited by equitable principles of general applicability.
(b) The shares of Common Stock issuable upon the exercise of this
Warrant, when issued in accordance with the terms hereof, will be validly
issued, fully paid and nonassessable.
(c) The issuance, execution and delivery of this Warrant do not, and
the issuance of the shares of Common Stock upon the exercise of this Warrant in
accordance with the terms hereof will not, (i) violate or contravene the
Company's articles or bylaws, or any law, statute, regulation, rule, judgment or
order applicable to the Company, (ii) violate, contravene or result in a breach
or default under any contract, agreement or instrument to which the Company is a
party or by which the Company or any of its assets are bound or (iii) require
the consent or approval of or the filing of any notice (other than notices which
the Company timely will make) or registration with any person or entity.
Section 7. Amendment. The terms of this Warrant may be amended,
modified or waived only with the written consent of the Holder.
51
<PAGE>
Section 8. Transfers, Etc.
(a) Subject to compliance with applicable federal and state securities
laws, and the provisions of paragraph (b) below, this Warrant may be transferred
by the Holder with respect to any or all of the Shares purchasable hereunder.
Upon surrender of this Warrant to the Company, together with the assignment
notice annexed hereto duly executed, for transfer of this Warrant as an entirety
by the Holder, the Company shall issue a new warrant of the same denomination to
the assignee. Upon surrender of this Warrant to the Company, together with the
assignment hereof properly endorsed, by the Holder for transfer with respect to
a portion of the shares of Common Stock purchasable hereunder, the Company shall
issue a new warrant to the assignee, in such denomination as shall be requested
by the Holder hereof, and shall issue to such Holder a new warrant covering the
number of Shares in respect of which this Warrant shall not have been
transferred.
(b) The Warrant is affixed with the following legend:
THIS WARRANT SHALL NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED
OR HYPOTHECATED, EXCEPT BY OPERATION OF LAW OR AS THE RESULT OF A
REORGANIZATION, FOR A PERIOD OF ONE (1) YEAR FROM THE EFFECTIVE DATE OF THE
REGISTRATION STATEMENT.
This Warrant or the underlying securities may be transferred
to any other selling group member participating in the offering or to any of
their respective officers or partners. If transferred prior to the conclusion of
the restrictive period, the remaining restrictive period shall apply to the
transferee.
If exercised, the certificate shall bear the following legend:
THIS CERTIFICATE SHALL NOT BE SOLD, TRANSFERRED, ASSIGNED,
PLEDGED OR HYPOTHECATED, EXCEPT BY OPERATION OF LAW OR AS THE RESULT OF A
REORGANIZATION, FOR A PERIOD OF ONE (1) YEAR FROM THE EFFECTIVE DATE OF THE
REGISTRATION STATEMENT.
(c) In case this Warrant shall be mutilated, lost, stolen or destroyed,
the Company shall issue a new warrant of like tenor and denomination and deliver
the same (i) in exchange and substitution for and upon surrender and
cancellation of any mutilated Warrant, or (ii) in lieu of any Warrant lost,
stolen or destroyed, upon receipt of an affidavit of the Holder or other
evidence reasonably satisfactory to the Company of the loss, theft or
destruction of such Warrant, and an indemnification of the Company with respect
thereto.
Section 9. Registration Rights
(a) Piggyback Registration. If (but without any obligation to do so)
the Company proposes to register, prior to the Expiration Date as set forth in
Section 1, with the Securities & Exchange Commission ("SEC") any of the Common
Stock under the Regulations of the SEC (other than securities to be issued
pursuant to a stock option or other employee benefit or similar plan, or in
connection with a merger, acquisition, or a Rule 145 transaction), the Company
shall as promptly as practicable, but at least 30 days prior to the filing of
the applicable registration statement, give written notice to the Holder of its
intention to effect such registration. If, within 20 days after receipt of such
notice but before the Expiration Date, the Holder submits a written
52
<PAGE>
request to the Company specifying the amount of Warrant Shares that the Holder
proposes to sell, the Company shall include the shares (but not this Warrant)
specified in such request in such registration statement (and any related
qualification under blue sky laws or other compliance) and the Company shall
keep each such registration statement in effect and maintain compliance with
each federal and state law and regulation as set forth in Section 9(b).
Prior to filing a registration statement pursuant to the Regulations
under which the shares of Common Stock issuable upon exercise of this Warrant
may be included, the Company shall give reasonable notice to the holder(s) of
this Warrant or Warrant Shares and shall allow such shares of Common Stock to be
included in such registration statement subject to the following terms and
conditions; (i) such shares need not be included in any underwritten offering if
and to the extent that the managing underwriter determines in its best judgment
that their inclusion would impair the success of the offering provided that (A)
if other selling shareholders without contractual registration rights have
requested registration of securities in the proposed offering, the Company will
reduce or eliminate such securities held by selling shareholders without
registration rights before any reduction or elimination of Registrable Stock,
and (B) any such reduction or elimination (after taking into account the effect
of clause (A)) shall be pro rata to all other selling shareholders with
contractual registration rights; (ii) the Company shall bear all costs of
registration and sale of the shares other than underwriting discounts or
commissions and the fees and expense (if any) of legal counsel to the holders;
and (iii) the Company shall have no obligation pursuant to this Section if at
the time the registration statement is proposed to be filed the holders may
freely sell the shares of Common Stock issuable upon exercise of this Warrant
pursuant to the Regulations of the SEC.
(b) Covenants of the Company. In connection with any offering of
Subject Stock registered pursuant to this Warrant, the Company shall (a) furnish
to the Holder such number of copies of any registration statement (including any
preliminary prospectus) as it may reasonably request in order to effect the
offering and sale of the Subject Stock to be offered and sold, but only while
the Company shall be required under the provisions hereof to cause the
registration statement to remain current; (b) take such action as shall be
desirable or necessary to qualify the Subject Stock covered by such registration
statement under such blue sky or other state securities laws for offer and sale
as the Holder shall request, and (c) keep the Holder advised in writing as to
the initiation of each registration and as to the completion thereof. Upon any
registration becoming effective pursuant to this Section, the Company shall use
its best efforts to: (i) keep such registration statement current for a period
of 120 days; (ii) prepare and file with the SEC such amendments and supplements
to such registration statement as may be necessary to comply with the provisions
of the Regulations of the SEC with respect to the disposition of all securities
covered by such registration statement; (iii) cause all such Subject Stock
registered pursuant to such registration statement to be listed on each
securities exchange or automated quotation system on which the Common Stock is
then listed; (iv) provide a transfer agent and registrar for all Subject Stock
registered pursuant to such registration statement and CUSIP number for all such
Subject Stock in each case not later than the effective date of such
registration; and (v) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC.
(c) Expenses. With respect to the registration of Subject Stock
pursuant to Section 4(a) together with any inclusion of the Subject Stock in a
so-called piggyback registration pursuant to Section 9(a), the Company will pay
all expenses incident to its performance of or compliance with this Section
including, without limitation, all registration and filing fees, fees and
expenses of compliance with securities or blue sky laws, printing expenses,
messenger,
53
<PAGE>
telephone and delivery expenses, and fees and disbursements of its counsel and
independent certified public accountants. The Holder will be responsible for any
stock transfer taxes, broker's fees or other direct marketing expenses, all
internal management, personnel and administrative costs of the Holder and the
fees and expenses of its attorneys, if any, incurred by it in connection with
effecting any such transactions.
(d) Indemnification. The Company will indemnify, to the maximum extent
permitted by law, the Holder, its officers and directors and each person who
controls the Holder (within the meaning of the Regulations of the SEC) against
all losses, claims, damages, liabilities and expenses (or actions, proceedings
or settlements in respect thereof) caused by, arising out of or based on any
untrue or alleged untrue statement of a material fact contained in any
registration statement (or any amendment or supplement thereto) of the Company
relating to the sale of Warrant Shares registered pursuant to this Section, or
any exhibits or materials incorporated by reference therein, filed with the SEC,
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,
except insofar as the same are caused by or contained in any information
furnished in writing to the Company by the Holder expressly for use therein.
The Holder will indemnify, to the maximum extent permitted by law, the
Company, its officers and directors and each person who controls the Company
(within the meaning of the Regulations of the SEC) against all losses, claims,
damages, liabilities and expenses (or actions, proceedings or settlements in
respect thereof) caused by, arising out of or based on any untrue or alleged
untrue statement of a material fact contained in any registration statement (or
any amendment or supplement thereto) of the Company relating to the sale of
Warrant Shares registered pursuant to this Section, or any exhibits or materials
incorporated by reference therein, filed with the SEC, 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, but only insofar as
the same are caused by or contained in any information furnished in writing to
the Company by the Holder expressly for use therein.
Any person entitled to indemnification under this Section will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability of any settlement made
by the indemnified party without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim in which case, the indemnifying party shall be obligated to pay the fees
and expenses of up to two counsel for all parties indemnified by such
indemnifying party with respect to such claim.
The indemnifications set forth in this Section shall survive the
termination or expiration of this Warrant.
54
<PAGE>
Section 10. No Impairment. The Company will not, by amendment of its
Articles of Incorporation or through any reclassification, capital
reorganization, consolidation, merger, sale or conveyance of assets,
dissolution, liquidation, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance of performance of any of the terms
of this Warrant, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holders.
Section 11. Governing Law. This Warrant shall be construed in
accordance with the laws of the State of California applicable to contracts
executed and to be performed wholly within such state.
Section 12. Notice. Notices and other communications are required or
permitted to be given hereunder shall be in writing and shall be conclusively
deemed effectively given upon personal delivery or confirmed facsimile
transmission, or five days after deposit in United States mail, by registered or
certified mail, postage prepaid, or one day after forwarding through a
nationally recognized air courier service, addressed (i) if to the Company, at
320 S. Garfield Avenue, Suite 318, Alhambra, California 91801, and (ii) if to
Holder, at the address set forth below, or at such other address as the Company
or Holder may designate by ten (10) days' advance written notice to the other
parties given in the manner herein provided.
IN WITNESS WHEREOF, the Company has executed this Warrant as of the
___th day of ______________, 199__.
CYBER MERCHANTS EXCHANGE, INC.
d.b.a C-ME.com
By:______________________________
Its: President
HOLDER
______________________________
Address:__________________________
__________________________
___________________________
55
<PAGE>
CYBER MERCHANTS EXCHANGE, INC. d.b.a C-ME.com
WARRANT EXERCISE FORM
Date _________________, 199__
This undersigned hereby irrevocably elects to exercise the attached
Warrant for ____________ shares of the Common Stock of CYBER MERCHANTS EXCHANGE,
INC. d.b.a C-ME.com.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name(s)__________________________________________________________
(please typewrite or print in block letters)
Address _____________________________________________________
_____________________________________________________
_____________________________________________
(Signature)
56
<PAGE>
CYBER MERCHANTS EXCHANGE, INC. d.b.a C-ME.com
WARRANT ASSIGNMENT FORM
For value received __________________________ hereby sells, assigns and
transfers unto
__________________________________________________________
[Please print or typewrite name and address of Assignee]
the within Warrant, and does hereby irrevocably constitute and appoint
________________________________ its attorney to transfer the within Warrant on
the books of the within named Company with full power of substitution on the
premises.
_______________________________________
Signature
Date: _________________________________
In the Presence of: ___________________
57
1787326
ENDORSED
FILED
In the office of the Secretary of State
of the State of California
JUL 16 1996
/s/ Bill Jones
BILL JONES, Secretary of State
ARTICLES OF INCORPORATION
OF
CYBER MERCHANTS EXCHANGE, INC.
*****
FIRST: That the name of the corporation is Cyber Merchants Exchange,
Inc.
SECOND: This corporation is a close corporation. All of the
corporation's issued shares of all classes shall be held of
record by not more than thirty-five persons.
THIRD: The purpose of this corporation is to engage in any lawful act
or activity for which a corporation may be organized under the
General Corporation Law of California other than the banking
business, the trust business or the practice of a profession
permitted to be incorporated by the California Corporations
Code.
FOURTH: The name of this corporation's initial agent for service of
process in the State of California is: Frank Yuan, 815 South
Fremont Avenue, Alhambra, CA 91803
<PAGE>
FIFTH: The total number of shares which the corporation is authorized
to issue is fifty million (50,000,000); all of such shares
shall be without par value.
IN WITNESS WHEREOF, the undersigned have executed these Articles this
Fifteenth day of July, 1996.
/s/ David I. Farber
-----------------------------
David I. Farber, Incorporator
/s/ Edith C. Shannon
-----------------------------
Edith C. Shannon, Incorporator
/s/ Maria J. Sandoval
-----------------------------
Maria J. Sandoval, Incorporator
CERTIFICATE OF RESTATED AND AMENDED
ARTICLES OF INCORPORATION OF
CYBER MERCHANTS EXCHANGE, INC.
Frank Yuan and Alan Chang certify that:
1. They are the President and Secretary, respectively, of Cyber Merchants
Exchange Net, Inc., a California corporation.
2. The articles of incorporation of the corporation are amended and
restated to read in their entirety as follows:
I. NAME.
The name of the corporation is Cyber Merchants Exchange, Inc.
II. PURPOSE.
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporation by the California
Corporations Code.
III. AUTHORIZED SHARES.
(a) This corporation is authorized to issue two classes of shares
designated respectively as "common shares" and "preferred shares". The number of
authorized common shares is forty million shares (40,000,000); the number of
authorized preferred shares is ten million (10,000,000). On the amendment of
this Article III to read as set forth above, each outstanding common share is
reclassified and converted to one-half of one common share.
(b) The preferred shares may be divided into such number of series as
the Board of Directors may determine. The Board of Directors is authorized to
determine and alter the rights, preferences, privileges, and restrictions
granted to or imposed upon any wholly unissued series of preferred shares, and
to fix the number of shares and the designation of any series of preferred
shares. The Board of Directors may increase or decrease (but not below the
number of shares of such series then outstanding) the number of shares of any
wholly unissued series subsequent to the issue of those shares.
(c) The total number of outstanding common shares just prior to this
amendment is 11,500,000. On the amendment of this Article, each outstanding
common share is combined and changed to one-half of one common share for a total
number of outstanding common shares of 5,750,000.
<PAGE>
IV. INDEMNIFICATION.
(a) Directors. The liability of the directors of this corporation for
monetary damages shall be eliminated to the fullest extent permissible under
California law.
(b) Directors and Officers. The corporation is authorized to indemnify
the directors and officers of the corporation to the fullest extent permissible
under California law.
3. This Certificate, restating and amending the articles of incorporation,
has been approved by the Board of Directors.
4. The amendment was approved by the required vote of the shareholders in
accordance with Corporations Code Sections 902 and 903. The total number of
outstanding shares entitled to vote on this amendment was 11,500,000. The
favorable vote of 66.66% of the outstanding shares (7,665,900 shares) was
required to approve this amendment. The number of shares voting in favor of the
amendment equaled or exceeded the required vote.
We declare under penalty of perjury that the statements set forth in
this certificate are true and correct of our own knowledge, and that this
declaration was executed on March 24, 1998 at Alhambra, California.
/s/ Frank S. Yuan
-----------------
Frank S. Yuan
President
/s/ Alan Chang
-----------------
Alan Chang
Secretary
BYLAWS
OF
CYBER MERCHANTS EXCHANGE, INC.
ARTICLE I. OFFICES
1.01 The corporation shall have its principal executive office in the City
and State designated in the Articles of Incorporation. The corporation may also
maintain offices at such other places within or without the United States as the
Board of Directors may, from time to time, determine.
ARTICLE II. DIRECTORS
Responsibility of Board
2.01 Subject to the provisions of the General Corporation Law and to any
limitations in the Articles of Incorporation of the corporation relating to
action required to be approved by the shareholders, as that term is defined in
California Corporations Code Section 153, or by the outstanding shares, as that
term is defined in California Corporations Code Section 152 or by less than a
majority vote of a class or series of preferred shares, as that term is defined
in California Corporations Code Section 402.5, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the Board of Directors. The Board may delegate the
management of the day-to-day operation of the business of the corporation to a
management company or other person, provided that the business and affairs of
the corporation are managed and all corporate powers are exercised under the
ultimate direction of the Board.
Number of Directors
2.02 The number of directors of this corporation shall be six (6), unless
and until otherwise determined by vote of a majority of the entire Board of
Directors. The number of Directors shall not be less than three, unless all of
the outstanding shares are owned beneficially and of record by less than three
shareholders, in which event the number of Directors shall not be less than the
number of shareholders permitted by statute.
Election and Term of Office
2.03 Except as may otherwise be provided herein or in the Articles of
Incorporation, the members of the Board of Directors of the Corporation, who
need not be shareholders, shall be elected by a majority of the votes cast at a
meeting of shareholders, by the holders of shares, present in person or by
proxy, entitled to vote in the election. Each Director shall hold office until
the annual meeting of the shareholders next succeeding his election, and until
his successor is elected and qualified, or until his prior death, resignation or
removal.
1
<PAGE>
Removal of Directors
2.04 Any individual Director or the entire Board of Directors may be removed
from office in the manner provided by law.
Filling Vacancies
-- By Board
2.05(a) Except as otherwise provided in the Articles of Incorporation of the
corporation or in these Bylaws, and except for a vacancy created by the removal
of a Director, vacancies on the Board may be filled by approval of the Board of
Directors pursuant to California Corporations Code Section 151, or, if the
number of Directors then in office is less that a quorum, by (1) the unanimous
written consent of the Directors then in office; (2) the affirmative vote of a
majority of the Directors then in office at a meeting held pursuant to notice or
waivers of notice complying with California Corporations Code Section 307; or
(3) a sole remaining Director.
-- By Shareholders
2.05(b) Unless the Articles of Incorporation of the corporation are amended, or
a Bylaw is adopted by the shareholders to provide that vacancies occurring in
the Board by reason of the removal of Directors may be filled by the Board, any
vacancies may be filled only by approval of the shareholders as that term is
defined in California Corporations Code Section 153. Any vacancies authorized to
be filled but not filled by the Directors may be filled by the shareholders and
any election by written consent requires the consent of a majority of the
outstanding shares entitled to vote; provided however, that no Director shall be
elected by written consent to fill a vacancy created by removal of any Director
except by the unanimous written consent of all shares entitled to vote for the
election of Directors.
Call of Meetings
2.06 Meetings of the Board may be called by the Board Chairperson, if any,
or the President, or any Vice President, or the Secretary, or any two Directors
of the corporation.
Place of Meetings
2.07 All meetings of the Board shall be held at the corporation's principal
executive office.
Time of Regular Meetings
2.08 Regular meetings of the Board shall be held, without call or notice,
immediately following each annual meeting of the shareholders of this
corporation.
Notice of Special Meeting and Waiver of Notice
2.09 Notice of any special meeting of the Board shall be given to each
Director by first-class mail, postage prepaid, at least four days in advance of
the meeting, or delivered in person or by telephone, including a voice messaging
system or other system or technology designed to record
2
<PAGE>
and communicate messages, telegraph, facsimile, electronic mail, or other
electronic means at least 48 hours in advance of the meeting. Notice need not be
given to any Director who signs, before or after the meeting, either a waiver of
notice, a consent to the holding of the meeting, or an approval of the minutes
of the meeting, or who attends the meeting without protesting the lack of notice
before or at the commencement of the meeting. All waivers, consents, and
approvals shall be filed with the corporate records or made a part of the
minutes of the meetings to which they pertain.
Quorum
2.10 A majority of the authorized number of Directors constitutes a quorum
of the Board for the transaction of business except as provided below.
Transactions of Board
2.11 Except as otherwise provided in the Articles, in these Bylaws, or by
law, every act or decision done or made by a majority of the Directors present
at a duly held meeting at which a quorum is present is the act of the Board,
provided, however, that any meeting at which a quorum was initially present may
continue to transact business notwithstanding the withdrawal of Directors if any
action taken is approved by at least a majority of the required quorum for the
meeting.
Adjournment
2.12 A majority of the Directors present at any meeting, whether or not a
quorum is present, may adjourn the meeting to another time and place. If the
meeting is adjourned for more than 24 hours, notice of the adjournment to
another time or place must be given before the time of the adjourned meeting to
the Directors who were not present at the time of the adjournment.
Conduct of Meetings
2.13 The Board Chairperson, or if there is no such person, the President,
or, in the Chairperson's absence, any Director selected by the Directors
present, shall preside at meetings of the Board of Directors. The Secretary of
the corporation, or, in the Secretary's absence, any person appointed by the
presiding officer shall act as Secretary of the Board. Board members may
participate at board meetings by conference telephone, electronic video screen
communication, or other communications equipment, whenever the board authorizes
this type of participation by adopting a resolution. The resolution must require
that the corporation (1) verify the identity of any director communicating by
telephone, electronic video screen, or other communication equipment and that
director's right to participate in board meetings and (2) verify that all
statements, questions, actions, and votes made by telephone, electronic video
screen, or other communications equipment were made by that director and not by
someone not permitted to participate as a director.
Participation in a meeting pursuant to this Paragraph
constitutes presence in person at the meeting if all the following are true:
(1) Each board member participating in the meeting can communicate
with all of the other members concurrently.
(2) Each member is provided the means of participating in all
matters before the board, including the capacity to propose,
or interpose an objection, to a specific action to be taken by
the corporation.
3
<PAGE>
(3) The board adopts a resolution pursuant to this Paragraph.
Compensation
2.14 Director's shall not receive any stated salary for their services as
directors but, by resolution of the Board, a fixed fee, with or without expenses
of attendance, may be allowed for attendance at each meeting. Nothing contained
in these Bylaws shall be construed to preclude any director from serving the
corporation in any other capacity as an officer, agent, employee, or otherwise,
and receiving compensation for the service.
Indemnification
2.15 The corporation has the power to indemnify any person who is or was a
director, officer, employee, or other agent of this corporation or of its
predecessor, or is or was serving as such of another corporation, partnership,
joint venture, trust, or other enterprise, at the request of this corporation
against expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any threatened, pending, or completed
action or proceeding, whether civil, criminal, administrative, or investigative,
as provided in California Corporations Code Section 317 as that section now
exists or may from time to time be amended to provide.
ARTICLE III. SHAREHOLDERS' MEETINGS
Place of Meetings
3.01 Meetings of the shareholders shall be held at the corporation's
principal executive office.
Time of Meeting
3.02 The annual meeting of the shareholders of the corporation shall be held
within five months after the close of the fiscal year of the corporation, for
the purpose of electing directors, and transacting such other business as may
properly come before the meeting.
Persons Entitled to Call Special Meetings
3.03 Special meetings of the shareholders may be call at any time by the
Board of Directors, the Board Chairperson, if any, the President of the
corporation, or the holders of shares entitled to cast not less than 10 percent
of the votes of the meeting.
Notice of Meeting
3.04 Notice of annual and special meetings of the shareholders shall be
given as provided in California Corporations Code Section 601 as that section
now exists or may from time to time be amended to provide.
4
<PAGE>
Waiver of Notice and Other Defects
3.05 The transactions of any meeting of shareholders, however called and
notice and wherever held, are as valid as though had at a meeting duly held
after regular call and notice, if a quorum is present either in person or by
proxy and if, either before or after the meeting, each of the persons entitled
to vote not present in person or by proxy signs a written waiver of notice or a
consent to the holding of the meeting or an approval of the minutes of the
meeting. All such waivers, consents, and approvals must be filed with the
corporate records or made a part of the minutes of the meeting. Attendance by a
person at the meeting also constitutes a waiver of notice to that person if he
or she fails to object at the beginning of the meeting to the transaction of
business because the meeting was not lawfully called or convened, but such
attendance does not constitute a waiver of the right to object to the
consideration of matters required by law or these Bylaws to be included in the
notice but not so included if the objection is expressly made at the meeting.
Quorum
3.06 A majority of the shares entitled to vote, represented in person or by
proxy, constitutes a quorum for the transaction of business. Business may be
continued after withdrawal of enough shareholders to leave less than a quorum,
provided any action taken (other than adjournment) is approved by at least a
majority of the shares required to constitute a quorum. In the absence of a
quorum, any meeting may be adjourned by a majority vote of the shares
represented in person or by proxy.
Election by Ballot
3.07 Elections for directors need not be by ballot unless a shareholder
demands election by ballot at the meeting and before voting begins.
Voting
3.08 Except as otherwise provided in the Articles of Incorporation or by
agreement or by the General Corporation Law, shareholders at the close of
business on the record date are entitled to notice and to vote, notwithstanding
the transfer of any shares on the books of the corporation after the record
date.
ARTICLE IV. OFFICERS
Titles, Appointment, Terms, and Compensation
4.01 This corporation shall have both a Board Chairperson and a President, a
Secretary, and a Chief Financial Officer who may also be called Treasurer. The
Board of Directors may designate and appoint any other officers that may be
necessary to enable the corporation to sign instruments and share certificates,
including one or more Vice Presidents, one or more Assistant Secretaries, and
one or more Assistant Treasurers. These other officers shall hold office for the
period, have the authority, and perform duties that the Board may, be
resolution, determine. One person may hold any two or more offices. In its
discretion, the Board of Directors may leave unfilled, for any period it may
fix, any offices except those of Board Chairperson,
5
<PAGE>
President, Secretary, and Chief Financial Officer. All officers shall be chosen
by, and, subject to any rights an officer may have under an employment contract
with the corporation, hold office at the pleasure of, the Board. The Board shall
fix each officer's compensation.
Board Chairperson
4.02 The Board Chairperson, if there is such an officer, shall, if present,
preside at all meetings of the Board and perform any other powers and duties
that may from time to time be assigned by the Board or prescribed by law or by
these Bylaws.
President
4.03 Subject to any supervisory powers that may be given by the Board of
Directors to the Board Chairperson, if there is such an officer, the President
shall be the chief executive officer of the corporation and shall perform all
the duties commonly incident to that office. The President shall preside at all
meetings of the shareholders and, if there is no Board Chairperson, at all
meetings of the Board.
Vice President
4.04 The Vice President, or the Vice Presidents in the order of seniority,
may assume and perform the duties of the President in the absence or disability
of the President or whenever the office of President is vacant, and shall
perform any other duties and have any other powers that the Board or the
President shall from time to time designate.
Secretary
4.05 The Secretary shall ensure that all notices are duly given in
accordance with the provisions of these Bylaws or as required by law; shall keep
the minutes of all proceedings of shareholders and of the Board; and shall
perform any other duties that are incident to the office of Secretary or that
are assigned from time to time by the Board or by the President.
Chief Financial Officer
4.06 The Chief Financial Officer shall receive and have custody of all funds
and securities of the corporation; keep and maintain adequate and correct books
and records of account and of the corporation's assets and liabilities; and
shall perform any other duties that may be assigned from time to time by the
Board of by the President.
ARTICLE V. EXECUTION OF INSTRUMENTS
5.01 The Board of Directors may, in its discretion, determine the method and
by resolution designate the signatory officer or officers, or other person or
persons, to execute any corporate instrument or document, or to sign the
corporate name without limitation, except as otherwise provided by law, and that
execution or signature shall be binding on the corporation.
6
<PAGE>
ARTICLE VI. ISSUANCE AND TRANSFER OF SHARES
Shareholder's Right to Certificate
6.01 Every holder of shares in the corporation shall be entitled to a
certificate certifying the number of shares and the class or series of shares
owned by him or her. This right extends to fractional shares and partly paid
shares if those shares are issued by the corporation.
Share Certificates
6.02 The certificates shall be in the form provided by the Board of
Directors and shall fully comply with the provisions of the California
Corporations Code. The certificates shall be signed by the Board Chairperson or
Vice Chairperson, if any, or the President or a Vice President, and by the Chief
Financial Officer or an Assistant Treasurer or the Secretary or any Assistant
Secretary of the corporation, and the seal of the corporation shall be affixed
to the certificates.
Exchange of Certificates
6.03 If the Articles of Incorporation are amended in any way affecting the
statements contained in the certificates for outstanding shares, or it becomes
desirable for any reason, in the discretion of the Board of Directors, to cancel
any outstanding certificate for shares and issue a new certificate conforming to
the rights of the holder, the Board may order any holders or outstanding
certificates to surrender and exchange them for new certificates within a
reasonable time to be fixed by the Board.
Replacement of Certificates
6.04 No new certificate shall be issued until the former certificate for the
shares represented has been surrendered and canceled. However, if the
certificate is lost, stolen, or destroyed, the corporation must, if so requested
by the shareholder, issue a new certificate, provided it has received no notice
that the certificate has been acquired by a bona fide purchaser, but it may
require the giving or a bond, undertaking, or other security sufficient to
indemnify it against any claim that may be made against it on account of the
alleged loss, theft, or destruction of the certificate or the issuance of the
new certificate.
Transfer of Shares
6.05 Shares of the corporation may be transferred by endorsement by the
signature of the owner, the owner's authorized agent, attorney, or legal
representative, and the delivery of the certificate; but a transfer is not
valid, except as to the parties to the transfer, until it is entered on the
books of the corporation so as to show the names of the parties by whom and to
whom transferred, the number of the certificate, and the number or designation
of the shares and the date of the transfer, and until the old certificate is
surrendered to the corporation and canceled.
Duty of the Corporation to Register Transfer
6.06 The corporation is under a duty to register the transfer when the
certificate, properly endorsed, is presented to it with a request to register
transfer; reasonable assurance is given that the endorsements are genuine and
effective; the corporation has no duty to inquire into
7
<PAGE>
adverse claims or it has discharged any such duty; and any applicable law
relating to the collection of taxes has been complied with.
Liability for Partly Paid Shares
6.07 The transferor and transferee of partly paid shares, if any are issued,
shall be liable to the corporation for the unpaid balance of those shares as
provided by law.
ARTICLE VII. CORPORATE RECORDS AND REPORTS
Keeping Records
7.01 The corporation shall keep adequate and correct books and records of
account and shall keep minutes of the proceedings of its shareholders, Board of
Directors, and Board committees, and shall keep at its principal executive
office, or at the office of its transfer agent or registrar, a record of its
shareholders, giving the names and addresses of all shareholders and the number
and class of shares held by each. The minutes must be kept either in written
form or in any other form capable of being converted into written form.
Inspection by Shareholders and Directors
7.02 Any shareholder shall have the right on written demand to inspect and
copy the record of shareholders, the accounting books and records, and the
minutes as provided by law. Each director shall have the absolute right at any
reasonable time to inspect and copy all books, records, and documents of every
kind and to inspect the physical properties of the corporation.
Waiver of Annual Report
7.03 So long as this corporation has less than 100 holders of record of its
shares, determined as provided in California Corporations Code Section 605, no
annual report shall be sent to shareholders or be required.
ARTICLE VIII. AMENDMENTS OF BYLAWS
By Shareholders and Directors
8.01 These Bylaws may, from time to time and at any time, be amended or
repealed, and new or additional bylaws adopted, by approval of the outstanding
shares, as that term is defined in California Corporations Code Section 152, or,
subject to any restrictions imposed by the Articles of Incorporation on the
power of the Board of Directors to adopt, amend, or repeal Bylaws, by approval
of the Board, provided, however, that such Bylaws may not contain any provision
in conflict with law or with the Articles of this corporation, and, provided
further, that: (1) after shares are issued a Bylaw changing the number of
directors or from a fixed to a variable Board can be adopted only by approval of
the outstanding shares; and (2) any such Bylaw reducing the number of directors
below five cannot be adopted if the votes cast against its adoption at a
shareholder's meeting, or the shares not consenting in the case or action by
written consent, are equal to more than 16 2/3 percent of the outstanding shares
entitled to vote.
8
<PAGE>
CERTIFICATE OF SECRETARY
I certify that:
1. I am the Secretary of Cyber Merchants Exchange, Inc.
2. The attached Bylaws are the Bylaws of the corporation approved by
the Board of Directors on February 2, 1997, at a meeting duly
held.
Dated: 2/2/97 /S/ Alan Chang
---------------------
Alan Chang, Secretary
9
Exhibit 4.2
NUMBER SHARES
[ 0 ] [ ]
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA JUL 16, 1996
See Reverse for
Certain Definitions
CYBER MERCHANTS EXCHANGE, INC.
TOTAL AUTHORIZED ISSUE
50,000,000 SHARES WITHOUT PAR VALUE
COMMON STOCK
This is to Certify that__________________________________________is the owner of
__________________________________________________________________fully paid and
non-assessable shares of the above Corporation transferable only on the books of
the Corporation by the holder hereof in person or by duly authorized Attorney
upon surrender of this Certificate properly endorsed.
Witness, the seal of the Corporation and the signatures of its duly authorized
officers.
Dated
- ----------------------------------- -----------------------------------
SECRETARY PRESIDENT
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THIS WARRANT AND SUCH SHARES
MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR ANY
EXEMPTION THEREFROM UNDER SAID ACT. THIS WARRANT AND SUCH SHARES MAY NOT BE
TRANSFERRED EXCEPT UPON THE CONDITIONS SPECIFIED IN THIS WARRANT, AND NO
TRANSFER OF THIS WARRANT OR SUCH SHARES SHALL BE VALID OR EFFECTIVE UNLESS AND
UNTIL SUCH CONDITIONS SHALL HAVE BEEN COMPLIED WITH.
WARRANT
To Purchase Stock of
CYBER MERCHANTS EXCHANGE, INC.
Expiring October 15, 2002
Cyber Merchants Exchange, Inc., a California corporation (the
"Company"), hereby certifies that, for value received, Burlington Coat Factory
Warehouse Corporation ("BCF") or assigns, is entitled, subject to the terms set
forth below, to purchase from the Company at any time or from time to time
during the Exercise Period (as defined in Section 2), that number of fully paid
and nonassessable shares of the Company's Common Stock, no par value (the
"Common Stock"), which equals 10% of the outstanding shares of Common Stock, on
a fully diluted basis, immediately following the closing of that certain
offering the Company is currently planning to conduct either pursuant to
Regulation A of the Securities Act of 1933, as amended (the "Securities Act"),
or pursuant to an exemption from registration under the Securities Act based on
Section 25102(n) of the California Corporate Securities Law of 1968 (the
"Offering"). The purchase price per share for the shares of Common Stock
underlying this Warrant will be set equal to the lesser of (i) $2.00 or (ii) the
lowest sales price of a share sold in the Offering (the "Purchase Price");
provided, however, that if the Initial Price (as defined in Section 2 below) is
less than the then current Purchase Price, as adjusted, the Purchase Price with
respect to the unexercised portion of this Warrant will be reduced to a price
equal to 90% of the Initial Price. Upon the final closing of the Offering or
abandonment, the Company shall notify BCF of the number of shares of Common
Stock covered by this Warrant and the Purchase Price thereof. Such notice shall
be in writing and shall indicate the number of shares sold in the Offering and
outstanding after the offering on a fully diluted basis and the lowest price at
which any shares were sold in the Offering.
The number and character of the shares of Common Stock covered by this
Warrant and the Purchase Price thereof are subject to adjustment as is
hereinafter provided. The term "Stock"
<PAGE>
shall mean, unless the context otherwise requires, the shares of Common Stock
and/or any other securities and property at the time receivable upon the
exercise of this Warrant and, when the context requires, the term the "Company"
shall mean the Company or any successor thereto.
I. The Warrant. This Warrant is issued under and pursuant to the terms
of that certain agreement dated October 15, 1997 (the "Agreement") entered into
by the Company and BCF, and this Warrant and the holders hereof are entitled to
the benefits provided for by, or referred to in, and are subject to the terms
of, the Agreement.
2. Exercise Period; Purchase Price Adjustment. This Warrant shall be
exercisable during the period (the "Exercise Period") commencing on October 15,
1997 and ending at 5:00 p.m., Alhambra, California time, on the earliest of the
following dates: (i) October 15, 2002; or (ii) 30 days after the closing of a
firmly underwritten public offering of the Company's securities (other than a
Regulation A offering, intrastate offering or similar offering) pursuant to an
effective registration statement filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act, with respect to which
the aggregate gross proceeds to the Company are at least $5,000,000 (the "Public
Offering"), but only if the initial price per share to the public in the Public
Offering (the "Initial Price") is at least $4.00. The Company shall give BCF at
least 30 days prior written notice of the closing of the Public Offering. Any
exercise of this Warrant after receipt of such notice may be conditioned upon
the actual occurrence of the closing of the Public Offering in which event if
such Public Offering is abandoned or if the closing otherwise does not occur,
for any reason, such exercise of the Warrant shall be null and void, and of no
force and effect. If the last day on which this Warrant may be exercised shall
be a Saturday, Sunday or a legal holiday or a day on which banking institutions
doing business in the City of Alhambra and State of California, are authorized
by law to close, this Warrant may be exercised prior to 5:00 p.m., Alhambra,
California time, on the next succeeding full business day in said City of
Alhambra with the same force and effect and at the same purchase price, as if
exercised on the last day herein.
3. Exercise of Warrant; Partial Exercise. This Warrant may be exercised
during the Exercise Period for the full number of shares of Stock at the time
called for hereby by the holder surrendering this Warrant, properly endorsed, to
the Company at its principal office in Alhambra, California or as otherwise
specified pursuant to Section 15 hereof, accompanied by a completed subscription
agreement in the form attached hereto and payment of an amount equal to the
product of (a) the number of shares of Stock called for on the face of this
Warrant (without giving effect to any adjustment therein) and (b) the Purchase
Price, which payment or payments shall be made, at the option of such holder, by
check in such amount, payable to the order of the Company.
This Warrant may be exercised during the Exercise Period for less than
the full number of shares of Stock at the time called for hereby by such a
surrender. Upon any such partial
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exercise, the Company at its expense will forthwith, and in any event within 10
days of such partial exercise, issue to the holder hereof a new Warrant or
Warrants of like tenor calling in the aggregate on their face for the number of
shares of Stock for which this Warrant shall not have been exercised, issued in
the name of the holder hereof or of such person as such holder (upon payment by
such holder of any applicable transfer taxes) may direct.
4. Delivery of Stock Certificates on Exercise. As soon as practicable
after the exercise of this Warrant and payment of the appropriate amount payable
upon the exercise hereof, and in any event within 10 days thereafter, the
Company at its expense (including the payment by it of any applicable issue tax)
will cause to be issued in the name of and delivered to the holder hereof, or to
such person as such holder (upon payment by such holder of any applicable
transfer taxes) may direct, a certificate or certificates for the number of full
shares of Stock to which such holder would be entitled upon such exercise, plus
cash in lieu of each fractional share to which such holder would otherwise be
entitled; provided, however, that, in case such shares or Stock shall not have
been registered under the Securities Act, (i) the Company may require that such
holder furnish to the Company a written statement that such holder is purchasing
such shares for such holder's own account for investment and not with a view to
the distribution thereof (other than sales permitted by the Securities Act or
the rules and regulations thereunder to be made without registration), subject,
nevertheless, to any requirement of law that the disposition of the property of
such holder shall at all times be within its own control, and (ii) the Company
shall not be obligated to issue and deliver any certificate for Stock to or in
the name of any person other than the holder of this Warrant, unless, in the
opinion of counsel to the holder of this Warrant, (concurred in by counsel to
the Company), such certificate may be so issued and delivered without
registration under the Securities Act.
5. Restrictions on Transfer. Holder shall not sell, transfer (with or
without consideration), assign, pledge, hypothecate or otherwise dispose of
(collectively, "Transfer") this Warrant or any Stock (collectively, the
"Securities") unless the Securities are disposed of pursuant to and in
conformity with an effective registration statement filed with the Commission
pursuant to the Securities Act, or pursuant to an available exemption from the
registration and prospectus delivery requirements of the Securities Act, and the
proposed disposition will not result in a violation of the securities laws of
any state of the United States. If requested by the Company, holder shall, prior
to the transfer of such Securities, deliver to the Company a written opinion of
counsel, satisfactory to the Company and its counsel, that the proposed
disposition will comply with the requirements set forth in this Section 5. Any
attempted Transfer which is not in full compliance with this Section 5 shall be
null and void ab initio, and of no force or effect. In furtherance thereof, any
certificate evidencing the Securities shall bear the following legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE
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SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN TAKEN FOR
INVESTMENT, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN
ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY
AND THE REGISTERED HOLDER HEREOF, A COPY OF WHICH AGREEMENT IS
ON FILE AT THE PRINCIPAL OFFICES OF THE COMPANY.
The Company may, at its option, place notations evidencing the
foregoing restrictions on transfer in its shareholders register, and may place
appropriate "stop transfer" instructions with its transfer agent, if any.
6. Adjustment for Dividends in Other Stock, Property;
Reclassifications. In case at any time or from time to time after October 15,
1997 (the "Issue Date") the holders of shares of the Common Stock of the Company
(or any shares of stock or other securities at the time receivable upon the
exercise of this Warrant) shall have received, or, on or after the record date
fixed for the determination of eligible shareholders, shall have become entitled
to receive, without payment therefor:
(i) additional stock or other securities or property (other than
cash) by way of dividend; or
(ii) any cash paid or payable out of capital or paid-in surplus or
surplus created as a result of a revaluation of property; or
(iii) other or additional stock or other securities or property
(including cash) by way of stock-split, spin-off, split-up, reclassification,
combination of shares or similar corporate rearrangement;
(other than additional shares of Common Stock or any other stock or securities
into which such Common Stock shall have been changed, or any other stock or
securities convertible into or exchangeable for such Common Stock or such other
stock or securities, issued in connection with a transaction covered by the
terms of Section 7), then in each such case the holder of this warrant, upon the
exercise hereof as provided in Section 3, shall be entitled to receive the
amount of stock or other securities and property (including cash in the cases
referred to in clause (ii) and (iii) above) to which such holder would have been
entitled on the date of such exercise if on the Issue Date he had been the
holder of record of the number of shares of Common Stock called for on the face
of this Warrant and had thereafter, during the period from the Issue Date to and
including the date of such exercise, retained such shares and/or such other or
additional stock and other securities and property (including cash in the cases
referred to in clause (ii) and (iii) above)
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receivable by him as aforesaid during such period, giving effect to all
adjustments called for during such period by Section 7.
7. Adjustment for Reorganization, Consolidation, Merger. In case of any
reorganization of the Company (or any other corporation the stock or other
securities or property of which are at the time receivable on the exercise of
this Warrant) after the Issue Date or in case, after the Issue Date, the Company
(or any such other corporation) shall consolidate with or merge with or into
another corporation or convey all or substantially all its assets to another
corporation, then and in each such case the holder of this Warrant, upon the
exercise hereof as provided in Section 3 at any time after the consummation of
such reorganization, consolidation, merger or conveyance, shall be entitled to
receive, in lieu of the Common Stock or other securities or property receivable
upon the exercise of this Warrant prior to such consummation, the securities or
property to which such holder would have been entitled upon such consummation if
such holder had exercised this Warrant immediately prior thereto and received
Common Stock or such other securities or property at the time receivable upon
the exercise of this Warrant, all subject to further adjustment as provided in
Section 6; in each such case, the terms of this Warrant shall be applicable to
the shares of stock or other securities or property receivable upon the exercise
of this Warrant after such consummation.
8. No Dilution or Impairment. The Company will not, by amendment of its
Certificate of Incorporation or through reorganization, consolidation, merger,
dissolution, issue or sale of securities, sale of assets 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 action as may be reasonably
necessary or appropriate in order to protect the rights of the holder of this
Warrant. Without limiting the generality of the foregoing, the Company (a) will
not increase the par value of any shares of Stock receivable upon the exercise
of this Warrant above the amount payable therefor upon such exercise and (b)
will 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
Stock upon the exercise of this Warrant at such time.
9. Accountants' Certificate as to Adjustments. In each case of an
adjustment in the shares of Stock receivable on the exercise of this Warrant,
the Company shall, or at the written request of BCF, shall cause, at the
Company's expense, independent public accountants of recognized standing
selected by the Company (who may be the independent public accountants then
auditing the books of the Company) to, compute such adjustment in accordance
with the terms of this Warrant and prepare a certificate setting forth such
adjustment and showing in detail the facts upon which such adjustment is based.
The Company will forthwith mail a copy of each such certificate to the holder of
this Warrant.
10. Notices of Record Date. In case
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(i) the Company shall take a record of the holders of its Common
Stock (or other stock or securities at the time receivable upon the exercise of
this Warrant) for the purpose of entitling them to receive any dividend (other
than a cash dividend) or other distribution, or any right to subscribe for or
purchase any shares of stock of any class or any other securities, or to receive
any other right; or
(ii) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation or
merger of the Company with or into another corporation, or any conveyance of all
or substantially all of the assets of the Company to another corporation; or
(iii) of any voluntary or involuntary dissolution, liquidation or
winding-up of the Company; then, and in each case, the Company will mail or
cause to be mailed to the holder of this Warrant a notice specifying, as the
case may be, (a) the date on which a record is to be taken for the purpose of
such dividend, distribution or right, and stating the amount and character of
such dividend, distribution or right, or (b) the date on which such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock (or such other
stock or securities at the time receivable upon the exercise of this Warrant)
shall be entitled to exchange their shares of Common Stock (or such other stock
or securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up. Such notice shall be mailed at least 30
days prior to the date therein specified.
11. Reservation of Stock Issuable on Exercise of Warrants. The Company
will at all times reserve and keep available, solely for issuance and delivery
upon the exercise of this Warrant, all such shares of Common Stock, and/or other
stock, securities and property as from time to time might be receivable upon the
exercise of this Warrant.
12. Right of First Refusal. If at any time and from time to time during
the Exercise Period of this Warrant, the Company proposes to issue or offer for
sale Common Stock or any other class or series of its equity securities or
securities convertible into equity securities, the Company shall upon each such
occasion at least thirty (30) days prior thereto send written notice thereof to
the holder of this Warrant specifying (a) the date on which the proposed issue
or sale shall take place, (b) the number and kind of securities proposed to be
issued or sold, (c) the purchase price or exercise price thereof, and (d) any
prospectus, offering memorandum or other material describing the Company and the
securities and the terms of such offering, including without limitation, the
financial statements and other information delivered or to be delivered to
offerees of the proposed issue or offering. Simultaneously therewith, the
Company shall offer to the holder the right to acquire the securities proposed
to be issued, at the proposed sale or
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exercise price thereof, in an amount equal to the proportion that the number of
shares of Stock underlying this Warrant bears to the total number of shares of
the Company's equity securities that are outstanding, on a fully diluted basis,
as of such date. If the holder of this Warrant shall fail to notify the Company
of its intention to participate in such issue or offering within fifteen (15)
days after receipt of the Company's notice of issue or offering, or if such
holder shall have notified the Company of its intention to participate but the
total number of shares proposed to be issued or sold which such holder desires
to acquire shall be in the aggregate less than number of shares the holder may
purchase, then the Company may offer such securities which shall not have been
subscribed for by the holder of this Warrant, to the other offerees in the
proposed issue or offering. If the holder exercises its right of first refusal
to purchase securities in such issue or offering, the holder shall participate
in the closing thereof with respect to the securities subscribed for by it at
the same time, in the same manner and on the same terms and conditions as the
other purchasers in such offering. If the purchase or exercise of the securities
in such offering shall change or otherwise be adjusted prior to closing, then on
each such occasion, the Company shall again offer to the holder of this Warrant
the right to purchase such securities upon such revised terms and conditions
exercisable by notice to the Company within ten (10) days after receipt of
written notice of the revised terms thereof in the same manner as aforesaid.
The rights established by this Section 12 shall have no application to
any of the following:
(i) the issuance of securities amounting to or exercisable for up to
10% of the Company's fully diluted outstanding equity pursuant to options or
purchase rights granted under the Company's employee incentive or option plans;
(ii) the issuance of securities of the Company or any subsidiary in
connection with a merger or consolidation or an acquisition by the Company or
such subsidiary which has been approved by the shareholders;
(iii) securities issued pursuant to any rights or agreements
including, without limitation, convertible securities, options and warrants,
provided that the rights established by this Section 12 applied with respect to
the initial sale or grant by the Company of such rights or agreements; or
(iv) any securities that are issued by the Company in a firmly
underwritten public offering registered under the Securities Act.
13. Additional Warrants. Subject to the limitations set forth below, if
at any time and from time to time during the Exercise Period of this Warrant,
the Company proposes to issue or offer for sale Common Stock or any other class
or series of its equity securities or options or warrants to purchase equity
securities, other than in connection with non-convertible debt financing, and
BCF does not exercise its first refusal right granted by Section 12 above, the
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Company shall, upon the closing of such offering, issue to BCF a warrant to
purchase the type of securities sold in such offering. The terms of such warrant
shall be identical to the terms of this Warrant, except that such warrant will
entitle BCF to purchase that number of shares equal to 10% of the shares sold in
such offering and the exercise price per share shall be equal to the sales price
per share of the securities sold in such offering.
Notwithstanding the foregoing, the Company shall not issue BCF an
additional warrant and the rights established by this Section 13 shall have no
application, with respect to any of the following:
(i) the issuance of securities amounting to or exercisable for up to
10% of the Company's fully diluted outstanding equity pursuant to options or
purchase rights granted under the Company's employee incentive or option plans;
(ii) the issuance of securities of the Company or any subsidiary in
connection with a merger or consolidation or an acquisition by the Company or
such subsidiary which has been approved by the shareholders;
(iii) securities issued pursuant to any rights or agreements
including, without limitation, convertible securities, options and warrants,
provided that the rights established by this Section 13 applied with respect to
the initial sale or grant by the Company of such rights or agreements; or
(iv) any securities that are issued by the Company in a Public
Offering (as defined in Section 2).
14. Listing on Securities Exchanges; Registration. In case at any time
any Common Stock, or other stock or securities of a character at the time
receivable upon the exercise of this Warrant shall be listed on any securities
exchange, the Company will also list and keep listed thereon, on official notice
of issuance upon the exercise of this Warrant (provided that the rules of such
exchange shall permit shall listing), all shares of Common Stock, and other
stock or securities from time to time receivable upon the exercise of this
Warrant which are so registered, and will register the same and keep the same
registered under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and will timely file all reports which may be required to be filed under
the Exchange Act by companies having a class of equity securities so registered.
15. Register of Warrants; Exchange of Warrants. The Company shall
maintain at its principal office in Alhambra, California, or such other
principal office of the Company as the Company may specify to the holder hereof
in writing, a register and appropriate books for the register of this Warrant
and the transfer thereof. Upon surrender for exchange of this Warrant (in
negotiable form, if not surrendered by the holder named on the face hereof) to
the Company
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at its principal office, the Company at its expense will issue and deliver a new
Warrant or Warrants of like tenor, calling in the aggregate on their face for
the same number of shares of Common Stock as are called for on the face of this
Warrant, in the denomination or denominations requested, to or on the order of
such holder and in the name of such holder or of such person as such holder
(upon payment by such holder of any applicable transfer taxes) may direct;
provided, however, that, in case the Warrant or Warrants so surrendered shall
not have been registered under the Securities Act, the Company shall not be
obligated to issue and deliver any Warrant or Warrants to or in the name of any
person other than the holder or holders of the Warrant or Warrants so
surrendered or in denominations other than the denomination of this Warrant or
Warrants so surrendered unless, in the opinion of counsel to the holder of this
Warrant (concurred in by counsel to the Company), such Warrant or Warrants may
be so issued and delivered without registration under the Securities Act.
16. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement in such reasonable amount as the Company may determine, or
(in the case of mutilation) upon surrender and cancellation thereof, the Company
at its expense will issue, in lieu thereof, a new Warrant of like tenor.
17. Compliance with Hart-Scott Act. In the event that any exercise of
this Warrant pursuant to Section 3 hereof shall be subject to pre-merger
notification and related filings with the Federal Trade Commission (the "FTC")
and the Antitrust Division of the Department of Justice (the "Department of
Justice") (or any other governmental agency) pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (or any similar act at the time in effect)
(the "Hart-Scott Act"), the Company shall, upon receipt of notice thereof from
the holder hereof, promptly prepare and make any required filings with, and
shall thereafter promptly make any required submission to, the FTC and the
Department of Justice (or such other governmental agency) pursuant to the
Hart-Scott Act with respect to such exercise. The Company shall cooperate with
and assist the holder hereof in the preparation of any filings and the making of
any submissions required so to be filed or submitted by the holder hereof
pursuant to the Hart-Scott Act in connection with such exercise. In addition, if
so requested by the holder hereof, the Company shall join in any request of the
holder hereof to the FTC or the Department of Justice (or such other
governmental agency) for early termination of the Hart-Scott Act waiting period
applicable to such exercise.
18. Negotiability. This Warrant is issued upon the following terms, to
all of which each taker or owner hereof consents and agrees:
(i) subject to Section 5, title to this Warrant may be transferred,
by endorsement (by the holder hereof executing the form of assignment attached
hereto) and
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delivered in the same manner as in the case of a negotiable instrument
transferrable by endorsement and delivery;
(ii) any person in possession of this Warrant properly endorsed is
authorized to represent himself as absolute owner hereof and is granted power to
transfer absolute title hereto by endorsement and delivery hereof to a bona fide
purchaser hereof for value; each prior taker or owner waives and renounces all
of his equities or rights in this Warrant in favor of every such bona fide
purchaser, and every such bona fide purchaser shall acquire absolute title
hereto and to all rights represented hereby; and
(iii) until this Warrant is transferred on the books of the Company,
the Company may treat the registered holder of this Warrant as the absolute
owner hereof for all purposes without being affected by any notice to the
contrary.
19. Registration Rights.
19.1 Registration on Request. (a) If, at any time when the Company is
entitled to file a registration statement on a Form S-3 Registration Statement,
the holders of Registrable Stock propose to dispose of at least 10% of the
shares of Registrable Stock pursuant to a Form S-3 Registration Statement, then
such holders may request the Company in writing to effect such registration. The
Company agrees that it will, as soon as practicable after receipt of such
notice, use its best efforts to effect such registration (and keep the same
effective for 120 days) and use its best efforts to effect such qualification
and compliance as would permit or facilitate the distribution of such
Registrable Stock in New York and California. The Company shall not be obligated
to effect any registration, qualification and/or compliance pursuant to this
Section 19.1, (i) more than ten times; (ii) which would become effective within
180 days following the effective date of a registration statement (other than a
registration statement filed on Form S-8) filed by the Company with the
Commission pertaining to an underwritten public offering of securities for cash
for the account of the Company or its other shareholders; or (iii) if, in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such registration
statement to be filed and it is therefore essential to defer the filing of such
registration statement; provided, the Company shall have the right to defer
taking action with respect to such filing for a period of not more than 90 days.
"Registrable Stock" means (x) the Common Stock issued upon the exercise of this
Warrant and the other Warrants resulting from an assignment this Warrant, (y)
any Common Stock received upon exercise of a right of first refusal granted
pursuant to Section 12 of this Warrant and the other Warrants resulting from an
assignment this Warrant and (z) any other securities issued upon exercise of
this Warrant or after exercise of a right of first refusal if securities of the
same class have been registered by the Company. Each share of Registrable Stock
shall continue to be Registrable Stock in the hands of each subsequent holder
thereof; provided, that each share of Registrable Stock shall cease to be
Registrable Stock when transferred to any person pursuant to a
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registered public offering or pursuant to Rule 144 promulgated by the Commission
under the Securities Act.
(a) Promptly upon receipt of any request for registration pursuant to
Section 19.1(a), the Company agrees that it will give written notice of such
request to all holders of Registrable Stock at the time outstanding and will
afford to all such holders an opportunity to join in such request. If the
registration is to be firmly underwritten, only securities which are to be
included in the underwriting may be included in the registration.
(b) Any holder of Registrable Stock, who shall make or join in any
request to the Company pursuant to Section 19.1(a) shall furnish to the Company
in writing such information as the Company may reasonably require for inclusion
in the registration statement (and the prospectus included therein) and shall
not (until further notice) effect sales of the shares covered by the
registration statement after receipt of telecopied or written notice from the
Company to suspend sales to permit the Company to correct or update a
registration statement or prospectus.
(c) No security to be newly issued by the Company or held by any
other security holders of the Company shall be included in a registration
statement filed pursuant to this Section 19 and the Company shall not file a
registration statement, other than on Form S-8, until 60 days after the
effective date of any registration statement filed pursuant to Section 19.
(d) Notwithstanding anything to the contrary contained in this
Section 19, no person (as defined, for these purposes, in Rule 144(a)(2) of the
Commission) who then beneficially owns 1% or less of the then outstanding Common
Stock (including the Registrable Stock) of the Company may include any of its
shares of Registrable Stock in any registration statement filed by the Company
pursuant to this Section 19 unless, in the opinion of counsel for the Company,
such person's intended disposition of Registrable Stock could not be effected
within 90 days of the date of said opinion without registration of such shares
under the Securities Act (assuming, for this purpose, that if "current public
information" (as defined in Rule 144(c) of the Commission under the Securities
Act) is available with respect to the Company as of the date of such opinion, it
will remain so available for such 90-day period).
19.2 Piggyback Registration. Prior to the Company's initial public
offering ("IPO"), the Company agrees that it will give written notice of the IPO
to all holders of Registrable Stock at the time outstanding and will afford to
all such holders an opportunity to join in the IPO; provided, however, that the
number of shares of Registrable Stock that each such holder may include shall in
no event exceed that number obtained by multiplying the number of shares of
Registrable Stock owned by such holder by a fraction (a) the numerator of which
shall be the number of shares of Common Stock the Company proposes to include in
the IPO (excluding the shares to be disposed of in the IPO by the holders of
Registrable Stock); and (b) the denominator
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of which shall be the total number of shares of Common Stock (on a fully diluted
basis) that will be outstanding after the IPO. If the IPO is to be firmly
underwritten, all holders of Registrable Stock participating in the IPO must
sell their shares to the underwriter on the same terms and conditions as the
Company and all other selling shareholders. Any holder of Registrable Stock, who
shall join in the IPO shall furnish to the Company in writing such information
as the Company may reasonably require for inclusion in the registration
statement (and the prospectus included therein) and shall not (until further
notice) effect sales of the shares covered by the registration statement after
receipt of telecopied or written notice from the Company to suspend sales to
permit the Company to correct or update a registration statement or prospectus.
Notwithstanding anything to the contrary contained in this Section 19, no person
(as defined, for these purposes, in Rule 144(a)(2) of the Commission) who then
beneficially owns 1% or less of the then outstanding Common Stock (including the
Registrable Stock) of the Company may include any of its shares of Registrable
Stock in the IPO unless, in the opinion of counsel for the Company rendered
prior to the IPO, such person's intended disposition of Registrable Stock could
not be effected within 90 days after the closing of the IPO without registration
of such shares under the Securities Act (assuming, for this purpose, that
"current public information" (as defined in Rule 144(c) of the Commission under
the Securities Act) will be available with respect to the Company and that it
will remain so available for such 90-day period). Notwithstanding anything to
the contrary contained in this Section 19, the Company may decide, in its sole
and absolute discretion, not to proceed with or to discontinue the IPO.
19.3 Registration Procedures. The Company agrees that it will furnish
to each holder of Registrable Stock such number of prospectuses, offering
circulars or other documents incident to any registration, qualification or
compliance referred to in this Section 19 as any such holder from time to time
reasonably may request, and will indemnify each such holder and any underwriter
of Registrable Stock (and any person who controls such holder or underwriter
within the meaning of Section 15 of the Securities Act) against all claims,
losses, damages, liabilities and expenses resulting from any untrue statement or
alleged untrue statement of a material fact contained therein (or in any related
registration statement, notification or the like) or from 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, except insofar as
the same may have been based upon information furnished in writing to the
Company by such holder or underwriter expressly for use therein, and with
respect to such information furnished to the Company such holder will indemnify
the Company, its directors, each of its officers who signs the registration
statement, offering circular or any other document incident to such
registration, qualification or compliance, the underwriter (if any) and each
person who controls such underwriter or the Company (within the meaning of
Section 15 of the Securities Act) against all claims, losses, damages,
liabilities and expenses resulting from any untrue statement or alleged untrue
statement of a material fact contained therein or from any omission or alleged
omission to state a material fact required to be stated or necessary to make the
information not misleading. In addition, the Company will enter into an
underwriting agreement in the form then currently in use by
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underwriters and consistent with provisions of this Section 19 with the
underwriters (if any) of the Registrable Stock.
19.4 Registration Expenses. All expenses incurred in effecting any
registration pursuant to this Section 19, including, without limitation, all
registration and filing fees, printing expenses, expenses of compliance with
Blue Sky laws, fees and disbursements of counsel for the Company, and expenses
of any audits incidental to or required by such registration shall be borne by
the Company; provided, that each holder of Registrable Stock shall bear its own
legal expenses (if it retains separate counsel) and all underwriting discounts
or brokerage fees or commissions relating to the sale of its Registrable Stock.
20. Market Stand-Off. The holder of this Warrant agrees that, in
connection with any underwritten public offering by the Company of its
securities pursuant to an effective registration statement filed under the
Securities Act, as amended, including the Company's initial public offering, the
holder shall not sell, make any short sale of, loan, hypothecate, pledge, grant
any option for the repurchase of, or otherwise dispose or transfer for value or
otherwise engage in any of the foregoing transactions with respect to any
securities of the Company without the prior written consent of the Company or
its underwriters, for such period of time from and after the effective date of
such registration statement as may be requested by the Company or such
underwriters; provided, such period shall not exceed 270 days.
21. Notice. All notices and other communications from the Company to
the holder of this Warrant shall be sufficiently given or made if sent by
first-class registered or certified mail, postage prepaid, addressed to the
registered holder of such Warrant at such holder's last known address appearing
on the register for the registration of the Warrants referred to in Section 15.
22. Change; Waiver. Neither this Warrant not any term hereof may be
changed, waived, discharged or terminated except by an instrument in writing
signed by the party against which the enforcement of the change, waiver,
discharge or termination is sought.
23. Headings. The headings in this Warrant are for purposes of
convenience only and shall not be deemed to constitute a part hereof.
24. Law Governing. THIS WARRANT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA WITHOUT REFERENCE
TO PRINCIPLES OF CONFLICT OF LAW.
[SIGNATURES APPEAR ON NEXT PAGE]
13
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer under its corporate seal.
Dated: October 15, 1997
CYBER MERCHANTS EXCHANGE, INC.
By: /S/
President
ATTEST:
/S/
Secretary
14
<PAGE>
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Warrant)
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, ____________* shares of Common Stock of Cyber Merchants
Exchange, Inc. and herewith makes payment of $_______________ therefor, and
requests that the certificates for such shares be issued in the name of, and be
delivered to, __________________________________________________________________
________________________, whose address is _____________________________________
_______________________________.
Dated:
_____________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant or name of assignee as
specified in form of assignment
below)
__________________________________
Address
___________________
*Insert here all or such portion of the number of shares called for on the face
of the within Warrant with respect to which the holder desires to exercise the
purchase right represented thereby, without adjustment for any other or
additional stock or other securities or property or cash which may be
deliverable on such exercise.
15
<PAGE>
FORM OF ASSIGNMENT
(To be signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto __________________________ the right represented by the within Warrant to
purchase __________ shares of Common Stock of Cyber Merchants Exchange, Inc. to
which the within Warrant relates, and appoints _________________________
___________________________________ attorney to transfer such right on the books
of (__________) with full power of substitution in the premises.
Dated:
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
_________________________________
Address
In the presence of:
16
Evers &
Hendrickson, LLP
Lawyers and Counselors At Law
- ------------------------------------
July 21, 1998
William D. Evers
Jay P. Hendrickson
Paul E. Manasian
Philip J. Nicholsen, PC
---------
Rafael Aguirre-Sacasa
Kevin F. Barrett
Kenneth A. Brunetti
Antoine M. Devine
Darcy Pertcheck
---------
Of Counsel
Frederick K. Koenen
Phone (415) 352-0693
Fax (415) 391-4292
Frank Yuan
President
Cyber Merchants Exchange, Inc.
320 S. Garfield Ave., Suite 318
Alhambra, California 91801
Re: Legality of Shares
------------------
Dear Mr. Yuan:
You have asked us as counsel for Cyber Merchants Exchange, Inc., a California
corporation (the "Company"), for our opinion regarding the legality of the
shares being cleared for registration with the Securities and Exchange
Commission pursuant to the filing of a Form SB-2 Registration Statement,
under the Securities Act of 1933, dated July 22, 1998. The Registration
Statement is on behalf of the Company and covers 2,500,000 shares of the
Common Stock of the Company.
We have been asked to opine as to the legality of the securities being
cleared. We have made reasonable inquiry and are of the opinion that the
securities being cleared, will, when sold, be legally issued, fully paid and
non-assessable.
We are not opining as to any other statements contained in the Registration
Statement, nor as to matters that occur after the date thereof.
Very truly yours,
EVERS & HENDRICKSON, LLP
By: William D. Evers, Partner
155 Montgomery Street, 12th Floor San Francisco California 94104 415 391 4291
LEASE AGREEMENT
BY AND BETWEEN
CONFEDERATION REAL ESTATE (U.S.), INC.
AS LANDLORD
AND
FRANK S. YUAN
AS TENANT
<PAGE>
TABLE OF CONTENTS
ARTICLE 1: BASIC LEASE INFORMATION............................................ 1
1.1 Basic Lease Information ......................................... 1
1.2 Other Definitions ............................................... 2
1.3 Exhibits ........................................................ 3
ARTICLE 2: AGREEMENT ......................................................... 3
ARTICLE 3: DELIVERY OF PREMISES............................................... 3
3.1 Delivery of Possession........................................... 3
3.2 Early Entry...................................................... 4
ARTICLE 4: MONTHLY RENT ...................................................... 4
4.1 Payment.......................................................... 4
ARTICLE 5: OPERATING EXPENSES................................................. 4
5.1 General.......................................................... 4
5.2 Estimated Payments............................................... 6
5.3 Annual Settlement................................................ 7
5.4 Final Proration.................................................. 7
5.5 Other Taxes...................................................... 7
5.6 Additional Rent.................................................. 7
ARTICLE 6: INSURANCE.......................................................... 8
6.1 Landlord's Insurance............................................. 8
6.2 Tenant's Insurance............................................... 8
6.3 Forms of Policies; Insurers...................................... 9
6.4 Waiver of Subrogation............................................ 9
6.5 Adequacy of Coverage............................................. 9
ARTICLE 7: USE................................................................ 9
ARTICLE 8: REQUIREMENTS OF LAW;
HAZARDOUS MATERIALS; FIRE INSURANCE................................. 10
8.1 General......................................................... 10
8.2 Hazardous Materials............................................. 10
8.3 Certain Insurance Risks......................................... 10
ARTICLE 9: ASSIGNMENT AND SUBLETTING......................................... 11
9.1 General......................................................... 11
9.2 Submission of Information....................................... 11
9.3 Payments to Landlord............................................ 11
9.4 Prohibited Transfers............................................ 11
9.5 Permitted Transfer.............................................. 11
9.6 Remedies........................................................ 12
ARTICLE 10: RULES AND REGULATIONS............................................ 12
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ARTICLE 11: COMMON AREAS..................................................... 12
ARTICLE 12: LANDLORD'S SERVICES.............................................. 13
12.1 Landlord's Repair and Maintenance.............................. 13
12.2 Landlord's Other Services...................................... 13
12.3 Tenant's Costs................................................. 13
12.4 Limitation of Liability........................................ 14
ARTICLE 13: TENANT'S CARE OF THE PREMISES.................................... 14
ARTICLE 14: ALTERATIONS...................................................... 15
14.1 General........................................................ 15
14.2 Free-Standing Partitions....................................... 15
ARTICLE 15: MECHANICS' LIENS................................................. 15
15.1 Indemnity and Discharge........................................ 15
ARTICLE 16: END OF TERM...................................................... 16
ARTICLE 17: EMINENT DOMAIN................................................... 16
ARTICLE 18: DAMAGE AND DESTRUCTION........................................... 17
ARTICLE 19: SUBORDINATION.................................................... 18
19.1 General........................................................ 18
ARTICLE 20: ENTRY BY LANDLORD................................................ 18
ARTICLE 21: INDEMNIFICATION, WAIVER, AND RELEASE............................. 19
21.1 Indemnification................................................ 19
21.2 Waiver and Release............................................. 20
ARTICLE 22: SECURITY DEPOSIT................................................. 20
ARTICLE 23: QUIET ENJOYMENT.................................................. 20
ARTICLE 24: EFFECT OF SALE................................................... 21
ARTICLE 25: DEFAULT.......................................................... 21
25.1 Events of Default.............................................. 21
25.2 Landlord's Remedies............................................ 22
25.3 Continuing Liability After Termination......................... 22
25.4 Cumulative Remedies............................................ 23
ARTICLE 26: PARKING.......................................................... 23
ii
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ARTICLE 27: MISCELLANEOUS.................................................... 23
27.1 No Offer....................................................... 23
27.2 Joint and Several Liability.................................... 23
27.3 No Construction Against Drafting Party......................... 24
27.4 Time of the Essence............................................ 24
27.5 No Recordation................................................. 24
27.6 No Waiver...................................................... 24
27.7 Limitation on Recourse......................................... 24
27.8 Estoppel Certificates.......................................... 24
27.9 Waiver of Jury Trial........................................... 24
27.10 No Merger..................................................... 25
27.11 Holding Over.................................................. 25
27.12 Notices....................................................... 25
27.13 Severability.................................................. 25
27.14 Written Amendment Required.................................... 25
27.15 Entire Agreement.............................................. 25
27.16 Captions...................................................... 26
27.17 Notice of Landlord's Default.................................. 26
27.18 Authority..................................................... 26
27.19 Brokers....................................................... 26
27.20 Governing Law................................................. 26
27.21 Interest...................................................... 26
27.23 No Easements for Air or Light................................. 26
27.24 Tax Credits................................................... 26
27.25 Financial Reports; Termination Right.......................... 27
27.26 Landlord's Fees............................................... 27
27.27 Binding Effect................................................ 27
27.28 Additional Rent............................................... 27
27.29 Approval of Mortgagee......................................... 27
27.30 Late Charge................................................... 27
27.31 Rent Covenant Independent..................................... 28
27.32 Certain Terms................................................. 28
Exhibits:
"A" - THE PREMISES............................................ i
"B" - RENT ADJUSTMENTS........................................ ii
"C" - WORK LETTER AGREEMENT...................................iii
"D" - RULES AND REGULATIONS................................... iv
"E" - COMMENCEMENT DATE CERTIFICATE........................... v
"F" - GUARANTY OF LEASE....................................... vi
"G" - OPTION TO EXTEND........................................vii
iii
<PAGE>
OFFICE LEASE
-------------------------------
THIS OFFICE LEASE is entered into by Landlord and Tenant as described
in the following basic lease information on the date that is set forth for
reference only in the following basic lease information. Landlord and Tenant
agree:
ARTICLE 1: BASIC LEASE INFORMATION
1.1 Basic Lease Information. In addition to the terms that are defined
elsewhere in this Lease, these terms are used in this Lease:
(a) LEASE DATE: September 1, 1996
(b) LANDLORD: Confederation Real Estate
(U.S.), Inc.
(c) LANDLORD'S ADDRESS: 260 Interstate North, Atlanta, Georgia
30339
with a copy at the same time to: The Carlson Company
#3 Corporate Plaza, Ste. 100
Newport Beach, CA 92660
(d) TENANT: Frank S. Yuan
dba: Cyber Merchants Exchange, Inc.
(e) TENANT'S ADDRESS: 815 S. Fremont
Alhambra, CA 91803
with a copy at the same time to: 320 S. Garfield Ave.
Suite 318
Alhambra, CA 91801
(f) BUILDING ADDRESS: 320 S. Garfield Ave.
Alhambra, CA 91801
(g) PREMISES: The premises shown on Exhibit A to
this Lease, known as Suite 318.
(h) RENTABLE AREA OF THE PREMISES: Approximately 2,260 square feet.
(i) RENTABLE AREA OF THE BUILDING: Approximately 52,684 square feet.
(j) TERM: 36 months, beginning on the
Commencement Date and expiring on
the Expiration Date unless properly
extended or renewed pursuant to a
right granted Tenant in any
Addendum hereto.
(k) COMMENCEMENT DATE: October 1, 1996 or as extended
pursuant to the Commencement Date
Certificate, but no later than
October 16, 1996.
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(l) EXPIRATION DATE: Thirty-six months from the
Commencement Date.
(m) SECURITY DEPOSIT: $3,164.00
(n) MONTHLY RENT: The initial Monthly Rent is
$3,164.00. The initial Monthly Rent
shall be adjusted as provided in
Exhibit B.
(o) BASE YEAR: 1996
(p) TENANT'S SHARE: 4.29% (determined by dividing the
Rentable Area of the Premises by the
Rentable Area of the Building,
multiplying the resulting quotient by
100, and rounding to the 3rd decimal
place).
(q) PARKING SPACES: 2 assisgned spaces.
(r) PARKING CHARGE: $0.00 per parking space per month,
subject to adjustments specified in
Article 26.
(s) LANDLORD'S BROKER: Lee & Associates
(t) TENANT'S BROKER: Uni-Fortune Company, Inc.
1.2 Other Definitions: In addition to the terms that are defined
elsewhere in this Lease, these terms are used in this Lease:
(a) ADDITIONAL RENT: Any amounts that this Lease requires Tenant to
pay in addition to Monthly Rent.
(b) BUILDING: The Building located on the Land and of which the
Premises are a part.
(c) COMMON AREAS: As defined in Section 11. 1.
(d) HAZARDOUS MATERIALS: As defined in Section 8.2.
(e) LAND: The Land on which the Project is located.
(f) LAWS: As defined in Section 3.2.
(g) OPERATING EXPENSES: As defined in Section 5. 1(b).
(h) PRIME RATE: The rate of interest last announced by Bank of America,
NT & SF, at its headquarters office, or any successor to it, as its reference
rate for purposes of pricing commercial loans. If Bank of America or any
successor to it ceases to announce its Prime Rate, the Prime Rate will be a
comparable interest rate designated by Landlord to replace the Prime Rate.
2
<PAGE>
(i) PROJECT: The development consisting of the Land and all
improvements built on the Land, including without limitation the Building,
Premises, parking lot, parking structure, if any, walkways, driveways, fences,
and landscaping.
(j) RENT: The Monthly Rent and Additional Rent.
(k) WORKLETTER: The Tenant Workletter attached to this Lease as Exhibit
C (if any).
If any other provision of this Lease contradicts any definition of this
Article, the other provision will prevail.
1.3 Exhibits. The following Exhibits are attached to this Lease and are
made part of this Lease:
EXHIBIT A - The Premises
EXHIBIT B - Rent Adjustments
EXHIBIT C - Workletter
EXHIBIT D - Rules and Regulations
EXHIBIT E - Commencement Date Certificate
EXHIBIT F - Guaranty of Lease
EXHIBIT G - Option to Extend
ARTICLE 2: AGREEMENT
2.1 Landlord leases the Premises to Tenant, and Tenant leases the
Premises from Landlord, according to this Lease. The duration of this Lease will
be the Term. The Term will commence on the Commencement Date and will expire on
the Expiration Date. If Tenant properly extends or renews this Lease under any
right provided for in any Addendum hereto, the Term will include the extension
or renewal term.
ARTICLE 3: DELIVERY OF PREMISES
3.1 Delivery of Possession. Landlord shall be deemed to have delivered
possession of the Premises to Tenant on the Commencement Date, as it may be
adjusted pursuant to the Workletter. Landlord shall construct or install in the
Premises the improvements to be constructed or installed by Landlord according
to the Workletter. If no Workletter is attached to this Lease, it shall be
deemed that Landlord delivered to Tenant possession of the Premises "as is" in
its present condition on the Commencement Date. Tenant acknowledges that neither
Landlord nor its agents or employees have made any representations or warranties
as to the suitability or fitness of the Premises for the conduct of Tenant's
business or for any other purpose, nor has Landlord or its agents or employees
agreed to undertake any alterations or construct any Tenant improvements to the
Premises except as expressly provided in this Lease and the Workletter. If for
any reason Landlord cannot deliver possession of the Premises to Tenant on the
Commencement Date, this Lease will not be void or voidable, Landlord will not be
liable to Tenant for any resulting loss or damage and the Term of this Lease
shall not be extended by a delayed delivery of possession. The preceding
sentence notwithstanding, if Landlord fails to deliver possession to Tenant
within sixty (60) days after the Commencement Date for any reason other than a
Delay Caused by Tenant, as defined in the Workletter, Tenant, as its sole
remedy, shall have the right to terminate this Lease and receive a refund of all
prepaid Rent and Security Deposits provided Tenant gives written notice of
termination to Landlord within three (3) days after that date. Tenant will
execute the Commencement Date Certificate attached to this Lease as Exhibit E,
appropriately completed, within fifteen (15) days of Landlord's request.
3
<PAGE>
3.2 Early Entry. If Tenant is permitted entry to the Premises prior to
the Commencement Date for the purpose of installing fixtures or any other
purpose permitted by Landlord, the early entry shall be at Tenant's sole risk
and subject to all the terms and provisions of this Lease as though the
Commencement Date had occurred, except for the payment of Rent, which shall
commence on the Commencement Date. Tenant, its agents, or employees shall not
interfere with or delay Landlord's completion of construction of the
improvements. All rights of Tenant under this Section 3.2 shall be subject to
the requirements of all applicable building codes, zoning requirements, and
federal, state, and local statutes, ordinances, laws, rules, regulations and
orders (collectively "Laws") so as not to interfere with Landlord's compliance
with all Laws, including the obtaining of a certificate of occupancy for the
Premises. Landlord has the right to impose additional conditions on Tenant's
early entry that Landlord, in its reasonable discretion, deems appropriate, and
shall further have the right to require that Tenant execute an early entry
agreement containing those conditions prior to Tenant's early entry.
ARTICLE 4: MONTHLY RENT
4.1 Payment. Throughout the Term of this Lease, Tenant shall pay
Monthly Rent to Landlord as rent for the Premises. Monthly Rent shall be paid in
advance on or before the first day of each calendar month of the Term. If the
Term commences on a day other than the first day of a calendar month or ends on
a day other than the last day of a calendar month, then Monthly Rent shall be
appropriately prorated by Landlord based on the actual number of calendar days
in such month. If the Term commences on a day other than the first day of a
calendar month, then the prorated Monthly Rent for such month shall be paid on
or before the first day of the Term. Monthly Rent shall be adjusted as provided
in Exhibit B.
ARTICLE 5: OPERATING EXPENSES
5.1 General.
(a) In addition to Monthly Rent, Tenant shall pay when due
under Section 5.2 Tenant's Share of the amount by which the Operating Expenses
paid, payable, or incurred by Landlord in each calendar year or partial calendar
year after the Base Year exceeds the Operating Expenses of the Building incurred
or to be incurred by Landlord for the Base Year. Landlord shall have the right
from time to time to allocate equitably some of the Operating Expenses among
particular tenants of the Building or Project (e.g., retail tenants as opposed
to office tenants).
(b) As used in this Lease, the term "Operating Expenses"
means:
(1) All costs of management, operation, and
maintenance of the Project reasonably incurred by Landlord, including without
limitation: real and personal property taxes and assessments assessed against
the Project and all increases therein whether under Proposition 13 or otherwise
(and any tax levied in whole or in part in lieu of or in addition to real
property taxes); all other governmental taxes, fees, charges and impositions on
or related to the ownership, operation or leasing of the Building or Project;
wages, salaries, benefits, compensation and payroll taxes of employees; fees and
costs for consulting, accounting, legal, janitorial, maintenance, guard, and
other services; management fees and costs (charged by Landlord, any affiliate of
Landlord, or any other entity managing the Project and determined at a rate
consistent with prevailing market rates for comparable services and projects in
the vicinity of the Project); reasonable reserves for Operating Expenses; that
part of office rent or rental value of space in the
4
<PAGE>
Project used or furnished by Landlord to enhance, manage, operate, and maintain
the Project; power, water, waste disposal, and other utilities; costs of
materials and supplies; costs of maintenance and repairs; costs of insurance
obtained with respect to the Project; depreciation on personal property and the
cost of equipment, except as set forth in (c) below or which is or should be
capitalized on the books of Landlord; the cost of licenses, permits, inspections
and the like; the cost of implementation or management of a tenant
transportation system if required by Laws; and any other costs, charges, and
expenses that under generally accepted accounting principles would be regarded
as management, maintenance and operating expenses; and
(2) The cost (amortized on a straight line basis over such
useful life as Landlord reasonably determines) together with interest at the
greater of the Prime Rate adjusted on the first day of each calendar quarter
plus one percent (1%) or Landlord's actual borrowing rate, for such capital
improvements that are made to the Project by Landlord (I) for the purpose of
reducing Operating Expenses, or (ii) after the Lease date and by requirement of
any Law that was not applicable to the Project at the time it was constructed
and not as a result of an unusual use or nature of occupancy of the Premises by
any tenant.
(c) The Operating Expenses shall not include:
(1) depreciation on the Project (other than depreciation on
personal property, fixtures, equipment, window coverings on exterior windows
provided by Landlord, and carpeting in public corridors and common areas);
(2) costs of alterations of space or other improvements made
for tenants of the Project;
(3) finders' fees and real estate brokers' commissions;
(4) ground lease payments, mortgage principal or interest;
(5) capital items other than those referred to in clause
(b)(2) above;
(6) costs of replacements of personal property and equipment
for which depreciation costs are included as an Operating Expense, but only as
to the amount which has been depreciated at the time of any such replacement;
(7) costs of excess or additional utilities or services
provided to any tenant in the Building that are directly billed to such tenants;
(8) the cost of repairs due to casualty or condemnation that
are reimbursed by third parties, to the extent and in the actual amount of such
reimbursement. If a risk required to be insured against is self-insured under
Section 6.1, the amount of a reasonable deductible by reference to similar
buildings in the vicinity of the Project shall be an Operating Expense.
(9) any cost incurred solely as a result of Landlord's breach
of this Lease;
(10) any income, estate, inheritance, or other transfer tax
and any excess profit, franchise, or similar taxes on Landlord's business;
(11) all costs, including legal fees, relating to activities
for the solicitation and execution of leases of space in the Building; and
(12) any legal fees incurred by Landlord in enforcing its
rights under other leases for premises in the Building.
5
<PAGE>
(13) Landlord's general overhead and administrative expenses
to the extent not recouped by the permitted management fees if Landlord or an
affiliate is providing management services.
(14) bad debt losses or reserves.
(15) costs for which amounts have been previously reserved as
Operating Expenses to the extent of the actual reserve.
(d) The Operating Expenses that vary with occupancy levels and that
are attributable to any part of the Term in which less than ninety-five percent
(95%) of the Rentable Area of the Building is occupied by tenants will be
adjusted by Landlord to the amount that Landlord reasonably believes they would
have been if ninety-five percent (95%) of the Rentable Area of the Building had
been so occupied for the entire year in question.
(e) Tenant acknowledges that Landlord has not made any representation
or given Tenant any assurances that the Operating Expenses for the Base Year
will equal or approximate the actual Operating Expenses for any calendar year
after the Base Year.
5.2 Estimated Payments. During each calendar year or partial calendar
year after the Base Year, in addition to Monthly Rent, Tenant shall pay to
Landlord on the first day of each month an amount equal to one-twelfth (1/12) of
the product of Tenant's Share multiplied by the "Estimated Operating Expenses"
(defined below) for such calendar year. "Estimated Operating Expenses" for any
calendar year means Landlord's reasonable estimate of Operating Expenses for
such calendar year, less the Operating Expenses for the Base Year and shall be
subject to revision according to the further provisions of this Section 5.2 and
Section 5.3. During any partial calendar year, Estimated Operating Expenses
shall be estimated on a full-year basis. During each December in which this
Section 5.2 is applicable, or as soon after each December as practicable,
Landlord shall give Tenant written notice of the Estimated Operating Expenses
for the ensuing calendar year. On or before the first day of each month during
the ensuing calendar year (or each month of the Term if the Term will expire
before the end of the calendar year), Tenant shall pay to Landlord one-twelfth
(1/12) of the product of Tenant's Share multiplied by the Estimated Operating
Expenses for such calendar year; however, if such written notice is not given in
December, Tenant shall continue to make monthly payments on the basis of the
prior year's Estimated Operating Expenses until the month after such written
notice is given, at which time Tenant shall commence making monthly payments
based upon the revised Estimated Operating Expenses. In the month Tenant is
first required to make a payment based upon the revised Estimated Operating
Expenses, Tenant shall pay to Landlord for each month which has elapsed since
December the difference between the amount payable based upon the revised
Estimated Operating Expenses and the amount payable based upon the prior year's
Estimated Operating Expenses. If at any time or times it reasonably appears to
Landlord that the actual Operating Expenses for any calendar year will vary from
the Estimated Operating Expenses for such calendar year, Landlord may, by
written notice to Tenant, revise the Estimated Operating Expenses for such
calendar year, and subsequent payments by Tenant in such calendar year shall be
based upon such revised Estimated Operating Expenses.
5.3 Annual Settlement. Within one hundred twenty (120) days after the
end of each calendar year in which Section 5.2 was applicable, or as soon after
such one hundred twenty (120) day period as practicable, Landlord shall deliver
to Tenant a statement of amounts payable under Section 5.1 for such calendar
year prepared and certified by Landlord. Such certified statement shall be final
and binding upon Landlord and Tenant unless Tenant objects to it in writing to
Landlord within thirty (30) days after it is given to Tenant. If such statement
shows an amount owing by Tenant that is less than the estimated payments
previously made by Tenant for such calendar year, the excess shall be held by
Landlord and credited against the next payment of Rent; however, if the Term has
ended and Tenant was not in default at its end, Landlord shall refund the
6
<PAGE>
excess to Tenant. If such statement shows an amount owing by Tenant that is more
than the estimated payments previously made by Tenant for such calendar year,
Tenant shall pay the deficiency to Landlord within thirty (30) days after the
delivery of such statement. Within the thirty (30) day period for Tenant's
objection to the certified statement, Tenant may review Landlord's records of
the Operating Expenses, at Tenant's sole cost and expense, at the place Landlord
normally maintains such records during Landlord's normal business hours, upon
reasonable advance written notice.
5.4 Final Proration. If the Term of this Lease ends on a day other than
the last day of a calendar year, the amount of increase (if any) in the
Operating Expenses payable by Tenant applicable to the calendar year in which
the Term ends shall be calculated on the basis of the number of days of the Term
falling within such calendar year, and Tenant's obligation to pay any increase
or Landlord's obligation to refund any overage shall survive the expiration or
other termination of this Lease.
5.5 Other Taxes.
(a) Tenant shall reimburse Landlord upon demand for any and all taxes
payable by Landlord (except to the extent that such taxes are to be included in
Operating Expenses under Section 5.1 and other than as set forth in subparagraph
(b) below), whether or not now customary or within the contemplation of Landlord
and Tenant:
(1) upon or measured by Rent, including without limitation,
any gross revenue tax, excise tax, or value added tax levied by the federal
government or any other governmental body with respect to the receipt of Rent;
and
(2) upon this transaction or any document to which Tenant is
a party creating or transferring an interest or an estate in the Premises.
(b) Tenant shall not be obligated to pay any inheritance tax, gift
tax, transfer tax, franchise tax, income tax (based on net income), profit tax,
or capital levy imposed upon Landlord.
(c) Tenant shall pay promptly when due all personal property taxes on
Tenant's personal property in the Premises and any other taxes payable by Tenant
that if not paid might give rise to a lien on the Premises or Tenant's interest
in the Premises.
5.6 Additional Rent. Amounts payable by Tenant according to this
Article 5 shall be payable as Rent, without deduction or offset. If Tenant fails
to pay any amounts due according to this Article 5, Landlord shall have all the
rights and remedies available to it on account of Tenant's failure to pay Rent.
ARTICLE 6: INSURANCE
6.1 Landlord's Insurance. At all times during the Term, Landlord shall
carry and maintain:
(a) Fire and extended coverage insurance covering the Project, its
equipment, Common Area furnishings, and leasehold improvements in the Premises
to the extent of the Tenant finish allowance (as that term is defined in the
Workletter); flood and earthquake may, but are not required to be, insured
casualties;
(b) Comprehensive form general public liability insurance; and
(c) Such other insurance as Landlord reasonably determines is
necessary from time to time.
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The insurance coverages and amounts in this Section 6.1 shall be
determined reasonably by Landlord based on coverages carried by prudent owners
of comparable buildings in the vicinity of the Project. The foregoing
notwithstanding, so long as Landlord is (1) Confederation Life Insurance Company
or (2) any other corporation having net assets as per its most recent year-end
audited balance sheet in excess of $50 million, it may self-insure all or any of
the required coverages.
6.2 Tenant's Insurance. At all times during the Term, Tenant shall
carry and maintain, at Tenant's expense, whether or not such insurance is
readily available at a commercially reasonable price, the following insurance,
in the amounts specified below or such other amounts as Landlord may from time
to time reasonably request, and on forms reasonably satisfactory to Landlord:
(a) Bodily injury and property damage liability insurance,
with a combined single occurrence limit of not less than $2,000,000. All such
insurance shall be equivalent to coverage offered by a commercial general
liability form, including without limitation personal injury and contractual
liability coverage for the performance by Tenant of the indemnity agreements set
forth in Article 21 of this Lease;
(b) Insurance covering all of Tenant's furniture and fixtures,
machinery, equipment, stock, and any other personal property owned and used in
Tenant's business and found in, on, or about the Project, and any leasehold
improvements to the Premises in excess of the finish allowance, if any, provided
pursuant to the Workletter in an amount not less than the full replacement cost.
Property forms shall provide coverage on a broad form basis insuring against
"all risks of direct physical loss." All policy proceeds shall be used for the
repair or replacement of the property damaged or destroyed; however, if this
Lease terminates under the provisions of Article 18, Tenant shall be entitled to
any proceeds resulting from damage to Tenant's furniture and fixtures,
machinery, equipment, stock, and any other personal property;
(c) Worker's compensation insurance insuring against and
satisfying Tenant's obligations and liabilities under the worker's compensation
laws of the State of California, including employer's liability insurance in the
limits required by applicable laws; and
(d) If Tenant operates owned, hired, or nonowned vehicles on
the Project, comprehensive automobile liability at a limit of liability not less
than $500,000 combined bodily injury and property damage.
Anything to the contrary herein notwithstanding, Landlord shall not
increase the required limits of the insurance required by subsection (b) or (d)
by more than ten percent (10%) per calendar year cumulatively.
6.3 Forms of Policies; Insurers. Certificates of insurance, together
with copies of the endorsements, when applicable, naming Landlord and any others
specified by Landlord as additional insureds, shall be delivered to Landlord
prior to Tenant's occupancy of the Premises and from time to time at least ten
(10) days prior to the expiration of the term of each such policy. All
commercial general liability or comparable policies maintained by Tenant shall
name Landlord and such other persons or firms as Landlord specifies from time to
time as additional insureds, entitling them to recover under such policies for
any loss sustained by them, their agents, and employees as a result of the
negligent acts or omissions of Tenant. All such policies maintained by Tenant
shall provide that they may not be terminated nor may coverage be reduced except
after thirty (30) days' prior written notice to Landlord. All commercial general
liability and property policies maintained by Tenant shall be written as primary
policies, not contributing with and not supplemental to the coverage that
Landlord may carry. All policies required to be maintained by Tenant shall be
issued by insurers admitted in the
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State of California and having a current Best's Key Rating Guide rating of at
least "A-XII".
6.4 Waiver of Subrogation. Landlord and Tenant each waives on its own
behalf, and to the extent not prohibited by its issued insurance policies, on
behalf of its insurers, any and all rights to recover against the other or
against any other Tenant or occupant of the Project, or against the officers,
directors, shareholders, partners, joint venturers, employees, agents,
customers, invitees, or business visitors of such other party or of such other
Tenant or occupant of the Project, for any loss or damage to such waiving party
arising from any cause covered by any property insurance required to be carried
by such party pursuant to this Article 6 or any other property insurance
actually carried by such party, to the extent of the actual limits of such
policy. Landlord and Tenant from time to time shall request their respective
insurers to issue appropriate waiver of subrogation rights endorsements to all
property insurance policies carried in connection with the Project or the
Premises or the contents of the Project or the Premises. Tenant agrees to cause
all other occupants of the Premises claiming by, under, or through Tenant to
execute and deliver to Landlord such a waiver of claims and to obtain such
waiver of subrogation rights endorsements.
6.5 Adequacy of Coverage. Landlord, its agents, and employees make no
representation that the limits of liability specified to be carried by Tenant
pursuant to this Article 6 are adequate to protect Tenant. If Tenant believes
that any of such insurance coverage is inadequate, Tenant shall obtain such
additional insurance coverage as Tenant deems adequate, at Tenant's sole
expense. The minimum insurance requirements of this Lease shall not be construed
as a limitation of Tenant's liability to Landlord for indemnity or otherwise.
ARTICLE 7: USE
7.1 The Premises shall be used only for general business office
purposes and purposes incidental to that use and for no other purpose. Tenant
shall use the Premises in a careful, safe and proper manner. Tenant shall not
use or permit the Premises to be used or occupied for any purpose or in any
manner prohibited by Laws. Tenant shall not commit waste or suffer or permit
waste to be committed in, on, or about the Premises or other parts of the
Project. Tenant shall conduct its business and control its employees, agents,
and invitees in such a manner as to comply with all provisions of this Lease and
so as not to create any nuisance or interfere with, annoy, or disturb any other
Tenant or occupant of the Project or Landlord in its operation of the Project.
ARTICLE 8: REQUIREMENTS OF LAW; HAZARDOUS MATERIALS; FIRE INSURANCE
8.1 General. At its sole cost and expense, Tenant shall promptly comply
with all Laws now in force or in force after the Lease Date, with the
requirements of any board of fire underwriters or other similar body constituted
now or after the date, with any direction or occupancy certificate issued
pursuant to an law by any public officer or officers, as well as with the
provisions of all recorded documents affecting the Premises, insofar as they
relate to the condition, use, or occupancy of the Premises, excluding
requirements of structural changes to the Premises or the Building, unless
required by Tenant's breach of this Lease or an unusual use or nature of
occupancy of the Premises by Tenant.
8.2 Hazardous Materials.
(a) For purposes of this Lease, "Hazardous Materials" means any
explosives, radioactive materials, hazardous wastes, or hazardous substances,
including without limitation substances defined as "hazardous substances" in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42
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U.S.C. ss.ss.9601-9657; the Hazardous Materials Transportation Act of 1975, 49
U.S.C. ss.ss.1801-1812; the Resource Conservation and Recovery Act of 1976, 42
U.S.C. ss.ss.6901-6987; or now or hereafter defined as a toxic or hazardous
material or substance or other pollutant or contaminant by any applicable Law.
(b) Tenant shall not cause or permit the storage, use,
generation, or disposition of any Hazardous Materials in, on, or about the
Premises or the Project by Tenant, its agents, employees, or contractors,
provided, however, that Tenant may store and use products which typically are
used by general office tenants provided that such products be stored only in
such quantities and used only in such manner as will pose no threat of any
material contamination of the Project. Tenant shall immediately advise Landlord
in writing of (1) any and all enforcement, cleanup, remedial, removal, or other
governmental or regulatory actions instituted, completed, or threatened pursuant
to any Laws relating to any hazardous materials affecting the Project; and (2)
all claims made or threatened by any third party against Tenant, Landlord, or
the Premises relating to damage, contribution, cost recovery, compensation,
loss, or injury resulting from any Hazardous Materials on or about the Premises.
Without Landlord's prior written consent, Tenant shall not take any remedial
action or enter into any agreements or settlements in response to the presence
of any Hazardous Materials in, on, or about the Project.
(c) Tenant shall be solely responsible for and shall defend,
indemnify and hold Landlord, its agents, and employees harmless from and against
all claims, costs, and liabilities, including attorneys' fees and costs, arising
out of or in connection with Tenant's breach of its obligations under this
Article 8. In the event of such breach, Tenant shall be solely responsible for
and shall defend, indemnify, and hold Landlord, its agents, and employees
harmless from and against any and all claims, costs, and liabilities, including
attorneys' fees and costs, arising out of or in connection with the containment,
removal, cleanup and restoration work and materials necessary to return the
Project and any other property of whatever nature located on the Project to
their condition existing prior to Tenant's breach of this Article 8. Tenant's
obligations under this Article 8 shall survive the expiration or other
termination of this Lease.
8.3 Certain Insurance Risks. Tenant shall not do or permit to be done
any act or thing upon the Premises or the Project which would (a) jeopardize or
be in conflict with fire insurance policies covering the Project and fixtures
and property in the Project; (b) increase the rate of fire insurance applicable
to the Project to an amount higher than it otherwise would be for general office
use of the Project; or subject Landlord to any liability or responsibility for
injury to any person or persons or to property by reason of any business or
operation being carried on upon the Premises.
ARTICLE 9: ASSIGNMENT AND SUBLETTING
9.1 General. Tenant, for itself, its heirs, distributees, executors,
administrators, legal representatives, successors, and assigns, covenants that
it will not assign, mortgage, or encumber this Lease, nor sublease, nor permit
the Premises or any part of the Premises to be used or occupied by others,
without the prior written consent of Landlord in each instance, which consent
shall not be unreasonably withheld or delayed. Any assignment or sublease in
violation of this Article 9 shall be void. If this Lease is assigned, or if the
Premises or any part of the Premises are subleased or occupied by anyone other
than Tenant, Landlord shall have the right, after default by Tenant, to collect
Rent from the assignee, subtenant, or occupant, and apply the net amount
collected to Rent. No assignment, sublease, occupancy, or collection shall be
deemed (a) a waiver of the provisions of this Section 9. 1; (b) the acceptance
of the assignee, subtenant, or occupant as Tenant; or (c) a release of Tenant
from the further performance by Tenant of covenants on the part of Tenant
contained in this Lease. The consent by Landlord to an assignment or sublease
shall not be construed to relieve Tenant from obtaining Landlord's prior written
consent in writing to any further assignment or sublease. No permitted subtenant
shall have the right to assign or encumber its sublease
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or further sublease all or any portion of its subleased space, or otherwise
permit the subleased space or any part of its subleased space to be used or
occupied by others, without Landlord's prior written consent in each instance.
9.2 Submission of Information. If Tenant requests Landlord's consent to
a specific assignment or subletting, Tenant shall submit in writing to Landlord
(a) the name and address of the proposed assignee or subtenant; (b) the business
terms of the proposed assignment or sublease; (c) reasonably satisfactory
information as to the nature and character of the business of the proposed
assignee or subtenant, and as to the nature of its proposed use of the space;
(d) banking, financial, or other credit information reasonably sufficient to
enable Landlord to determine the financial responsibility and character of the
proposed assignee or subtenant; and (e) the proposed form of assignment or
sublease for Landlord's review and reasonable approval or disapproval.
9.3 Payments to Landlord. If Landlord consents to a proposed assignment
or sublease, Landlord shall have the right to require Tenant to pay to Landlord
a sum equal to (a) any Rent or other consideration paid to Tenant by any
proposed transferee that (after deducting the costs of Tenant, if any, in
effecting the assignment or sublease, including reasonable alterations costs,
commissions and legal fees) is in excess of the Rent allocable to the
transferred space then being paid by Tenant to Landlord pursuant to this Lease;
(b) any other profit or gain (after deducting any necessary expenses incurred)
realized by Tenant from any such sublease or assignment; and (c) Landlord's
reasonable attorneys' fees and costs incurred in connection with negotiation,
review, and processing of the transfer. All such sums payable shall be payable
to Landlord at the time the next payment of Monthly Rent is due.
9.4 Prohibited Transfers. The transfer of a majority of the issued and
outstanding capital stock of any corporate Tenant or subtenant of this Lease, or
a majority of the total interest in any partnership Tenant or subtenant, however
accomplished, and whether in a single transaction or in a series of related or
unrelated transactions, shall be deemed an assignment of this Lease or of such
sublease requiring Landlord's consent in each instance. For purposes of this
Article 9, the transfer of outstanding capital stock of any corporate Tenant
shall not include any sale of such stock by persons other than those deemed
"insiders" within the meaning of the Securities Exchange Act of 1934, as
amended, effected through the "over-the-counter market" or through any
recognized stock exchange.
9.5 Permitted Transfer. Landlord consents to an assignment of this
Lease or sublease of all or part of the Premises to a wholly-owned subsidiary of
Tenant, to a corporation of which Tenant is a wholly-owned subsidiary, or to a
corporation which is a wholly-owned subsidiary of Tenant's parent corporation;
provided that Tenant promptly provides Landlord with a fully executed copy of
such assignment or sublease. Tenant shall not thereby be released from liability
under this Lease.
9.6 Remedies. If Tenant believes that Landlord has withheld its consent
pursuant to this Article 9 unreasonably, Tenant's sole remedy shall be to seek a
declaratory judgment that Landlord has unreasonably withheld its consent or an
order of specific performance or mandatory injunction of the Landlord's
agreement to give its consent.
ARTICLE 10: RULES AND REGULATIONS
10.1 Tenant shall at all times observe faithfully, and comply with, the
rules and regulations set forth in Exhibit D and shall cause its employees,
agents, licensees, and visitors to do likewise. Landlord shall have the right
from time to time reasonably to amend, delete, or modify existing rules and
regulations, or adopt reasonable new rules and regulations for the use, safety,
cleanliness, and care of the Premises, the Building, and the Project, and the
comfort, quiet, and convenience of occupants of the Project. Modifications or
additions to the rules and regulations shall be effective upon thirty (30)
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days' prior written notice to Tenant from Landlord. In the event of any breach
of any rules or regulations or any amendments or additions to such rules and
regulations, Landlord shall have all remedies that this Lease provides for
default by Tenant, and shall in addition have any remedies available at law or
in equity, including the right to enjoin any breach of such rules and
regulations. Landlord shall not be liable to Tenant for violation of such rules
and regulations by any other tenant, its employees, agents, visitors, or
licensees or any other person. In the event of any conflict between the
provisions of this Lease and the rules and regulations, the provisions of this
Lease shall govern.
ARTICLE 11: COMMON AREAS
11.1 As used in this Lease, the term "Common Areas" means, without
limitation, the hallways, entryways, stairs, elevators, driveways, parking
areas, walkways, terraces, docks, loading areas, restrooms, trash facilities,
and all other areas and facilities in the Project that are provided and
designated from time to time by Landlord for the general nonexclusive use and
convenience of Tenant with Landlord and other tenants of the Project and their
respective employees, invitees, licensees or other visitors. Landlord grants
Tenant, its employees, invitees, licensees and other visitors a nonexclusive
license for the Term to use the Common Areas in common with others entitled to
use the Common Areas, subject to the terms and conditions of this Lease.
Landlord shall have the right, without advance written notice to Tenant, and
without any liability to Tenant, or Tenant's employees, invitees, licensees and
other visitors, but, subject to the condition that Landlord shall take no action
permitted under this Article 11 in such a manner as to materially impair or
adversely affect Tenant's substantial benefit and enjoyment of the Premises,
Landlord shall have the right to:
(a) Close off any of the Common Areas to whatever extent required
in the opinion of Landlord and its counsel to prevent a dedication of any of the
Common Areas or the accrual of any rights by any person or the public to the
Common Areas;
(b) Temporarily close any of the Common Areas for maintenance,
alteration, or improvement purposes; and
(c) Change the size, use, shape, or nature of any such Common
Areas, including erecting additional buildings on the Common Areas, expanding
the existing Building or other buildings to cover a portion of the Common Areas,
converting Common Areas to a portion of the Building or other buildings, or
converting any portion of the Building (excluding the Premises) or other
buildings to common areas. Upon erection of any additional buildings or change
in common areas, the portion of the Project upon which buildings or structures
have been erected will no longer be deemed to be a part of the Common Areas. In
the event of any such changes in the size or use of the Building or Common Areas
of the Building or Project, Landlord shall make an appropriate adjustment in the
Rentable Area of the Building or the Building's prorata share of exterior Common
Areas of the Project, as appropriate, and a corresponding adjustment to Tenant's
Share of the Operating Expenses payable pursuant to Article 5 of this Lease.
ARTICLE 12: LANDLORD'S SERVICES
12.1 Landlord's Repair and Maintenance. Subject to Article 18, Landlord
shall maintain, repair and restore the Common Areas of the Building and Project,
including lobbies, stairs, elevators, corridors, and restrooms, the windows in
the Building, the mechanical, heating, ventilation and air conditioning,
plumbing and electrical equipment serving the Building (excluding, however, any
plumbing in the Premises or any above building standard heating, air
conditioning or lighting equipment in the Premises, which repair shall be
Tenant's sole responsibility), and the structure of the Building in reasonably
good order and condition; provided, however, that any such work necessitated by
the negligence or wilful misconduct of Tenant, or Tenant's employees, agents,
invitees or licenses, shall be paid for in full by Tenant.
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12.2 Landlord's Other Services.
(a) Landlord shall furnish the Premises with: (1) electricity for
lighting and the operation of low-wattage office machines (such as desktop
micro-computers, desktop calculators, and typewriters) during Business Hours (as
that term is defined below), although Landlord shall not be obligated to furnish
more power to the Premises than is proportionally allocated to the Premises
under the Building design; (2) heat and air conditioning reasonably required for
the comfortable occupation of the Premises during Business Hours; (3) access and
elevator service; (4) lighting replacement during Business Hours (for building
standard lights, but not for any special Tenant lights, which will be replaced
at Tenant's sole cost and expense); (5) restroom supplies; (6) window washing
with reasonable frequency, as determined by Landlord; and (7) daily janitorial
service on weekdays. Landlord may provide, but will not be obligated to provide,
any such services (except access and elevator service) at times other than
Business Hours.
(b) Tenant shall have the right to purchase for use during Business
Hours and non-business hours the services described in clauses (a)(1) and (2) in
excess of the amounts Landlord has agreed to furnish so long as (1) Tenant gives
Landlord reasonable prior written notice of its desire to do so; (2) the excess
services are reasonably available to Landlord and to the Premises; and (3)
Tenant pays as Additional Rent (at the time the next payment of Monthly Rent is
due) Landlord's then applicable standard charge for such excess service or if no
standard charge then applies, a reasonable charge as determined by Landlord; all
subject to the notice and other procedures established by Landlord from time to
time for providing such additional or excess services.
(c) The term "Business Hours" means 8:00 a.m. to 6:00 p.m. on
Monday through Friday, except holidays (as that term is defined below), and 8:00
a.m. to 12:00 noon on Saturdays, except holidays. The term "holidays" means New
Year's Day, Presidents Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day, or other day generally observed if one of
the holidays specified above falls on a Saturday or Sunday.
12.3 Tenant's Costs. Whenever equipment or lighting (other than
building standard lights) is used in the Premises by Tenant and such equipment
or lighting affects the temperature otherwise normally maintained by the design
of the Building's air conditioning system, Landlord shall have the right, after
prior written notice to Tenant, to install supplementary air conditioning
facilities in the Premises or otherwise modify the ventilating and air
conditioning system serving the Premises; and the cost of such facilities,
modifications, and additional service shall be paid by Tenant, within thirty
(30) days of receipt of Landlord's invoice, as Additional Rent. If Landlord
reasonably believes that Tenant is using more power than Landlord is required to
furnish pursuant to Section 12.2, Landlord shall have the right to install
separate meters of Tenant's power usage, and Tenant shall pay for the cost of
such excess power as Additional Rent, together with the cost of installing any
risers, meters, or other facilities that may be necessary to furnish or measure
such excess power to the Premises, such payment to be made within thirty (30)
days of receipt of Landlord's invoice.
12.4 Limitation on Liability. Landlord shall not be in default under
this Lease or liable to Tenant or persons claiming through Tenant for a failure
to supply, or interruption of, utility services, for power surges or a failure
to supply or interruption of other services required to be provided by Landlord
unless caused by Landlord's gross negligence. Landlord shall, however, use
reasonable efforts to restore such utilities or other services as soon as is
reasonably practicable. Landlord reserves the right temporarily to discontinue
such services at such times as may be necessary by reason of accident; repairs,
alterations or improvements; strikes; lockouts; riots; acts of God; governmental
preemption in connection with a national or local emergency; any rule,
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order, or regulation of any governmental agency; conditions of supply and demand
that make any product or material unavailable; Landlord's compliance with any
mandatory governmental energy conservation or environmental protection program,
or any voluntary governmental energy conservation program at the request of or
with consent or acquiescence of Tenant; or any other happening beyond the
control of Landlord. Landlord shall not be liable for damages to person or
property or for injury to, or interruption of, business for any discontinuance
permitted under the preceding sentence, nor shall such discontinuance in any way
be construed as an eviction of Tenant or cause an abatement of Rent or operate
to release Tenant from any of Tenant's obligations under this Lease. Landlord
shall not be liable to Tenant for any theft or mysterious disappearance of
property of Tenant or its employees from the Premises or Project unless
attributable to Landlord's gross negligence. In the event of invasion, mob,
riot, public excitement, strikes, lockouts, or other circumstances rendering
such action advisable in Landlord's sole opinion, Landlord shall have the right
to prevent access to the Building or Project during the continuance of the same
by such means as Landlord, in its sole discretion, may deem appropriate,
including without limitation locking doors and closing parking areas and other
Common Areas.
ARTICLE 13: TENANT'S CARE OF THE PREMISES
Subject to Article 18, Tenant shall maintain the Premises (including
Tenant's equipment, personal property, and trade fixtures located in the
Premises) in their condition at the time they were delivered to Tenant,
reasonable wear and tear excluded. Tenant shall immediately advise Landlord of
any damage to the Premises, Building or the Project. Tenant shall be liable for
all damage or injury to the Premises, Building, the Project, or the fixtures,
appurtenances, and equipment in the Premises, Building or the Project that is
caused by Tenant, its agents, employees, or invitees to the extent: (1) not
attributable to risk required by this Lease to be insured against, or actually
insured against, by Landlord under Section 6.1(a) and (b); or (ii) Landlord
otherwise fails to receive full reimbursement for any such damage or injury
under the policies insuring risks required to be insured, or actually insured
against by Landlord under Section 6.1 (a) and (b). Under clause (ii) above, and
without limiting the generality thereof, Tenant shall be liable for Landlord's
deductible amounts under applicable insurance policies, and if Landlord elects
to self-insure under Section 6.1, Tenant shall be liable for an amount which
would be a reasonable deductible amount by reference to the insurance maintained
in similar projects in the vicinity of the Project. Landlord shall have the
right but not the obligation to repair such damage at Tenant's expense, and such
expense (plus fifteen percent (15%) of such expense for Landlord's overhead)
will be collectible as Additional Rent and will be paid by Tenant within thirty
(30) days after receipt of Landlord's invoice.
ARTICLE 14: ALTERATIONS
14.1 General.
(a) Except for the work contemplated by the Workletter, during the
Term, Tenant shall not make or allow to be made any alterations, additions,
improvements or installation (collectively "Alterations") to or of the Premises
or any part of the Premises, or attach any fixtures or equipment to the
Premises, without first obtaining Landlord's written consent. Landlord agrees
not to withhold or delay its consent unreasonably to proposed Alterations which
are not "material". Alterations shall be deemed "material" if they affect
structural elements of the Building, are visible from the exterior of the
Premises, affect Building systems (i.e., HVAC, electrical, plumbing or
mechanical systems), involve an expenditure of more than $5,000 for all related
work or if the installation or removal of the Alteration would cause more than
minor damage to the Premises. All alterations shall be performed by contractors
approved by Landlord and
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be subject to conditions reasonably specified by Landlord (which if the
reasonably estimated cost of the work exceeds $5,000 may include requiring the
posting of a payment and completion bond with Landlord named as obligee); and
(b) All Alterations, whether temporary or permanent in character,
made in or upon the Premises by Landlord, shall be and remain Landlord's
property. All Alterations made by Tenant shall be and remain the property of
Tenant during the Term, and subject to Tenant's rights under Article 16, to
remove trade fixtures and equipment the removal of which will not cause
structural damage or material non-structural damage to the Premises ("Removable
Trade Fixtures"), at the end of the Term shall remain on the Premises without
compensation to Tenant, unless when consenting to such Alterations, additions or
improvements, Landlord has advised Tenant in writing that such alterations,
additions or improvements must be removed at the expiration or other termination
of this Lease.
14.2 Free-Standing Partitions. Tenant shall have the right to install or
relocate free-standing work station partitions without Landlord's prior written
consent, so long as no building or other governmental permit is required for
their installation or relocation; however, if a permit is required, Landlord
shall not unreasonably withhold its consent to such relocation or installation.
Free-standing work station partitions for which Tenant pays shall be part of
Tenant's Removable Trade Fixtures for all purposes under this Lease.
ARTICLE 15: MECHANICS' LIENS
15.1 Indemnity and Discharge: Tenant shall pay or cause to be paid all
costs and charges (a) for work done by Tenant or caused to be done by Tenant in
or to the Premises, and (b) for all materials furnished for or in connection
with such work. Tenant shall indemnify Landlord against and hold Landlord, the
Premises and the Project free and harmless from all mechanics' liens and claims
of liens, and all other liabilities, liens, claims and demands on account of
such work by or on behalf of Tenant, other than work performed by Landlord
pursuant to the Workletter. If any such lien, at any time, is filed against the
Premises or any part of the Project, Tenant shall cause such lien to be
discharged of record within ten (10) days after the filing of such lien, except
that if Tenant desires to contest such lien, it shall furnish Landlord, within
such ten (10) day period, security reasonably satisfactory to Landlord of at
least one hundred fifty percent (150%) of the amount of the claim, plus
estimated costs and interest, or comply with such statutory procedures as may be
available to release the lien. If a final judgment establishing the validity or
existence of a lien for any amount is entered, Tenant shall pay and satisfy the
same at once. If Tenant fails to pay any charge for which a mechanics' lien has
been filed, and has not given Landlord security as described above, or has not
complied with such statutory procedures as may be available to release the lien,
Landlord shall have the right, at its option, to pay such charge and related
costs and interest, and the amount so paid, together with reasonable attorneys'
fees incurred in connection with such lien, shall be immediately due from Tenant
to Landlord as Additional Rent. Nothing contained in this Lease shall be deemed
the consent or agreement of Landlord to subject Landlord's interest in the
Project to liability under any mechanics' or other lien law. If Tenant receives
written notice that a lien has been or is about to be filed against the Premises
or the Project, or that any action affecting title to the Project has been
commenced on account of work done by or for or materials furnished to or for
Tenant, it shall immediately give Landlord written notice of such notice. At
least fifteen (15) days prior to the commencement of any work (including but not
limited to any maintenance, repairs, Alterations or installations) in or to the
Premises, by or for Tenant, Tenant shall give Landlord written notice of the
proposed work and the names and addresses of the persons supplying labor and
materials for the proposed work. Landlord shall have the right to post notices
of non-responsibility or similar written notices on the
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Premises in order to protect the Premises against any such liens.
ARTICLE 16: END OF TERM
16.1 At the end of the Term, Tenant shall promptly quit and surrender the
Premises broom-clean and in good order and repair, ordinary wear and tear and
damage from casualty which Tenant is not required by other provisions of this
Lease to repair excepted. If Tenant is not then in default, Tenant shall have
the right to remove from the Premises any Removable Trade Fixtures (as defined
in Section 14.1 (b)), unattached equipment, and movable furniture placed in the
Premises by Tenant. Whether or not Tenant is in default, Tenant shall remove
such Alterations, equipment, and furniture as Landlord has required under
Article 14. Tenant shall fully and properly repair any damage occasioned by the
removal of any Removable Trade Fixtures, equipment, furniture and Alterations.
All trade fixtures, equipment, furniture, inventory, effects and Alterations
left on the Premises after the end of the Term shall be deemed conclusively to
have been abandoned and may be appropriated, sold, stored, destroyed, or
otherwise disposed of by Landlord without written notice to Tenant or any other
person and without obligation to account for them. Alternatively, Landlord, at
its option, shall have the right to declare the Term to be continuing until all
such property is removed and the Premises surrendered to Landlord in the
condition required by this Lease, and Monthly Rent (at the rate specified in
Section 27.11) and Additional Rent shall continue to accrue and shall be payable
upon demand. Tenant shall pay Landlord for all expenses incurred in connection
with the removal of such property, including but not limited to the cost of
repairing any damage to the Building or Premises caused by the removal of such
property. Tenant's obligation to observe and perform this covenant shall survive
the expiration or other termination of this Lease.
ARTICLE 17: EMINENT DOMAIN
17.1 If all of the Premises are taken by exercise of the power of eminent
domain (or conveyed by Landlord in lieu of such exercise) this Lease shall
terminate on a date (the "Termination Date") which is the earlier of the date
upon which the condemning authority takes possession of the Premises or the date
on which title to the Premises is vested in the condemning authority. If more
than twenty-five percent (25%) of the Rentable Area of the Premises is so taken,
Tenant shall have the right to cancel this Lease by written notice to Landlord
given within twenty (20) days after the Termination Date. If less than
twenty-five percent (25%) of the Rentable Area of the Premises is so taken, or
if the Tenant does not cancel this Lease according to the preceding sentence,
the Monthly Rent shall be abated in the proportion of the Rentable Area of the
Premises so taken to the Rentable Area of the Premises immediately before such
taking, and Tenant's Share shall be appropriately recalculated. If twenty-five
percent (25%) or more of the Building or the Project is so taken, Landlord may
cancel this Lease by written notice to Tenant given within thirty (30) days
after the Termination Date. In the event of any such taking, the entire award
shall be paid to Landlord and Tenant shall have no right or claim to any part of
such award; however, Tenant shall have the right to assert a claim against the
condemning authority in a separate action, so long as Landlord's award is not
otherwise reduced, for Tenant's moving expenses and leasehold improvements owned
by Tenant.
ARTICLE 18: DAMAGE AND DESTRUCTION
18.1 (a) If the Premises or the Building are damaged by fire or other
casualty, Landlord shall give Tenant written notice of the time which will be
needed to repair such damage, as determined by Landlord in its reasonable
discretion, and the election (if any) which Landlord has made pursuant to this
Article 18. Such notice shall be given before the 30th day (the "Notice Date")
after the fire or other casualty.
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(b) If the Premises or the Building are damaged by fire or
other casualty to an extent which can be repaired within one hundred twenty
(120) days after the Notice Date without incurring overtime or extraordinary
charges, as reasonably determined by Landlord, Landlord shall promptly begin to
repair the damage after the Notice Date and will pursue the completion of such
repair with reasonable diligence. In that event this Lease shall continue in
full force and effect except that Monthly Rent shall be abated on a prorata
basis from the date of the damage until the date of the completion of such
repairs (the "Repair Period") based on the proportion of the Rentable Area of
the Premises Tenant is unable to use and does not actually use during the Repair
Period.
(c) If the Premises or the Building are damaged by fire or
other casualty to an extent that they cannot be repaired within one hundred
twenty (120) days after the notice date without incurring overtime or
extraordinary charges, as reasonably determined by Landlord, then (1) Landlord
shall have the right to cancel this Lease as of the date of such damage by
written notice given to Tenant on or before the Notice Date; or (2) Tenant may
cancel this Lease as of the date of such damage by written notice given to
Landlord within ten (10) days after Landlord's delivery of a written notice that
the repairs cannot be made within such one hundred twenty (120) day period
provided, however, that Tenant shall not have a cancellation right if the damage
is confined to parts of the Building other than the Premises and those parts of
the Common Area reasonably necessary for Tenant's access to, and enjoyment of,
the Premises. If neither Landlord nor Tenant so elects to cancel this Lease,
Landlord shall proceed with reasonable diligence to repair the Building and
Premises and Monthly Rent shall be abated on a prorata basis during the repair
period based in the proportion of the Rentable Area of the Premises Tenant is
unable to use and does not actually use during the Repair Period.
(d) If any such damage by fire or other casualty is the result
of the willful conduct or negligence or failure to act of Tenant, its agents,
contractors, employees, or invitees, there shall be no abatement of Monthly Rent
as otherwise provided for in this Article 18 and Tenant shall have no right to
cancel this Lease. Tenant shall have no rights to terminate this Lease on
account of any damage to the Premises, the Building, or the Project, except as
set forth in this Lease.
ARTICLE 19: SUBORDINATION
19.1 General. This Lease and Tenant's rights under this Lease are subject
and subordinate to any ground or underlying lease, mortgage, indenture, deed of
trust, or other lien encumbrance (each a "Superior Lien"), together with any
renewals, extensions, modifications, consolidations, and replacements of such
Superior Lien, now or after the date affecting or placed, charged, or enforced
against the Land, the Building, or all or any portion of the Project or any
interest of Landlord in them or Landlord's interest in this Lease and the
leasehold estate created by this Lease (except to the extent any such instrument
expressly provides that this Lease is superior to such instrument or the holder
of any such Superior Lien elects to treat this Lease as Superior). This
provision shall be self-operative and no further instrument of subordination
shall be required in order to effect it. Notwithstanding the foregoing, Tenant
shall execute, acknowledge, and deliver to Landlord, within twenty (20) days
after written demand by Landlord, such documents as may be reasonably requested
by Landlord or the holder of any Superior Lien to confirm or further effect any
such subordination.
19.2 Attornment and Nondisturbance. Tenant agrees that in the event that
any holder of a Superior Lien succeeds to Landlord's interest in the Premises,
Tenant shall pay to such holder all Rents subsequently payable under this Lease.
Furthermore, if the Superior Lien instrument provides that this Lease is
superior to the Superior Lien or if the holder of the Superior Lien elects to so
treat this Lease, Tenant agrees that in the event of the enforcement by the
holder of a Superior Lien of the remedies provided for
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by law or by such Superior Lien, Tenant shall, upon request of any person or
party succeeding to the interest of Landlord as a result of such enforcement,
automatically become the Tenant of and attorn to such successor in interest
without change in the terms or provisions of this Lease. Such successor in
interest shall not be bound by or liable for:
(a) Any payment of Rent for more than one month in advance,
except prepayments in the nature of security for the performance by Tenant of
its obligations under this Lease;
(b) Any amendment or modification of this Lease made without
the written consent of such successor in interest (if such consent was required
under the terms of such Superior Lien);
(c) Any claim against Landlord arising prior to the date on
which such successor in interest succeeded to Landlord's interest; or
(d) Any claim or offset against Rent.
Upon request by such successor in interest and without cost to Landlord or
such successor in interest, Tenant shall, within twenty (20) days after written
demand, execute, acknowledge, and deliver an instrument or instruments
confirming the attornment, so long as such instrument provides that such
successor in interest will not disturb Tenant in its use of the Premises in
accordance with, and as long as no event of default has occurred or continues
under, this Lease.
ARTICLE 20: ENTRY BY LANDLORD
20.1 Landlord, its agents, employees, and contractors may enter the
Premises at any time in response to an emergency and at otherwise reasonable
hours to:
(a) Inspect the Premises;
(b) Exhibit the Premises to prospective purchasers, lenders,
or tenants;
(c) Determine whether Tenant is complying with all of its
obligations in this Lease;
(d) Supply janitorial service and any other service to be
provided by Landlord to Tenant according to this Lease;
(e) Post written notices of nonresponsibility or similar
notices; or
(f) Make repairs required of Landlord under the terms of this
Lease or make repairs to any adjoining space or utility services or make
repairs, alterations, or improvements to any other portion of the Building;
however, all such work will be done as promptly as reasonably possible and so as
to cause as little interference to Tenant as reasonably possible.
Tenant, by this Article 20, waives any claim against Landlord, its agents,
employees, or contractors for damages for any injury or inconvenience to or
interference with Tenant's business, any loss of occupancy or quiet enjoyment of
the Premises, or any other loss occasioned by any entry in accordance with this
Article 20. Landlord shall at all times have and retain a key with which to
unlock all of the doors in, on, or about the Premises (excluding Tenant's
vaults, safes, and similar areas designated in writing by Tenant in advance).
Landlord shall have the right to use any and all means Landlord may deem proper
to open doors in and to the Premises in an emergency in order to obtain
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entry to the Premises, provided that Landlord shall promptly repair any damages
caused by any forced entry. Any entry to the Premises by Landlord in accordance
with this Article 20 shall not be construed or deemed to be a forcible or
unlawful entry into or a detainer of the Premises or an eviction, actual or
constructive, of Tenant from the Premises or any portion of the Premises, nor
shall any such entry entitle Tenant to damages or an abatement of Monthly Rent,
Additional Rent, or other charges that this Lease requires Tenant to pay.
ARTICLE 21: INDEMNIFICATION, WAIVER, AND RELEASE
21.1 Indemnification. Except for any injury or damage to persons on the
Premises that is proximately caused by or results proximately from the gross
negligence or wilful misconduct of Landlord, its employees, or agents, and
subject to the provisions of Section 6.4, Tenant shall neither hold nor attempt
to hold Landlord, its employees, officers, directors or agents liable for, and
Tenant shall indemnify and hold harmless Landlord, its employees, and agents
from and against, any and all demands, claims, causes of action, fines,
penalties, damages (including consequential damages), liabilities, judgments,
and expenses (including without limitation reasonable attorneys' fees) incurred
in connection with or arising from:
(a) the use or occupancy or manner of use or occupancy of the
Premises by Tenant or any person claiming under Tenant;
(b) any activity, work, or thing done or permitted by Tenant, its
employees, agents, contractors, or invitees in or about the Premises, the
Building, or the Project;
(c) any breach by Tenant or its employees, agents, contractors, or
invitees of this Lease; and
(d) any injury or damage to the person, property, or business of
Tenant, its employees, agents, contractors, or invitees entering upon the
Premises, the Building or the Project under the express or implied invitation of
Tenant.
If any action or proceeding is brought against Landlord, its employees,
officers, directors or agents by reason of any such claim for which Tenant has
indemnified Landlord, Tenant, upon written notice from Landlord, shall defend
the same at Tenant's expense, with counsel reasonably satisfactory to Landlord.
21.2 Waiver and Release. Tenant, as a material part of the consideration
to Landlord for this Lease, by this Section 21.2 waives and releases all claims
against Landlord, its employees, officers, directors and agents with respect to
all matters for which Landlord has disclaimed liability pursuant to the
provisions of this Lease. It is the intention of the parties that Landlord shall
have no liability for, and shall be indemnified by Tenant from, damages and
liabilities incurred by Tenant or any third party caused by Landlord's ordinary
negligence, or that of persons for whom Landlord is legally responsible, and
which arise from or in connection with the use and occupancy of the Premises and
Project by Tenant, its employees, agents, contractors or employees. The
provisions of Section 27.13 are expressly made applicable to all waiver,
indemnity and other exculpatory provisions contained in this Lease.
ARTICLE 22: SECURITY DEPOSIT
22.1 Tenant has deposited the Security Deposit with Landlord as security
for the full, faithful, and timely performance of every provision of this Lease
to be performed by Tenant. If Tenant defaults with respect to any provision of
this Lease, including but not limited to the provisions relating to the payment
of Rent, Landlord may but shall not
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be obligated to use, apply, or retain all or any part of the Security Deposit
for the payment of any Rent, or any other sum in default, or for the payment of
any other amount Landlord may spend or become obligated to spend by reason of
Tenant's default, or to compensate Landlord for any other loss or damage
Landlord may suffer by reason of Tenant's default. If any portion of the
Security Deposit is so used, applied, or retained, Tenant shall within five (5)
days after written demand deposit cash with Landlord in an amount sufficient to
restore the Security Deposit to its original amount. Landlord shall not be
required to keep the Security Deposit separate from its general funds, and
Tenant shall not be entitled to interest on the Security Deposit. The Security
Deposit shall not be deemed a limitation on Landlord's damages or a payment of
liquidated damages or a payment of the Monthly Rent due for the last month of
the Term. If Tenant fully, faithfully, and timely performs every provision of
this Lease to be performed by it, the Security Deposit or any balance of the
Security Deposit will be returned to Tenant within sixty (60) days after the
expiration of the Term. Landlord shall have the right to deliver the funds
deposited under this Lease by Tenant to the purchaser of the Building in the
event the Building is sold, and after such time Landlord shall have no further
liability to Tenant with respect to the Security Deposit.
ARTICLE 23: QUIET ENJOYMENT
23.1 Landlord covenants and agrees with Tenant that so long as Tenant pays
the Rent and observes and timely performs all the terms, covenants, and
conditions of this Lease on Tenant's part to be observed and performed, Tenant
may peaceably and quietly enjoy the premises subject, nevertheless, to the terms
and conditions of this Lease, and Tenant's possession shall not be disturbed by
anyone claiming by, through, or under Landlord.
ARTICLE 24: EFFECT OF SALE
24.1 A sale, conveyance, or assignment of the Building or the Project
shall operate to release Landlord from liability from and after the effective
date of such sale, conveyance, or assignment upon all of the covenants, terms,
and conditions of this Lease, express or implied, except those liabilities that
arose prior to such effective date, and, after the effective date of such sale,
conveyance, or assignment, Tenant shall look solely to Landlord's successor in
interest in and to this Lease. This Lease will not be affected by any such sale,
conveyance, or assignment, and Tenant shall attorn to Landlord's successor in
interest to this lease subject to the provisions of Section 19.2.
ARTICLE 25: DEFAULT
25.1 Events of Default. The following events are referred to,
collectively, as "Events of Default" or, individually, as an "Event of Default":
(a) Tenant defaults in the due and punctual payment of Rent,
and such default continues for five (5) days after written notice from Landlord.
Such notice shall be in form and content sufficient to satisfy the notice
requirement of California Code of Civil Procedure ss.1161(2) and shall
constitute the notice required by that section. Tenant shall not be entitled to
more than one five (5) day written notice for monetary defaults during any
consecutive twelve (12) month period, and if after such written notice any Rent
is not paid when due, an Event of Default shall be considered to have occurred
and Landlord may give a three (3) day notice to pay or quit under California
Code of Civil Procedure ss.1161(2);
(b) Tenant vacates or abandons the Premises;
(c) This Lease or the Premises or any part of the Premises are
taken upon execution or by other process of law directed against Tenant, or are
taken upon or subject to any attachment by any creditor of Tenant or claimant
against Tenant, and said
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attachment is not discharged or disposed of within fifteen (15) days after its
levy;
(d) Tenant or any guarantor of this Lease files a voluntary
petition in bankruptcy or insolvency or for reorganization or arrangement under
the bankruptcy laws of the United States or under any insolvency act of any
state, or admits the material allegations of any such petition by answer or
otherwise, or is dissolved or makes an assignment for the benefit of creditors;
(e) Involuntary proceedings under any such bankruptcy law or
insolvency act or for dissolution are instituted against Tenant or any guarantor
of the Lease, or a receiver or trustee is appointed for all or substantially all
of the property of Tenant or any guarantor, and such proceeding is not dismissed
or such receivership or trusteeship vacated within sixty (60) days after such
institution or appointment;
(f) Tenant fails to take possession of the Premises on the
Commencement Date of the Term;
(g) Tenant breaches any of the other agreements, terms,
covenants, or conditions that this Lease requires Tenant to perform, and such
breach either cannot be cured or, if curable, continues for a period of fifteen
(15) days after written notice from Landlord to Tenant or, if such breach is
curable but cannot be cured reasonably within such fifteen (15) day period,
Tenant fails to diligently commence to cure such breach within fifteen (15) days
after written notice from Landlord and to complete such cure within a reasonable
time thereafter. Such fifteen (15) day notice of a curable breach shall be in
form and content sufficient to satisfy the notice requirement of California Code
of Civil Procedure ss.1161(3) and shall constitute the notice required by that
Section;
(h) Any financial statement or certificate, or representation
or warranty at any time furnished or made to Landlord by Tenant or any guarantor
of this Lease was false or misleading in any material respect as of the date
thereof or omits any information necessary to make such statement, certificate,
representation and warranty not materially misleading; or
(i) Any guarantor of this Lease commits a material breach of
the provisions of the guaranty agreement.
25.2 Landlord's Remedies. If any one or more Events of Default set forth
in Section 25.1 occurs, Landlord shall have the right, at its election, to
exercise one or more of the following remedies, which shall be cumulative and
not exclusive:
(a) To terminate Tenant's rights under this Lease, re-enter
the Premises, remove all persons and personal property therefrom, and recover
from Tenant the amounts specified by Section 25.3.
(b) Even though Tenant has breached this Lease or abandoned
the Premises, to continue the Lease in effect for so long as Landlord does not
terminate Tenant's right to possession and to enforce all of Landlord's rights
and remedies under the Lease, including the right to recover all Rent and other
sums due Landlord as they become due. Landlord shall also have the right to
recover from Tenant, whether before or after Tenant's right to possession of the
Premises is terminated, all expenses incurred by Landlord in reletting the
Premises or attempting to do so, including without limitation, reasonable legal
expenses, remodeling costs and brokerage commissions.
(c) Without further demand or notice to cure any Event of
Default and to charge Tenant for the cost of effecting such cure, including
without limitation reasonable attorneys' fees and interest on the amount so
advanced at the rate set forth in Section
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27.21, provided that Landlord shall have no obligation to cure any such Event of
Default.
(d) To exercise all other remedies available to Landlord under
law. If Landlord elects the remedy provided in subsection (b), neither acts of
maintenance or preservation of efforts to relet the Premises nor the appointment
of a receiver upon Landlord's initiative shall constitute a termination of
Tenant's right to possession. If a reletting occurs, Tenant's right to
possession shall terminate upon execution of the new lease, whereupon this Lease
shall terminate and Landlord shall be entitled to recover from Tenant the
amounts provided for in Section 25.3.
25.3 Continuing Liability After Termination. Upon termination of this
Lease, Landlord shall have the right to recover from Tenant:
(a) The worth at the time of award of the unpaid Rent that had
been earned at the time of termination;
(b) The worth at the time of award of the amount by which the
unpaid Rent that would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided;
(c) The worth at the time of award of the amount by which the
unpaid Rent for the balance of the Term of this Lease (had the same not been so
terminated by Landlord) after the time of award exceeds the amount of such
rental loss that Tenant proves could be reasonably avoided; and
(d) Any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom, including without limitation all reasonable legal expenses,
remodeling costs and brokerage commissions in reletting the Premises or
attempting to do so.
The "worth at the time of award" of the amounts referred to in clauses
(a) and (b) above is computed by adding interest at the per annum interest rate
described in Section 27.21 on the date on which this Lease is terminated from
the date of termination until the time of the award. The "worth at the time of
award" of the amount referred to in clause (c) above is computed by discounting
such amount at the discount rate of the Federal Reserve Bank of San Francisco,
at the time of award Plus one percent (1%).
25.4 Cumulative Remedies. Each right and remedy provided for in this Lease
is cumulative and is in addition to every other right or remedy provided for in
this Lease or now or after the Lease Date existing at law or in equity or by
statute or otherwise, and the exercise or beginning of the exercise by Landlord
of any one or more of the rights or remedies provided for in this Lease or now
or after the Lease Date existing at law or in equity or by statute or otherwise
will not preclude the simultaneous or later exercise by Landlord of any or all
other rights or remedies provided for in this Lease or now or after the Lease
Date existing at law or in equity or by statute or otherwise. All costs incurred
by Landlord in collecting any amounts and damages owing by Tenant pursuant to
the provisions of this Lease or to enforce any provision of this Lease,
including reasonable attorneys' fees from the date any such matter is turned
over to an attorney, whether or not one or more actions are commenced by
Landlord, shall also be recoverable by Landlord from Tenant.
ARTICLE 26: PARKING
26.1 Tenant shall be entitled to use the Parking Spaces during the Term
subject to the rules and regulations set forth in Exhibit D, and any amendments
or additions to
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them. The Parking Charges set forth in Section 1.1(r), if any, will be due and
payable in advance at the same time and place as Monthly Rent. The Parking
Spaces will be unassigned, non-reserved, and non-designated unless stated
otherwise in Section 1.1(q). Landlord reserves the right to adjust the Parking
Charges in Landlord's sole discretion at any time after thirty (30) days' prior
written notice, provided that a Parking Charge increase shall not exceed ten
percent (10%) per calendar year cumulatively.
ARTICLE 27: MISCELLANEOUS
27.1 No Offer. This Lease is submitted to Tenant on the understanding that
it will not be considered an offer and will not bind Landlord in any way until
Tenant has duly executed and delivered duplicate originals to Landlord and
Landlord has executed and delivered one of such originals to Tenant.
27.2 Joint and Several Liability. If Tenant is composed of more than one
signatory to this Lease, each signatory shall be jointly and severally liable
with each other signatory for payment and performance according to this Lease.
The act of, written notice to, written notice from, refund to, or signature of
any signatory to this Lease (including without limitation modifications of this
Lease made by fewer than all such signatories) will bind every other signatory
as though every other signatory had so acted, or received or given the written
notice or refund, or signed.
27.3 No Construction Against Drafting Party. Landlord and Tenant
acknowledge that each of them and their counsel have had an opportunity to
review this Lease and that this Lease will not be construed against Landlord
merely because Landlord has prepared it.
27.4 Time of the Essence. Time is of the essence of each and every
provision of this Lease.
27.5 No Recordation. Tenant's recordation of this Lease or any memorandum
or short form of it shall be void and shall constitute a non-curable default
under this Lease.
27.6 No Waiver. The waiver by Landlord of any agreement, condition or
provision contained in this Lease shall not be deemed to be a waiver of any
subsequent breach of the same or any other agreement, condition, or provision
contained in this Lease, nor shall any custom or practice that may grow up
between the parties in the administration of the terms of this Lease be
construed to waive or to lessen the right of Landlord to insist upon the
performance by Tenant in strict accordance with the terms of this Lease. The
subsequent acceptance of Rent by Landlord shall not be deemed to be a waiver of
any preceding breach by Tenant of any agreement, condition, or provision of this
Lease, other than the failure of Tenant to pay the particular Rent so accepted,
regardless of Landlord's knowledge of such preceding breach at the time of
acceptance of such Rent. No waiver of any agreement, condition or provision of
this Lease shall be binding on Landlord unless contained in a writing executed
by a duly authorized officer or agent of Landlord.
27.7 Limitation on Recourse. Tenant specifically agrees to look solely to
Landlord's interest in the Project for the recovery of any judgments against
Landlord and no other assets of Landlord whatsoever shall be available for
satisfaction of any judgment, or be subject to levy, seizure, distraint or other
similar legal proceeding in connection with any such judgment. It is agreed that
Landlord (and its shareholders, venturers, and partners, and their shareholders,
venturers, and partners and all of their officers, directors, and employees)
shall not be personally liable for any such judgments. The provisions contained
in the preceding sentences are not intended to and shall not limit any right
that Tenant might otherwise have to obtain injunctive relief against Landlord or
relief in any suit or action in connection with enforcement or collection from
third parties
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of amounts that may become owing or payable under or on account of insurance
maintained by Landlord.
27.8 Estoppel Certificates. At any time and from time to time but within
ten (10) days after written request by Landlord, Tenant shall execute,
acknowledge, and deliver to Landlord, promptly upon request, a certificate
certifying: (a) that this Lease is unmodified and in full force and effect or,
if there have been modifications, that this Lease is in full force and effect,
as modified, and stating the date and nature of each modification; (b) the date,
if any, to which Monthly Rent and other sums payable under this Lease have been
paid; (c) that no written notice of any default has been delivered to Landlord
which default has not been cured, except as to defaults specified in said
certificate; (d) that there is no Event of Default under this Lease or an event
which, with notice or the passage of time, or both, would result in an Event of
Default under this Lease, except for defaults specified in said certificate; and
(e) such other matters as may be reasonably requested by Landlord. Any such
certificate may be relied upon by any prospective purchaser or existing or
prospective mortgagee or beneficiary under any deed of trust of the Building or
any part of the Project. Tenant's failure to deliver such a certificate within
such time shall be conclusive evidence of the matters set forth in the proposed
certificate sent to Tenant by Landlord.
27.9 Waiver of Jury Trial. Landlord and Tenant by this Section 27.9 waive
trial by jury in any action, proceeding, or counterclaim brought by either of
the parties to this Lease against the other on any matters whatsoever arising
out of or in any way connected with this Lease, the relationship of Landlord and
Tenant, Tenant's use or occupancy of the Premises, or any other claims (except
claims for personal injury) and with respect to any statutory remedy.
27.10 No Merger. The voluntary or other surrender of this Lease by Tenant
or the cancellation of this Lease by mutual agreement of Tenant and Landlord or
the termination of this Lease on account of Tenant's default shall not work a
merger, and shall, at Landlord's option, either (a) terminate all or any
subleases and subtenancies or (b) operate as an assignment to Landlord of all or
any subleases or subtenancies. Landlord's option under this Section 27.10 shall
be exercised by written notice to Tenant and all known sublessees or subtenants
in the Premises or any part of the Premises.
27.11 Holding Over. Tenant shall have no right to remain in possession of
all or any part of the Premises or Project after the expiration of the Term. If
Tenant remains in possession of all or any part of the Premises or Project after
the expiration of the Term, with the express or implied consent of Landlord: (a)
such tenancy will be deemed to be a periodic tenancy from month-to-month only;
(b) such tenancy will not constitute a renewal or extension of this Lease for
any further term; and (c) such tenancy may be terminated by Landlord upon ten
(10) days written notice. In such event, Monthly Rent shall be increased to an
amount equal to one hundred fifty percent (150%) of the Monthly Rent payable
during the last month of the Term, and any other sums due under this Lease shall
be payable in the amount and at the times specified in this Lease. Such
month-to-month tenancy shall be subject to every other term, condition, and
covenant contained in this Lease.
27.12 Notices. Any notice, request, demand, consent, approval, or other
communication required or permitted under this Lease must be in writing and
shall be deemed to have been given: (a) when personally delivered to an officer
or partner of the party to whom the notice is directed; (b) sent by facsimile
with hard copy dispatched within twenty-four (24) hours by overnight carrier or
mail as provided below; (c) deposited with any nationally recognized overnight
carrier that routinely issues receipts; or (d) deposited in any depository
regularly maintained by the United States Postal Service, postage prepaid,
certified mail, return receipt requested, addressed to the party
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for whom it is intended at its address set forth in Section 1.1. Notice so given
shall be deemed to have been received on the date of actual receipt (or the date
on which delivery is refused by the intended recipient). Either Landlord or
Tenant may add additional addresses or change its address for purposes of
receipt of any such communication by giving 10 days' prior written notice of
such change to the other party in the manner prescribed in this Section 27.12.
27.13 Severability. If any provision of this Lease proves to be illegal,
invalid, or unenforceable, the remainder of this Lease will not be affected by
such finding, and in lieu of each provision of this Lease that is illegal,
invalid, or unenforceable a provision will be added as a part of this Lease as
similar in terms to such illegal, invalid, or unenforceable provision as may be
possible and be legal, valid, and enforceable.
27.14 Written Amendment Required. No amendment, alteration, modification
of, or addition to the Lease will be valid or binding unless expressed in
writing and signed by Landlord and Tenant. Tenant agrees to make any
modifications of the terms and provisions of this Lease required or requested by
any lending institution providing financing for the Building, or Project, as the
case may be, provided that no such modifications materially adversely affect
Tenant's rights and obligations under this Lease.
27.15 Entire Agreement. This Lease, the exhibits and addenda, if any,
contain the entire agreement between Landlord and Tenant. No promises or
representations, except as contained in this Lease, have been made to Tenant
respecting the condition or the manner of operating the premises, the Building,
or the Project.
27.16 Captions. The captions of the various articles and sections of this
Lease are for convenience only and do not necessarily define, limit, describe,
or construe the contents of such articles or sections.
27.17 Notice of Landlord's Default. In the event of any alleged default in
the obligation of Landlord under this Lease, Tenant shall deliver to Landlord
written notice listing the reasons for Landlord's default and Landlord shall
have thirty (30) days following receipt of such notice to cure such alleged
default or, in the event the alleged default cannot reasonably be cured within a
thirty (30) day period, to commence action and proceed to cure such alleged
default with reasonable diligence. Tenant shall send a copy of such notice to
Landlord to any holder of a mortgage or other encumbrance on the Building or
Project of which Tenant has been notified in writing, and any such holder shall
also have the same time period plus an additional thirty (30) days to cure such
alleged default.
27.18 Authority. Tenant and the party executing this Lease on behalf of
Tenant represent to Landlord that such party is authorized to do so by requisite
action of the board of directors or partners, as the case may be, and agree upon
request to deliver to Landlord a resolution or similar document to that effect.
27.19 Brokers. Landlord and Tenant respectively represent and warrant to
each other that neither of them has consulted or negotiated with any broker or
finder with regard to the premises except their respective brokers named in
Section 1.1, if any. Each party shall indemnify the other against and hold the
other harmless from any claim or action for fees or commissions by anyone with
whom it has consulted or negotiated with regard to the premises except that
party's broker named in Section 1.1 and from all resulting liabilities,
judgments, losses, costs and expenses. Landlord shall pay any fees or
commissions due Landlord's Broker. Tenant's Broker shall look solely to
Landlord's Broker or Tenant for payment of any fees or commissions due it with
respect to this Lease.
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27.20 Governing Law. This Lease shall be governed by and construed
pursuant to the laws of the State of California.
27.21 Interest. Any Rent or Additional Rent that is not paid when due
shall accrue interest at an annual rate of interest equal to the Prime Rate on
the date the payment was due plus three percent (3%) per annum (but in no event
in an amount in excess of the maximum rate allowed by applicable law) from the
date on which it was due until the date on which it is paid in full with accrued
interest. This interest charge is in addition to any applicable late charge
under Section 27.30.
27.23 No Easements for Air or Light. Any diminution or shutting off of
light, air, or view by any structure that may be erected on lands adjacent to
the Building shall in no way affect this Lease or impose any liability on
Landlord.
27.24 Tax Credits. Landlord is entitled to claim all tax credits and
depreciation attributable to leasehold improvements in the Premises except for
Alterations made by Tenant at its expense. Promptly after Landlord's demand,
Landlord and Tenant shall prepare a detailed list of the leasehold improvements
and fixtures and their respective costs for which Landlord or Tenant has paid.
Landlord shall be entitled to all credits and depreciation for those items for
which Landlord has paid by means of any Tenant finish allowance or otherwise.
Tenant shall be entitled to any tax credits and depreciation for all items for
which Tenant has paid with funds not provided by Landlord.
27.25 Financial Reports; Termination Right. Within fifteen (15) days after
Landlord's request at any time during the Term, Tenant shall furnish Tenant's
most recent audited financial statements (including any notes to them) to
Landlord, or, if no such audited statements have been prepared, such other
financial statements (and notes to them) as may have been prepared by an
independent certified public accountant or, if none, Tenant's internally
prepared financial statements. Tenant shall discuss its financial statements
with Landlord and shall give Landlord access to Tenant's books and records in
order to enable Landlord to verify the financial statements. Landlord shall not
disclose any aspect of Tenant's financial statements that Tenant designates to
Landlord as confidential except (a) to Landlord's lenders or prospective
purchasers of the Project, (b) in litigation between Landlord and Tenant, and
(c) if required by court order. If based on such financial statements, other
information provided by Tenant, or other information in Landlord's possession
reasonably deemed reliable by Landlord, Landlord reasonably determines that
Tenant is or is about to become insolvent within the meaning of the bankruptcy
laws of the United States or the State of California, Landlord shall have the
right to terminate this Lease and all of Tenant's estate hereunder forthwith
upon written notice to Tenant.
27.26 Landlord's Fees. Whenever Tenant requests Landlord to take any
action or give any consent required or permitted under this Lease, Tenant shall
reimburse Landlord for all of Landlord's reasonable costs incurred in reviewing
the proposed action or consent, including without limitation reasonable
attorneys', engineers' or architects' fees, within ten (10) days after
Landlord's delivery to Tenant of a statement of such costs. Tenant shall be
obligated to make such reimbursement without regard to whether Landlord consents
to any such proposed action.
27.27 Binding Effect. The covenants, conditions, and agreements contained
in this Lease will bind and inure to the benefit of Landlord and Tenant and
their respective heirs, distributees, executors, administrators, successors,
and, except as otherwise provided in this Lease, their assigns.
27.28 Additional Rent. All sums payable by Tenant to or on behalf of
Landlord under this Lease other than Monthly Rent under Section 4.1 constitute
Additional Rent
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for purposes of the Bankruptcy Act, any unlawful detainer action brought against
Tenant and all other purposes.
27.29 Approval of Mortgagee. If at the time this Lease is executed, the
Project is encumbered by a mortgage or deed of trust, this Lease is subject to
the approval of the mortgagee or beneficiary of the trust deed and Tenant agrees
to make such modifications to this Lease as are requested by said mortgagee or
beneficiary provided such modifications do not alter the Rent or otherwise
adversely affect Tenant in a material way.
27.30 Late Charge. If any payment of Rent or Additional Rent due Landlord
is not received by Landlord within ten (10) days of the due date (without regard
to any notice under Section 25.1), Tenant shall pay to Landlord on demand, as
liquidated damages, a late charge equal to five percent (5%) of the delinquent
payment to compensate Landlord for the damages it so incurs in the form of
increased accounting and administrative costs. The parties agree that such late
charge represents a reasonable attempt to determine such damages under the
circumstances now existing. Only one late charge may be imposed with respect to
any one delinquent payment, but the late charge due under this section is in
addition to interest due under Section 27.21. The acceptance of a late charge
shall not constitute a waiver of Tenant's default with respect to the delinquent
payment on which the late charge was imposed or of any right or remedy available
to Landlord.
27.31 Rent Covenant Independent. Tenant's covenants to pay Monthly Rent
and Additional Rent are independent of Landlord's covenants under this Lease.
27.32 Certain Terms. If Tenant validly exercises any option to renew or
extend the Term of this Lease (such renewal or extension rights existing only if
set forth in the Addendum, if applicable), all references in this Lease to the
Term shall include the renewal or extension Term. All such renewal or extension
options are personal to Tenant and cannot be assigned or transferred except as
part of an assignment of this Lease made in conformance with Article 9.
Landlord and Tenant have executed this Lease as of the day and year first
above written.
"LANDLORD"
CONFEDERATION REAL ESTATE (U.S.),
INC.
By: /s/ Kevin Ellis By: /s/ Roy L. Hanlin
---------------------------------- ------------------------
Its: Director, Real Estate Investments Its: Manager, Real Estate
---------------------------------- ------------------------
"TENANT"
FRANK S. YUAN DBA: CYBER
MERCHANTS EXCHANGE, INC.
By: /s/
-------------------------
Its: President
------------------------
REVIEWED
FOR EXECUTION
/s/
----------------
CONFED R.E. DEPT.
27
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The Premises
[OBJECT OMITTED]
EXHIBIT "A"
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Rent Adjustments
Base rent shall be fixed at $3,164.00 for the entire term of the lease.
Provided Tenant fully performs its obligatins under this Lease, Base Rent shall
be abated in full for October 1996, November 1996, December 1996 and half of
January 1997 of this Lease. In the event this Lease is terminated by reason of
Tenant's default, the conditionally abated rent for said months shall be due and
payable to Landlord in full and shall be part of Landlord's recoverable damages.
EXHIBIT "B"
2
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Work Letter Agreement
Tenant accepts premises in an "as-is" condition.
EXHIBIT "C"
3
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RULES AND REGULATIONS
1. Landlord may from time to time adopt appropriate systems and procedures
for the security or safety of the Building, any persons occupying, using, or
entering the Building, or any equipment, finishings, or contents of the
Building, and Tenant shall comply with Landlord's reasonable requirements
relative to such systems and procedures.
2. The sidewalks, halls, passages, exits, entrances, elevators, and
stairways of the Building shall not be obstructed by Tenant or used for any
purpose other than for ingress to and egress from the Premises. The halls,
passages, exits, entrances, elevators, escalators, and stairways are not for the
general public, and Landlord shall in all cases retain the right to control and
prevent access to such halls, passages, exits, entrances, elevators, and
stairways of all persons whose presence in the judgment of Landlord would be
prejudicial to the safety, character, reputation, and interests of the Building
and its tenants, provided that nothing contained in these rules and regulations
shall be construed to prevent such access to persons with whom any Tenant
normally deals in the ordinary course of its business, unless such persons are
engaged in illegal activities. Neither Tenant nor any employee or invitee of
Tenant shall go upon the roof of the Building except such roof or portion of
such roof as may be contiguous to the Premises of Tenant and may be designated
in writing by Landlord as a roof deck or roof garden area. Tenant shall not be
permitted to place or install any object (including without limitation radio and
television antennas, loudspeakers, sound amplifiers, microwave dishes, solar
devices, or similar devices) on the exterior of the Building or on the roof of
the Building.
3. No sign, placard, picture, name, advertisement, or written notice
visible from the exterior of Tenant's Premises shall be inscribed, painted,
affixed, or otherwise displayed by Tenant on any part of the Building or the
premises without the prior written consent of Landlord. Landlord shall adopt and
furnish to Tenant general guidelines relating to signs inside the Building on
the office floors. Tenant agrees to conform to such guidelines. All approved
signs or lettering on doors shall be printed, painted, affixed, or inscribed at
the expense of Tenant by a person approved by Landlord. Other than draperies
expressly permitted by Landlord and Building standard mini-blinds, material
visible from outside the Building shall not be permitted. In the event of the
violation of this rule by Tenant, Landlord shall have the right to remove the
violating items without any liability, and may charge the expense incurred by
such removal to Tenant.
4. No cooking shall be done or permitted by Tenant on the Premises, except
in areas of the Premises which are specially constructed for cooking and except
that use by the Tenant of microwave ovens and Underwriters' Laboratory approved
equipment for brewing coffee, tea, hot chocolate, and similar beverages shall be
permitted, provided that such use is in accordance with all applicable federal,
state, and city laws, codes, ordinances, rules, and regulations.
5. Tenant shall not employ any person or persons other than the cleaning
service of Landlord for the purpose of cleaning the Premises, unless otherwise
agreed to by Landlord in writing. Except with the written consent of Landlord,
no person or persons other than those approved by Landlord shall be permitted to
enter the Building for the purpose of cleaning it. Tenant shall not cause any
unnecessary labor by reason of such Tenant's carelessness or indifference in the
preservation of good order and cleanliness. Should Tenant's actions result in
any increased expense for any required cleaning, Landlord reserves the right to
assess Tenant for such expenses.
6. The toilet rooms, toilets, urinals, wash bowls and other plumbing
fixtures shall not be used for any purposes other than those for which they were
constructed, and no sweepings, rubbish, rags, or other foreign substances will
be thrown in such plumbing
EXHIBIT "D"
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fixtures. Tenant shall bear all damages resulting from any misuse of the
fixtures will be borne by Tenant, its servants employees, agents, visitors, or
licensees.
7. Tenant shall not in any way deface any part of the Premises or the
Building of which they form a part. In those portions of the Premises where
carpet has been provided directly or indirectly by Landlord, Tenant shall at its
own expense install and maintain pads to protect the carpet under all furniture
having casters other than carpet casters.
8. Tenant shall not alter, change, replace, or rekey any lock or install a
new lock or a knocker on any door of the Premises. Landlord, its agents, or
employees will retain a pass (master) key to all door locks on the Premises. Any
new door locks required by Tenant or any change in keying of existing locks
shall be installed or changed by Landlord following Tenant's written request to
Landlord and shall be at Tenant's expense. All new locks and rekeyed locks shall
remain operable by Landlord's pass (master) key. Landlord shall furnish Tenant,
free of charge, with two (2) keys to each door lock on the Premises. Landlord
shall have the right to collect a reasonable charge for additional keys
requested by Tenant. Upon termination of its tenancy, Tenant shall deliver to
Landlord all keys for the Premises and Building that have been furnished to such
Tenant.
9. The elevator designated for freight by Landlord will be available for
use by Tenant during the hours and pursuant to such procedures as Landlord may
determine from time to time. The persons employed to move Tenant's equipment,
material, furniture, or other property in or out of the Building must be
acceptable to Landlord. The moving company must be a locally recognized
professional mover, whose primary business is the performing of relocation
services, and must be bonded and fully insured. A certificate or other
verification of such insurance must be received and approved by Landlord prior
to the start of any moving operations. Insurance must be sufficient, in
Landlord's sole opinion, to cover all personal liability, theft or damage to the
Project, including but not limited to floor coverings, doors, walls, elevators,
stairs, foliage, and landscaping. Special care must be taken to prevent damage
to foliage and landscaping during adverse weather. All moving operations shall
be conducted at such times and in such a manner as Landlord will direct, and all
moving shall take place during non-business hours unless Landlord agrees in
writing otherwise. Tenant shall be responsible for the provision of Building
security during all moving operations, and shall be liable for all losses and
damages sustained by any party as a result of the failure to supply adequate
security. Landlord shall have the right to prescribe the weight, size, and
position of all equipment, materials, furniture, or other property brought into
the Building. Heavy objects shall, if considered necessary by Landlord, stand on
wood strips of such thickness as is necessary to properly distribute the weight.
Landlord shall not be responsible for loss of or damage to any such property
from any cause, and all damage done to the Building by moving or maintaining
such property will be repaired at the expense of Tenant. Landlord reserves the
right to inspect all such property to be brought into the Building and to
exclude from the Building all such property which violates any of these rules
and regulations or the Lease of which these rules and regulations are a part.
Supplies, goods, materials, packages, furniture, and all other items of every
kind delivered to or taken from the premises shall be delivered or removed
through the entrance and route designated by Landlord, and Landlord shall not be
responsible for the loss or damage of any such property unless such loss or
damage results from the negligence of Landlord, its agents, or employees.
10. Tenant shall not use or keep in the Premises or the Building any
kerosene, gasoline, or inflammable or combustible or explosive fluid or material
or chemical substance other than limited quantities of such materials or
substances reasonably necessary for the operation or maintenance of office
equipment or limited quantities of cleaning fluids and solvents required in
Tenant's normal operations in the premises.
EXHIBIT "D"
5
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Without Landlord's prior written approval, Tenant shall use no method of heating
or air conditioning other than that supplied by Landlord. Tenant shall not use
or keep or permit to be used or kept any foul or noxious gas or substance in the
premises.
11. Landlord shall have the right, exercisable upon written notice and
without liability to any Tenant, to change the name and street address of the
Building.
12. Landlord shall have the right to prohibit any advertising by Tenant
mentioning the Building that, in Landlord's reasonable opinion, tends to impair
the reputation of the Building or its desirability as a building for offices,
and upon written notice from Landlord, Tenant shall refrain from or discontinue
such advertising.
13. Tenant shall not bring any animals (except "Seeing Eye" dogs) or birds
into the Building, and shall not permit bicycles or other vehicles inside or on
the sidewalks outside the Building except in areas designated from time to time
by Landlord for such purposes.
14. All persons entering or leaving the Building between the hours of 7
p.m. and 7 a.m. Monday through Friday, and at all hours on Saturdays, Sundays,
and holidays shall comply with such off-hour regulations as Landlord may
establish and modify from time to time. Landlord reserves the right to limit
reasonably or restrict access to the Building during such time periods.
15. Tenant shall store all its trash and garbage within its Premises. No
material shall be placed in the trash boxes or receptacles if such material is
of such nature that it may not be disposed of in the ordinary and customary
manner of removing and disposing of trash and garbage without being in violation
of any law or ordinance governing such disposal. All garbage and refuse disposal
shall be made only through entryways and elevators provided for such purposes
and at such times as Landlord designates. Removal of any furniture or
furnishings, large equipment, packing crates, packing materials, and boxes shall
be the responsibility of each Tenant and such items may not be disposed of in
the Building trash receptacles nor shall they be removed by the Building's
janitorial service, except at Landlord's sole option and at the Tenant's
expense. No furniture, appliances, equipment, or flammable products of any type
may be disposed of in the Building trash receptacles.
16. Canvassing, peddling, soliciting, and distributing handbills or any
other written materials in the Building are prohibited, and Tenant shall
cooperate to prevent the same.
17. The requirements of Tenant will be attended to only upon application by
written, personal, or telephone notice at the office of the Building. Employees
of Landlord will not perform any work or do anything outside of their regular
duties unless under special instructions from Landlord.
18. A directory of the Building will be provided for the display of the
name and location of Tenants, but Landlord shall not in any event be obligated
to furnish more than one (1) directory strip for each 2,500 square feet of
rentable area in the Premises. Any additional name(s) that Tenant desires to
place in such directory must first be approved by Landlord, and if so approved,
Tenant shall pay to Landlord a charge, set by Landlord, for each such additional
name. All entries on the Building directory display shall conform to standards
and style set by Landlord in its sole discretion.
19. Tenant shall see that the doors of the Premises are closed and locked
and that all water faucets, water apparatus, electrical equipment and utilities
are shut off before Tenant or Tenant's employees leave the Premises, so as to
prevent waste or damage, and for any default or carelessness in this regard
Tenant shall make good all injuries sustained
EXHIBIT "D"
6
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by other tenants or occupants of the Building or Landlord. On multiple-tenancy
floors, all tenants shall keep the doors to the Building corridors closed at all
times except for ingress and egress.
20. Tenant shall not conduct itself in any manner that is inconsistent with
the character of the Building as a first quality building or that will impair
the comfort and convenience of other tenants in the Building.
21. Neither Landlord nor any operator of the parking areas within the
Project, as the same are designated and modified by Landlord, in its sole
discretion, from time to time (the "parking areas") shall be liable for loss of
or damage to any vehicle or any contents of such vehicle or accessories to any
such vehicle, or any property left in any of the parking areas, resulting from
fire, theft, vandalism, accident, conduct of other users of the parking areas
and other persons, or any other casualty or cause. Further, Tenant understands
and agrees that: (a) Landlord shall not be obligated to provide any traffic
control, security protection or operator for the parking areas; (b) Tenant uses
the parking areas at its own risk; and (c) Landlord shall not be liable for
personal injury or death, or theft, loss of, or damage to property. Tenant
waives and releases Landlord from any and all liability arising out of the use
of the parking areas by Tenant, its employees, agents, invitees, and visitors,
whether brought by any of such persons or any other person. The foregoing
provisions are intended to exculpate Landlord from its ordinary negligence or
that of any person for whose actions Landlord is legally responsible but are not
intended to relieve Landlord of liability for gross negligence or willful
misconduct.
22. Tenant (including Tenant's employees, agents, invitees, and visitors)
shall use the Parking Spaces solely for the purpose of parking passenger model
cars, small vans, and small trucks and shall comply in all respects with any
rules and regulations that may be promulgated by Landlord from time to time with
respect to the parking areas. The parking areas may be used by Tenant, its
agents, or employees, for occasional overnight parking of vehicles. Tenant shall
ensure that any vehicle parked in any of the Parking Spaces will be kept in
proper repair and will not leak excessive amounts of oil or grease or any amount
of gasoline. If any of the Parking Spaces are at any time used (a) for any
purpose other than parking as provided above; (b) in any way or manner
reasonably objectionable to Landlord; or (c) by Tenant after default by Tenant
under the Lease, Landlord, in addition to any other rights otherwise available
to Landlord, shall have the right to consider such default an Event of Default
under the Lease.
23. Tenant's right to use the parking areas will be in common with other
tenants of the Project and with other parties permitted by Landlord to use the
parking areas. Landlord reserves the right to assign and reassign, from time to
time, particular Parking Spaces for use by persons selected by Landlord,
provided that Tenant's rights under the Lease are substantially preserved.
Landlord shall not be liable to Tenant for any unavailability of Tenant's
designated spaces, if any, nor shall any unavailability entitle Tenant to any
refund, deduction, or allowance. Tenant shall not park in any numbered space or
any space designated as: RESERVED, HANDICAPPED, VISITORS ONLY, or LIMITED TIME
PARKING (or similar designation).
24. If the parking areas are damaged or destroyed, or if the use of the
parking areas is limited or prohibited by any governmental authority, or the use
or operation of the parking areas is limited or prevented by strikes or other
labor difficulties or other causes beyond Landlord's control, Tenant's inability
to use the Parking Spaces shall not subject Landlord or any operator of the
parking areas to any liability to Tenant and shall not relieve Tenant of any of
its obligations under the Lease and the Lease shall remain in full force and
effect.
EXHIBIT "D"
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25. Tenant has no right to assign or sublicense any of its rights in the
Parking Spaces, except as part of a permitted assignment or sublease of the
Lease; however, Tenant may allocate the Parking Spaces among its employees.
26. No act or thing done or omitted to be done by Landlord or Landlord's
agent during the Term of the Lease in connection with the enforcement of these
rules and regulations shall constitute an eviction by Landlord of any Tenant nor
will it be deemed an acceptance of surrender of the Premises by Tenant, and no
agreement to accept such termination or surrender will be valid unless in a
writing signed by Landlord. The delivery of keys to any employee or agent of
Landlord shall not operate as a termination of the Lease or a surrender of the
Premises unless such delivery of keys is done in connection with a written
instrument executed by Landlord approving the termination or surrender.
27. In these rules and regulations, "Tenant" includes the employees,
agents, invitees, and licensees of Tenant and others permitted by Tenant to use
or occupy the Premises.
28. Landlord shall have the right to waive any one or more of these rules
and regulations for the benefit of any particular tenant or tenants, but no such
waiver by Landlord will be construed as a waiver of such rules and regulations
in favor of any other tenant or tenants, nor prevent Landlord from enforcing any
such rules and regulations against any or all of the Tenants of the Building
after such waiver.
29. These rules and regulations are in addition to, and shall not be
construed to modify or amend, in whole or in part, the terms, covenants,
agreements, and conditions of the Lease.
Tenant's Initials:__________
EXHIBIT "D"
8
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GUARANTY OF LEASE
WHEREAS, CONFEDERATION REAL ESTATE (U.S.), INC. hereinafter referred to
as "Landlord" and FRANK S. YUAN, hereinafter referred to as "Tenant", are about
to execute a document entitled "Lease" dated September 1, 1996 concerning the
premises commonly known as Garfield Center 320 S. Garfield Avenue, Suite 318,
Alhambra, CA 91801 wherein Landlord will lease the premises to Tenant, and
WHEREAS, Frank S. Yuan hereinafter referred to as "Guarantor" has a
financial interest in Tenant and
WHEREAS, Landlord would not execute the Lease if Guarantor did not
execute and deliver to Landlord this Guaranty of Lease.
NOW THEREFORE, for and in consideration of the execution of the
foregoing Lease by Landlord and as a material inducement to Landlord to execute
said Lease, Guarantor hereby jointly, severally, unconditionally and irrevocably
guarantee the prompt payments by Tenant of all rentals and all other sums
payable to Tenant under said Lease and the faithful and prompt performance by
Tenant of each and every one of the terms, conditions and covenants of said
Lease to be kept and performed by Tenant.
It is specifically agreed and understood that the terms of the
foregoing Lease may be altered, affected, modified or changed by agreement
between Landlord and Tenant, or by a course of conduct, and said Lease may be
assigned by Landlord or any assignee of Landlord without consent or notice to
Guarantor and that this Guaranty shall thereupon and thereafter guarantee the
performance of said Lease as so changed, modified, altered or assigned.
This Guaranty shall not be released, modified, or affected by failure
or delay on the part of Landlord to enforce any of the rights or remedies of the
Landlord under said Lease whether pursuant to the terms thereof or at law or in
equity.
No notice of default need be given to Guarantor, it being specifically
agreed and understood that the guarantee of the undersigned is a continuing
guarantee under which Landlord may proceed forthwith and immediately against
Tenant or against Guarantor following any breach or default by Tenant or for the
enforcement of any rights that Landlord may have as against Tenant pursuant to
or under the terms of the within Lease or at law or in equity.
Landlord shall have the right to proceed against Guarantor hereunder
following any breach or default by Tenant without first proceeding against
Tenant and without previous notice to or demand upon either Tenant or Guarantor.
Guarantor hereby waives (a) notice of acceptance of this Guaranty, (b)
demand of payment, presentation and protest, (c) all right to assert or plead
any statute of limitations as to or relating to this Guaranty and the Lease, (d)
any right to require the Landlord to proceed against the Tenant or any other
Guarantor or any other person or entity liable to Landlord, (a) any right to
require Landlord to apply to any default any security deposit or other security
it may hold under the Lease, (f) any right Landlord to proceed under any other
remedy Landlord may have before proceeding against Guarantor, (g) any right of
subrogation.
Guarantor does hereby subrogate all existing or future indebtedness of
Tenant to Guarantor to the obligations owed to Landlord under the Lease and this
Guaranty.
The obligations of Tenant under the Lease to execute and deliver
estoppel statements and financial statements, as therein provided, shall be
deemed to also require the Guarantor hereunder to do and provide the same
relative to Guarantor.
The term "Landlord" whenever hereinabove used refereed to and means the
Landlord in the foregoing Lease specifically named and also any assignee of said
Landlord, whether by outright assignment or by assignment for security, and also
any successor to the interest of said Landlord or of any assignee in such Lease
or any part thereof, whether by assignment or otherwise. So long as Landlord's
interest in or to the leased premises or the rent, issues and profits therefrom,
or in, to or under said Lease are subject to any mortgage or deed of trust or
assignment for security, no acquisition by Guarantor of the Landlord's interest
in the leased premises or under said Lease shall affect the continuing
obligation of Guarantor under this Guaranty which shall nevertheless continue in
full force and effect for the benefit of the mortgage, beneficiary, trustee or
assignee under such mortgage, deed of trust or assignment, of any purchase at
sale by judicial foreclosure or under private power of sale and of the
successors and assigns of any such mortgage, beneficiary, trustee, assignee or
purchaser.
Exhibit F
<PAGE>
The term "Tenant" whenever hereinafter used refers to and means the
Tenant in the foregoing Lease specifically named and also any assignee or
sublessee of said lease and also any successor to the interests of said Tenant,
assignee or sublessee of such Lease or any part thereof, whether by assignment,
sublease or otherwise.
In the event any action be brought by said Landlord against Guarantor
hereunder to enforce the obligation of Guarantor hereunder, the unsuccessful
party in such action shall pay to the prevailing party therein a reasonable
attorney's fee which shall be fixed by the court.
GUARANTOR
Date: 9-9-96 By: /s/ Frank S. Yuan
------------------
Frank S. Yuan
Exhibit F
<PAGE>
Option to Extend: (a) Option. Landlord hereby grants to Tenant an
option ("Extension Option") to extend the Term of
the Lease for a period of three (3) years ("Option
Period") upon and subject to the terms and
conditions set forth hereinbelow. If Tenant desires
to exercise its Extension Option granted herein,
Tenant shall deliver to Landlord written notice of
such election ("Extension Notice") no later than one
hundred eighty (180) days nor earlier than three
hundred sixty (360) days prior to the expiration of
the initial Term of the Lease.
(b) Proper Exercise. Despite a timely exercise by
Tenant, Tenant's Extension Option shall not, at
Landlord's option, be deemed to be properly
exercised if at the time Tenant exercises its
Extension Option or at the end of the initial Term
of the Lease, an event of default has occurred and
is continuing under the Lease. Provided Tenant
properly exercises the Extension Option, the Term of
the Lease shall be extended for the Option Period,
and all of the terms, covenants, and conditions of
the Lease shall remain unmodified and in full force
and effect during the Option Period, except that the
Annual Base Rent shall be modified as set forth in
Subparagraphs (c) and (d) below.
(c) Rent. The Annual Base Rent payable during the
option Period shall be one hundred percent (100%) of
the fair market rental value of the Premises, as
determined herein. The fair market rental value of
the Premises shall be determined by Landlord based
on prevailing market rentals then being paid on new
leases of similar space, for a three (3) year term,
in the Project, or if there have been no reasonably
comparable new leases made within the Project during
the preceding six (6) months, in projects comparable
to the Project in the Alhambra area and under
economic lease terms similar to those of this Lease.
In determining the fair market rental value of the
Premises, Landlord shall specifically exclude any
consideration of (i) Tenant's use of the Premises or
of the fact that Tenant has an option to extend the
term for three (3) years at 100% of full fair market
rental value and (ii) the value of any improvements
to the Premises made by Tenant which Tenant has
negotiated for the right to remove at the and of the
Lease Term. References herein to "fair market rental
value" shall not include any Lease concessions
offered by landlords within the above-described area
for leased premises including, without limitation,
free rent, tenant improvement allowances or any
other payments or concessions of any kind. Landlord
shall provide Tenant with written notice of its
determination of the fair market rental value of the
Premises within sixty (60) days after Landlord's
receipt of Tenant's Extension Notice. Tenant shall
have fifteen (15) days ("Tenant Review Period")
after receipt of Landlord's notice of the new Annual
Base Rent within which to accept such new Annual
Base Rent or to object thereto in writing. If Tenant
fails to respond to Landlord within Tenant's Review
Period, Tenant shall conclusively be deemed to have
approved of the new Annual Base Rent determined by
Landlord. In the event Tenant objects to the fair
market rental value submitted by Landlord, Landlord
and Tenant shall attempt to agree upon the fair
market rental value for the Premises, using their
best good faith efforts. If Landlord and Tenant fail
to reach agreement of the fair market rental value
of the Premises within fifteen (15) days following
the expiration of Tenant's Review Period (the
"Outside Agreement Date"), then the fair market
rental value for the premises shall be determined by
appraisal (an arbitration not being binding
intended) in accordance with Subparagraph (d) below.
Exhibit G
<PAGE>
(d) Appraisal. Landlord and Tenant shall each,
within fifteen (15) days of the Outside Agreement
Date, appoint one appraiser who shall by profession
be a real estate appraiser who shall have been
active over the five (5) year period ending on the
date of such appointment of the appraisal of
commercial properties in the Alhambra area. The two
appraisers so appointed shall, within fifteen (15)
days of the date the appointment of the last
appointed appraiser, agree upon and appoint a third
appraiser who shall be qualified under the same
criteria set forth hereinabove for qualifications of
the initial two appraisers. Once the three
appraisers have been selected, each appraiser shall
determine the fair market rental value of the
Premises in accordance with the assumptions and
requirements applicable to Landlord's determination
of the fair market rental value under Subparagraph
(c) above and give written notice of his/her
determination to Landlord and Tenant within thirty
(30) of his/her appointment. The average of the
three appraisals shall determine the fair market
rental value of the Premises for purposes of setting
the Annual Base Rent for the Option Period.
Landlord shall pay the charges of its appraiser,
Tenant shall pay the charges of its appraiser and
Landlord and Tenant shall share the charges of the
third appraiser equally.
If either Landlord or Tenant fails to appoint an
appraiser within the time period set forth above,
the appraiser appointed by one of them shall reach a
decision in accordance with this Subparagraph (d),
notify Landlord and Tenant thereof, and such
appraiser's decision shall be binding upon Landlord
and Tenant. If the two appraisers fail to agree upon
and appoint a third appraiser, both appraisers shall
be dismissed and the matter shall be decided by
submission to binding arbitration under the
commercial arbitration rules of the American
Arbitration Association. All costs of arbitration
shall be shared equally by Landlord and Tenant.
Notwithstanding the foregoing provisions of this
Lease Rider, in no event shall the Annual Base Rent
during the Option Period be less than the Annual
Base Rent payable by Tenant during the initial term
of this Lease or the preceding Option Period, as
applicable.
Exhibit G
PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT (this "Agreement") is made on the 15th day
of October, 1997 (the "Effective Date"), by and between Burlington Coat Factory
Warehouse Corporation, a Delaware corporation, on behalf of itself and its'
Affiliates (collectively, "BCF"), with offices at 1830 Route 130, Burlington,
New Jersey 08016, and Cyber Merchants Exchange, Inc., a California corporation,
d/b/a Cyber Merchants Exchange ("C-ME"), with offices at 320 South Garfield
Avenue, Suite 318, Alhambra, California 91801.
RECITALS
WHEREAS, C-ME has developed technology, and desires to engage in the
business of providing a service which utilizes such technology, whereby C-ME
collects text, graphic images, and other data and information including, without
limitation, electronic pictures from manufacturers, vendors and other suppliers
of goods and services ("Network Vendors"), and transmits the same via various
Internet or other electronic means to the web sites of retailers and other users
of goods and services ("Network Users"), thereby creating an electronic showroom
and catalogue of goods and services. Each of such web sites shall be either a
private Internet Sourcing Network ("ISN"), designed and built for the exclusive
use of a retailer, or a public ISN designed for others (such ISN is hereinafter
referred to as a "Network," individually, and "Networks," collectively);
WHEREAS, the collection of services and Networks to be provided by C-ME
are hereinafter referred to as the "Magic Net;"
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WHEREAS, C-ME desires BCF to become a Network Participant and assist
C-ME in the promotion and marketing of the Magic Net to Network Vendors, and BCF
is willing to do so on the terms and conditions hereinafter contained;
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual promises contained herein, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
Terms in this Agreement which are capitalized shall have the meanings
set forth below or defined elsewhere in this Agreement:
1.1 "Additional Network" shall mean any Network subscribed to by a
Network Vendor in addition to its Base Network.
1.2 "Additional Network Hosting Fee" shall mean the monthly fee payable
to C-ME by any Network Vendor for the hosting of promotional data on fifteen
(15) of such Network Vendor's products and/or services on each of such Network
Vendor's Additional Networks.
1.3 "Additional Network Set-Up Fee" shall mean the initial set-up fee
payable to C-ME by any Network Vendor for subscription to any Network other than
such Network Vendor's Base Network.
1.4 "Additional Service Fee" shall mean the fee payable to C-ME for any
consulting services C-ME is requested to provide in connection with the
installation, hosting or maintenance of the hardware and software required for
the Internet E.D.I.
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1.5 "Affiliate" shall mean BCF and any corporation, partnership or
joint venture, which directly or indirectly is controlled by, or is under common
control with BCF. As used herein "control" is defined as directly or indirectly
beneficially controlling, owning or holding of record more than 50% of all
classes of voting securities of a corporation, or, in the case of an entity
which is not a corporation, more than 50% of the equity interest.
1.6 "BCF Industry Group" shall mean the apparel, linens, juvenile
furniture and footwear industries in which, or with which, BCF conducts its
business.
1.7 "Base Network" shall mean the first Network subscribed to by a
Network Vendor.
1.8 "Base Network Hosting Fee" shall mean the monthly fee payable to
C-ME by any Network Vendor for the hosting of promotional data on fifteen (15)
of such Network Vendor's products and/or services on such Network Vendor's Base
Network.
1.9 "Base Network Set-Up Fee" shall mean the initial set-up fee payable
to C-ME by a Network Vendor for subscribing to such Network Vendor's Base
Network.
1.10 "Change Fees" shall mean the fees payable to C-ME by any Network
Vendor for changes including, but not limited to, additions, deletions, or
modifications made by C-ME to such Network Vendor's product information and/or
product images.
1.11 "Excess Hosting Fee" shall mean the monthly fee payable to C-ME by
any Network Vendor for the display of any products in excess of the fifteen (15)
products included in the Base or Additional Network Hosting Fees.
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1.12 "FOCASTING" shall mean the proprietary technology developed by
C-ME whereby Network Users can create their own private web pages by selecting
categories and product lines which fall within their specific areas of interest
to be pushed and broadcast to such web pages.
1.13 "Internet Electronic Data Interchange" or "Internet E.D.I." shall
mean the electronic exchange of business documents, from computer to computer,
between trading partners over the Internet.
1.14 "Hosting Fees" shall mean any of the Base Network Hosting Fee, the
Additional Network Hosting Fee, or any other periodic fee charged to a Network
Vendor for the hosting of such Network Vendor's promotional data on the Magic
Net.
1.15 "Net Additional Network Hosting Fee" shall mean the Additional
Network Hosting Fees payable to C-ME by any Network Vendor listed on the BCF
Vendor List, which Network Vendor participates in an Additional Network other
than the BCF Network, minus any share of such fee payable by C-ME to the Network
User (other than BCF).
1.16 "Net Base Network Hosting Fee" shall mean the Base Network Hosting
Fees payable to C-ME by any Network Vendor listed on the BCF Vendor List, which
Network Vendor participates in a Base Network other than the BCF Network, minus
any share of such fee payable by C-ME to the Network User (other than BCF).
1.17 "Net Excess Hosting Fee" shall mean the Excess Hosting Fees
payable to C-ME by any Network Vendor listed on the BCF Vendor List, which
Network Vendor
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participates in either a Base or Additional Network other than the BCF Network,
minus any share of such fee payable by C-ME to the Network User (other than
BCF).
1.18 "Set-Up Fees" shall mean any of the Base Network Set-Up Fee and
the Additional Network Set-Up Fee charged to a Network Vendor in order to
establish any of the services offered by C-ME on the Magic Net.
ARTICLE 2
RIGHTS AND OBLIGATIONS OF C-ME
2.1 C-ME shall use reasonable commercial efforts to provide for BCF a
Network consisting of (a) promotional materials provided by Network Vendors who
have subscribed to a Network designed with the assistance of BCF and for its
exclusive use (the "BCF Network"), and (b) the various specifications and
services listed on Exhibit A hereto, incorporated herein by reference. C-ME
shall maintain the BCF Network and allow BCF access thereto free of charge. C-ME
shall also ensure that no person other than itself and authorized BCF employees
shall have access to data on the BCF Network. C-ME shall exercise reasonable
commercial efforts to develop and provide an interchange facility for electronic
data transmission between BCF and Network Vendors, and between BCF and Network
Users, free of charge to BCF for the duration of this Agreement.
2.2 C-ME shall make available to BCF each new product, service,
enhancement or additional feature of the Magic Net as soon as the same shall
become available, provided, however, that nothing contained herein shall
obligate C-ME to develop any such additional features, products or services.
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2.3 C-ME shall provide BCF with the FOCASTING, ISN and Internet E.D.I.
software required for data design, storage and transmission on the BCF Network
(the "C-ME Software") free of charge, provided, however, that C-ME may charge a
reasonable consulting fee to facilitate the connection of the BCF Network to
BCF's existing mainframe and network for use of the Internet E.D.I., if C-ME's
assistance is requested by BCF. C-ME will exercise reasonable commercial efforts
to maintain and provide training and instructional materials for the operation
of any C-ME Software or other aspects of the BCF Network (C-ME's obligation
under Sections 2.1, 2.2 and 2.3 are collectively referred to herein as the "C-ME
Services").
2.4 To the extent applicable, C-ME hereby grants BCF, for the duration
of the term of this Agreement, a royalty-free license to use, solely in
connection with the BCF Network, the C-ME Software included or used in
connection with the BCF Network, including all updates thereof, and shall
indemnify, defend, save and hold BCF harmless from and against any damages
finally awarded against BCF (without any limitation of liability) in favor of a
third party in a claim by a third party of patent or copyright infringement in
connection with the use of the C-ME Software forming the Magic Net, and the use
and exploitation of images and data received via the BCF Network and
transmission or re-broadcast of images and data.
2.5 With respect to transmissions received, directly or indirectly, by
BCF from Network Vendors through the BCF Network, C-ME hereby grants to BCF a
non-exclusive license to capture, copy, reproduce, display, publish, exploit,
and print color images and other such data supplied by Network Vendors. C-ME
shall require each Network Vendor to supply C-ME such images and data for use by
BCF. C-ME shall provide to BCF, upon finalization,
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its proposed agreement for use with Network Vendors in order to allow BCF the
opportunity to comment thereon.
2.6 In addition, upon execution of this Agreement, C-ME shall issue to
BCF the warrant to purchase shares of C-ME's Common Stock attached hereto as
Exhibit B.
2.7 C-ME shall have the power to negotiate, in its sole discretion, the
fees itemized on Exhibit C hereto with other Network Participants and Network
Vendors; provided however, C-ME shall seek prior approval from BCF, which
approval shall not be unreasonably withheld, of any changes to the fees in which
BCF shall share as specified in Article 4.
2.8 C-ME shall pay to BCF any and all fees as provided in Article 4
hereof.
ARTICLE 3
RIGHTS AND OBLIGATIONS OF BCF
3.1 BCF shall provide to C-ME a list of its Network Vendors and other
potential participants in the BCF Network ("BCF Vendor List"). BCF may amend
and/or supplement the BCF Vendor List from time to time with supplemental lists
of vendors, contractors, suppliers and other parties. C-ME acknowledges and
agrees that the BCF Vendor List and its contents are trade secrets and
proprietary information of BCF which must be accorded confidential treatment.
3.2 BCF shall exercise commercially reasonable efforts to assist C-ME
in marketing and promoting the Magic Net to potential Network Vendors. In
connection with the foregoing, BCF may, in its reasonable discretion, undertake
the following:
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a) assign project leaders in BCF's management information and vendor
compliance departments to work with C-ME personnel to set up and implement the
BCF Network, to give input on the development of an electronic data interchange
system on the Magic Net as well as assist in marketing efforts;
b) send mailings to potential Network Vendors to promote
participation by such vendors in the Magic Net (such mailing may also encourage
and request use of C-ME's electronic data interchange system when such system
has been fully developed);
c) provide the services, from time to time, of Monroe G. Milstein
and/or Mark Nesci to contact vendors, selected by said persons in their sole
discretion, to promote participation in the Magic Net;
d) instruct BCF's buyers to utilize the BCF Network;
e) after the electronic data interchange system on Magic Net has been
fully developed and is fully operational to BCF's satisfaction, encourage and
request vendor use of such system;
f) if advisable, hold meetings with vendors (in the form of seminars,
breakfast meetings, and the like) in order to market and promote the Magic Net;
and
g) if advisable, issue a joint press release with C-ME after giving
due regard to the burdens and responsibilities imposed on a public company in
connection with such a release (it being understood that C-ME may not issue any
press release naming or otherwise identifying BCF without BCF's prior written
consent).
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The enumeration of specific actions above is by way of example and not
of requirement or limitation. BCF may, in the exercise of its judgment,
determine the appropriate actions to be taken to market and promote the Magic
Net under the circumstances existing from time to time. C-ME may consult with
BCF concerning marketing and promotional efforts but the final determination
thereon shall be made by BCF.
3.3 BCF shall provide C-ME with specifications and data for the
creation of the BCF Network. In addition, BCF will work with C-ME to design the
BCF Network and provide any and all training and/or instructional materials to
C-ME regarding industrial categories and other systems integral to BCF's
marketing methods.
3.4 Neither C-ME nor any other person shall be authorized to use BCF's
name to solicit any party to participate in the program, without BCF's prior
written approval, in each instance of the content of any communications, written
or oral or in any other format, with prospective participants which includes the
use of BCF's name.
3.5 BCF shall acquire, install and maintain the hardware and software,
as specified on Exhibit A hereto, necessary for BCF to participate in the BCF
Network and the Internet E.D.I.
3.6 Once the Internet E.D.I. capabilities are implemented with the BCF
Network, BCF may develop and implement a system, (with the assistance of C-ME to
ensure conformity throughout its Networks), to (a) transmit orders from BCF
buyers and other related personnel to each of its Network Vendors, (b) issue
invoices for merchandise sold via the BCF Network and (c) facilitate and track
the shipping of merchandise between Network Vendors and BCF.
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3.7 BCF shall indemnify, defend, save and hold C-ME harmless from and
against any claim of any Network Vendor arising as a result of BCF's failure to
perform its obligations under a contract with that Network Vendor.
3.8 BCF shall use its reasonable efforts to use the ISN and Internet
E.D.I. services provided by C-ME. BCF shall not promote, endorse, support, have
an ownership interest in or receive any revenues from, any competing online
electronic showroom or vendor web site service similar to Magic Net during the
term of this Agreement.
ARTICLE 4
FEES AND CHARGES
4.1 C-ME shall pay BCF the following shares of fees:
a. Fifty percent (50%) of all Base Network Hosting Fees, including
Excess Hosting Fees, if any, collected by C-ME with respect to each Network
Vendor, including Foreign Vendors, which subscribes to the BCF Network as its
Base Network through C-ME's U.S. offices for the duration of such subscription;
b. Fifty percent (50%) of all Additional Network Hosting Fees,
including Excess Hosting Fees, if any, collected by C-ME with respect to each
Network Vendor, including Foreign Vendors, which subscribes to the BCF Network
as an Additional Network through C-ME's U.S. offices for the duration of such
subscription;
c. Fifty percent (50%) of the Net Base Network Hosting Fees, Net
Additional Network Hosting Fees, and Net Excess Hosting Fees collected by C-ME
with respect to each Network Vendor listed on the BCF Vendor List and vendors in
BCF's Industry
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Group, which participates in Magic Net but subscribes to another Network as its
Base Network or Additional Network during the first two years after the date of
this Agreement; provided, however, that such share shall not be less than
thirty-three percent (33%) of the total Base Network Hosting, Additional Network
Hosting Fees, and Excess Hosting Fees collected from such Network Vendor for the
duration of such subscription. The fees described in this Paragraph 4.1(c) shall
be payable by C-ME to BCF for the duration for such subscription of a Network
Vendor;
d. Five percent (5%) of all Base Network Hosting Fees, Additional
Network Hosting Fees, and Excess Hosting Fees collected by C-ME with respect to
each Network Vendor listed on the BCF Vendor List and vendors in BCF's Industry
Group which participates in Magic Net, after the first two of this Agreement,
but which does not subscribe to the BCF Network as its Base Network or
Additional Network; and
e. Thirty-Three percent (33%) of all Base Network Hosting Fees,
Additional Network Hosting Fees, and Excess Hosting Fees collected by C-ME from
each Network Vendor not (i) having its primary place of business within the
United States, and (ii) originating transactions from within the United States
(a "Foreign Vendor"), which subscribes to the BCF Network as its Base Network or
Additional Network; provided, however, that should such Foreign Vendor subscribe
to the BCF Network through a foreign affiliate of C-ME in which C-ME does not
own a controlling interest and is therefore unable to control the pricing of its
services, C-ME shall make no warranties herein as to the share of such fees
payable to BCF, but shall exercise its best efforts to obtain up to thirty-three
percent (33%) of
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the Base Network Hosting Fee, Additional Network Hosting Fees, and Excess
Hosting Fee for BCF. In the event that BCF's share of the fees collected in this
Paragraph 4.1(e) is less than 33%, then BCF shall have the right to approve such
lower percentage share or disapprove of such vendor's participation in the BCF
Network.
4.2 Such payments shall be made on a monthly basis, for as long as this
Agreement shall be in effect, within thirty (30) days after the end of the
immediately preceding month, together with a statement showing revenues and a
computation of fees payable for such preceding month. BCF shall not receive any
share of any Set-Up Fees, Change Fees, or Additional Service Fees. BCF shall
have the right to audit C-ME's books and records from time to time to ensure
accuracy of statements provided, and payments made, by C-ME to BCF.
4.3 With regard to any other monthly recurring fees that may be
collected from any Network Vendor, BCF share of such fees shall be in the same
percentage as referenced in Paragraph 4.1, as the case may be.
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ARTICLE 5
REPRESENTATIONS AND WARRANTIES
5.1 BCF represents and warrants to C-ME that:
a. BCF is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware.
b. BCF has full corporate authority and power to enter into this
Agreement and to perform its obligations under this Agreement.
c. BCF will not sell to, purchase from, provide or exchange with any
third party any Network Vendor information identified as confidential
information in the agreement for services between C-ME and each such Network
Vendor. Notwithstanding, the above no such information shall be deemed
confidential to the extent it is otherwise in the possession of BCF without any
obligation of confidentiality, is now or hereafter in the public domain, is
lawfully obtained from a third party, or is required to be disclosed by law. BCF
will maintain limited access to such information and a complete record of all
individuals with access thereto.
d. BCF's performance of this Agreement will not violate any
applicable law or regulation or any agreement to which BCF may now or hereafter
be bound.
e. This Agreement represents a valid obligation of BCF and is fully
enforceable against BCF according to its terms.
5.2 C-ME represents and warrants to BCF that:
a. C-ME is a corporation duly organized, validly existing and in good
standing under the laws of the State of California.
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b. C-ME has full corporate authority and power to enter into this
Agreement and to perform its obligations under this Agreement.
c. C-ME's performance of this Agreement will not violate any
applicable law or regulation or any agreement to which C-ME may now or hereafter
be bound.
d. This Agreement represents a valid obligation of C-ME and is fully
enforceable against C-ME according to its terms.
e. The C-ME Services shall be completed in a workmanlike manner.
f. C-ME does not represent or warrant that the C-ME Services will be
uninterrupted or error free, nor will C-ME be liable for damages resulting
therefrom. C-ME disclaims liability for loss of data in transit between BCF and
Network Vendors and between BCF and Network Users.
g. C-ME does not represent or warrant that information provided by
the Network Vendors will be accurate or error free.
THE WARRANTIES SET FORTH ABOVE CONSTITUTE THE ONLY WARRANTIES WITH RESPECT TO
THE SERVICES AND ARE IN LIEU OF ANY OTHER WARRANTIES WRITTEN OR ORAL, STATUTORY,
EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, THE WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
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ARTICLE 6
TERMINATION; DEFAULT; REMEDIES
6.1 This Agreement may be terminated by the non-defaulting party upon
the occurrence of any of the following events of default:
a. either party fails to pay the other when due any amount due under
this Agreement, and such failure continues for a period of fifteen (15) business
days after notice has been sent to the non-paying party;
b. any party (i) files for bankruptcy, receivership, insolvency,
reorganization, dissolution, liquidation or any similar proceedings, as
applicable, or (ii) has a proceeding instituted against it and such proceeding
is not dismissed within sixty (60) days; and
c. a party fails to observe any material obligation specified in this
Agreement and such failure is not cured within thirty (30) days of a notice
specifying the breach, unless such failure cannot be cured within thirty (30)
days but the defaulting party has commenced action to effect such cure within
the thirty (30) day period and thereafter is diligently pursuing the same.
ARTICLE 7
LIMITATION OF LIABILITY AND INDEMNIFICATION
7.1 BCF will indemnify, defend and hold C-ME harmless from and against
any and all obligations, charges, liabilities, costs, fees, increased taxes or
expenses, including without limitation, court costs and reasonable attorneys'
fees (including allocated costs of internal
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counsel), which C-ME may incur or which may be claimed against C-ME by any
person or as a result of acts or omissions of BCF, its employees or agents
relating to the exercise of, or the failure to exercise, BCF's obligations under
this Agreement; provided however, BCF's total cumulative liability shall not
exceed the aggregate fees received from C-ME during the six (6) month period
prior to the date of such claim.
7.2 C-ME will indemnify, defend and hold BCF harmless from and against
any and all obligations, charges, liabilities, costs, fees, increased taxes of
expenses, including without limitation, court costs and reasonable attorneys'
fees (including allocated costs of internal counsel), which BCF may incur or
which may be claimed against BCF by any person as a result of acts or omissions
of C-ME, its directors, officers, employees or agents relating to the exercise
of, or the failure to exercise, C-ME's obligations under this Agreement;
provided, however, that the total cumulative liability of C-ME for damages
(except in the case of willful or intentional acts or omissions) arising from
any breach of C-ME's obligations related to or arising from C-ME Services,
including claims for indemnity related thereto, shall not exceed an amount equal
to the aggregate fees payable to C-ME from Network Vendors participating in the
BCF Network during the six-month period previous to the date of such claim.
7.3 This Section will survive termination of this Agreement.
NEITHER BCF NOR C-ME SHALL BE LIABLE FOR ANY SPECIAL, INCIDENTAL,
CONSEQUENTIAL OR PUNITIVE DAMAGES OR LOSS OF PROFITS OF ANY NATURE OR FOR ANY
REASON WHATSOEVER ARISING OUT OF, OR RELATED TO, THE PROVISION OR FAILURE TO
PROVIDE BCF OR C-ME
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SERVICES, AS THE CASE MAY BE, REGARDLESS OF THE FORM OF ACTION, WHETHER IN
CONTRACT, TORT, BREACH OF WARRANTY OR OTHERWISE EVEN IF BCF OR C-ME HAS BEEN
NOTIFIED OF THE POSSIBILITIES THEREOF, OTHERWISE THE PARTIES SHALL BE LIABLE FOR
SUCH DAMAGES.
THE FEES SET FORTH IN ARTICLE 4 HEREOF REFLECT THE ALLOCATION OF RISKS
BETWEEN THE PARTIES. BY SIGNING THIS AGREEMENT, THE PARTIES HERETO ACKNOWLEDGE
AND UNDERSTAND THESE ALLOCATIONS OF RISK LIMITING THE RESPECTIVE LIABILITY OF
THE PARTIES HERETO, AND THAT A CHANGE IN THE ALLOCATION OF RISKS SET FORTH IN
THIS AGREEMENT WOULD AFFECT SUCH FEES.
ARTICLE 8
CONFIDENTIALITY
8.1 Both parties agree that each will reveal Confidential Information
only to those of its directors, officers, agents or employees with a need to
know. "Confidential Information" means all confidential or proprietary
information about any other party, including but not limited to software,
customer and vendor names, addresses, and account numbers; retail locations;
sales volume(s); merchandise mix or other information of the business affairs of
either party or Network Vendor, its parent company or its affiliated and
subsidiary companies, which that party reasonably considers confidential and/or
proprietary. Confidential Information will not include information in the public
domain, information already known by the party receiving the information prior
to commencing the discussions that led to this
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Agreement, information lawfully obtained from a third party, and information
required to be disclosed by law.
8.2 Each party agrees not to use Confidential Information nor to
disclose Confidential Information to any third party, except as may be necessary
for that party to perform its obligations pursuant to this Agreement, unless
otherwise agreed upon by the parties or required by law. If either party should
disclose Confidential Information to a third party, such party will cause the
third party to agree to the confidentiality provisions set forth in this
Paragraph. The provisions of this Paragraph will survive the termination of this
Agreement.
8.3 Each party agrees that any violation in breach of the provisions of
this Article shall result in irreparable harm to the party to which the
Confidential Information belongs and such party shall be entitled to such
injunctive relief from any court of competent jurisdiction without the necessity
of any undertaking, bond or proof or evidence of injury or damage. Such remedy
shall be in addition to, and not in lieu of, any other right or remedy available
to each party under law or equity.
ARTICLE 9
MISCELLANEOUS
9.1 All notices or other communications required or permitted to be
given hereunder shall be in writing and shall be delivered by hand or sent by
prepaid telex, cable or telecopy, or sent, postage prepaid, by registered,
certified or express mail, or reputable overnight courier service and shall be
deemed given when so delivered by hand, telexed, cabled, or telecopied, or if
mailed, three days after mailing (one business day in the case of express mail
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or overnight courier service), to the address of the party for whom intended at
such address as is set forth at the beginning of this Agreement, Attention:
President, or at such other address as such party may hereafter specify by
written notice to the other party.
9.2 In the event that any provision (or any portion of any provision)
of this Agreement shall be held to be void or unenforceable, the remaining
provisions of this Agreement (and the remaining portion of any provision found
void or unenforceable in part only) shall continue in full force and effect.
Additionally, in the event this Agreement or any provision or portion thereof
shall be held to violate any rule against perpetuities or any other rule
limiting the duration of the term of this Agreement, then this Agreement or any
such provision or portion thereof shall be automatically amended (and any court
of competent jurisdiction is hereby requested to amend it) so as to extend for
the longest period possible, including extension, which shall not be in
violation of any such rule, it being the intent of the parties to provide the
longest term possible.
9.3 This Agreement, and the Exhibits attached hereto, constitute the
entire understanding and contract among the parties with respect to the subject
matter hereof, supersedes all prior agreements and understanding between them,
written or oral, and may not be modified, amended or terminated orally.
9.4 A waiver of any breach or violation of any term, provision,
agreement, covenant or condition herein contained shall not be deemed to be a
continuing waiver or a waiver of any future or past breach or violation.
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9.5 This Agreement may not be assigned by any party without the prior
written consent of the other party, which consent may be withheld or denied in
the non-assigning party's sole discretion.
9.6 This Agreement shall be binding upon and shall inure to the benefit
of all representatives, nominees, transferees, successors and assigns.
9.7 The following procedure will be adhered to in all disputes that
arise under this Agreement, except in circumstances in which a party seeks
injunctive relief to protect its trademarks or other intellectual property and
its Confidential Information. Either party to this Agreement must notify the
other party of the nature of the dispute with as much detail as possible about
the deficient performance of the other party. Each party shall have a
representative who is knowledgeable of the services and empowered to represent
the respective party in dispute negotiations ("Project Manager"). The Project
Managers shall meet telephonically or in person as soon as possible, but no
later than thirty (30) days after the date of the written notification, to reach
an agreement about the nature of the deficiency and the corrective action to be
taken by the respective parties. The Project Managers shall within fifteen (15)
days after such meeting produce a report about the nature of the dispute in
detail to their respective management. If the Project Managers are unable to
agree on corrective action, the respective managers to whom the Project Managers
report or their successors ("Management") shall meet telephonically or in person
to facilitate an agreement as soon as possible, but no later than fifteen (15)
days after the date of the report. If Management cannot resolve the dispute with
a written plan of corrective action as soon as possible, but no later
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than sixty (60) days after their initial meeting, or if the agreed upon
completion dates in the written plan of corrective action are exceeded, either
party may proceed with its respective rights under this Agreement.
9.8 In the event of any dispute, claim, question or disagreement
between the parties arising out of or relating to the Agreement, the parties
shall use their best efforts to settle such dispute, claims, questions or
disagreements. To this effect, they shall consult and negotiate with each other
and in good faith and, recognizing their mutual interests, attempt to reach a
just and equitable solution satisfactory to the parties. If they do not reach
such solution, then upon notice by either party to the other, claims, questions
or disagreements shall be settled by final and binding arbitration in accordance
with the Expedited Procedures of the Commercial Rules of the American
Arbitration Association, or such other procedures applicable to disputes of this
type.
Within fifteen (15) days after the notice of election to arbitrate by
either party to the other as described above, each party shall select one person
to act as arbitrator, and the two selected shall select a third arbitrator
within ten (10) days of their appointment. If the arbitrators selected by the
parties are unable or fail to agree upon the third arbitrator, the parties or
their attorneys may request the American Arbitration Association to appoint the
third neutral arbitrator. Prior to the commencement of hearings, each of the
arbitrators appointed shall take an oath of impartiality. The arbitrators must
be members of the State Bar actively engaged in the practice of law with
expertise in the process of deciding disputes and interpreting contracts in
computer services. The arbitrators shall award to the prevailing party,
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if any, as determined by the arbitrators, all of its costs and fees. "Costs and
fees" means all reasonable pre-award expenses of the arbitration, including the
arbitrators' fees, administrative fees, travel expenses, out-of-pocket expenses
such as copying and telephone, court costs, witness fees and attorney's fees.
Upon the request of a party, the arbitrators' award shall include findings of
fact and conclusion of law. The arbitrators shall provide copies of such award
to the parties. Any award may be entered by the prevailing party in any court of
competent jurisdiction.
9.9 No breach of any obligation of a party to this Agreement shall
constitute an event of default or breach to the extent it arises out of a cause,
existing or future, that is beyond the control and without negligence of the
party otherwise chargeable with breach or default, including without limitation:
action or strike; lockout or other labor dispute; flood; war; riot; theft;
earthquake or natural disaster. Either party desiring to rely upon any of the
foregoing as an excuse for default or breach shall, when the cause arises, give
to the other party prompt notice of the facts which constitute such cause; and,
when the cause ceases to exist, give prompt notice thereof to the other party.
This section shall in no way limit the right of either party to this Agreement
to make any claim against third parties for any damages suffered due to said
causes.
9.10 This Agreement shall be governed by and construed in accordance
with the laws of the State of California, applicable to Agreements made and
wholly to be performed within said state.
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9.11 Whenever used in this Agreement, words denoting the masculine
gender shall include the feminine and neuter gender and vice versa, as
appropriate, and words denoting the singular number shall include the plural and
vice versa, as appropriate.
9.12 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original but all of which together shall constitute
one instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
CYBER MERCHANTS EXCHANGE, INC.
d/b/a Cyber Merchants Exchange
By: /S/
Frank Yuan
President and Chief Executive Officer
BURLINGTON COAT FACTORY
WAREHOUSE CORPORATION
By: /S/
Mark A. Nesci
Vice President/ Chief Operating Officer
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EXHIBIT A
Service Specifications for the BCF Network
What C-ME will provide:
C-ME will create a private ISN for BCF which will function similar to
C-ME's existing web site (http://www.c-me.com) and feature C-ME's Focused
Broadcasting (FOCASTING) software.
The private ISN will have a database of products broken down in product
categories according to BCF's specifications. C-ME will take the information
provided to it by vendors who join BCF's ISN and create uniform web listings.
The uniform web listing can include the following information: a picture of the
product, product descriptions, fabric content, sizes, packing ratios, delivery
terms, and country of origin. The uniform web listings will then be placed in
product categories furnished by BCF.
BCF's buyers can access this information through the use of C-ME's
FOCASTING software. Similar to PointCast(TM) services, FOCASTING will enable
BCF's buyers to create individual web pages which contain only those product
categories that fall within their specific areas of interest. After their
customized web page is created, the FOCASTING software will "push" or broadcast
directly to the buyer's desktop all products within BCF's ISN that fall within
the product categories selected by the buyer. For example, if a Men's Jeans
buyer created a customized web page using FOCASTING and selected "Men's Jeans,"
the FOCASTING software will transmit all the information and images relating to
Men's Jeans within BCF's ISN to the buyer each time he/she logs on.
C-ME will also provide support to BCF's buyers and other personnel in
order to educate them on how to use BCF's ISN and FOCASTING software.
Lastly, once created, C-ME will provide BCF with Internet E.D.I.
software and, if requested, provide a for-fee consulting on how to incorporate
the Internet E.D.I. software with BCF's existing computer network and mainframe.
What BCF needs to use the ISN:
BCF must acquire and maintain as many work stations as are necessary
for BCF's buyers to access BCF's ISN and use the FOCASTING software. The work
stations must have Internet access and be equipped with the appropriate web
browser software. BCF may also acquire and maintain a web server which will
enable it to
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capture and store all information, including but not limited to, data, pictures,
and images, contained on BCF's ISN.
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EXHIBIT B
Warrant Agreement
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EXHIBIT C
SCHEDULE OF FEES PAYABLE TO C-ME BY NETWORK VENDORS
1. Base Network Set-Up Fee: $300.00
2. Base Network Hosting Fee: $150.00/month
3. Additional Network Set-Up Fee: $100.00
4. Additional Network Hosting Fee: $20.00/month
5. Excess Hosting Fee: $1.00/month/product
6. Change Fees:
a. Changes to product description and product image: $5.00/change
b. Changes to product image: $3.00/change
c. Changes to product description: $2.00/change
7. Base Network Set-Up Fee with Internet EDI: $500.00
8. Base Network Hosting Fee with Internet EDI: $200.00 - 300.00
27
PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT (this "Agreement") is made on the 27th day
of January, 1998 (the "Effective Date"), by and between General Textiles/FBC
Stores, Factory 2-U, Inc., a California corporation, on behalf of itself and
its' Affiliates (collectively, "FBC"), with offices at 4000 Ruffin Road, San
Diego, California 92123-1866, and Cyber Merchants Exchange, Inc., a California
corporation, d/b/a Cyber Merchants Exchange ("C-ME"), with offices at 320 South
Garfield Avenue, Suite 318, Alhambra, California 91801.
RECITALS
WHEREAS, C-ME has developed technology, and desires to engage in the
business of providing a service which utilizes such technology, whereby C-ME
collects text, graphic images, and other data and information including, without
limitation, electronic pictures from manufacturers, vendors and other suppliers
of goods and services ("Network Vendors"), and transmits the same via various
Internet or other electronic means to the web sites of retailers and other users
of goods and services ("Network Users"), thereby creating an electronic showroom
and catalogue of goods and services. Each of such web sites shall be a private
Internet Sourcing Network ("ISN"), designed and built for the exclusive use of a
retailer, and/or a public ISN designed for others (such ISN is hereinafter
referred to as a "Network," individually, and "Networks," collectively);
WHEREAS, C-ME desires FBC to become a Network User and assist C-ME in
the promotion and marketing of the FBC Network to Network Vendors, and FBC is
willing to do so on the terms and conditions hereinafter contained;
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual promises contained herein, the parties hereto agree as follows:
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ARTICLE 1
DEFINITIONS
Terms in this Agreement which are capitalized shall have the meanings
set forth below or defined elsewhere in this Agreement:
1.1 "Additional Service Fee" shall mean the fee payable to C-ME for any
consulting services C-ME is requested to provide in connection with the
installation, hosting or maintenance of the hardware and software required for
the Internet E.D.I.
1.2 "Affiliate" shall mean FBC and any corporation, partnership or
joint venture, which directly or indirectly is controlled by, or is under common
control with FBC. As used herein "control" is defined as directly or indirectly
beneficially controlling, owning or holding of record more than 50% of all
classes of voting securities of a corporation, or, in the case of an entity
which is not a corporation, more than 50% of the equity interest.
1.3 "Base Network" shall mean the first Network subscribed to by a
Network Vendor.
1.4 "Base Network Hosting Fee" shall mean the monthly fee payable to
C-ME by any Network Vendor for the hosting of promotional data on fifteen (15)
of such Network Vendor's products and/or services on such Network Vendor's Base
Network.
1.5 "Base Network Set-Up Fee" shall mean the initial set-up fee payable
to C-ME by a Network Vendor for subscribing to such Network Vendor's Base
Network.
1.6 "Change Fees" shall mean the fees payable to C-ME by any Network
Vendor for changes including, but not limited to, additions, deletions, or
modifications made by C-ME to such Network Vendor's product information and/or
product images.
1.7 "Dynamic End-User Portfolio System" or "DEPS." shall mean the
proprietary technology developed by C-ME whereby Network Users can: (i)
independently manipulate
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information contained within their databases including, but not limited to,
selectively deleting, restoring, and archiving information, without affecting
the databases created by other Network Users, and (ii) receive notifications of
new information transmitted to their databases.
1.8 "Excess Hosting Fee" shall mean the monthly fee payable to C-ME by
any Network Vendor for the display of any products in excess of the fifteen (15)
products included in the Base or Additional Network Hosting Fees.
1.9 "FBC Network" shall mean the Network created and maintained by C-ME
for FBC's exclusive use.
1.10 "FOCASTING" shall mean the proprietary technology developed by
C-ME whereby Network Users can create their own private web pages by selecting
categories and product lines which fall within their specific areas of interest
to be pushed and broadcast to such web pages.
1.11 "Internet Electronic Data Interchange" or "Internet E.D.I." shall
mean the electronic exchange of business documents, from computer to computer,
between trading partners over the Internet.
ARTICLE 2
RIGHTS AND OBLIGATIONS OF C-ME
2.1 C-ME shall use reasonable commercial efforts to provide for FBC a
Network consisting of (a) promotional materials provided by Network Vendors who
have subscribed to a Network designed with the assistance of FBC and for its
exclusive use, and (b) the various specifications and services listed on Exhibit
A hereto, incorporated herein by reference. C-ME shall maintain the FBC Network
and allow FBC access thereto free of charge.
2.2 C-ME shall make available to FBC each new product, service,
enhancement or additional feature of the FBC Network as soon as the same shall
become available, provided,
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however, that nothing contained herein shall obligate C-ME to develop any such
additional features, products or services.
2.3 C-ME shall provide FBC with the FOCASTING, ISN, DEPS, and Internet
E.D.I. software required for data design, storage and transmission on the FBC
Network (the "C-ME Software") free of charge, provided, however, that C-ME may
charge a reasonable consulting fee to facilitate the connection of the FBC
Network to FBC's existing mainframe and network for use of the Internet E.D.I.,
if C-ME's assistance is requested by FBC. C-ME will exercise reasonable
commercial efforts to maintain and provide training and instructional materials
for the operation of any C-ME Software or other aspects of the FBC Network
(C-ME's obligation under Sections 2.1, 2.2 and 2.3 are collectively referred to
herein as the "C-ME Services").
2.4 To the extent applicable, C-ME hereby grants FBC, for the duration
of the term of this Agreement, a royalty-free license to use, solely in
connection with the FBC Network, the C-ME Software included or used in
connection with the FBC Network, including all updates thereof, and shall
indemnify, defend, save and hold FBC harmless from and against any damages
finally awarded against FBC (without any limitation of liability) in favor of a
third party in a claim by a third party of patent or copyright infringement in
connection with the use of the C-ME Software forming the FBC Network, and the
use and exploitation of images and data received via the FBC Network and
transmission or re-broadcast of images and data.
2.5 With respect to transmissions received, directly or indirectly, by
FBC from Network Vendors through the FBC Network, C-ME hereby grants to FBC a
non-exclusive license to capture, copy, reproduce, display, publish, exploit,
and print color images and other such data supplied by Network Vendors. C-ME
shall require each Network Vendor to supply C-ME such images and data for use by
FBC. C-ME shall provide to FBC, upon finalization, its proposed
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agreement for use with Network Vendors in order to allow FBC the opportunity to
comment thereon.
2.6 C-ME shall have the power to negotiate, in its sole discretion, the
fees itemized on Exhibit B hereto with other Network Participants and Network
Vendors.
2.7 C-ME shall pay to FBC any and all fees as provided in Article 4
hereof.
ARTICLE 3
RIGHTS AND OBLIGATIONS OF FBC
3.1 FBC shall provide to C-ME a list of its Network Vendors and other
potential participants in the FBC Network ("FBC Vendor List"). FBC may amend
and/or supplement the FBC Vendor List from time to time with supplemental lists
of vendors, contractors, suppliers and other parties.
3.2 FBC shall exercise its best efforts to assist C-ME in marketing and
promoting the FBC Network to potential Network Vendors. In connection with the
foregoing, FBC shall undertake the following:
a) assign project leaders in FBC's management information and
vendor compliance departments or other departments which perform a similar role
to work with C-ME personnel to set up and implement the FBC Network, to give
input on the development of an electronic data interchange system on the FBC
Network as well as assist in marketing efforts;
b) send mailings to potential Network Vendors encouraging and
requesting participation by such vendors in the FBC Network and follow-up said
mailings with telephone calls by FBC employees and/or agents including, but not
limited to, general merchandise managers, division merchandise managers, buyers
or other persons to said potential Network Vendors to promote vendor
participation in the FBC Network;
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c) instruct FBC's buyers to utilize the FBC Network on a daily
basis;
d) after the electronic data interchange system on the FBC
Network has been fully developed and is fully operational, encourage and request
vendor use of such system;
e) hold meetings with vendors (in the form of seminars,
breakfast meetings, and the like) in order to market and promote the FBC
Network; and
f) issue a joint press release with C-ME to market and promote
the FBC Network.
3.3 FBC shall provide C-ME with specifications and data for the
creation of the FBC Network. In addition, FBC will work with C-ME to design the
FBC Network and provide any and all training and/or instructional materials to
C-ME regarding industrial categories and other systems integral to FBC's
marketing methods.
3.4 Neither C-ME nor any other person shall be authorized to use FBC's
name to solicit any party to participate in the program, without FBC's prior
written approval, in each instance of the content of any communications, written
or oral or in any other format, with prospective participants which includes the
use of FBC's name.
3.5 FBC shall acquire, install and maintain the hardware and software
necessary for FBC to participate in the FBC Network and the Internet E.D.I. If
requested by FBC, C-ME shall advance FBC reasonable sums of money for the
purpose of purchasing computer equipment necessary to use the C-ME Software.
C-ME shall seek FBC's prior written approval before any money is advanced
pursuant to this Section.
3.6 Once the Internet E.D.I. capabilities are implemented with the FBC
Network, FBC may develop and implement a system, (with the assistance of C-ME to
ensure conformity throughout its Networks), to (a) transmit orders from FBC
buyers and other related personnel to
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each of its Network Vendors, (b) issue invoices for merchandise sold via the FBC
Network and (c) facilitate and track the shipping of merchandise between Network
Vendors and FBC.
3.7 FBC shall indemnify, defend, save and hold C-ME harmless from and
against any claim of any Network Vendor arising as a result of FBC's failure to
perform its obligations under a contract with that Network Vendor.
3.8 FBC shall use its best efforts to use the C-ME Software and FBC
Network provided by C-ME. FBC shall not promote, endorse, support, have an
ownership interest in or receive any revenues from, any competing on-line
electronic showroom or vendor web site service similar to the C-ME Software or
FBC Network during the term of this Agreement.
3.9 FBC grants C-ME an irrevocable license to include any promotional
data provided by any Network Vendor which is contained in the FBC Network on any
web site developed by C-ME including, but not limited to http://www.c-me.com.
This Section will survive termination of this Agreement.
3.10 If any money is advanced pursuant to Section 3.5 above, FBC grants
C-ME the right to deduct from FBC's share of the fees specified in Article 4 the
full amount of the advanced money until all advanced money has been paid. In no
event shall FBC be liable for any advanced money. However, if FBC's share of the
fees specified in Article 4 are not enough to fully reimburse C-ME the advanced
money or if this Agreement is terminated pursuant to Article 6 before FBC has
reimbursed C-ME the full sum of the advanced money, FBC must return to C-ME all
computer equipment purchased with the advanced money without offset or credit.
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ARTICLE 4
FEES AND CHARGES
4.1 C-ME shall pay FBC thirty-three percent (33%) of all Base Network
Hosting Fees, including Excess Hosting Fees, if any, collected by C-ME with
respect to each Network Vendor, including Foreign Vendors, which subscribes to
the FBC Network as its Base Network through C-ME's U.S. offices for the duration
of such subscription. FBC shall not share in any Base Network Hosting Fees,
including Excess Hosting Fees, if any, collected from Foreign Vendors which
subscribes to the FBC Network as its Base Network through a foreign affiliate of
C-ME.
4.2 Such payments shall be made on a monthly basis, for as long as this
Agreement shall be in effect, within thirty (30) days after the end of the
immediately preceding month, together with a statement showing revenues and a
computation of fees payable for such preceding month. FBC shall not receive any
share of any Set-Up Fees, Change Fees, Additional Service Fees, or any other
fees. FBC shall have the right to audit C-ME's books and records from time to
time to ensure accuracy of statements provided, and payments made, by C-ME to
FBC.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
5.1 FBC represents and warrants to C-ME that:
a. FBC is a corporation duly organized, validly existing and
in good standing under the laws of the State of California.
b. FBC has full corporate authority and power to enter into
this Agreement and to perform its obligations under this Agreement.
c. FBC will not sell to, purchase from, provide or exchange
with any third party any Network Vendor information identified as confidential
information in the agreement for
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services between C-ME and each such Network Vendor. Notwithstanding, the above
no such information shall be deemed confidential to the extent it is otherwise
in the possession of FBC without any obligation of confidentiality, is now or
hereafter in the public domain, is lawfully obtained from a third party, or is
required to be disclosed by law. FBC will maintain limited access to such
information and a complete record of all individuals with access thereto.
d. FBC's performance of this Agreement will not violate any
applicable law or regulation or any agreement to which FBC may now or hereafter
be bound.
e. This Agreement represents a valid obligation of FBC and is
fully enforceable against FBC according to its terms.
5.2 C-ME represents and warrants to FBC that:
a. C-ME is a corporation duly organized, validly existing and
in good standing under the laws of the State of California.
b. C-ME has full corporate authority and power to enter into
this Agreement and to perform its obligations under this Agreement.
c. C-ME's performance of this Agreement will not violate any
applicable law or regulation or any agreement to which C-ME may now or hereafter
be bound.
d. This Agreement represents a valid obligation of C-ME and is
fully enforceable against C-ME according to its terms.
e. The C-ME Services shall be completed in a workmanlike
manner.
f. C-ME does not represent or warrant that the C-ME Services
will be uninterrupted or error free, nor will C-ME be liable for damages
resulting therefrom. C-ME disclaims liability for loss of data in transit
between FBC and Network Vendors and between FBC and Network Users.
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g. C-ME does not represent or warrant that information
provided by the Network Vendors will be accurate or error free.
THE WARRANTIES SET FORTH ABOVE CONSTITUTE THE ONLY WARRANTIES WITH RESPECT TO
THE SERVICES AND ARE IN LIEU OF ANY OTHER WARRANTIES WRITTEN OR ORAL, STATUTORY,
EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, THE WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
ARTICLE 6
TERMINATION; DEFAULT; REMEDIES
6.1 This Agreement may be terminated by the non-defaulting party upon
the occurrence of any of the following events of default:
a. either party fails to pay the other when due any amount due
under this Agreement, and such failure continues for a period of fifteen (15)
business days after notice has been sent to the non-paying party;
b. any party (i) files for bankruptcy, receivership,
insolvency, reorganization, dissolution, liquidation or any similar proceedings,
as applicable, or (ii) has a proceeding instituted against it and such
proceeding is not dismissed within sixty (60) days; and
c. a party fails to observe any material obligation specified
in this Agreement and such failure is not cured within thirty (30) days of a
notice specifying the breach.
6.2 This Agreement may be terminated by either party upon thirty (30)
days written notice by the terminating party to the other party.
6.3 Upon termination of this Agreement, all data contained within FBC's
ISN shall remain the property of FBC and the C-ME Software shall remain the
property of C-ME.
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ARTICLE 7
LIMITATION OF LIABILITY AND INDEMNIFICATION
7.1 FBC will indemnify, defend and hold C-ME harmless from and against
any and all obligations, charges, liabilities, costs, fees, increased taxes or
expenses, including without limitation, court costs and reasonable attorneys'
fees (including allocated costs of internal counsel), which C-ME may incur or
which may be claimed against C-ME by any person or as a result of acts or
omissions of FBC, its employees or agents relating to the exercise of, or the
failure to exercise, FBC's obligations under this Agreement; provided however,
FBC's total cumulative liability shall not exceed the aggregate fees received
from C-ME during the six (6) month period prior to the date of such claim.
7.2 C-ME will indemnify, defend and hold FBC harmless from and against
any and all obligations, charges, liabilities, costs, fees, increased taxes of
expenses, including without limitation, court costs and reasonable attorneys'
fees (including allocated costs of internal counsel), which FBC may incur or
which may be claimed against FBC by any person as a result of acts or omissions
of C-ME, its directors, officers, employees or agents relating to the exercise
of, or the failure to exercise, C-ME's obligations under this Agreement;
provided, however, that the total cumulative liability of C-ME for damages
(except in the case of willful or intentional acts or omissions) arising from
any breach of C-ME's obligations related to or arising from C-ME Services,
including claims for indemnity related thereto, shall not exceed an amount equal
to the aggregate fees payable to C-ME from Network Vendors participating in the
FBC Network during the six (6) month period previous to the date of such claim.
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7.3 This Section will survive termination of this Agreement.
NEITHER FBC NOR C-ME SHALL BE LIABLE FOR ANY SPECIAL, INCIDENTAL,
CONSEQUENTIAL OR PUNITIVE DAMAGES OR LOSS OF PROFITS OF ANY NATURE OR FOR ANY
REASON WHATSOEVER ARISING OUT OF, OR RELATED TO, THE PROVISION OR FAILURE TO
PROVIDE FBC OR C-ME SERVICES, AS THE CASE MAY BE, REGARDLESS OF THE FORM OF
ACTION, WHETHER IN CONTRACT, TORT, BREACH OF WARRANTY OR OTHERWISE EVEN IF FBC
OR C-ME HAS BEEN NOTIFIED OF THE POSSIBILITIES THEREOF, OTHERWISE THE PARTIES
SHALL BE LIABLE FOR SUCH DAMAGES.
THE FEES SET FORTH IN ARTICLE 4 HEREOF REFLECT THE ALLOCATION OF RISKS
BETWEEN THE PARTIES. BY SIGNING THIS AGREEMENT, THE PARTIES HERETO ACKNOWLEDGE
AND UNDERSTAND THESE ALLOCATIONS OF RISK LIMITING THE RESPECTIVE LIABILITY OF
THE PARTIES HERETO, AND THAT A CHANGE IN THE ALLOCATION OF RISKS SET FORTH IN
THIS AGREEMENT WOULD AFFECT SUCH FEES.
ARTICLE 8
CONFIDENTIALITY
8.1 Both parties agree that each will reveal Confidential Information
only to those of its directors, officers, agents or employees with a need to
know. "Confidential Information" means all confidential or proprietary
information about any other party, including but not limited to software,
customer and vendor names, addresses, and account numbers; retail locations;
sales volume(s); merchandise mix or other information of the business affairs of
either party or Network Vendor, its parent company or its affiliated and
subsidiary companies, which that party reasonably
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considers confidential and/or proprietary. Confidential Information will not
include information in the public domain, information already known by the party
receiving the information prior to commencing the discussions that led to this
Agreement, information lawfully obtained from a third party, and information
required to be disclosed by law.
8.2 Each party agrees not to use Confidential Information nor to
disclose Confidential Information to any third party, except as may be necessary
for that party to perform its obligations pursuant to this Agreement, unless
otherwise agreed upon by the parties or required by law. If either party should
disclose Confidential Information to a third party, such party will cause the
third party to agree to the confidentiality provisions set forth in this
Section. The provisions of this Section will survive the termination of this
Agreement.
8.3 Each party agrees that any violation in breach of the provisions of
this Article shall result in irreparable harm to the party to which the
Confidential Information belongs and such party shall be entitled to such
injunctive relief from any court of competent jurisdiction without the necessity
of any undertaking, bond or proof or evidence of injury or damage. Such remedy
shall be in addition to, and not in lieu of, any other right or remedy available
to each party under law or equity.
ARTICLE 9
MISCELLANEOUS
9.1 All notices or other communications required or permitted to be
given hereunder shall be in writing and shall be delivered by hand or sent by
prepaid telex, cable or telecopy, or sent, postage prepaid, by registered,
certified or express mail, or reputable overnight courier service and shall be
deemed given when so delivered by hand, telexed, cabled, or telecopied, or if
mailed, three days after mailing (one business day in the case of express mail
or overnight courier
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service), to the address of the party for whom intended at such address as is
set forth at the beginning of this Agreement, Attention: President, or at such
other address as such party may hereafter specify by written notice to the other
party.
9.2 In the event that any provision (or any portion of any provision)
of this Agreement shall be held to be void or unenforceable, the remaining
provisions of this Agreement (and the remaining portion of any provision found
void or unenforceable in part only) shall continue in full force and effect.
Additionally, in the event this Agreement or any provision or portion thereof
shall be held to violate any rule against perpetuities or any other rule
limiting the duration of the term of this Agreement, then this Agreement or any
such provision or portion thereof shall be automatically amended (and any court
of competent jurisdiction is hereby requested to amend it) so as to extend for
the longest period possible, including extension, which shall not be in
violation of any such rule, it being the intent of the parties to provide the
longest term possible.
9.3 This Agreement, and the Exhibits attached hereto, constitute the
entire understanding and contract among the parties with respect to the subject
matter hereof, supersedes all prior agreements and understanding between them,
written or oral, and may not be modified, amended or terminated orally.
9.4 A waiver of any breach or violation of any term, provision,
agreement, covenant or condition herein contained shall not be deemed to be a
continuing waiver or a waiver of any future or past breach or violation.
9.5 This Agreement may not be assigned by any party without the prior
written consent of the other party, which consent may be withheld or denied in
the non-assigning party's sole discretion.
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9.6 This Agreement shall be binding upon and shall inure to the benefit
of all representatives, nominees, transferees, successors and assigns.
9.7 The following procedure will be adhered to in all disputes that
arise under this Agreement, except in circumstances in which a party seeks
injunctive relief to protect its trademarks or other intellectual property and
its Confidential Information. Either party to this Agreement must notify the
other party of the nature of the dispute with as much detail as possible about
the deficient performance of the other party. Each party shall have a
representative who is knowledgeable of the services and empowered to represent
the respective party in dispute negotiations ("Project Manager"). The Project
Managers shall meet telephonically or in person as soon as possible, but no
later than thirty (30) days after the date of the written notification, to reach
an agreement about the nature of the deficiency and the corrective action to be
taken by the respective parties. The Project Managers shall within fifteen (15)
days after such meeting produce a report about the nature of the dispute in
detail to their respective management. If the Project Managers are unable to
agree on corrective action, the respective managers to whom the Project Managers
report or their successors ("Management") shall meet telephonically or in person
to facilitate an agreement as soon as possible, but no later than fifteen (15)
days after the date of the report. If Management cannot resolve the dispute with
a written plan of corrective action as soon as possible, but no later than sixty
(60) days after their initial meeting, or if the agreed upon completion dates in
the written plan of corrective action are exceeded, either party may proceed
with its respective rights under this Agreement.
9.8 In the event of any dispute, claim, question or disagreement
between the parties arising out of or relating to the Agreement, the parties
shall use their best efforts to settle such dispute, claims, questions or
disagreements. To this effect, they shall consult and negotiate with
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each other and in good faith and, recognizing their mutual interests, attempt to
reach a just and equitable solution satisfactory to the parties. If they do not
reach such solution, then upon notice by either party to the other, claims,
questions or disagreements shall be settled by final and binding arbitration in
accordance with the Expedited Procedures of the Commercial Rules of the American
Arbitration Association, or such other procedures applicable to disputes of this
type.
Within fifteen (15) days after the notice of election to arbitrate by
either party to the other as described above, each party shall select one person
to act as arbitrator, and the two selected shall select a third arbitrator
within ten (10) days of their appointment. If the arbitrators selected by the
parties are unable or fail to agree upon the third arbitrator, the parties or
their attorneys may request the American Arbitration Association to appoint the
third neutral arbitrator. Prior to the commencement of hearings, each of the
arbitrators appointed shall take an oath of impartiality. The arbitrators must
be members of the State Bar actively engaged in the practice of law with
expertise in the process of deciding disputes and interpreting contracts in
computer services. The arbitrators shall award to the prevailing party, if any,
as determined by the arbitrators, all of its costs and fees. "Costs and fees"
means all reasonable pre-award expenses of the arbitration, including the
arbitrators' fees, administrative fees, travel expenses, out-of-pocket expenses
such as copying and telephone, court costs, witness fees and attorney's fees.
Upon the request of a party, the arbitrators' award shall include findings of
fact and conclusion of law. The arbitrators shall provide copies of such award
to the parties. Any award may be entered by the prevailing party in any court of
competent jurisdiction.
9.9 No breach of any obligation of a party to this Agreement shall
constitute an event of default or breach to the extent it arises out of a cause,
existing or future, that is beyond the control and without negligence of the
party otherwise chargeable with breach or default, including without
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limitation: action or strike; lockout or other labor dispute; flood; war; riot;
theft; earthquake or natural disaster. Either party desiring to rely upon any of
the foregoing as an excuse for default or breach shall, when the cause arises,
give to the other party prompt notice of the facts which constitute such cause;
and, when the cause ceases to exist, give prompt notice thereof to the other
party. This section shall in no way limit the right of either party to this
Agreement to make any claim against third parties for any damages suffered due
to said causes.
9.10 This Agreement shall be governed by and construed in accordance
with the laws of the State of California, applicable to Agreements made and
wholly to be performed within said state.
9.11 Whenever used in this Agreement, words denoting the masculine
gender shall include the feminine and neuter gender and vice versa, as
appropriate, and words denoting the singular number shall include the plural and
vice versa, as appropriate.
9.12 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original but all of which together shall constitute
one instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
CYBER MERCHANTS EXCHANGE, INC.
d/b/a Cyber Merchants Exchange
By: /s/ Frank Yuan
------------------------
Frank Yuan
President and Chief Executive Officer
GENERAL TEXTILES/FBC STORES,
FACTORY 2-U, INC.
By: /s/ Mary McNabb
------------------------
Mary McNabb
Vice President/General Merchandise
Manager
17
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EXHIBIT A
Service Specifications for the FBC Network
What C-ME will provide:
C-ME will create a private ISN for FBC which will function similar to
C-ME's existing web site (http://www.c-me.com) and feature C-ME's Focused
Broadcasting (FOCASTING) software.
The private ISN will have a database of products broken down in product
categories according to FBC's specifications. C-ME will take the information
provided to it by vendors who join FBC's ISN and create uniform web listings.
The uniform web listing can include the following information: a picture of the
product, product descriptions, fabric content, sizes, packing ratios, delivery
terms, and country of origin. The uniform web listings will then be placed in
product categories furnished by FBC.
FBC's buyers can access this information through the use of C-ME's
FOCASTING software. Similar to PointCast(TM) services, FOCASTING will enable
FBC's buyers to create individual web pages which contain only those product
categories that fall within their specific areas of interest. After their
customized web page is created, the FOCASTING software will "push" or broadcast
directly to the buyer's desktop all products within FBC's ISN that fall within
the product categories selected by the buyer. For example, if a Men's Jeans
buyer created a customized web page using FOCASTING and selected "Men's Jeans,"
the FOCASTING software will transmit all the information and images relating to
Men's Jeans within FBC's ISN to the buyer each time he/she logs on.
C-ME will also provide support to FBC's buyers and other personnel in
order to educate them on how to use FBC's ISN and FOCASTING software.
Lastly, once created, C-ME will provide FBC with Internet E.D.I.
software and, if requested, provide a for-fee consulting on how to incorporate
the Internet E.D.I. software with FBC's existing computer network and mainframe.
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EXHIBIT B
SCHEDULE OF FEES PAYABLE TO C-ME BY NETWORK VENDORS
1. Base Network Set-Up Fee: $300.00
2. Base Network Hosting Fee: $150.00/month
3. Excess Hosting Fee: $1.00/month/product
4. Change Fees:
a. Changes to product description
and product image: $5.00/change
b. Changes to product image: $3.00/change
c. Changes to product description: $2.00/change
5. Base Network Set-Up Fee with Internet EDI: $500.00
6. Base Network Hosting Fee with Internet EDI: $200.00 - 300.00
19
EMPLOYMENT AGREEMENT
CYBER MERCHANTS EXCHANGE, INC., a California corporation, located at
320 S. Garfield Avenue, Alhambra, California 91803, hereinafter referred to as
Employer, and DAVID RAU, 5831 Lancashire Avenue, Westminster, California 92683,
hereinafter referred to as Employee, in consideration of the mutual promises
made herein, agree as follows:
Employment and Title
1. Employer hereby employs Employee and Employee accepts tmployment as
part-time treasurer for Employer. The parties agree that Employee's employment
with Employer is "at will."
Duties
2. Employee shall report to Employer's President. Employee shall be
responsible for maintaining Employers accounts and finances, including but not
limited to paying Employer's employees, accounts payable, . . . etc., and
performing all duties incidental thereto, including supervision of employees
within that department and such other work as may be required of him in
connection with the business of Employer.
Trade Secrets
3. (a) The parties acknowledge and agree that during the term of this
agreement and in the course of the discharge of his duties hereunder, Employee
shall have access to and become acquainted with information concerning the
operation of Employer, including without limitation, financial, personnel,
sales, planning, and other information that is owned by Employer and regularly
used in the operation of Employer's business and that this information
constitutes Employer's trade secrets.
(b) Employer agrees that he shall not disclose any such trade
secrets, directly or indirectly, to any other person or use them in any way,
either during the term of this agreement or at any other time thereafter, except
as is required in the course of his employment for Employer.
Annual Salary
4. As compensation for the services to be rendered by Employee
hereunder, Employer shall pay Employee an annual salary at the rate of
$33,600.00 per annum, payable in equal semi(a)monthly installments of $1,400.00
on the fifteenth (15th) and final days of each month during the period of
employment,
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prorated for any partial employment period.
Restricted Stock Option
5. (a) As additional compensation, Employer agrees to provide Employee
with the option to purchase 50,000 shares of common stock for a total cost of
$10.00. This restricted stock option shall vest six months after the execution
of this employment agreement. However, the Employee may only purchase fifty (50)
percent of the restricted stock option at the end of his first year of
employment (i.e., 25,000 shares). Employee shall have fifteen (15) business days
after the end of his first year of employment to exercise this restricted stock
option. The Employee may purchase the remaining fifty (50) percent of the
restricted stock option at the end of his second year of employment. Employee
shall have fifteen (15) business days after the end of his second year of
employment to exercise this restricted stock option.
(b) Employee will have no right to this restricted stock option upon
Employer's termination of this agreement for or without cause and/or upon
Employee's resignation.
Vacation
6. (a) Employee will be entitled to an annual vacation leave of fifteen
(15) working days at full pay.
(b) Although vacations will be granted at times most desired by
Employee, Employer reserves the right to determine or approve the vacation time
in order to ensure its efficient and orderly operation.
(c) Employee is ordinarily expected to use all vacation time in the
year earned. However, Employee may accumulate up to a maximum of twenty (20)
vacation days.
Illness
7. After completing one year of employment, Employee shall be entitled
to five (5) days per year as sick leave with full pay. Sick leave may be accrued
to a maximum of eight (8) days per year.
Business Expenses
8. Employee shall be entitled to receive, within 10 days after delivery
to Employer of an itemized statement thereof, reimbursement for all justified
and reasonable expenses incurred in connection with the performance of
Employee's duties.
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Entire Time and Efforts
9. During the term of this agreement, Employee shall devote his entire
time and efforts to the business and affairs of Employer and do his utmost to
promote its interest.
Competitive Activities
10. During the term of this agreement, Employee shall not, directly or
indirectly, own, manage, operate, join, control, be employed by, or participate
in the ownership, management, operation, or control of, or be connected in any
manner with, any business that is competitive to the business of Employer.
Termination
11. (a) Employer may terminate this agreement and the employment
hereunder at any time on ten (10) business days written notice to Employee.
Employee may terminate this agreement and the employment hereunder at any time
on ten (10) business days written notice to Employer.
(b) If Employee is unable to perform his duties by reason of
illness or disability for a continuous period of 30 days, Employer may terminate
this agreement and the employment hereunder without further notice. Termination
of this reason shall not be deemed "for cause" as that term is used in this
section.
(c) In the event of termination under this section, Employer's
obligations to Employee under this agreement shall cease except for annual
salary accrued to the date on which termination becomes effective.
Probation
12. The first six (6) months after the execution of this employment
agreement will be a probationary period during which Employee can be terminated
for or without cause by Employer. During this probationary period, Employee will
not receive any group medical or term life insurance coverage from Employer.
Notices
13. Any notices to be given hereunder by either party to the other
shall be in writing and may be transmitted by personal delivery or by mail,
registered or certified, postage prepaid with return receipt requested. Mailed
notices shall be addressed to Employer at 320 S. Garfield Avenue, Alhambra,
California 91803, and to Employee at 5831 Lancashire Avenue, Westminster,
California 92683, but each party may change that address by written notice in
accordance with this section. Notices
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delivered personally shall be deemed communicated as of the date of actual
receipt; mailed notices shall be deemed communicated as of the date of mailing.
Arbitration
14. (a) Any controversy between Employer and Employee involving the
construction or application of any of the terms, provisions, or conditions of
this agreement shall on the written request of either party served on the other
be submitted to arbitration. Arbitration shall comply with and be governed by
the provisions of the California Arbitration Act.
(b) Employer and Employee shall each appoint one person to hear and
determine the dispute. If the two persons so appointed are unable to agree, then
those persons shall select a third impartial arbitrator whose decision shall be
final and conclusive upon both parties.
(c) The cost of arbitration shall be borne by the losing party or
in such proportions as the arbitrators decide.
Attorney's Fees and Costs
15. If any legal action is necessary to enforce or interpret the terms
of this agreement, the prevailing party shall be entitled to reasonable
attorneys' fees, costs, and necessary disbursements in addition to any other
relief to which that party may be entitled. This provision shall be construed as
applicable to the entire contract.
Entire Agreement
16. This agreement supersedes any and all other agreements, either oral
or in writing, between the parties hereto with respect to the employment of
Employee by Employer and contains all of the covenants and agreements between
the parties with respect to that employment in any manner whatsoever. Each party
to this agreement acknowledges that no representation, inducements, promises, or
agreements, orally or otherwise, have been made by any party, or anyone acting
on behalf of any party, which are not embodied herein, and that no other
agreement, statement, or promise not contained in this agreement shall be valid
or binding on either party. Any modification of this agreement will be effective
only if it is in writing and signed by the party to be charged.
Effect of Waiver
17. The failure of either party to insist on strict compliance with any
terms, covenants, or conditions of this agreement by the other party shall not
be deemed a waiver of that
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term, covenant, or condition, nor shall any waiver or relinquishment of any
right or power at any one time or times be deemed a waiver or relinquishment of
that right or power for all or any other times.
Partial Invalidity
18. If any provision in this agreement is held by a court of competent
jurisdiction to be invalid, void, or unenforceable, the remaining provisions
shall nevertheless continue in full force without being impaired or invalidated
in any way.
Law Governing Agreement
19. This agreement shall be governed by and construed in accordance
with the laws of the State of California.
Executed on October 28, 1996, at Alhambra, California.
EMPLOYER
CYBER MERCHANTS EXCHANGE, INC.
By /S/ FRANK YUAN
-------------------------
FRANK YUAN, PRESIDENT
EMPLOYEE
/S/ DAVID RAU
-------------------------
DAVID RAU
5
ESCROW INSTRUCTIONS
These ESCROW INSTRUCTIONS are given by Cyber Merchants Exchange, Inc.
d.b.a. Cyber Merchants Exchange, a California corporation with its principal
offices at 320 South Garfield Avenue, Suite 318, Alhambra, California 91801 (the
"Company") to Imperial Trust Company ("Escrow Agent") in connection with the
offering hereinafter set forth and in compliance with Rule 240.10b-9 of the
General Rules and Regulations under the Securities Exchange Act of 1934, as
amended.
1. Offering.
The Company will offer for sale to the public 2,500,000 shares of its
Common Stock at $4.00 per share pursuant to a SB-2 filing with the Securities
and Exchange Commission on _____________, 1998 (the "Offering"). The Offering
will be made on a "best efforts" basis requiring that a minimum of 100,000
shares be sold within twelve months of the commencement date of the offering,
which may be extended for an additional ninety (90) days by the Company upon
furnishing of written notice thereof to the Escrow Agent. Escrow Agent is not to
be concerned with the documents filed by the Company in connection with the
Offering. (the "Offering Documents"), except as specifically set forth below.
2. Establishment of the Escrow.
Escrow Agent will open one or more escrow accounts (the "Escrow"), and
the Company will deliver to Escrow Agent from time to time for deposit into the
Escrow the full amount of each cash payment received from each subscriber (the
"Subscription Price"), together with a copy of the Subscription Agreement
executed by such subscriber, showing the name, address, and taxpayer
identification number of such subscriber, the number of shares subscribed for,
and the amount paid therefore. All monies so deposited will be in the form of a
subscriber's personal check in favor of "Cyber Merchants Exchange, Inc. Escrow
Account." Should any such check be returned to Escrow Agent as uncollectible for
any reason, Escrow Agent will charge the amount of such returned check, the name
of the subscriber and the reason for return, and hold such check subject to
further instructions from the Company. Escrow Agent will hold all monies and
other property which shall not become the property of the Company, nor be
subject to the debts thereof, unless and until disbursed to the Company pursuant
to instructions provided to the Escrow Agent by the Company as set forth herein.
3. Investment.
All funds will be held by Escrow Agent in Monarch Government Money
Market Fund, an interest-bearing account.
4. Cancellation.
a. Cancellation by the Company.
The Company may reject or cancel any subscription in whole or in part.
If the Subscription Price for such rejected or canceled subscription has been
delivered to Escrow Agent, the Company will inform Escrow Agent of the rejection
or cancellation, and Escrow Agent, upon receiving such notice, will refund to
the subscriber the Subscription Price or any part thereof plus any accrued
interest as calculated pursuant to Paragraph 5(c) below; provided however, if
the Company rejects or cancels the subscription within thirty (30) calendar days
of being advised by Escrow Agent of such subscription, the subscriber shall only
be entitled to a refund of the Subscription price without any accrued interest.
b. Cancellation by Subscriber.
All subscriptions shall be irrevocable, and no subscriber will have any
right to cancel or rescind the subscription.
<PAGE>
5. Closing.
a. The Escrow will remain open until the earliest to
occur of the following (the "Closing Date"):
(1) Receipt by Escrow Agent of aggregate Subscription
Prices for 100,000 shares offered pursuant to the Offering, together with a
written instruction from the Company that the Escrow be closed; or
(2) Five o'clock p.m. on the date twelve months after
the commencement date of the offering, provided that the Company may extend the
Closing Date by written instructions to Escrow Agent for a period of up to
ninety (90) days.
b. If, upon the Closing Date, Escrow Agent has received
the Subscription Prices for all the shares offered pursuant to the Offering,
Escrow Agent will disburse all monies plus interest, instruments, and other
documents in the Escrow as directed by the Company pursuant to written
instructions.
c. If, upon the Closing Date, Escrow Agent has not
received the Subscription Prices for a minimum of 100,000 shares, Escrow Agent
will, unless otherwise instructed in writing by the Company, refund all monies
in the Escrow to the subscribers plus any accrued interest the subscriber may be
entitled to. As used herein, the amount of accrued interest to be refunded shall
depend upon the amount of the Subscription Price and the date upon which the
Subscription Price was collected in good funds by Escrow Agent. For example, if
a subscription for 5,000 shares is made by a subscriber on January 1, 1999 and
good funds were collected on the same day, Escrow Agent shall refund interest
accrued on the subscriber's Subscription Price since January 1, 1999.
Calculation as to the amount of accrued interest to be refunded shall be done by
the Company.
d. Notwithstanding the foregoing, Escrow Agent is not
required to disburse any monies until the check thereof has been collected in
good funds.
6. Instructions and Amendments.
All notices and instructions to Escrow Agent must be in writing and may
be delivered personally, by facsimile or mailed, certified or registered mail,
to:
Imperial Trust Company
201 N. Figueroa, Suite 610
Los Angeles, California 90012
Attn: Karyn Salman
All such notice and instructions will be deemed given when received by
Escrow Agent, as shown on a receipt therefor. All instructions from the Company
will be signed by Frank Yuan on behalf of the Company or such other
representative of the Company as provided by notice. Unless otherwise provided
herein, these instructions may be amended or further instructions given only to
the extent that such amendments or instructions are consistent with, and do not
add materially to, the description of the Escrow contained in the Offering
Documents, unless consented to in writing by all subscribers whose Subscription
Prices have been received by Escrow Agent therefore and unless disclosed to all
subscribers thereafter.
7. Escrow Fees.
The Company will pay Escrow Agent's fees and expenses, which will be
deducted directly from the Company's escrow account. However, upon the close of
the Escrow, Escrow Agent may withhold from any amount disbursed to the Company
the amount of its then earned but unpaid fees and expenses and any uncollected
funds. (Schedule "A" attached hereto and made part hereof sets forth Escrow
Agent's escrow fees.)
<PAGE>
8. Exculpation.
Escrow Agent will not be liable for:
a. the genuineness, sufficiency, correctness as to form,
manner of execution or validity of any instrument deposited in the Escrow, or
the identity, authority or rights of any person executing the same;
b. any misrepresentation or omission in the Offering Documents
or any failure to keep or comply with any of the provisions of any agreement,
contract or other instrument referred to therein; and
c. the failure of the Company to transmit, or any delay in
transmitting any subscriber's Subscription Price to Escrow Agent.
Escrow Agent's duties hereunder shall be limited to the safekeeping of
monies, instruments or other documents received by the Escrow Agent into the
Escrow, and for the disposition of same in accordance with these Escrow
Instructions and any amendments thereto.
9. Interpleader.
In the event conflicting demands are made or notices served upon Escrow
Agent with respect to the Escrow, Escrow Agent shall have the absolute right at
its election to do either or both of the following:
a. withhold and stop all further proceedings in, and
performance of, these Escrow Instructions, or
b. file a suit in interpleader in any court of competent
jurisdiction and obtain an order from the court requiring the parties to
litigate their several claims and rights among themselves. In the event such
interpleader suit is brought, Escrow Agent shall be fully released from any
obligation to perform any further duties imposed upon it pursuant to these
Escrow Instructions and any amendments thereto, and the Company shall pay Escrow
Agent all costs, expenses and reasonable attorney's fees expended or incurred by
Escrow Agent, the amount thereof to be fixed and judgment thereof to be rendered
by the court in suit.
10. Indemnity.
The Company further agrees to pay on demand, and to indemnify and hold
Escrow Agent harmless from and against all costs, damages, judgments, attorney's
fees, expenses, obligations and liabilities of any kind or nature which, in good
faith, Escrow Agent may incur or sustain in connection with or arising out of
the Escrow, and Escrow Agent is hereby given a lien upon all rights, titles, and
interest of the Company in all monies and other property deposited in the
Escrow, to protect Escrow Agent's rights and to indemnify and reimburse Escrow
Agent under these Escrow Instructions and any amendments thereto.
11. Resignation of the Escrow Agent.
The Escrow Agent reserves the right to resign as the Escrow Agent at
any time by giving thirty (30) days written notice thereof to all parties at the
last known address. Upon notice of resignation by the Escrow Agent, the
undersigned agree that the Escrow Agent may deliver deposited funds, upon
payment in full of all fees due the Escrow Agent to such replacement Escrow
Agent. If no notice is promptly received from the undersigned and the
replacement Escrow Agent, the Escrow Agent may petition any court of competent
jurisdiction for disposition of the assets and the Escrow Agent shall thereby be
released from any and all responsibility and liability to the parties hereto.
<PAGE>
12. Other.
a. Time is of the essence of these and all additional or
changed instructions.
b. These Escrow Instructions may be executed in counterparts,
each of which so executed shall irrespective of the date of its execution and
delivery, be deemed an original, and said counterparts together shall constitute
one and the same instrument.
c. These Escrow Instructions shall be governed by, and shall
be construed according to the laws of the State of California.
d. The Company will not make any reference to Imperial Trust
Company in connection with the Offering except with respect to its role as
Escrow Agent hereunder, and in no event will the Company state or imply that
Escrow Agent has investigated or endorsed the Offering in any manner whatsoever.
e. In the event of any dispute, claim, question or
disagreement between the parties arising out of or relating to the Escrow
Instructions or any amendment thereto, the parties shall use their best efforts
to settle such dispute, claims, questions or disagreements. To this effect, they
shall consult and negotiate with each other and in good faith and, recognizing
their mutual interests, attempt to reach a just and equitable solution
satisfactory to the parties. If they do not reach such solution, then upon
notice by either party to the other, claims, questions or disagreements shall be
settled by final and binding arbitration in accordance with the Expedited
Procedures of the Commercial Rules of the American Arbitration Association, or
such other procedures applicable to disputes of this type. Within fifteen (15)
days after the notice of election to arbitrate by either party to the other as
described above, each party shall select one person to act as arbitrator, and
the two selected shall select a third arbitrator within ten (10) days of their
appointment. If the arbitrators selected by the parties are unable or fail to
agree upon the third arbitrator, the parties or their attorneys may request the
American Arbitration Association to appoint the third neutral arbitrator. Prior
to the commencement of hearings, each of the arbitrators appointed shall take an
oath of impartiality. The arbitrators must be members of the State Bar actively
engaged in the practice of law with expertise in the process of deciding
disputes and interpreting contracts in computer services. The arbitrators shall
award to the prevailing party, if any, as determined by the arbitrators, all of
its costs and fees. "Costs and fees" means all reasonable pre-award expenses of
the arbitration, including the arbitrators' fees, administrative fees, travel
expenses, out-of-pocket expenses such as copying and telephone, court costs,
witness fees and attorney's fees. Upon the request of a party, the arbitrators'
award shall include findings of fact and conclusion of law. The arbitrators
shall provide copies of such award to the parties. Any award may be entered by
the prevailing party in any court of competent jurisdiction.
IN WITNESS WHEREOF, the parties have executed these Escrow Instructions
as of the date set forth besides such parties' signatures below:
"Company" Cyber Merchants Exchange, Inc.,
a California corporation
Dated: ____________________ By: ____________________________
Frank S. Yuan
President
"Escrow Agent" Imperial Trust Company
Dated: _____________________ By: ____________________________
Karyn Salman
<PAGE>
SCHEDULE "A"
IMPERIAL TRUST COMPANY FEE SCHEDULE
FOR CYBER MERCHANTS EXCHANGE, INC.
ESCROW ACCOUNT
BASIC ANNUAL FEE (or any part thereof): $2,500.00
FEE PER DISBURSEMENT: $10.00
WORLD WIDE MAGIC NET, INC.
STOCK OPTION PLAN
ARTICLE I
1. Definitions
As used herein, the following terms have the meanings hereinafter set forth
unless the context clearly indicates to the contrary:
1.1. "Board" shall mean the Board of Directors of the Company.
1.2. "Committee" shall mean a committee appointed by the Board to
administer the Plan.
1.3. "Company" shall mean World Wide Magic Net, Inc., a California
corporation.
1.4. "Option" shall mean an option to purchase Stock granted pursuant
to the provision of Article VI hereof.
1.5. "Optionee" shall mean a Director, employee or consultant to whom
an Option has been granted hereunder.
1.6. "Plan" shall mean the 1996 World Wide Magic Net, Inc. Stock Option
Plan, the terms of which are set forth herein.
1.7. "Reorganization" shall mean any statutory merger, statutory
consolidation, sale of all or substantially all of the assets of the Company, or
sale, pursuant to an agreement with the Company, of securities of the Company
pursuant to which the Company is or becomes a wholly-owned subsidiary of another
company after the effective date of the Reorganization.
1.8. "Stock" shall mean the common shares of the Company or, in the
event that the outstanding common shares are hereafter changed into or exchanged
for shares of a different stock or securities of the Company or some other
corporation, such other stock or securities.
1.9. "Subsidiary" shall mean any corporation, the majority of the
outstanding capital stock of which is owned, directly or indirectly, by the
Company.
ARTICLE II
2. The Plan
2.1. Name. This plan shall be known as the "1996 World Wide Magic Net,
Inc. Stock Option Plan."
2.2. Purpose. The purpose of the Plan is to advance the interests of
the Company and its shareholders by affording to all employees of the Company
and its Subsidiaries an opportunity to acquire or increase their proprietary
interest in the Company by the grant to such employees of Options under the
terms set forth herein. By thus encouraging such Directors, employees or
consultants to become owners of the Company shares, the Company seeks to
motivate, retain, and attract those highly competent individuals upon whose
judgment, initiative, leadership and continued efforts the success of the
Company in large measure depends. The options granted
<PAGE>
hereunder are not "incentive stock options" within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code").
2.3. Effective Date. The Plan shall become effective as of September
30, 1996.
ARTICLE III
3. Participants
All employees of the Company and its Subsidiaries shall be eligible to
participate in the Plan. The Committee may grant Options to any eligible
employee in accordance with such determination as the Committee from time to
time in its sole discretion shall make.
ARTICLE IV
4. Administration
4.1. Duties and Powers of Committee. The Plan shall be administered by
the Committee. The Committee shall elect one of its members as its chairperson
and shall hold its meetings at such times and places as it may determine. The
Committee may appoint a secretary and shall keep minutes of its meetings.
Subject to the express provisions of the Plan, the Committee shall have sole
discretion and authority to determine from among eligible Optionees those to
whom and the time or times at which Options may be granted and the number of
shares of Stock to be subject to each Option. In determining the Optionees to
whom Options shall be granted and the number of shares subject to such Options,
the Committee may take into account the nature of the services rendered by the
respective Optionees, their present and potential contribution to the success of
the Company or its Subsidiary, and such other factors as the Committee in its
discretion shall deem relevant. An employee who has been granted an option under
the Plan may be granted an additional option or options under the Plan if the
Committee shall so determine. Subject to the provisions of the Plan, the
Committee shall also have complete authority to interpret the Plan, to
prescribe, amend, and rescind rules and regulations relating to it and to make
other determinations necessary or advisable in the administration of the Plan.
4.2. Majority Rule. A majority of the members of the Committee shall
constitute a quorum, and any action taken by a majority present at a meeting at
which a quorum is present or any action taken without a meeting evidenced by a
writing executed by all of the members of the Committee shall constitute the
action of the Committee.
4.3. Company Assistance. The Company shall supply full and timely
information to the Committee on all matters relating to eligible Optionees,
their employment, death, retirement, disability or other termination of
employment, and such other pertinent facts as the Committee may require. The
Company shall furnish the Committee with such clerical and other assistance as
is necessary in the performance of the Committee's duties.
4.4. Reliance on Reports. Each member of the Committee shall be fully
justified in relying or acting in good faith upon any report made by the
independent public accountants of the Company and its Subsidiaries and upon any
other information furnished in connection with the Plan by any person or persons
other than himself. In no event shall any person who is or shall have been a
member of the Committee be liable for any determination made or other action
taken or any omission to act in reliance upon any such report or information or
for any action, including the furnishing of information, taken or failure to
act, if in good faith.
4.5. Indemnification. The Company shall indemnify and hold harmless
each person who is or shall have been a member of the Committee against and from
any and all loss, expense, liability
<PAGE>
or costs (including reasonable attorneys' fees) that may be imposed upon or
reasonably incurred by him in connection with or resulting from any claim,
action, suit, or proceedings to which he may be a party or in which he may be
involved by reason of any action taken or failure to act under the Plan, and
against and from any and all amounts paid by him in any such action, suit or
proceeding, provided he shall have given the Company an opportunity, at its own
expense, to handle and defend the same before he undertakes to handle and defend
on his own behalf. The right of indemnification set forth shall not be exclusive
of any other rights of indemnification to which such person may be entitled
under the Company's Articles of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify him or hold him
harmless. It is the Company's intention that all expenses incurred in connection
with the administration of the Plan shall be borne by the Company rather than by
any member of the Committee.
ARTICLE V
5. Shares of Stock Subject to Plan
5.1. Limitations. The shares subject to this Plan are common shares of
the Company. Such shares may be either authorized and issued shares or shares
issued and thereafter acquired by the Company.
5.2. Options Granted Under Plan. Shares of Stock with respect to which
an Option granted hereunder shall have been exercised shall not, for as long as
such shares are issued and outstanding, again be available for Options
hereunder. If Options granted hereunder shall terminate for any reason without
being wholly exercised, new Options may be granted hereunder covering the number
of shares to which such Option termination relates.
5.3. Antidilution. In the event that the outstanding shares of Stock
hereafter are changed into or exchanged for a different number or kind of shares
or other securities of the Company or of another corporation by reason of
merger, consolidation, other reorganization, recapitalization, reclassification,
combination of shares, stock split-up, or stock dividend:
(a) The aggregate number and kind of shares subject to Options
which may be granted hereunder shall be adjusted appropriately; and
(b) Rights under outstanding Options granted hereunder both as
to the number of subject shares and the Option price, shall be adjusted
appropriately;
provided; however, that if, in connection with a Reorganization, there exists an
agreement (the "Reorganization Agreement") which specifically provides for the
change, conversion, or exchange of shares under outstanding and unexercised
Options for securities of another company, then the Committee shall adjust the
shares under such outstanding and unexercised Options in a manner not
inconsistent with the Reorganization Agreement. All adjustments and
determinations shall be made solely by the Committee, whose decisions as to what
adjustments or determinations shall be made, and the extent thereof, shall be
final, binding and conclusive. Adjustments made under this Paragraph 5.3 may
provide for the elimination of fractional shares.
5.4. Unsecured Obligation. Optionees under this Plan shall not have any
interest in any fund or specific asset of the Company by reason of this Plan. No
trust fund shall be created in connection with the Plan or any grant of Options
thereunder.
ARTICLE VI
6. Options
<PAGE>
6.1. Option Grant. Nothing contained in the Plan or in any resolutions
adopted or to be adopted by the Committee, the Board or the shareholders of the
Company shall constitute the granting of any Option hereunder. The granting of
an Option pursuant to the Plan shall take place only when the Committee shall
have resolved to grant such Option and such resolution shall be evidenced by a
writing, substantially in the form attached hereto as Exhibit A, and delivered
to the employee to whom such Option is to be granted.
6.2. Option Price. The per share Option price of the Stock subject to
each Option shall be determined by the Committee at the time of the Option
grant; provided, however, any such determined price shall not be less than the
Fair Market Value.
6.3. Option Period. To the extent exercisable as herein provided, each
Option granted hereunder must be exercised as provided in Section 6.5.
6.4. Option Vesting. Subject to Section 6.6(a) below, the Optionee's
rights to the Optioned Shares shall vest as follows:
(a) fifty percent (50%) of the Optioned Shares after two (2)
years of full-time continuous employment with the Company (or its Subsidiaries)
(the "First Vested Shares"); and
(b) fifty percent (50%) of the Optioned Shares after three (3)
years of full-time continuous employment with the Company (or its Subsidiaries)
(the "Second Vested Shares").
6.5. Option Exercise.
(a) Notwithstanding any provisions contained elsewhere herein
to the contrary, Options granted hereunder may in no event be exercised unless
and until the Optionee shall have remained in the full-time continuous employ of
the Company (or its Subsidiaries) for twelve (12) consecutive months from and
after the date of the Option grant.
(b) Subject to Section 6.5(a) above and except as otherwise
provided below in this Section 6.5(b) and in Section 6.6 hereof, an Option may
be exercised with respect to:
(1) fifty percent (50%) of the Optioned Shares
either: (i) six (6) months after the Company's first public offering is declared
effective, or (ii) the first day after the expiration of any holdback or similar
period that may be imposed upon the Company by the Company's underwriter(s) in
such public offering, whichever is later (the "First Exercisable Shares"); and
(2) fifty percent (50%) of the Optioned Shares
either: (x) one (1) year after the Company's first public offering is declared
effective, or (y) one (1) year after the expiration of any holdback or similar
period that may be imposed upon the Company by the Company's underwriter(s) in
such public offering, whichever is later (the "Second Exercisable Shares").
The Optionee must exercise his/her right to purchase the First Exercisable
Shares and the Second Exercisable Shares within three (3) months after the
occurrence of (b)(1)(i), (b)(1)(ii), (b)(2)(x), or (b)(2)(y) as the case may be.
For purposes of this paragraph 6.5(b), the term "public offering" shall mean an
offer by the Company to sell all or a portion of its authorized but unissued
common stock, no par value, to the public through one or more underwriters on a
firmly underwritten basis, where the offering and consequent sale shall be made
pursuant to: (i) a registration statement required by the Securities Act of
1933, as amended, and the rules and regulations of the Securities and Exchange
Commission (the "SEC") and filed with the SEC; and (ii) a prospectus prepared in
connection with such offering.
<PAGE>
(c) Subject to Sections 6.5(a) and 6.5(b) above, Options may
be exercised in whole at any time, or in part from time to time with respect to
whole Vested Shares only, within the period permitted for the exercise thereof.
Options shall be exercised by written notice, substantially in the form attached
hereto as Exhibit B, of intent to exercise the Option with respect to a
specified number of shares delivered to the Company at its principal office in
the State of California, accompanied by payment in full to the Company at said
office of the amount of the Option price for the number of shares of Stock with
respect to which the Option is then exercised. In addition to and at the time of
payment of the Option price, the Optionee shall pay to the Company in cash the
full amount of all federal and state withholding or other employment taxes
applicable to the taxable income of such Optionee resulting from such exercise
as determined by the Company. If allowed by the Committee, in its sole
discretion, the Optionee may elect to pay such federal and state withholding or
other employment taxes by having the Company withhold shares having an aggregate
Fair Market Value equal to the amount required to be withheld. An election by
Optionee to have shares withheld for this purpose shall be subject to the
following restrictions:
(1) if an Optionee has received multiple grants, a
separate election must be made for each grant;
(2) the election must be made simultaneously with the
exercise of the Option; and
(3) the election will be irrevocable.
(d) Notwithstanding Section 6.5(b) above, after the Options
have vested pursuant to Section 6.4 and to the extent the Options have vested,
the Optionee may exercise the Option at any time and at the Optionee's
discretion
(e) Unless the options and shares subject to the Plan shall
have been registered under the Securities Act of 1933, as amended, or the
Company has determined that such registration is unnecessary, each Optionee
exercising an Option under the Plan may be required by the Company to give a
representation in writing that he is acquiring such shares for his own account
for investment and not with a view to, or for sale in connection with, the
distribution of any part thereof.
6.6. Effect of Death or Other Termination of Employment.
(a) If, prior to one year from the date an Option shall have
been granted an Optionee's employment with the Company (or its Subsidiaries)
shall be terminated, whether voluntarily or involuntarily, with or without
cause, for any reason whatsoever, including death or disability, or for no
reason, or notice of such termination has been given or received by either the
Company or the Optionee, or Optionee shall not have remained in the full-time
continuous employ of the Company (or its Subsidiaries) for twelve (12)
consecutive months from and after the date of the Option grant, the Optionee's
right to exercise such Option shall terminate and all rights thereunder shall
cease.
(b) Subject to Section 6.5(a) and 6.6(a) hereof, if, on or
after one year from the date an Option shall have been granted:
(1) an Optionee's employment with the Company (or its
Subsidiaries) shall be terminated for any reason, then, except as otherwise
provided in Section 6.6(b)(2) or 6.6(b)(3), the Optionee shall have the right,
during the period ending three months after such termination, to exercise such
Option to the extent that it was exercisable at the date of such termination of
employment and shall not have been theretofore exercised.
<PAGE>
(2) an Optionee shall die while in the employment of
the Company (or its Subsidiaries), or within three months after termination of
such employment or while entitled to exercise an Option pursuant to Section
6.6(b)(3) below, the remaining Optioned Shares shall become Vested Shares and
shall be subject to exercise by the executor or administrator of the estate of
the decedent Optionee, or the person or persons to whom an Option granted
hereunder shall have been validly transferred by the executor or the
administrator pursuant to will or the laws of descent and distribution, during
the period ending one year after the date of the Optionee's death, on the terms
and conditions of this Plan. No transfer of an Option by the Optionee by will or
by the laws of descent and distribution shall be effective to bind the Company
unless the Company shall have been furnished with written notice thereof and an
authenticated copy of the will and/or such other evidence as the Committee may
deem necessary to establish the validity of the transfer and the acceptance by
the transferee or transferees of the terms and conditions of such Option.
(3) an Optionee shall become permanently and totally
disabled, as determined by the Committee in accordance with applicable Company
personnel policies, while in the employment of the Company (or its
Subsidiaries), the remaining Optioned Shares shall become Vested Shares and
shall be subject to exercise by the Optionee or the representative of the
Optionee during the period ending three months after the date of the Optionee's
disability, on the terms and conditions of this Plan.
6.7. Nontransferrability of Option. No Option shall be transferrable or
assignable by an Optionee other than by will or the laws of descent and
distribution. During the lifetime of an Optionee the Option shall be exercisable
only by the Optionee. No Option shall be pledged or hypothecated in any way and
no Option shall be subject to execution, attachment, or similar process except
with the written consent of the Committee.
6.8. Rights as Shareholder. An Optionee or a transferee of an Option
shall have no rights as a shareholder with respect to any shares subject to such
Option prior to the purchase of such shares by exercise of such Option and
payment in full of the purchase price of such shares as provided herein.
6.9. Abandonment of Option. An Optionee may at any time elect in
writing to abandon an Option with respect to the number of shares as to which
the Option shall not have been exercised.
6.10. Proceeds. The proceeds received by the Company from the sale of
common stock pursuant to the exercise of Options granted under the Plan shall be
added to the Company's general funds and used for general corporate purposes.
6.11. Call Option.
(a) Call Option Events. In the event an Optionee's employment
with the Company (or its Subsidiaries) is terminated, whether voluntary or
involuntary, with or without cause or for any reason whatsoever or for no reason
(the "Call Option Event"), the Company shall have the irrevocable right and
option to purchase (the "Call Option") from such Optionee and/or from his
spouse, donees or legal representative (each of whom shall be deemed the
Optionee for the purposes of this Section 6.11 as the context requires) all of
the shares purchased by such Optionee pursuant to an Option granted under the
Plan (the "Purchased Shares"), and the Optionee shall have the obligation to
sell the Purchased Shares upon and to the extent of the Company's exercise of
the Call Option, all on the terms and conditions as set forth in this Section
6.11.
(b) Exercise. The Company shall exercise the Call Option, if
at all, by written notice to the Optionee delivered by registered or certified
mail or by hand delivery within
<PAGE>
two (2) years after the termination of the Optionee's employment with the
Company (or its Subsidiaries) as described in paragraph 6.11(a) above. Said
notice shall include the number of the Purchased Shares the Company wishes to
purchase from the Optionee and the price to be paid therefor. The failure of the
Company to provide timely notice shall be deemed a waiver of its rights under
the Call Option.
(c) Purchase Price. The purchase price to be paid for each of
the Purchased Shares upon and to the extent the Call Option is exercised shall
be the greater of:
(1) The highest price per share which the Company
obtains from selling its common shares during the period ending on the last day
of the month preceding the date the Call Option is exercised and commencing six
(6) months prior thereto (the "Pricing Period"); or
(2) The fair market value of one share of common
stock of the Company as of the last quarter of the fiscal year preceding the
date the Call Option is exercised, as determined by an independent appraiser
selected and paid for by the Company.
(d) Payment of Purchase Price. The Company shall pay the
purchase price within thirty (30) days of the expiration of the Pricing Period.
The Company may elect to pay the purchase price in (i) one lump sum or (ii) not
more than twelve (12) equal installments, without interest.
ARTICLE VII
7. Stock Certificates
The Company shall not be required to issue or deliver any certificate for shares
of Stock purchased upon the exercise of any Option granted hereunder or any
portion thereof prior to the fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock
exchanges, if any, on which the Stock is then listed;
(b) The completion of any registration or other qualification
of such shares under any federal or state law or under the rulings or
regulations of the SEC or any other governmental regulatory body, which the
Committee shall in its sole discretion deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any
federal or state governmental agency which the Committee shall in its sole
discretion determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee from time to time may establish for
reasons of administrative convenience; and
(e) The addition of such legends to the certificate as are
determined by the Company as being required under federal and state securities
laws.
ARTICLE VIII
8. Termination, Amendment, and Modification of Plan
The Plan shall terminate on, and no option shall be granted thereunder after,
September 30, 2006. The Board may at any time, upon recommendation of the
Committee, terminate the Plan prior to September 30, 2006, and may at any time
and from time to time and in any respect, amend or
<PAGE>
modify the Plan; provided that no termination, amendment, or modification of the
Plan shall in any manner affect any Option theretofore granted under the Plan
without the consent of the Optionee.
ARTICLE IX
9. Miscellaneous
9.1. Governing Law. This Plan shall be governed by and construed in
accordance with the laws of the State of California.
9.2. Employment. Nothing in the Plan or in any Option granted hereunder
is intended to create any right on the part of an Optionee to employment with
the Company (or its Subsidiaries) for any period of time, in any capacity, or at
any rate of compensation.
9.3. Other Compensation Plan. The adoption of the Plan shall not affect
any other stock option or incentive or other compensation plans in effect for
the Company or any Subsidiary, nor shall the Plan preclude the Company or any
Subsidiary from establishing any other forms of incentive or other compensation
for employees of the Company or any Subsidiary.
9.4. Plan Binding on Successors. The Plan shall be binding upon the
successors and assigns of the Company.
9.5. Singular, Plural, Gender. Whenever used herein, nouns in the
singular shall include the plural, and the masculine pronoun shall include the
feminine and neuter.
9.6. Captions Not Part of Plan. Captions of Articles and Sections
hereof are inserted for convenience and reference. Such captions are not a part
of this Plan and shall not be deemed in any manner to modify, explain, enlarge
or restrict any of the provisions hereof.
<PAGE>
EXHIBIT A
WORLD WIDE MAGIC NET, INC.
NOTICE OF GRANT OF OPTION UNDER
THE 1996 WORLD WIDE MAGIC NET, INC.
STOCK OPTION PLAN
Date: ______________, 199__
(Name and Address)
_______________________
_______________________
Subject to your acceptance, World Wide Magic Net, Inc. (the "Company") hereby
grants to you an Option to purchase ___________________________ (____________)
common shares of the Company at an Option price of
_______________________________ ($___________) per share, all on the terms and
conditions set forth in the 1996 World Wide Magic Net, Inc. Stock Option Plan.
Please acknowledge your receipt of this Notice of Grant of Option and a copy of
the 1996 World Wide Magic Net, Inc. Stock Option Plan, and your acceptance
thereof, by signing the enclosed copy of this Notice as indicated below and
returning it to the Company's Chief Financial Officer.
WORLD WIDE MAGIC NET, INC.
By: __________________________
Its: __________________________
ACCEPTANCE
The undersigned represents and acknowledges that by his/her signature below,
he/she has received a copy of the 1996 World Wide Magic Net, Inc. Stock Option
Plan (the "Plan"), has reviewed it in its entirety and is familiar with the
terms and provisions thereof, and accepts the Option subject to all the terms
and conditions of the Plan.
_______________________________
<PAGE>
EXHIBIT B
ELECTION TO EXERCISE OPTION GRANTED UNDER
THE 1996 WORLD WIDE MAGIC NET, INC. STOCK OPTION PLAN
World Wide Magic Net, Inc.
Attn: Chief Financial Officer
320 S. Garfield Ave., Suite 318
Alhambra, California 91801
The undersigned hereby exercises the Option granted and elects to purchase
_____________________ (___________) common shares of World Wide Magic Net, Inc.
(the "Company") pursuant to the Notice of Grant of Option dated _______________,
199___. Enclosed is the sum of $_______________ as payment for the shares so
purchased.
The undersigned represents and acknowledges that he/she has received a copy of
the 1996 World Wide Magic Net, Inc. Stock Option Plan (the "Plan"), has reviewed
it in its entirety and is familiar with the terms and provisions thereof. By
his/her signature below, the undersigned hereby acknowledges and agrees that (i)
the shares being purchased are, in all respects, subject to the terms and
conditions of the Plan, (ii) he/she is bound by all of the terms and conditions
of the Plan, and (iii) all decisions or interpretations of the Committee upon
any questions or issues arising under the Plan or under the Notice of Grant of
Option shall be binding, conclusive and final.
The undersigned represents and warrants that (i) he/she the sole owner and
holder of the Option and has not transferred or assigned to any third person or
entity any interest therein and is entitled to exercise the Option under the
terms of the Plan, (ii) he/she is purchasing the above shares for investment
only, and not with a view to distribution involving a public offering, and (iii)
until the stock certificate evidencing the shares is issued (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company), he/she is not entitled to any rights as a stockholder.
The undersigned understands that he/she may suffer adverse tax consequences as a
result of the purchase of the shares. The undersigned represents that he/she has
had an on opportunity to obtain the advice of counsel prior to executing this
Election to Exercise Option and that he/she is not relying on the Company for
tax advice.
As an express condition precedent to the effectiveness of this exercise of
Option, the undersigned shall satisfy all applicable federal, state and local
income and employment tax withholding obligations and deliver to the Company the
full amount of such obligations or make other arrangements acceptable to the
Company to satisfy such obligations. In addition, to the extent that the
undersigned's purchase and receipt of the shares subject to the Option results
in taxable income to the undersigned, the undersigned shall report and include
in income on his/her state and federal income tax returns with respect to the
year in which the Option is exercised, all such income that results from the
exercise of the Option, and the undersigned agrees to indemnify and hold the
Company harmless from any loss, liability, costs, expenses (including reasonable
attorneys fees), penalties or interest that the Company may incur as a result of
the undersigned's failure to perform the foregoing obligations.
Dated: _______________________
Submitted by: Accepted by:
______________________________ WORLD WIDE MAGIC NET, INC.
(Signature)
Address: By: __________________________
______________________________ Its: _________________________
______________________________
CONSENT OF INDEPENDENT AUDITORS
KPMG
725 South Figueroa St.
Los Angeles, CA 90017
The Board of Directors
Cyber Merchants Exchange, Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
Our report dated October 16, 1998 contains an explanatory paragraph that states
that the Company's recurring losses from operations raise substantial doubt
about the entity's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
that uncertainty.
KPMG LLP
Los Angeles, California
4/15/99
Evers &
Hendrickson, LLP
Lawyers and Counselors At Law
- ------------------------------------
July 21, 1998
William D. Evers
Jay P. Hendrickson
Paul E. Manasian
Philip J. Nicholsen, PC
---------
Rafael Aguirre-Sacasa
Kevin F. Barrett
Kenneth A. Brunetti
Antoine M. Devine
Darcy Pertcheck
---------
Of Counsel
Frederick K. Koenen
Phone (415) 352-0693
Fax (415) 391-4292
Frank Yuan
President
Cyber Merchants Exchange, Inc.
320 S. Garfield Ave., Suite 318
Alhambra, California 91801
Dear Mr. Yuan:
This law firm consents to the incorporation of its name and its opinion
letter re the legality of the securities being cleared for registration with the
Securities and Exchange Commission pursuant to filing of the Form SB-2
Registration Statement on July 22, 1998.
Sincerely,
EVERS & HENDRICKSON, LLP
By: William D. Evers, Partner
155 Montgomery Street, 12th Floor San Francisco California 94104 415 391 4291
CYBER MERCHANTS EXCHANGE, INC. d.b.a. C-ME.com
SHARE PURCHASE AGREEMENT
[To purchase any of the shares of Common Stock of C-ME.com, you must be a
resident of one of the following states: California Illinois, New Jersey or New
York. Citizens of other countries are eligible to purchase shares. In addition,
residents of the State of California will also have to meet certain eligibility
requirements as set forth in the California Addendum, attached hereto as Exhibit
A.]
To: Cyber Merchants Exchange, Inc. d.b.a. C-ME.com
320 S. Garfield Ave, Suite 318
Alhambra, California 91801 USA
Phone (626) 588-3660 Fax (626) 588-3655
1. I have received and had an opportunity to read the Prospectus by which the
shares are offered. I represent that I am purchasing the shares for
investment.
Signature: ___________________________ Date: ___________________
2. Number of shares of Common Stock subscribed for:
Total dollar amount subscribed for (# of shares times $8.00): $____________
Mail Instructions: A check for the total amount should be attached hereto, made
payable to:
<PAGE>
IMPERIAL TRUST COMPANY
F/B/O: C-ME.com/06902-00
201 N. Figueroa, Suite 610
Los Angeles, CA 90012
Attention: Karyn Salman; or
Wire Instructions: Payment by wire should be made:
IMPERIAL BANK
Inglewood, California
ABA No. 122201444
For Credit to Imperial Trust Company
Settlement Account No. 09-042-326
(Further Credit to Acct. #06902-00)
3. Register the shares in the following name(s) and amount(s):
Name(s): _______________________ Number of shares: _______________
as (check one):
Individual _____ Joint Tenants ____ Trust _____
Tenants in Common _____ Corporation _____ Other _____
For the person(s) who will be registered shareowner(s):
Mailing Address: _______________________________________________________
City, State & Zip Code: __________________________________________________
Telephone Number: Business ( ) _______________ Home: ( ) ________________
Social Security or Taxpayer ID Number: ____________________________________
(Please attach any special mailing instructions other than shown above)
NO SHARE PURCHASE AGREEMENT IS EFFECTIVE UNTIL ACCEPTANCE
(You will be mailed a signed copy of this agreement to retain for your records.)
4. Subscription accepted by Cyber Merchants Exchange, Inc. d.b.a. C-ME.com:
________________________________________ ________________________
Frank S. Yuan, President Date
<PAGE>
Exhibit A
CYBER MERCHANTS EXCHANGE, INC. d.b.a. C-ME.com
CALIFORNIA ADDENDUM TO SHARE PURCHASE AGREEMENT
FOR
INVESTORS RESIDENT IN CALIFORNIA
PURCHASING OVER $2,500
$20,000,000
COMMON STOCK
2,500,000 Shares of Common Stock at $8.00 per share
Purchase in excess of $2,500
For investors residing in the State of California, if the aggregate purchase
price of all shares purchased by the undersigned during the 12 months preceding
the proposed sale, including the proposed sale, is in excess of $2,500, he/she
hereby warrants that:
1) He/she with his/her spouse has a minimum net worth* of at least
$250,000 and had a minimum gross income of $65,000 during the last tax
year and will have (based on a good faith estimate) minimum gross
income of $65,000 during the current tax year; or
2) He/she with his/her spouse has a minimum net worth* of $500,000; AND
3) In either case the aggregate purchase price of all such shares
referenced above does not exceed 10% of his/her net worth.*
________________________ ____________________________________________
Date of Signing Signature of the Subscriber
____________________________________________
Please Print the Subscriber's Name
- --------------------------------------------------------------------------------
*Net worth for purposes of this Questionnaire excludes all equity and interests
in the investor's personal residence, automobiles and furnishings.
