<PAGE>
Registration No. 0-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
FILED JUNE 11, 1999
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
eUNIVERSE, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEVADA (Applied for)
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
101 NORTH PLAINS INDUSTRIAL ROAD
WALLINGFORD, CONNECTICUT 06492
(Address of Principal Executive Offices) (Zip Code)
203-265-6412
(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Item 1 Business...........................................................................................1
General Development of Business.........................................................................1
Description of the Business..............................................................................1
Sales and Marketing......................................................................................5
Order Fulfillment and Source of Supply...................................................................5
Competition..............................................................................................6
Employees................................................................................................7
Facilities...............................................................................................7
Domain Names, Patents and Trademarks.....................................................................7
The Company's Strategy and Plans.........................................................................7
Acquisition of Case's Ladder, Inc........................................................................9
Proposed Acquisition of Gamer's Alliance, Inc...........................................................10
Item 2 Financial Information............................................................................10
Item 3 Properties.......................................................................................14
Item 4 Security Ownership of Certain Beneficial Owners and Management...................................14
Item 5 Directors and Executive Officers.................................................................15
Agreement Concerning Election of Director...............................................................16
Compensation of Directors and Term of Office............................................................16
Item 6 Executive Compensation...........................................................................16
Item 7 Certain Relationships and Related Transactions...................................................16
Item 8 Legal Proceedings................................................................................17
Item 9 Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters..17
Item 10 Recent Sales of Unregistered Securities..........................................................18
Acquisition of CD Universe, Inc.........................................................................18
Sale of Convertible Preferred Stock.....................................................................18
Purchase of Common Stock by GKM Investors...............................................................19
Merger with MCA.........................................................................................19
Acquisition of Case's Ladder............................................................................20
Item 11 Description of Securities........................................................................20
Item 12 Indemnification of Directors and Officers........................................................20
Nevada Corporation Law..................................................................................20
Articles of Incorporation...............................................................................21
Bylaws..................................................................................................21
Item 13 Financial Statements.............................................................................22
Item 14 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............22
Item 15 Financial Statements and Exhibits................................................................22
Financial Statements....................................................................................22
</TABLE>
<PAGE>
Item 1 Business
The registrant, eUniverse, Inc., is a Nevada corporation engaged in
developing, acquiring and operating a network of web sites which provide
entertainment-oriented products and services. At the present time, the
registrant is engaged in the retail sale of audio CDs, videotapes, digital
video disks ("DVDs") and related services. The registrant intends to expand its
----
offerings into the areas of online gaming and other forms of web-based
entertainment programming. As used herein, the term "Company" refers to
-------
eUniverse, Inc. and all of its subsidiaries, unless the context requires
otherwise.
General Development of Business.
The Company was founded in February 1999 by Brad D. Greenspan when he
incorporated Entertainment Universe, Inc. ("EUI"). On April 14, 1999, EUI sold
---
1,832,812 shares of Series A Convertible Preferred Stock in a private offering
under Regulation D of the Securities Act of 1933 (the "Securities Act") (See
--------------
"Item 10, Recent Sales of Unregistered Securities") and used a portion of the
proceeds to acquire CD Universe, Inc. ("CD Universe"). CD Universe is a
-----------
Connecticut corporation engaged in the business of selling audio CDs and
videotapes over the internet.
Also on April 14, 1999, EUI merged with and into a public company,
Motorcycle Centers of America, Inc. ("MCA"), a Nevada corporation with limited
---
business transactions and deriving no current revenue, whose shares were traded
on the OTC Bulletin Board, which then changed its name to eUniverse, Inc. The
Company is the surviving entity of that merger. In connection with that merger,
the holders of the EUI Series A Convertible Preferred Stock exchanged their
shares, on a one-to-one basis, for shares of MCA convertible preferred stock
which has equivalent rights and preferences. Likewise, in connection with the
merger, the holders of EUI common stock exchanged their shares, on a one-to-one
basis, for shares of MCA common stock. As used herein, the term
"Reorganization" refers to the merger between EUI and MCA.
--------------
Description of the Business.
The Company is a media driven enterprise that is in the process of acquiring
and developing a portfolio of internet-based businesses. Its current emphasis
is on acquiring businesses in the field of entertainment, primarily games, music
and movies. The Company's strategy is based on the acquisition and/or
development of web-based businesses in several sectors of the entertainment
industry, and utilizing their synergies to generate cross traffic and increased
revenues. This strategy includes the integration of a worldwide distribution of
web-based entertainment programming. The Company is presently exploring
expansion into internet-based entertainment in a form that is similar to
television and radio programming. Its long-term strategic plans are intended to
take advantage of a world-wide distribution network comprised of the installed
base of personal computers and televisions, making use of existing and emerging
technologies to deliver this targeted programming.
At the present time, the Company is primarily engaged in the retail sale of
music and video products and accessories, including audio CDs, videotapes and
DVDs via the internet. The Company offers customers a selection of over 240,000
audio CD titles and 40,000 movie titles in VHS, DVD and LVD formats, as well as
proprietary content and features. The Company's CD Universe web site currently
attracts over 1,000,000 visitors per month and receives over 20,000 orders each
month. The Company plans to capitalize on its experience in online retailing to
enter other e-commerce areas by acquiring community-based web sites with
significant traffic, selling advertising space on their web pages, and enhancing
the retail capabilities of these sites in order to diversify its product
offerings.
1
<PAGE>
In May 1999, the Company acquired MegaDVD.com, a web site devoted to the
retail sale of DVDs. The Company has entered into an agreement to purchase all
of the outstanding stock of Case's Ladder, Inc. ("Case's Ladder"), and a letter
-------------
of intent with respect to the purchase of all of the outstanding stock of
Gamer's Alliance, Inc. ("Gamer's Alliance"). Both Case's Ladder and Gamer's
----------------
Alliance own and operate online gaming sites. The Company's planned acquisition
of those companies represents an early step toward its goal of using strategic
acquisitions as well as internal growth to develop a diverse but synergistic
portfolio of internet-based entertainment offerings for a world-wide customer
base.
To date, the Company has only a limited operating history in its music and
video entertainment business upon which an evaluation of the Company and its
prospects can be based. The Company's prospects for financial success must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in new, unproven and rapidly evolving markets. To
address these risks, the Company must, among other things, expand its customer
base, respond effectively to competitive developments, continue to attract,
retain and motivate qualified employees and continue to upgrade its
technologies. There can be no assurance that the Company will be successful in
addressing such risks. If the Company is not successful in developing and
expanding its music and video business, including sales of advertising on its
web sites and development of related business opportunities, its ability to
achieve profitability will be materially adversely affected.
Prior to becoming part of the Company, CD Universe only generated revenue
from merchandise sales. In contemplation of the Company's plans to use its site
traffic to generate advertising revenues, the Company has recently implemented a
program to enable it to accept paid third-party advertising. This program began
generating revenues in the quarter ending June 30, 1999. Although the Company
has begun to sell advertising on its web sites, it has not realized material
advertising revenues to date. In order for the Company to generate significant
advertising revenues, advertisers and advertising agencies must be willing to
direct a portion of their budgets to the internet and, specifically, to the
Company's web sites. There can be no assurance that advertisers and advertising
agencies will accept the internet as a medium for advertising. If internet
advertising is not widely accepted by advertisers and advertising agencies, or
if the Company is not successful in generating significant advertising revenues
from such sources, the Company's business, results of operations and financial
condition could be materially adversely affected.
The Company intends to diversify its retail offerings to include additional
products such as t-shirts, memorabilia and accessories. The Company also plans
to eventually offer exclusive music content for sale through online downloads
and believes this form of music distribution will benefit from higher margins
relative to its current business.
Due to the fact that material may be downloaded from web sites and may be
subsequently distributed to others, there is a potential that claims will be
made against the Company pursuant to such legal theories as defamation,
negligence, copyright or trademark infringement or other theories based on the
nature and content of such material. Such claims have been brought, and
sometimes successfully pressed, against on-line services in the past. In
addition, the Company could be exposed to liability with respect to the material
that may be accessible through its products and web sites. Although the Company
carries general liability insurance, such insurance may not cover potential
claims of this type, or the level of coverage may not be adequate to fully
protect the Company against all liability that may be imposed. Any costs or
imposition of liability that is not covered by insurance or in excess of
insurance coverage could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company is
currently not aware of any claims that can be expected to have a material
adverse impact on its financial condition or its ability to conduct business as
described herein.
2
<PAGE>
The Company makes use of strategic partnerships and proprietary content to
attract and retain traffic on its Web site. It has built a network of over
7,000 affiliate Web sites through its "Partners Program." These affiliate Web
sites increase the Company's market presence by offering its music products to
their audience in exchange for a commission on sales. The Company also creates
proprietary content such as the Big Bang newsletter, a personalized newsletter
for customers, and CD University, a content-driven area that provides
information about specific musical genres. The Company intends to continue to
modify existing web site features, add new features and sites, and create,
license and acquire new content in order to differentiate itself from other
internet retailers. In that fashion, the Company believes that it will be able
to increase traffic to its sites, and thereby increase revenue and profit,
without having to match the large sums spent by competitors on advertising and
brand recognition. (However, see the discussion of risks associated with
reliance on strategic partnerships in the subsection below entitled "The
Company's Strategy and Plans.")
In partnership with Custom Revolutions, a provider of custom compilations of
music over the internet, the Company recently announced the launch of the CD
Universe CustomDisc store located on CD Universe's Web site. The store offers
customers the ability to create their own personalized CDs carrying the CD
Universe brand from a selection of over 175,000 songs. In addition, Custom
Revolutions and the Company develop a weekly series of compilations of music
that are offered through the CD Universe web site.
The CD Universe online store is designed to be informative, and to allow
customers to discover, learn about and purchase CDs, videos and other music and
video-related products. The store is designed to be intuitive and easy to use
and to enable customers to complete the ordering process with a minimum amount
of effort. Customers enter the CD Universe store through its Web site,
cduniverse.com, and in addition to ordering music and video products, can
conduct searches, browse among top sellers and other featured titles, read
reviews, listen to music samples, register for a personalized newsletter,
participate in promotions and check order status.
The CD Universe web site provides a search engine that enables customers to
navigate the store to find CDs or other products of interest. Customers can
search for CDs based on artist, album title, song title, record label or musical
genre. Upon clicking on an album title, the site visitor is provided with
information about the artist and the specific album, a list of tracks on the
album, sound samples and a list of reviews.
The Company believes that effective use of content encourages purchases by
customers who may be browsing the site without a specific title in mind. The CD
Universe web site provides sound samples, information about specific artists,
albums and types of music, ratings, articles on music topics and other
information. To help customers browse and discover CDs, the web site has eight
music spaces organized by genre. These include rock, jazz, R & B, classical,
country, Christian, world music and miscellaneous. The main page of each space
features links to more specific genre pages which have a list of new releases as
well as alphabetical listings of the artists and albums available within that
genre. In addition to these regular online store content features, CD
Universe's Web site offers several other features to encourage customers to
learn about and discover CDs that might be of interest to the customer. The web
site's CD University feature provides links to genre-specific areas where
customers are provided with information about specific musical offerings and
biographies of featured musicians in that genre. CD University currently offers
links for classical, jazz and blues and is in the process of adding more musical
genres to this area. In addition, the CD Universe web site has a feature called
RockOnTV, provided by RockOnTV.com, where customers can read a listing of music
and musician-related programs available on TV during that week.
Once a CD has been selected, customers are prompted to click on the price to
add products to their virtual shopping carts. Customers can add and remove
products from their shopping carts as they
3
<PAGE>
browse, prior to finalizing their purchase. The shopping cart page displays each
item that has been placed in the cart, including title, price and availability.
To execute orders, customers can choose from a secure or standard purchasing
mode depending on the capabilities of the customer's Web browser. After choosing
a purchasing mode, the customer is prompted to enter his or her name and
password or to create an account on CD Universe's Web site that can be used to
make repeat purchases.
The Company accepts credit cards, personal checks or money orders as payment
for customer orders. The CD Universe web site enables customers to store their
credit card information in a personal account, thereby avoiding the need to re-
enter this information when making future purchases. Customers are offered
several shipping options, including overnight delivery. The Company confirms
each order by e-mail communication to the customer promptly after the order is
placed, and subsequently confirms shipment of the order by e-mail. In addition,
the CD Universe web site includes a feature which enables customers to check on
the status of their order. Use of the internet by consumers is at an early
stage of development, and market acceptance of the internet as a medium for
commerce is still by no means certain. The Company's future success will depend
on its ability to significantly increase revenues, which will require the
development and widespread acceptance of the internet as a medium for commerce,
particularly as a channel of retail distribution. The internet may not prove to
be a viable commercial marketplace because of inadequate development of the
necessary infrastructure, such as reliable network backbones, or complementary
services, such as high-speed modems and security procedures for financial
transactions. The viability of the internet may prove uncertain due to delays
in the development and adoption of new standards and protocols to handle
increased levels of internet activity or due to increased government regulation.
If use of the internet for the purposes envisioned by the Company does not
continue to grow, or if the necessary internet infrastructure is not further
developed and maintained, the Company's business, results of operations and
financial condition could be materially adversely affected.
Despite the Company's implementation of network security measures, its
infrastructure is potentially vulnerable to computer break-ins and similar
disruptive problems caused by individuals with a variety of objectives.
Consumer concern over internet security has been, and could continue to be, an
impediment to the expansion of commercial activities that require consumers to
transmit their credit card information and other personal information over the
internet. In addition, computer viruses, break-ins or other security problems
could lead to misappropriation of proprietary information and interruptions,
delays or cessation in service to the Company's customers. Until more
comprehensive and reliable security technologies are developed and implemented,
the security and privacy concerns of existing and potential customers may
inhibit the growth of the internet as a merchandising medium.
The Company plans to acquire content-oriented web sites with significant web
traffic and attractive demographics that cater to specific communities of
interests. By adding retail sales features to newly acquired sites and taking
advantage of cross marketing opportunities, the Company plans to sell music and
video products as well as other products to these sites' visitors. The Company
is currently in the process of acquiring web sites which will provide growth
opportunities in such retail markets such as video games and PC and interactive
entertainment software. The Company also plans to expand internationally
through the acquisition of Web content sites and electronic retailers in foreign
countries in order to provide it with local fulfillment capabilities for its
foreign customers. Set forth below in the subsection entitled "Pending
and Proposed Acquisitions" is a description of the current status of ongoing
transactions in which the Company intends to acquire Case's Ladder, Inc. and the
web sites operated by Gamer's Alliance, Inc., both of which are online gaming
companies.
The Company believes that its strategic assets include customer loyalty,
proprietary content and user-friendly technology, and that such assets will
enable it to grow web site traffic, retain customers, expand revenue
opportunities and execute strategic acquisitions. The Company also plans to
develop
4
<PAGE>
strategic relationships with traditional media partners which will enable it to
build awareness of its sites and e-commerce services and increase traffic to its
sites.
Sales and Marketing.
Since its inception in 1996, traffic on CD Universe's web site has grown to
an average of over 1,000,000 visitors per month in 1998. At the present time,
the Company receives and processes over 20,000 orders in a typical month, with
an average order size of about $35 exclusive of shipping charges.
To date, the Company has been able to increase site traffic and sales
without having to match the large sums spent by competitors on advertising and
brand recognition. The Company makes use of strategic partnerships and
proprietary content to attract and retain traffic on its web sites. CD
Universe's "Partner Program" increases its market presence by allowing
affiliated web sites to offer CDs to their audience for which CD Universe
provides fulfillment. The affiliated site provides a hyperlink to the CD
Universe web site that leads the consumer to more information about a specific
artist or title. This hyperlink automatically connects the customer to the CD
Universe online store where the affiliate's customer may place an order to
purchase a CD. In this manner, the affiliate can offer enhanced services and
product recommendations, while avoiding ordering and fulfillment costs.
Affiliates receive a commission of 5% to 7% on sales of the Company's products
that originate from the affiliate's web site.
The Company expects to experience significant fluctuations in future quarterly
operating results that may be caused by a variety of factors, many of which are
outside the Company's control. Factors that may affect the Company's quarterly
operating results include, without limitation, (i) the Company's ability to
retain existing customers, attract new customers at a steady rate and maintain
customer satisfaction, (ii) the announcement or introduction of new or enhanced
web sites, products and strategic alliances by the Company and its competitors,
(iii) the mix of products sold by the Company, (iv) seasonality of the recorded
music industry (namely, the fact that sales of recorded music traditionally peak
during the Christmas season, (v) seasonality of advertising sales, (vi) Company
promotions and sales programs, (vii) price competition or higher recorded music
prices in the industry, (viii) the level of use of the Internet and increasing
consumer acceptance of the Internet for the purchase of consumer products such
as those offered by the Company, (ix) the Company's ability to upgrade and
develop its systems and infrastructure in a timely and effective manner, (x) the
level of traffic on the Company's Web sites, (xi) technical difficulties, system
downtime or Internet brownouts, (xii) the amount and timing of operating costs
and capital expenditures relating to expansion of the Company's business,
operations and infrastructure and the implementation of marketing programs, key
agreements and strategic alliances, (xiii) the number of recorded music releases
introduced during the period, (xiv) the level of merchandise returns experienced
by the Company and (xv) general economic conditions and economic conditions
specific to the Internet, on-line commerce, and the recorded music and
prerecorded videocassette industries.
Order Fulfillment and Source of Supply.
The Company currently accepts orders only over the Internet. Product
orders received by the Company are accepted, verified, batched and
electronically sent on a daily basis to Valley Media, Inc., of Woodland Hills,
California ("Valley Media"), the Company's primary supplier. Shipments from
------------
Valley Media and other suppliers are received at the Company's fulfillment
center in Wallingford, Connecticut. Employees break down bulk shipments into
the individual orders to be sent to customers. This arrangement allows the
Company to offer customers a large number of CD and video titles while
maintaining virtually no inventory. It also reduces product returns by allowing
the Company to only order products for which it has received orders. In
addition, this method of operation allows the Company to grow from internal cash
flow since it receives credit terms from its distributors. The Company
typically fills over 80% of its orders by the next business day, and
approximately 90% of its
5
<PAGE>
orders within one week. The Company believes that the speed of order fulfillment
is an important factor to its customers, and accordingly has a significant
impact on its ability to increase revenues from retail sales.
At the present time, Valley Media supplies approximately 90% of the music and
video products and accessories sold by the Company. There can be no assurance
that the Company will maintain that relationship or that it will be able to find
an alternative supplier which will provide products and services on terms
satisfactory to the Company should its relationship with Valley Media terminate.
Therefore, an unanticipated termination of the Company's relationship with
Valley Media, particularly during the fourth quarter of the calendar year in
which a high percentage of recorded music and video product sales are made,
could materially adversely affect the Company's results of operations for the
quarter in which such termination occurred even if the Company was able to
establish a relationship with an alternative supplier. To date, Valley Media
has satisfied the Company's requirements on a timely basis. However, to the
extent that Valley Media is unable to continue to satisfy the Company's
increasing product requirements, such constraints may have a material adverse
effect on the Company's business, results of operations and financial condition.
Competition.
The online commerce market is new, rapidly evolving and intensely
competitive, and the Company expects that competition will further intensify in
the future. Barriers to entry are minimal, and current and new competitors can
launch new sites at a relatively low cost. With respect to recorded music
sales, the Company currently competes with numerous internet retailers,
including music retail chains, record labels, independent retailers with web
sites on the internet and online stores retailing music and video titles such as
CDnow and Amazon.com. In addition, the Company competes with traditional music
retailers, as well as megastores, mass merchandisers, consumer electronics
stores and music clubs. It is the Company's objective to compete with both
online and traditional music retailers through a combination of larger
selections, discounted prices, the convenience of being open 24 hours, 7 days a
week, proprietary content, customer service, fulfillment expertise and web site
ease of use. The Company believes that its strategy of continually upgrading
and enhancing its systems and focus on enhancing customers' overall satisfaction
will enable the Company to compete effectively in the online music retailing
market. the Company believes that the nature of the Internet environment allows
consumers to easily change vendors with the click of a mouse and, therefore, CD
Universe's ease of use and proprietary content can successfully lure customers
away from larger online retailers.
The primary competitive factors in providing music, video and other
entertainment products and services via the internet are name recognition,
variety of value-added services, ease of use, price, quality of service,
availability of customer support and technical expertise. The Company's
prospects for achieving its business objectives will depend heavily upon its
ability to provide high quality, entertaining content, along with user-friendly
web site features and value-added internet services. Other factors that will
affect the Company's prospects for success include its ability to attract
experienced and qualified personnel, particularly in the areas of management,
sales and marketing, and web site design. If the Company is unable to compete
successfully in the music and video retailing business, there will be a material
adverse impact on its business, results of operations and financial condition.
In addition, the competition for advertising revenues, both on internet web
sites and in more traditional media, is intense. If the Company fails to
attract and retain significant sources of revenue from paid advertisements and
sponsorships on its web sites, the Company's business, results of operations and
financial condition will be materially adversely affected.
Many of the Company's current and potential competitors in the area of
online music and video retailing have longer operating histories, significantly
greater financial, technical and marketing resources, greater name recognition
and larger existing customer bases than the Company. These
6
<PAGE>
competitors may be able to respond more quickly than the Company to new or
emerging technologies and changes in the economy or the marketplace affecting
the products and services that the Company offers. In addition, some of the
Company's competitors can be expected to devote greater resources, both human
and financial, to the development, promotion and sale of music, video and other
entertainment products and services. Accordingly, there can be no assurance that
the Company will be able to compete successfully and achieve its objectives with
respect to growth in revenue and profit.
Employees.
In addition to the officers who are referred to in Item 5 of this document,
the Company currently employs 22 full-time associates and up to 16 part-time
staffers. Of the Company's 22 full-time associates, six are in marketing, six
are in programming and operations, six are in product fulfillment, and four are
in administration. The part-time staffers work in the packing and customer
service areas.
The Company's success depends to a significant extent on the continued
contributions of its senior management team and technical and marketing
personnel. In particular, the Company's business is highly dependent upon the
services of Brad Greenspan, Leland Silvas and Charles Beilman. The Company has
employment agreements with Messrs. Silvas and Beilman. However, such employment
agreements do not assure the services of such employees. Despite employment
agreements and non-competition arrangements with certain members of management,
the Company's employees may voluntarily terminate their employment with the
Company at any time. The Company's success also depends on its ability to
attract and retain additional qualified employees. Competition for qualified
personnel is intense and there are a limited number of persons with knowledge of
and experience in commercial application of the internet and music retailing
industries. There can be no assurance that the Company will be able to attract
and retain highly qualified personnel to fill critical managerial and
operational positions. The loss of one or more key employees could have a
material adverse effect on the Company.
Facilities.
The Company currently leases a 19,500 sq. ft. office, warehouse and order
fulfillment center in Wallingford, Connecticut (the "Wallingford Facility").
--------------------
The Company's lease with respect to this facility expires in March 2002 and the
Company has the right and option to extend it for an additional five year term.
The Company believes that the Wallingford Facility will be adequate to meet its
needs for the foreseeable future.
Domain Names, Patents and Trademarks
The Domain names of the Company's web sites constitute the Company's most
important intellectual property. Domain names registered to the Company include
the following: euniverse.com, cduniverse.com, videouniverse.com and
megadvd.com. In connection with planned acquisitions of Case's Ladder, Inc. and
Gamer's Alliance, Inc., the Company will acquire the domain names associated
with those businesses. (See "Acquisition of Case's Ladder, Inc." and "Proposed
Acquisition of Gamer's Alliance, Inc.") At the present time, the Company does
not own any patents and is in the process of filing applications for appropriate
trademark registrations. The Company believes that it presently has, or is
capable of acquiring, ownership and/or control of the intellectual property
rights which are necessary to conduct its operations and to carry out its
strategic plans.
The Company's Strategy and Plans.
The Company plans to implement the following strategies in its efforts to
increase revenue and profit through the internet-based sale of products,
services and advertising:
7
<PAGE>
Provide Innovative and Easy-to-Use Web Sites. The Company plans to make
--------------------------------------------
its customer experience informative, efficient and intuitive by improving its
store format and features. For example, the CD Universe store incorporates
"point and click" options, supported by technical enhancements including user-
friendly search capabilities (by artist, album, title, song title or record
label), personalized music suggestions, order tracking and confirmation. The CD
Universe store also promotes music learning and discovery by enabling visitors
to create customized versions of CDs and its Big Bang newsletter. Site visitors
are prompted to register and choose from a checklist of options and musical
preferences that allow the registrant to select the genre or genres he or she is
interested in as well as the content he or she desires to receive (e.g., press
releases, charts, reviews, concert tour information and CD Universe news). These
features are designed to make use of the web site entertaining and informative,
and to encourage purchases and repeat visits.
Increase Market Penetration Through Strategic Partnerships. The Company
----------------------------------------------------------
intends to increase market penetration through strategic partnerships that
expand awareness of its product and service offerings. The Company offers
internet-based partners the opportunity to establish links from titles and
artists on their Web site to their corresponding area within the CD Universe
site. The Company believes that the combination of its capability in order
fulfillment, visitor-tracking technology, flexible software and customer
preference information makes a partnership with the Company attractive for other
internet-based businesses. Although the Company's ability to generate
additional revenue from internet commerce may depend on increased site traffic,
purchases and advertising that the Company expects to generate through such
strategic alliances, there can be no assurance that its infrastructure of
hardware and software will be sufficient to handle the potential increased
traffic and sales volume from such alliances. There can also be no assurance
that these relationships will be maintained through their initial terms or that
additional third-party alliances will be available to the Company on acceptable
commercial terms or at all. The inability to enter into new, and to maintain
any one or more of its existing, strategic alliances could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Expand Web Presence. CD Universe has been able to increase site traffic,
-------------------
and thereby increase sales, without having to match the large sums spent on
advertising by some of its online competitors. The Company has entered into
linkage arrangements with other web sites. It will continue to seek cost-
effective ways to increase traffic at its web sites and has discussions underway
with potential strategic partners which may increase traffic at the CD Universe
web site. The Company plans to expand its international presence and has
recently introduced a localized version of the CD Universe site for the Japanese
market, to be marketed directly to Japanese consumers on Yahoo! Japan. In
addition, the Company intends to develop content as well as offering new
products and services with the objective of attracting and retaining site
traffic, and increasing sales and profit margins.
Although the Company's growth strategy includes plans for expansion into
international markets, there can be no assurance that the Company will be able
to successfully market, sell and distribute its products in international
markets due to a variety of legal, contractual and practical considerations. In
addition, there are certain risks inherent in doing business on a global level,
such as unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, difficulties in protecting intellectual property rights, longer
payment cycles, problems in collecting accounts receivable, political
instability, fluctuations in currency exchange rates and potentially adverse tax
consequences which could adversely impact the Company's prospects for successful
international operations. If such factors have a material adverse impact on the
Company's ability to develop international operations, its business, results of
operations and financial condition may likewise be adversely affected.
Acquire Other Existing Web Sites. A key element to the Company's growth
--------------------------------
strategy will be to acquire existing sites to complement the products and
features of the CD Universe web site. The
8
<PAGE>
Company's strategy is to acquire entertainment-oriented sites that have several
key characteristics such as: (i) substantial existing traffic, (ii) strategic
content, management or technology, (iii) product offerings that are compatible
with the demographics of the Company's customer base, and (iv) the potential to
utilize the Company's capability in the areas of retail sales, order
fulfillment, hardware capacity and web site design. The Company is also
contemplating the acquisition of e-commerce web sites in higher margin business
such as the retail sale of PC and interactive entertainment software.
Information obtained through customer tracking technology and customized
services on CD Universe's web site enable the Company to target its customer
base and provide other complementary e-commerce offerings.
The Company's growth and future profitability may depend in part upon its
ability to identify companies that are suitable acquisition candidates, to
acquire those companies upon appropriate terms and to effectively integrate and
expand their operations within its own infrastructure. There can be no assurance
that the Company will be able to identify additional candidates that it deems
suitable for acquisition or that the Company will be able to consummate desired
acquisitions on favorable terms. Acquisitions involve a number of special
risks, including the diversion of management's attention to the assimilation of
the operations and personnel of the acquired companies, adverse short-term
effects on the Company's operating results and the potential inability to
integrate financial and management reporting systems. A significant portion of
the Company's capital resources could be used for these acquisitions.
Accordingly, the Company may require additional debt or equity financing for
future acquisitions, which may not be available on terms favorable to the
Company, if at all. Moreover, the Company may not be able to successfully
integrate an acquired business into the Company's business or to operate an
acquired business profitably. There can be no assurance that the Company will
be able to integrate and expand the operations of acquired companies, without
excessive costs, delays or other adverse developments.
Advertising. Historically, the Company has only generated revenue from
-----------
merchandise sales through the CD Universe online store. However, it has
recently implemented a program to enable it to accept paid third-party
advertising. The Company intends to use in-house and third party
representatives to sell advertising space and other promotional opportunities on
its web sites. This program began generating revenues in the quarter ending
June 30, 1999.
Acquisition of Case's Ladder, Inc.
The Company entered into a Stock Purchase Agreement dated April 21, 1999
for the purchase of all of the outstanding shares of the common stock of Case's
Ladder, Inc. (the "Case's Ladder Agreement"). The other parties to the
-----------------------
agreement are Case's Ladder, Inc. and its shareholders--Frank Westall (Chief
Executive Officer and Chairman of Case's Ladder) and Chip Hilts (Chief Operating
Officer and Chief Financial Officer of Case's Ladder). The purchase price for
the Case's Ladder shares is a total of 700,000 shares of restricted common stock
of the Company that will be issued to the shareholders of Case's Ladder. The
Case's Ladder Agreement provides that the selling shareholders will have the
right to participate in any registered offering of the Company's common stock
and to sell their Company shares in the Company's offering of its shares to the
public to the extent that any of the Company's directors and/or officers have
such registration rights and sale privileges. The Case's Ladder Agreement also
provides that Frank Westall, Chip Hilts and Jeremy Rusnak will be employed by
the Company subsequent to the closing, that they will be granted options to
purchase 600,000 shares of the Company's common stock, in the aggregate, at a
price of $10 per share, and that the stock options will vest in quarterly
installments over a period of 36 months.
The Case's Ladder web site serves primarily as an online game portal,
providing competitive rankings for online gamers in a number of online games and
allowing gamers to compete against one another in a variety of tournaments and
leagues. The Case's Ladder web site currently has over one
9
<PAGE>
million registered users and receives over 1.1 million unique visitors each
month. Approximately 75% of registered users on the Case's Ladder web site are
between the ages of 18 and 50 with the majority of those visitors having an
annual income over $50,000. Case's Ladder currently derives revenue only from
membership fees and advertising. The Company believes that this acquisition of
new users with favorable demographics will allow it to expand the customer base
for its existing products, and to diversify its product offerings into areas
such as computer games.
Proposed Acquisition of Gamer's Alliance, Inc.
On May 4, 1999, the Company announced that it had entered into a letter of
intent to acquire all of the outstanding shares of Gamer's Alliance, Inc., a
Missouri corporation based in Chesterfield, Missouri. Gamer's Alliance has been
online since January 1997, and is one of the largest networks of gaming-related
sites on the internet. On a monthly basis, Gamer's Alliance has over 750,000
unique visitors and over 10 million banner impressions. It maintains a network
of more than 50 web sites, including GA-games, GA-Source (a gaming news site
which provides game previews, product reviews and interviews), and GA-Sports (a
network of news on computer sports gaming).
The letter of intent with Gamer's Alliance proposes a closing date for the
transaction in June, 1999, and provides that the Company will pay the purchase
price for the Gamer's Alliance stock partly in cash and partly in the Company's
common stock. The letter of intent provides for a contingent payment to the
sellers of additional shares of the Company's common stock over a period of five
calendar quarters, contingent upon Gamer's Alliance achieving specified
milestones with respect to revenue, the number of unique site visitors, and
other matters. The letter of intent with Gamer's Alliance also provides that
subsequent to the closing, certain members of management of Gamer's Alliance
will work for the Company pursuant to employment agreements.
Item 2 Financial Information
Selected Financial Information
The following selected financial data are derived from the audited financial
statements of the Company presented as of March 31, 1999. As indicated in Item
1, the Company completed a merger with Entertainment Universe subsequent to
March 31, 1999. The effect of the merger along with other acquisitions is
presented separately in pro forma statements. The data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto included in Item 15.
<TABLE>
<CAPTION>
eUniverse, Inc. f/k/a/ MOTORCYCLE CENTERS OF AMERICA, INC.
- ----------------------------------------------------------------------------------------------------------------------------
Statements of Operations
Three
Months
Ended
March 31, Years ended
December 31,
------------------------------------------
1999 1998 1997
--------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Costs and expenses................................. $ 80,473 $ 45,603 $ 27,039
OPERATING LOSS (80,473) (45,603) (27,039)
--------------------- ------------------- -------------------
Non-operating income/ (expense).................... 84,603 (57,290) 19,313
--------------------- ------------------- -------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES 4,130 (102,893) (7,726)
INCOME TAXES....................................... - - -
--------------------- ------------------- -------------------
NET INCOME (LOSS) $ 4,130 $(102,893) $ (7,726)
======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
eUniverse, Inc. f/k/a/ MOTORCYCLE CENTERS OF AMERICA, INC.
- ----------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
March 31, December 31,
1999 1998
------------------- ------------------------
ASSETS
CURRENT ASSETS
<S><C> <C> <C>
Cash and cash equivalents......................................... $101,568 $ 887
Working capital (deficit)......................................... 28,268 (46,047)
Total assets...................................................... 102,276 9,720
Total shareholders equity......................................... 28,976 (45,214)
</TABLE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
For the periods ended December 31, 1998 and 1997 Motorcycle Centers of
America had no substantial operations. During these periods the company was
engaged in merger negotiations with several companies who had significant
operations and who desired the company's legal status to have freely traded
shares on the OTC Electronic Bulletin Board. On January 26, 1998, the Company
entered into an Agreement and Plan of Reorganization with Sandale Holdings,
Limited, to acquire a motorcycle manufacturing company in China. The Plan of
Reorganization was terminated on August 14, 1998. In connection with the Plan
of Reorganization, the Company redomiciled in Nevada. On October 4, 1998, the
Company entered into an Agreement and Plan of Reorganization with DDA America,
LLC to acquire all of the issued and outstanding stock of DDA America, LLC. The
Plan of Reorganization was terminated on March 1, 1999. The operating losses
for the year ended December 31, 1998 are largely attributable to expenses
associated with these merger negotiations.
For the three month period ended March 31, 1999, the company's operating loss
was attributable to costs associated with the merger with EUI which was
completed on April 14, 1999. Investment gains and interest income more than
fully offset the operating losses resulting in net income for the period of
$4,130.
Pro Forma Financial Information
Subsequent to March 31, 1999, the last balance sheet date presented in this
registration statement, the registrant completed a number of transactions
involving business combinations and the sale and other issuance of common stock
and preferred stock. The pro forma financial statements reflect the following
transactions:
. The acquisition of CD Universe, Inc. ("CD Universe") by Entertainment
Universe, Inc.("EUI").
. The sale of 1,832,812 preferred shares by EUI
. The sale of 885,835 common shares by Motorcycle Centers of America,
Inc.("MCA").
. The payment of offering costs and other expenses through cash and common
stock.
. The merger of MCA and EUI through an exchange of shares.
11
<PAGE>
. The acquisition of Cases Ladder, Inc. ("CLI").
. The purchase of the MegaDVD web-site through the issuance of shares.
. The repurchase and retirement of common stock by MCA.
The pro forma balance sheets presented reflect the historical balance sheets
of MCA, CD Universe, and EUI as of March 31, 1999 and CLI as of December 31,
1998. Pro forma adjustments have been made to give effect to the above
transactions as if they had occurred as of March 31, 1999.
The pro forma income statements presented reflect the historical income
statements for MCA and CLI for the year ended December 31, 1998 and for CD
Universe for the year ended March 31, 1999. There is no significant activity for
EUI, as it came into existence in February 1999. Pro forma adjustments have been
made to reflect activity attributable to the above transactions, as if they had
occurred at the beginning of the year.
These unaudited pro forma combined financial statements should be read in
conjunction with the financial statements and notes thereto appearing elsewhere
in this Registration Statement. The pro forma information is not necessarily
indicative of the results that would have been reported had such events
actually occurred on the dates specified, nor is it indicative of the Company's
future results.
eUNIVERSE
PROFORMA FINANCIAL STATEMENTS
MARCH 31, 1999
<TABLE>
<CAPTION>
Motorcycle
Centers of Case's Entertainment
America CD Universe Ladder Universe Combined
-------------- --------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash $ 101,568 $ 11,335 $ $ 90 $ 112,993 3
6
9
Receivables 92,938 65,262 158,200
Due from officer 157,569 157,569
Other current assets 32,276 2,172 34,448
-------------- --------------- ------------ --------------- -------------
-------------- --------------- ------------ --------------- -------------
Total current assets 101,568 294,118 67,434 90 463,210
-------------- --------------- ------------ --------------- -------------
Property and equipment, net 708 225,718 21,752 248,178
Investment in subsidiaries
CD Universe 505,000 505,000 4
12
Case's Ladder 12
Acquisition costs - CD Universe 54,840 54,840
Amortization of acquisiton costs
Goodwill 38,000 38,000 2
7
Amortization of goodwill
Other intangibles 60,000 60,000 1
Other assets 510 510
-------------- --------------- ------------ --------------- -------------
Total other assets 708 264,228 21,752 619,840 906,528
-------------- --------------- ------------ --------------- -------------
Total assets $ 102,276 $ 558,346 $ 89,186 $ 619,930 $ 1,369,738
<CAPTION>
Pro Forma adjustments
to reflect acquisitions
and stock issuances
as of March 31, 1999
DR CR Pro Forma
--------------- ---------------- ----------------
<S> <C> <C> <C>
ASSETS
Cash 6,598,122 4 1,975,000 $ 5,561,360
7,900 5 48,490
885,835 10 20,000
Receivables 158,200
Due from officer - 157,569
Other current assets 34,448
----------------
Total current assets 5,911,577
----------------
Property and equipment, net 248,178
Investment in subsidiaries
CD Universe 1,345,000 7 2,368,976 -
518,976
Case's Ladder 11,674 2 11,674 -
Acquisition costs - CD Universe 54,840
Amortization of acquisiton costs 13 5,484 (5,484)
Goodwill 7,011,674 - 16,758,650
9,708,976 -
-
Amortization of goodwill 13 1,675,865 (1,675,865)
Other intangibles 52,500 112,500
Other assets 510
----------------
Total other assets 15,493,329
----------------
Total assets $ $ 21,404,906
</TABLE>
<TABLE>
<CAPTION>
Motorcycle
Centers of Case's Entertainment
America CD Universe Ladder Universe Combined
-------------- --------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expense$ 7,000 $ 942,322 $ 20,165 $ $ 969,487
Customer deposits 16,667 16,667
Due to officers 66,300 105,000 55,000 226,300 7
Due to affiliates 30,000 9,028 39,028
-------------- --------------- ------------ --------------- -------------
Total liabilities 73,300 1,077,322 100,860 1,251,482
-------------- --------------- ------------ --------------- -------------
Preferred stock
Common stock 2,148 1,000 2,750 620,020 625,918 10
11
12
12
Additional paid in capital 171,796 171,796 3
5
8
10
Deferred offering costs (5,734) (5,734)
Accumulated deficit (139,234) (519,976) (14,424) (90) (673,724) 5
13
14
-------------- --------------- ------------ --------------- -------------
Total stockholders equity 28,976 (518,976) (11,674) 619,930 118,256
-------------- --------------- ------------ --------------- -------------
Total liabilities and equity $ 102,276 $ 558,346 $ 89,186 $ 619,930 $ 1,369,738
<CAPTION>
Pro Forma adjustments
to reflect acquisitions
and stock issuances
as of March 31, 1999
DR CR Pro Forma
---------------- ---------------- ----------------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expense $ $ 969,487
Customer deposits 16,667
Notes payable - officers 85,000 141,300
Due to affiliates 39,028
----------------
Total liabilities 1,166,482
----------------
Preferred stock 3 183,281 183,281
Common stock 1,845 1 5 14,723
609,955 2 700
1,000 7 2,425
2,750 8 319
9 886
14 20
Additional paid in capital 480,000 1 52,495 21,891,683
20,000 2 6,999,300
159,500 7 7,272,575
18,155 3 6,414,841
8 159,181
9 879,215
11 609,955
14 9,980
Deferred offering costs 9 5,734 -
Accumulated deficit 28,490 6 7,900 (1,851,263)
1,681,349 12 519,976
10,000 12 14,424
----------------
Total stockholders equity 20,238,424
----------------
Total liabilities and equity $ $ 21,404,906
</TABLE>
<TABLE>
<CAPTION>
Motorcycle
Centers of Case's Entertainment
America CD Universe Ladder Universe Combined
-------------- --------------- ------------ --------------- ------------- -
<S> <C> <C> <C> <C> <C>
Revenue $ - $ 8,851,713 $ 378,345 $ - $ 9,230,058
Cost of revenues - 8,264,306 33,660 - 8,297,966
-------------- --------------- ------------ --------------- -------------
Gross profit - 587,407 344,685 - 932,092
-------------- --------------- ------------ --------------- -------------
General and administrative expense 45,603 995,584 360,019 90 1,401,296 5
14
Amortization - 13
-------------- --------------- ------------ --------------- -------------
Total 45,603 995,584 360,019 90 1,401,296
-------------- --------------- ------------ --------------- -------------
Loss from operations (45,603) (408,177) (15,334) (90) (469,204)
Other income (expense) (57,290) 1,013 - - (56,277)
-------------- --------------- ------------ --------------- -------------
Loss before income taxes (102,893) (407,164) (15,334) (90) (525,481)
Income tax expense (benefit) - - (1,372) - (1,372)
-------------- --------------- ------------ --------------- -------------
Net loss $ (102,893)$ (407,164) $ (13,962) $ (90) $ (524,109)
<CAPTION>
Pro Forma adjustments
to reflect acquisitions
and stock issuances
as of March 31, 1999
DR CR Pro Forma
--------------- ---------------- ----------------
<S> <C> <C> <C>
Revenue $ 9,230,058
Cost of revenues 8,297,966
----------------
Gross profit 932,092
----------------
General and administrative expense 28,490 1,439,786
10,000
Amortization 1,681,349 1,681,349
----------------
Total 3,121,135
----------------
Loss from operations (2,189,043)
Other income (expense) 6 7,900 (48,377)
----------------
Loss before income taxes (2,237,420)
Income tax expense (benefit) (1,372)
----------------
Net loss $ (2,236,048)
</TABLE>
Notes to Pro Forma Financial Statements - March 31, 1999
Pro forma adjustments have been made to reflect the following transactions,
corresponding to the respective journal entry numbers on the pro forma financial
statements:
1) To record issuance of 4,605 shares of common stock to acquire web site.
2) To record issuance of 700,000 shares of common stock to acquire Cases
Ladder, Inc.
3) To record sale of 1,832,812 shares of preferred stock at $3.60 per share.
4) To record payment of cash balance of CD Universe acquisition, the payment of
costs incurred in connection with the preferred offering and repayment of an
advance from the former shareholder.
5) To record payments of costs and expenses incurred in connection with the
preferred offering.
6) To record earnings on escrowed funds.
7) To record issuance of 2,425,000 shares of common stock, valued at $3.00 per
share, in completion of the acquisition of CD Universe.
8) To record the issuance of 319,000 shares of common stock, valued at $0.50
per share, for services provided in connection with the preferred offering.
9) To record the sale of 885,835 shares of common stock at $1.00 per share.
10) To record the acquisition and retirement of 1,845,000 shares of common
stock for a purchase price of $20,000.
11) To adjust common stock to par value.
12) To record elimination of intercompany accounts and balances.
13) To record the amortization of goodwill and acquisition costs, based on a
ten year amortization period, as if the transaction had occurred at the
beginning of the year.
12
<PAGE>
14) To record the issuance of 20,000 shares of common stock, valued at $0.50
per share, for services.
Management's Discussion and Analysis of Pro Forma Financial Condition and
Results of Operations
For the pro forma period presented herein, eUniverse would have reported $9.2
million in revenues. CD Universe revenues for the period ended March 31, 1999
totaled $8.9 million, derived principally from sales of music to its online
customers. Case's Ladder revenues for the period ended December 31, 1999 totaled
$0.4 million, split approximately equally between advertising revenues and
membership fees. On the combined basis, cost of revenues were $8.3 million, or
89.9% of revenues, resulting in a gross profit of $0.9 million for the period.
CD Universe cost of revenues which include cost of the products purchased along
with shipping and fulfillment expenses amounted to 93.4% of revenues. Case's
Ladder costs of revenues totaling $0.03 million, or 8.7%, consist principally of
fees related to processing and collection of the revenues for membership and
advertising.
General and administrative expenses include costs of advertising and
marketing, web-site development and maintenance along with general costs for
office administration. These costs totaled $1.4 million, or 15.6% of revenues.
On a pro forma basis the loss from operations prior to amortization of
goodwill would be ($0.5) million. As a result of the acquisitions of CD Universe
and Case's Ladder, goodwill will be recorded in the amounts of $9.9 and 7.0
million, respectively. The pro forma full year's amortization of this goodwill
using a 10 year amortization period amounts to $1.7 million, resulting in a loss
from operations after amortization of ($2.3) million.
The net loss on a pro forma basis for a full 12 month period would have been
($2.2) million after other income items totaling $36,000 and an income tax
benefit of $1,300.
Liquidity And Capital Resources
In April 1999, MCA completed a sale of common stock pursuant Rule 504 of
Regulation D totaling $0.9 million, and EUI completed a sale of its Series A 6%
Convertible Preferred Stock to accredited investors totaling $6.6 million
including Lehman Brothers, Eisenberg Partners and principals of Gerard Klauer
Mattison & Co., Inc. Funds received from this preferred offering were used to
complete the acquisition of CD Unverse and the merger with MCA requiring funds
of $2.0 million. Following the transactions as presented in the pro forma
balance sheets, the company has cash resources of $5.6 million.
Prior to the acquisition by EUI, CD Universe primarily financed its
operations through internally-generated cash flow and advances from related
parties. Prior to the acquisition by eUniverse, Case's Ladder primarily
financed its operations through internally-generated cash flow and advances from
related parties.
eUniverse expects to fund its 1999 and 2000 cash flow from cash on hand and
through internally-generated cash flow.
Risks Associated With The Year 2000 Issue
The Year 2000 issue (Y2K) is the result of computer programs written using
two digits rather than four to define the applicable year. Any of the Company's
computer and telecommunications programs that have date sensitive software may
recognize a date using "00" as the year 1900 instead of 2000. This could result
in system failure or miscalculations causing disruptions in operations,
including the ability to process transactions, send invoices, or engage in
similar normal business activities. The Company has determined that its
equipment is Y2K compliant.
eUniverse is currently conducting an analysis to determine the extent to which
others have Year 2000 issues. These include CD Universe's major suppliers'
systems, including the systems of credit card processors, telecommunications
providers, product distributors and companies with whom CD Universe has
marketing agreements. CD Universe's primary distributor for music products,
Valley Media, has indicated that it has begun its remediation efforts and
expects to be in compliance before the year 2000. CD Universe is currently
unable to predict the extent to which the Year 2000 issue will affect Valley's
suppliers, to the extent to which Valley would be vulnerable to its suppliers'
failure to resolve any Year 2000 issues on a timely basis. The failure of a
major supplier subject to the Year 2000 issue to convert its systems on a timely
basis or a conversion that is incompatible with CD Universe's systems could have
a material adverse effect on CD Universe. In addition, most of the purchases
from CD Universe's online store are made with credit cards, and our operations
may be materially adversely affected to the extent customers are unable to use
their credit cards due to Year 2000 issues that are not rectified by their
credit card providers.
CD Unverse and eUniverse intend to actively work with and encourage their
suppliers to minimize the risks of business disruptions resulting from Year 2000
issues and develop contingency
13
<PAGE>
plans where necessary. Such plans may include using alternative suppliers and
establishing contingent supply arrangements. CD Universe and eUniverse expect to
have such plans in place by September 30, 1999.
Item 3 Properties
The Company leases a 19,500 square foot office and warehouse facility in
Wallingford, Connecticut. The lease expires in March, 2002 and can be extended
for an additional five years at the Company's option. The Company owns or
leases no other facilities that are material to the operation of its business.
Item 4 Security Ownership of Certain Beneficial Owners and Management
The following tables set forth certain information regarding beneficial
ownership of the Company's common stock and preferred stock as of May 11, 1999
by (i) each person known by the Company to own beneficially more than 5% of the
Company's common stock, (ii) each of the Company's executive officers and
directors and (iii) all directors and executive officers as a group:
Common Stock:
Name of Beneficial Owner Shares Beneficially Percentage Beneficially
Owned(1) Owned(2)
Brad D. Greenspan 8,061,000 57.2%
Charles Beilman 2,425,000 17.2%
Joseph Abrams(3) 1,539,000 10.9%
Leland N. Silvas 358,334(4) 2.5%
William R. Wagner 8,333(5) nm
Directors and Executive 10,852,667 77.0%
Officers as a Group
_________________
(1) Unless otherwise noted, all of the shares shown are held by individuals or
entities possessing sole voting and investment power with respect to such
shares. Shares not outstanding but deemed beneficially owned by virtue of
the right of a person to acquire them within 60 days, whether by the
exercise of options or warrants or the conversion of shares of Preferred
Stock into shares of Common Stock, are deemed outstanding in determining
the number of shares beneficially owned by such person or group.
(2) The "Percentage Beneficially Owned" is calculated by dividing the "Number
of Shares Beneficially Owned" by the total outstanding shares of Common
Stock including shares beneficially owned by the person with respect to
whom the percentage is calculated..
_________________
(1)
(2)
(3)
(4)
(5)
14
<PAGE>
(3) Includes shares beneficially owned by Mr. Abrams as Trustee under the
following trusts: (i) 839,000 shares held by the Joseph W. & Patricia G.
Abrams Living Trust Under Trust Agreement dated March 16, 1994, (ii)
350,000 shares held by Matthew R. Abrams Irrevocable Trust Under Trust
Agreement dated December 19, 1991, and (iii) 350,000 shares held by Sarah
E. Abrams Irrevocable Trust Under Trust Agreement dated December 19, 1991.
(4) Includes 158,334 shares represented by options exercisable within 60 days.
(5) Consists entirely of shares represented by options exercisable within 60
days.
Item 5 Directors and Executive Officers
The following are the Directors and Executive Officers of the Company:
Name Age Position
Brad D. Greenspan 26 Chairman of the Board of Directors
Leland N. Silvas 44 President, Chief Executive Officer and Director
Charles Beilman 39 Chief Operating Officer, Chief Technical Officer and
Director
William R. Wagner 52 Vice President, Chief Financial Officer and Secretary
Brad D. Greenspan, Chairman of the Board of Directors of the Company since
April 1999. Mr. Greenspan founded and has served as the President of Palisades
Capital, Inc., a private Beverly Hills merchant bank, since 1996. In addition,
Mr. Greenspan manages a small fund that provides growth capital to technology
related companies. Mr. Greenspan received a BA degree in political
science/business from UCLA in 1996.
Leland N. Silvas, President and Chief Executive Officer of the company since
April 1999. Mr. Silvas is a major shareholder of Label-add, Inc. a Connecticut-
based advertising and direct marketing company and was employed there until
being recruited to eUniverse, Inc. in 1999. Mr. Silvas was President and Chief
Operating Officer of McPhersons global housewares division, from 1994-1998.
From 1992 to 1994 Mr. Silvas was a board member for Partners In Computing, a New
York City-based software solutions company. He currently sits on the advisory
board to the Adept Group, a computer consulting company based in New York City
and is a board member of ADV MARKETING and 1-800-adagency.
Charles Beilman, Chief Operating Officer and Chief Technical Officer of the
Company since April 1999. Mr. Beilman founded CD Universe in November 1995 and
was its sole shareholder and Chief Executive Officer until the sale of CD
Universe to the Company in April 1999. Since 1985, Mr. Beilman has served as
President and Director of Trak Systems, which supplies proprietary inventory
control computer systems to retail music stores throughout the United States and
Canada.
William R. Wagner, Vice President, Chief Financial Officer and Secretary of
the Company since April 1999. Prior to joining the Company, Mr. Wagner was
Chief Financial Officer of Heritage Marketing and Incentives, Inc., a
Massachusetts-based marketing incentives company. From 1995 to 1997, he was
Chief Financial Officer of ServiceSoft Corporation, a Massachusetts internet
software company, and from 1990 to 1994, he was Chief Financial Officer of
General Scanning, Inc., a pioneer in laser technology and systems.
15
<PAGE>
Agreement Concerning Election of Director
In connection with the purchase by E. P. Opportunity Fund, LLC ("E. P.") of
preferred stock issued by EUI, an agreement dated April 6, 1999 was entered into
between E. P., EUI and Brad D. Greenspan (the "E. P. Letter Agreement") which,
in effect, gave E. P. the right to select one of the Directors of EUI during
such period as it owns shares of EUI preferred stock. On April 16, 1999, in
connection with the Reorganization, the E. P. Letter Agreement was assigned by
EUI to the Company, which assumed the obligations of EUI thereunder. As a
result, as long as it owns Preferred Stock, E. P. has the right to appoint a
member of the Board of Directors of the Company. E. P. has not exercised that
right as of the date hereof.
Compensation of Directors and Term of Office
Directors of the Company do not currently receive compensation from the
Company for their services as members of the Board of Directors, but are
reimbursed for out-of-pocket travel expenses associated with attending Board of
Directors meetings.
Directors of the Company serve until the next succeeding annual meeting of
shareholders and until their successors are elected and qualified, subject to
resignation or removal by the shareholders.
Item 6 Executive Compensation
At the end of its most recent fiscal year, the Company's President and Chief
Executive Officer and other officers had not yet been employed and compensation
had not yet been paid. On April 6, 1999, the Company entered into employment
agreements with Leland Silvas, Chief Executive Officer and President, and
William R. Wagner, Vice President, Chief Financial Officer and Secretary. The
contract with Mr. Silvas is for an initial term expiring April 30, 2000 and
automatically renews for additional one-year periods unless terminated on three
months notice. The Silvas contract stipulates an annual base salary of $200,000
to be reviewed annuallly with a bonus opportunity of up to 50% of base salary
opon achievement of goals as determined by the Compensation Committee of the
Board of Directors. Mr. Silvas is entitled to options to purchase 825,000 shares
of common stock of the Company at an exercise of $3.00 per share, which options
become exercisable at various times as set forth in the contract. The contract
with Mr. Wagner is for an indefinite term, subject to termination on three
months notice, and stipulates an annual salary of $125,000 and options to
purchase 100,000 shares of common stock of the Company at an exercise price of
$3.00 per share. The Company entered into an employment contract with Mr.
Beilman which became effective April 14, 1999 for an initial period of three
years, subject to termination on ten days notice, and stipulates an annual
compensation of $135,000.
Item 7 Certain Relationships and Related Transactions
On April 14, 1999, the Company acquired all of the capital stock of CD
Universe, Inc. for a total consideration of $1,915,000 in cash plus 2,425,000
shares of common stock of the Company. The rights to acquire CD Universe, Inc.
were originally held by Palisades Capital, Inc. ("Palisades"), a private
merchant bank owned and operated by Brad D. Greenspan. On February 11, 1999
Palisades assigned its rights to acquire CD Universe, Inc. to EUI for
consideration of 8,061,000 shares of common stock of EUI which were issued to
Mr. Greenspan. (See Item 4 "Security Ownership of Certain Beneficial Owners and
Management"). In connection with the Reorganization, those shares of EUI common
stock were exchanged for an equivalent number of shares of the Company's common
stock.
16
<PAGE>
Item 8 Legal Proceedings
The Company is not a party to any pending legal proceedings that in the
opinion of management of the Company would have a material adverse effect on the
Company's results of operations or consolidated financial condition.
Item 9 Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters
Shareholders and Dividends
As of May 31, 1999, there were 14,092,933 shares of common stock of the
Company outstanding, which were held by approximately 111 shareholders of
record.
To date, the Company has paid no cash dividends and has no intention to pay
cash dividends on its common stock in the foreseeable future.
Market Information
The common stock of the Company is traded on the OTC Electronic Bulletin Board
under the symbol EUNI. Prior to April 22, 1999, when the Company changed its
name to eUniverse, Inc., the common stock of the Company was traded under the
symbol MCAM. Between April 14, 1999 and April 22, 1999 the common stock of the
Company was traded under the symbol MCAMD.
The chart below sets forth the range of reported high and low bid
quotations for the common stock of the Company for each full quarterly period
from April 1, 1998 and for the months of April and May 1999. The source of the
quotations is Bloomberg Financial Services. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. The closing price for the common stock of the
Company on May 29, 1999 was $9.25.
MONTHLY PERIOD ENDING RANGE OF HIGH AND LOW BID
QUOTATIONS
May 29, 1999 $ 9.00 - 12.25
April 30, 1999 $ 1.875 - 14.00
QUARTERLY PERIOD ENDING RANGE OF HIGH AND LOW BID
QUOTATIONS
March 31, 1999 $ 0.25 - 0.90
December 31, 1998 $ 0.03125 - 1.25
September 30, 1998 $ 0.25 - 0.225
June 30, 1998 $ 0.225 - 0.40
Shares Available for Resale
Approximately 12,984,000 shares of the Company's common stock
(approximately 92% of the shares outstanding) are restricted shares that may be
sold only in the event such shares are registered
17
<PAGE>
pursuant to the Securities Act or are sold pursuant to an exemption thereunder,
including Rule 144, which permits the resale of certain limited amounts of
restricted securities after a 12-month initial holding period. Subject to the
volume limitations of Rule 144, approximately 10,050,000 of such restricted
shares will become available for resale on March 3, 2000, an additional 509,000
shares will become available on April 1, 2000, and an additional 2,425,000
shares will become available on April 14, 2000. (See "Item 4 Securities
Ownership of Certain Beneficial Owners and Management".)
There are 1,832,812 shares of the Company's Series A 6% Convertible Preferred
Stock outstanding, which were sold to accredited investors including Lehman
Brothers, Eisenberg Partners and principals of Gerard Klauer Mattison & Co.,
Inc. Commencing on October 14, 1999, such shares are convertible into shares of
common stock of the Company at a one-to-one ratio unless the market price of the
common stock is less than $3.60 during certain periods prior to conversion (See
"Item 10 Sale of Convertible Preferred Stock"). The Company has granted the
holders of Preferred Stock certain registration rights so that they may sell
their shares of common stock received upon conversion under a registration
pursuant to the Securities Act. Such rights are set forth in the Registration
Rights Agreement of Entertainment Universe Inc. dated April 1999 which was
assigned to and assumed by the Company pursuant to the Assignment and Assumption
Agreement by and between Entertainment Universe, Inc. and Motorcycle Centers of
America, Inc., dated as of April 14, 1999. The shares of common stock received
upon conversion may be sold on the market pursuant to Rule 144 without
registration under the Securities Act commencing 12 months after conversion and
subject to the volume limitations of Rule 144.
The Company has granted options to various employees and advisors to
purchase an aggregate of up to 1,560,000 shares of common stock of the Company
at exercise prices ranging from $3.00 to $11.40. Options representing 68,750 of
such shares are vested and exercisable. Warrants and options to purchase an
additional 704,990 shares of common stock at exercise prices ranging from $2.76
to $11.00 have been issued to various entities in exchange for financing and
public relations services. Warrants and options representing 400,000 of such
shares are vested and exercisable. In addition, the Company has previously
announced plans to issue up to 700,000 shares of its common stock in connection
with acquisition of Case's Ladder. (See "Item 1 Business")
Item 10 Recent Sales of Unregistered Securities
Acquisition of CD Universe, Inc.
On April 14, 1999 EUI acquired from Charles Beilman, the sole shareholder of
CD Universe, one hundred percent of the capital stock of CD Universe, Inc. for a
total consideration of $1,915,000 in cash plus 2,425,000 shares of common stock
of the Company. Charles Beilman is the Chief Operating Officer, Chief Technical
Officer and a Director of the Company. (See Item 7, Certain Relationships and
Related Transactions.)
Leland N. Silvas was issued 200,000 shares of common stock of the Company on
March 3, 1999 in consideration of his acceptance of employment by the Company as
President and Chief Executive Officer. (See Item 4 "Security Ownership of
Certain Beneficial Owners and Management.")
Sale of Convertible Preferred Stock
On April 14, 1999, EUI sold 1,832,812 shares of its Series A 6% Convertible
Preferred Stock in a private offering pursuant to Section 4(2) of the Securities
Act and Rule 506 of Regulation D adopted under the Securities Act. The EUI
Preferred Stock was sold to a group of approximately 40 purchasers, including
Lehman Brothers, Eisenberg Partners and principals of Gerard Klauer Mattison &
Co., Inc., all of whom were accredited investors as defined in Rule 501 of
Regulation D. The aggregate offering price for the Preferred Stock was
$6,598,122. In connection with the Reorganization, the holders of the EUI
Preferred Stock exchanged their shares, on a one-to-one basis, for shares of the
Company's
18
<PAGE>
Preferred Stock having equivalent rights and preferences, as set forth in the
Designation of Preferred Stock of Motorcycle Centers of America, Inc. dated
April 7, 1999 (the "Designation of Preferred Stock").
Holders of the Company's Preferred Stock have the right to convert all or any
portion of such stock into shares of the Company's common stock at any time
after October 15, 1999 at a one-to-one ratio, unless the market price of the
Company's common stock is below $3.60 during various periods prior to the date
of conversion, as set forth in the Designation of Preferred Stock, in which case
the conversion ratio would be greater than one-to-one.
The Company's Preferred Stock does not bear dividends, and the holders of such
stock are not entitled to receive any dividends thereon. In the event of the
liquidation or dissolution of the Company, the holders of the Preferred Stock
will be entitled to receive, prior in preference to any distribution to the
holders of the Company's common stock and any other class of stock which has
been designated as junior in rank to the Preferred Stock, an amount per share
equal to the original issue price of the Preferred Stock ($3.60) plus interest
thereon at a rate of 6% per annum from the date of issuance. The holders of
Preferred Stock are entitled to cast the number of votes per share on each
matter submitted to the Company's holders of common stock that equals the number
of votes that could be cast on the shares of common stock that could have been
converted immediately prior to the taking of the vote. Votes of the Preferred
Stock holders shall be cast together with those cast by the holders of common
stock and not as a separate class except as otherwise provided in the
Designation of Preferred Stock on matters directly affecting the rights of the
holders of Preferred Stock.
Gerard Klauer Mattison & Co., Inc. ("GKM") acted as exclusive placement agent
---
in connection with the sale of the EUI Preferred Stock. As part of its
compensation, GKM received warrants to purchase 300,000 shares of common stock
of the Company at an exercise price of $3.00 per share, which became exercisable
on April 14, 1999 and expire April 14, 2004. GKM also received warrants to
purchase an additional 269,990 shares of common stock of the Company at an
exercise price of $2.76 per share, which become exercisable on April 14, 2000
and expire April 14, 2004.
Purchase of Common Stock by GKM Investors
On March 3, 1999, the Company issued 250,000 shares of common stock of the
Company for consideration of $1.00 per share to GKM and certain of its
affiliates in a private offering pursuant to Rule 506 of Regulation D. The
proceeds of the offering were used to pay part of the cash consideration for the
acquisition of CD Universe, Inc.
Merger with MCA
On April 14, 1999, EUI merged with and into MCA pursuant to an Agreement and
Plan of Reorganization dated April 9, 1999 (the "Merger Agreement"). As
----------------
contemplated in the Merger Agreement, all of the outstanding shares of EUI were
acquired by MCA, and the shareholders of EUI were issued shares of MCA equal to
approximately 92% of the shares of MCA outstanding after the transaction. In
connection with the merger into MCA, each share of EUI Preferred Stock was
exchanged for a share of preferred stock of MCA having identical rights and
preferences, and MCA changed its name to eUniverse, Inc.
Rule 504 Sale of Common Stock
On April 6, 1999, MCA sold 885,835 shares of MCA common stock pursuant to
Rule 504 of Regulation D under the Securities Act at a price of $1.00 per share
to purchasers of the EUI Preferred
19
<PAGE>
Stock described above. These shares were exchanged for shares of freely tradable
common stock of the Company as the result of the merger with MCA and name change
to eUniverse, Inc. described above.
Issuance of Common Stock to Various Service Providers
On April 1, 1999, EUI issued 354,000 shares to approximately 10 persons in
consideration of public relations, legal and related services provided to the
Company in connection with various activities, including the Preferred Stock
Offering and Merger with MCA.
Acquisition of Case's Ladder
The Company entered into a Stock Purchase Agreement dated April 21, 1999 (the
"Case's Ladder Agreement") with Case's Ladder and its shareholders for the
-----------------------
purchase of all of the outstanding shares of the common stock of Case's Ladder.
The purchase price for the Case's Ladder shares is a total of 700,000 shares of
restricted common stock of the Company that will be issued to the shareholders
of Case's Ladder. The Case's Ladder Agreement provides that the selling
shareholders will have the right to participate in any registered offering of
the Company's common stock and to sell their Company shares in the Company's
offering of its shares to the public to the extent that any of the Company's
directors and/or officers have such registration rights and sale privileges.
The Case's Ladder Agreement also provides that certain principals of Case's
Ladder will be employed by the Company subsequent to the closing and that they
will be granted options to purchase 600,000 shares of the Company's common
stock, in the aggregate, at a price of $10 per share.
Item 11 Description of Securities
The following description of the common stock of the Company is a summary only
and is qualified in its entirety by the provisions of the Articles of
Incorporation of the Company.
The Company is authorized to issue 250,000,000 shares of common stock, $.001
par value per share (the "Common Stock"). As of May 31,1999 there were
------------
outstanding 14,092,933 shares of Common Stock held of record by 111
shareholders.
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Subject to preferences that may be
applicable to the holders of outstanding shares of Preferred Stock, if any, the
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, and subject to the prior distribution rights of the holders
of outstanding shares of Preferred Stock, if any, the holders of shares of
Common Stock shall be entitled to receive pro rata all of the remaining assets
of the Company available for distribution to its stockholders. The Common Stock
has no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the Common Stock.
Item 12 Indemnification of Directors and Officers
Nevada Corporation Law
20
<PAGE>
Sections 78.751 et seq. of the Nevada Revised Statutes allow a company to
indemnify its officers, directors, employees, and agents from any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, except under certain circumstances.
Indemnification may only occur if a determination has been made that the
officer, director, employee, or agent acted in good faith and in a manner which
such person believed to be in the best interests of the company. A
determination may be made by the shareholders, by a majority of the directors
who were not parties to the action, suit, or proceeding confirmed by opinion of
independent legal counsel; or by opinion of independent legal counsel in the
event a quorum of directors who were not a party to such action, suit, or
proceeding does not exist.
Articles of Incorporation
Article Twelfth of the Articles of Incorporation of the Company provide as
follows with respect to indemnification of Directors and Officers:
"TWELFTH. INDEMNIFICATION: The corporation shall indemnify and hold harmless
------------------------
the Officers and Directors of the Corporation from any and all liabilities or
claims to the fullest extent now, or hereafter from time to time, permitted
pursuant to the general corporation Law of the state of Nevada."
Bylaws
Article XII of the Bylaws of the Company provide as follows with respect to
indemnification of Officers and Directors:
"Section 1. Exculpation. No Director or Officer of the Corporation shall be
-----------
liable for the acts, defaults, or omissions of any other Director or Officer, or
for any loss sustained by the Corporation, unless the same has resulted from his
own willful misconduct, willful neglect, or gross negligence.
"Section 2. Indemnification. Each Director and Officer of the Corporation
---------------
and each person who shall serve at the Corporation's request as a director or
officer of another corporation in which the Corporation owns shares of capital
stock or of which it is a creditor shall be indemnified by the Corporation to
the fullest extent permitted from time to time by the Nevada Revised Statutes
against all reasonable costs, expenses and liabilities (including reasonable
attorneys' fees) actually and necessarily incurred by or imposed upon him in
connection with, or resulting from any claim, action, suit, proceeding,
investigation, or inquiry of whatever nature in which he may be involved as a
party or otherwise by reason of his being or having been a Director or Officer
of the Corporation or such director or officer of such other corporation,
whether or not he continues to be a Director or Officer of the Corporation or a
director or officer of such other corporation, at the time of the incurring or
imposition of such costs, expenses or liabilities, except in relation to matters
as to which he shall be finally adjudged in such action, suit, proceeding,
investigation, or inquiry to be liable for willful misconduct, willful neglect,
or gross negligence toward or on behalf of the Corporation in the performance of
his duties as such Director or Officer of the Corporation or as such director or
officer of such other corporation. As to whether or not a Director or Officer
was liable by reason of willful misconduct, willful neglect, or gross negligence
toward or on behalf of the Corporation in the performance of his duties as such
Director or Officer of the Corporation or as such director or officer of such
other corporation, in the absence of such final adjudication of the existence of
such liability, the Board of Directors and each Director and Officer may
conclusively rely upon an opinion of independent legal counsel selected by or in
the manner designated by the Board of Directors. The foregoing right to
indemnification shall be in addition to and not in limitation of all other
rights which such person may be entitled as a matter of law, and shall inure to
his legal representatives' benefit.
21
<PAGE>
"Section 3. Liability Insurance. The Corporation may purchase and maintain
-------------------
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation or who is or was serving at the request of the
Corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, association, or other enterprise against any
liability asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not he is indemnified against such
liability by this article XII."
Provided the terms and conditions of the applicable provisions under Nevada
law, the Company's Articles of Incorporation and Bylaws are met, officers,
directors, employees, and agents of the Company may be indemnified against any
cost, loss, or expense arising out of any liability under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Company, the
Company has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is, therefore,
unenforceable.
Item 13 Financial Statements
The financial statements of the Company are filed under Item 15, beginning on
page F-1.
Item 14 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 15 Financial Statements and Exhibits
Financial Statements
The financial statements of the Company and the financial statements of the
businesses acquired or to be acquired presented in the pro forma financial
information disclosed in Item 2 are included below as follows:
Motorcycle Centers of America, Inc. for the three months ended March 31,
1999 and the years ended December 31, 1998 and 1997.
CD Universe, Inc. for the year ended March 31, 1999.
Case's Ladder, Inc. for the two months ended February 28, 1999 and year
ended December 31, 1998.
22
<PAGE>
<TABLE>
<CAPTION>
MOTORCYCLE CENTERS OF AMERICA, INC.
-----------------------------------
Index to Financial Statements
Page
-----------
<S> <C>
Independent auditors' report................................................................................. F-2
Balance sheets, March 31, 1999 and December 31, 1998......................................................... F-3
Statements of operations, for the three months ended March 31, 1999 and
the years ended December 31, 1998 and 1997............................................................... F-4
Statement of shareholders' equity (deficit), for the period from January 1, 1997
through March 31, 1999................................................................................... F-5
Statements of cash flows, for the three months ended March 31, 1999 and
the years ended December 31, 1998 and 1997............................................................... F-7
Summary of significant accounting policies.................................................................. F-9
Notes to financial statements............................................................................... F-11
</TABLE>
F-1
<PAGE>
Cordovano and Harvey, P.C. Certified Public Accountants
- --------------------------------------------------------------------------------
201 Steele Street
Suite 300
Denver, Colorado 80206
(303) 329-0220 Phone
(303) 316-7493 Fax
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders
Motorcycle Centers of America, Inc.
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
We have audited the balance sheets of Motorcycle Centers of America, Inc. as of
March 31, 1999 and December 31, 1998, and the related statements of operations,
shareholders' equity (deficit) and cash flows for the three months ended March
31, 1999 and for the years ended December 31, 1998 and 1997. 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Motorcycle Centers of America,
Inc. as of March 31, 1999 and December 31, 1998, and the results of its
operations and its cash flows for the three months ended March 31, 1999 and for
the years ended December 31, 1998 and 1997, in conformity with generally
accepted accounting principles.
As discussed to Note J to the financial statements, on April 9, 1999, the
Company entered into an Agreement and Plan of Reorganization with Entertainment
Universe, Inc. (EUI). As a result of the reorganization, EUI became a wholly
owned subsidiary of the Company and the former shareholders of EUI own
approximately 91.6 percent of the Company.
Cordovano and Harvey, P.C.
June 3, 1999
F-2
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
-----------------------------------
Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------------------------- ------------------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash............................................................ $ 101,568 $ 887
Marketable securities (Note C).................................. - 8,000
--------------------------- ------------------------
TOTAL CURRENT ASSETS 101,568 8,887
FURNITURE AND EQUIPMENT, less accumulated
depreciation of $2,792 and $2,667, respectively (Note D)....... 708 833
INVESTMENTS, less allowance of $40,220 and
$40,220, respectively.......................................... - -
--------------------------- ------------------------
$ 102,276 $ 9,720
=========================== ========================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable............................................... $ - $ 1,497
Accrued liabilities............................................ 7,000 7,000
Due to officer (Note B)........................................ 66,300 46,437
--------------------------- ------------------------
TOTAL CURRENT LIABILITIES 73,300 54,934
--------------------------- ------------------------
COMMITMENT AND CONTINGENCY (Note H)............................... - -
SHAREHOLDERS' EQUITY (DEFICIT) (Note F)
Preferred stock, $.10 par value; 40,000,000 shares authorized;
-0- and -0- shares issued and outstanding, respectively....... - -
Common stock, $.001 par value; 250,000,000 shares authorized;
2,148,098 and 70,098 shares issued and outstanding, respectively 2,148 70
Additional paid-in capital..................................... 171,796 103,814
Deferred offering costs........................................ (5,734) (5,734)
Retained deficit............................................... (139,234) (143,364)
--------------------------- ------------------------
TOTAL SHAREHOLDERS EQUITY (DEFICIT) 28,976 (45,214)
--------------------------- ------------------------
$ 102,276 $ 9,720
=========================== ========================
</TABLE>
See accompanying summary of significant accounting policies and
Notes to the financial statements.
F-3
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
-----------------------------------
Statements of Operations
<TABLE>
<CAPTION>
Three
Months Years ended December 31,
Ended --------------------------
March 31,
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
COSTS AND EXPENSES
Occupancy.................................................. $ 1,398 $ 5,256 $ 7,542
Consulting, related parties (Note B)....................... 70,060 - -
Consulting................................................. 2,936 - 9,000
Legal and accounting....................................... - 16,495 5,350
Stock transfer fees........................................ 50 2,180 1,593
Brokerage charges.......................................... 3,721 - 1,213
Office..................................................... 2,158 6,991 1,419
Depreciation............................................... 125 722 833
Earnest money paid in failed merger (Note H)............... - 10,000 -
Other...................................................... 25 3,959 89
------------ ----------- -----------
OPERATING LOSS (80,473) (45,603) (27,039)
NONOPERATING INCOME (EXPENSE)
Interest and dividend income............................... 530 150 63
Interest - - (87)
expense....................................................
Loss on write-off of investments........................... - (40,220) -
Trading gains and (losses), net (Note C)................... 84,073 (17,220) 19,337
------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 4,130 (102,893) (7,726)
INCOME TAXES (Note E)...................................... - - -
------------ ----------- -----------
NET INCOME (LOSS) $ 4,130 $(102,893) $ (7,726)
============ =========== ===========
Basic income (loss) per common share $0.06 $(1.47) $(0.53)
============ =========== ===========
Basic weighted average common shares outstanding 70,098 69,833 14,607
============ =========== ===========
</TABLE>
See accompanying summary of significant accounting policies and
notes to the financial statements.
F-4
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
-----------------------------------
Statement of Shareholders' Equity (Deficit)
January 1, 1997 through March 31, 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
------------------------------ ------------------------- ------------------------
Shares Par Value Shares Par Value Shares Amount
-------------- ----------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997............... - $ - 5,405 * $ 5 50 * $(1,125)
Treasury stock contributed by officer
(Notes B & F)......................... - - - - 65 * (2,600)
Sale of treasury stock (Note F)........ - - - - (115)* 3,725
Sale of common stock................... - - 47,500 * 48 - -
Net loss............................... - - - - - -
-------------- ----------- ---------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1997 - - 52,905 * 53 - -
Sale of common stock................... - - 18,750 * 19 - -
Repurchase common stock,
subsequently cancelled............... - - (1,557)* (2) - -
Deferred offering costs................ - - - - - -
Net loss............................... - - - - - -
-------------- ----------- ---------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1998 - - 70,098 * 70 - -
Common stock issued for services,
at cost of services................... - - 78,000 * 78 - -
Common stock issued to former
officer for services, at cost of
services (Note B).................... - - 2,000,000 * 2,000 - -
Net income for the three months
ended March 31, 1999................. - - - - - -
-------------- ----------- ---------- ----------- --------- -----------
BALANCE, MARCH 31, 1999 - $ - 2,148,098 $2,148 - $ -
============== =========== ========== =========== ========= ===========
<CAPTION>
Additional Deferred
Paid-in Offering Retained
Capital Costs Deficit Total
------------ --------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1997............... $104,037 $ - $ (32,745) $ 70,172
Treasury stock contributed by officer
(Notes B & F)......................... - - - (2,600)
Sale of treasury stock (Note F)........ (2,362) - - 1,363
Sale of common stock................... 9,452 - - 9,500
Net loss............................... - - (7,726) (7,726)
------------ --------- ---------- ----------
BALANCE, DECEMBER 31, 1997 111,127 - (40,471) 70,709
Sale of common stock................... 3,731 - - 3,750
Repurchase common stock,
subsequently cancelled............... (11,044) - - (11,046)
Deferred offering costs................ - (5,734) - (5,734)
Net loss.............................. - - (102,893) (102,893)
------------ --------- ---------- ----------
BALANCE, DECEMBER 31, 1998 103,814 (5,734) (143,364) (45,214)
Common stock issued for services,
at cost of services................... 29,982 - - 30,060
Common stock issued to former
officer for services, at cost of
services (Note B).................... 38,000 - - 40,000
Net income for the three months
ended March 31, 1999................. - - 4,130 4,130
------------ --------- ---------- ----------
BALANCE, MARCH 31, 1999 $171,796 $ (5,734) $ (139,234) $ 28,976
============ ========= ========== ==========
</TABLE>
* Restated for 1 for 20 reverse splits (Note F)
See accompanying summary of significant accounting policies and notes to the
financial statements.
F-5
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
----------------------------------
Statement of Shareholders' Equity (Deficit)
January 1, 1997 through March 31, 1999
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
Shares Par Value Shares Par Value Shares Amount
<S> <C> <C> <C> <C> <C> <C>
BALANCE PER AUDIT
MARCH 31, 1999 - $ - 2,148,098 $ 2,148 - $ -
============ ========== ============ =========== ======== =========
PRO FORMA (Unaudited) (Note K)
Repurchase common stock,
subsequently cancelled............. - - (1,845,000) (1,845) - -
Common stock subscribed less
offering costs of 5,734 - - 885,835 886 - -
Shares issued in acquisition of
Entertainment Universe 1,832,812 183,281 12,904,000 12,904 - -
------------ ---------- ------------ ----------- -------- ---------
PRO FORMA BALANCE,
MARCH 31, 1999 (Unaudited) 1,832,812 $ 183,281 14,092,933 $ 14,093 - $ -
============ ========== ============ =========== ======== =========
<CAPTION>
Additional Deferred
Paid-in Offering Retained
Capital Costs Deficit Total
<S> <C> <C> <C> <C>
BALANCE PER AUDIT
MARCH 31, 1999 $ 171,796 $ (5,734) $ (139,234) $ 28,976
=========== ======== =========== ========
PRO FORMA (Unaudited) (Note K)
Repurchase common stock,
subsequently cancelled............. (18,155) - - (20,000)
Common stock subscribed less
offering costs of 5,734 879,215 5,734 - 885,835
Shares issued in acquisition of
Entertainment Universe (196,185) - - -
----------- -------- ----------- --------
PRO FORMA BALANCE,
MARCH 31, 1999 (Unaudited) $ 836,671 $ - $ (139,234) $894,811
=========== ======== =========== ========
</TABLE>
See accompanying summary of significant accounting policies and notes to the
financial statements.
F-6
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
-----------------------------------
Statements of Cash flows
<TABLE>
<CAPTION>
Three
Months
Ended
March 31, Years ended December 31,
-----------------------------------
1999 1998 1997
---------------- --------------- ----------------
OPERATING ACTIVITIES
<S><C> <C> <C> <C>
Net income (loss)................................................... $ 4,131 $(102,893) $ (7,726)
Transactions not requiring cash:
Depreciation........................................................ 125 723 833
Common stock issued for services.................................... 70,060 - -
Unrealized (gains) losses on marketable
securities, net..................................................... (84,073) 17,220 (5,775)
Loss on write-off of investments.................................... - 40,220 -
Changes in current liabilities:
Accounts payable and accrued expenses............................... (1,497) 7,579 (4,910)
---------------- --------------- ----------------
NET CASH (USED IN)
OPERATING ACTIVITIES (11,254) (37,151) (17,578)
---------------- --------------- ----------------
INVESTING ACTIVITIES
Purchases of marketable securities.................................. - (8,000) (31,188)
Proceeds from sale of marketable securities......................... 92,073 561 32,313
Repayment of advances to former officer (Note B).................... (5,137) (68,563) (23,150)
Advances from former officer (Note B)............................... 25,000 115,000 48,080
---------------- --------------- ----------------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 111,936 38,998 26,055
---------------- --------------- ----------------
FINANCING ACTIVITIES
Purchases of treasury stock......................................... - (11,046) (2,600)
Proceeds from sale of treasury stock................................ - - 1,363
Payments for deferred offering costs................................ - (5,734) -
Proceeds from issuance of common stock.............................. - 3,750 9,500
Principal payments on notes payable................................. - - (5,000)
---------------- --------------- ----------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES - (13,030) 3,263
---------------- --------------- ----------------
</TABLE>
See accompanying summary of significant accounting policies and
notes to the financial statements.
F-7
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
-----------------------------------
Statements of Cash flows
<TABLE>
<CAPTION>
Three
Months
Ended
March 31, Years ended
December 31,
-------------------------------------------
1999 1998 1997
--------------------- --------------------- ------------------
<S><C> <C> <C> <C>
CHANGE IN CASH AND CASH EQUIVALENTS... 100,681 (11,184) 11,740
Cash and cash equivalents, beginning of period 887 12,071 331
--------------------- --------------------- ------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD................................ $101,567 $ 887 $12,071
===================== ===================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest........................................ $ - $ - $ 874
Income $ - $ - $ -
taxes...........................................
===================== ===================== ==================
Noncash investing and financing transactions:
Receipt of investments as payment for
advances (Note $ - $ - $46,600
B)................................................... ===================== ===================== ==================
Treasury stock subsequently cancelled........................ $ 11,046 $ - $ -
===================== ===================== ==================
</TABLE>
See accompanying summary of significant accounting policies and
notes to the financial statements.
F-8
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
-----------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
March 31, 1999
Use of estimates
- --------------------------------------------------------------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash equivalents
- --------------------------------------------------------------------
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Marketable securities
Marketable securities consist of various equity securities and are stated at
current market value. All equity securities are considered "trading" securities
under the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
Accordingly, unrealized gains and losses on equity securities are reflected in
the accompanying statements of operations.
Investments
Investments are recorded at cost. The Company's investments consist of less
than a twenty-percent ownership in a company whose stock is thinly traded. The
investments were written down to net realizable value at December 31, 1998 and
March 31, 1999.
Furniture and equipment
Furniture and equipment are recorded at cost and are depreciated using the
straight-line method over the useful lives of the assets, beginning at the time
the assets are placed into operation.
Upon retirement or disposition of the furniture and equipment, the cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations. Repairs and maintenance are charged to expense
as incurred and expenditures for additions and improvements are capitalized.
Income taxes
- ---------------------------------------------------------------------------
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the recorded book basis and tax basis
of assets and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to
offset future taxable income and tax credits that are available to offset future
federal income taxes.
F-9
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
-----------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
March 31, 1999
Treasury stock
- -------------------------------------------------------------------
The Company accounts for purchases and reissuances of treasury stock using the
cost method. Under the cost method, each acquisition of treasury stock is
accounted for at cost. Upon the sale or disposition, the treasury stock account
is reduced for an amount equal to the number of shares sold, multiplied by the
cost per share. The difference is treated as paid-in capital.
Fair value of financial instruments
SFAS 107, "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. The
Company has determined, based on available market information and appropriate
valuation methodologies, the fair value of its financial instruments
approximates carrying value. The carrying amounts of cash, accounts payable,
and other accrued liabilities approximate fair value due to the short-term
maturity of the instruments.
Earnings per common share
Effective December 31, 1997, SFAS 128 "Earnings per Share" requires a dual
presentation of earnings per share-basic and diluted. Basic earnings per common
share has been computed based on the weighted average number of common shares
outstanding. Diluted earnings per share reflects the increase in weighted
average common shares outstanding that would result from the assumed exercise of
outstanding stock options. Basic and diluted earnings per share were the same
for all prior periods presented due to the Company's simple capital structure.
Earnings per share calculations are reported on a post-split basis for all
periods presented.
New accounting pronouncements
- -----------------------------------------------------------------
The Company has adopted the following new accounting pronouncements for the year
ended December 31, 1998. There was no effect on the financial statements
presented from the adoption of the new pronouncements. SFAS No. 130, "Reporting
Comprehensive Income," requires the reporting and display of total comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is based on the "management" approach for reporting segments. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about the Company's products, the geographic areas in which it earns
revenue and holds long-lived assets, and its major customers. SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post-retirement Benefits,"
which requires additional disclosures about pension and other post-retirement
benefit plans, but does not change the measurement or recognition of those
plans.
F-10
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
-----------------------------------
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
Note A: Nature of operations
- -----------------------------
Effective December 19, 1994, Motorcycle Centers of America, Inc. (MCAI)
(formerly NABCO, Inc.) merged with Humanus Corporation (Humanus), which was
incorporated under the laws of Colorado on February 23, 1988. Subsequent to the
merger, Humanus changed its name to NABCO, Inc.
NABCO was originally incorporated for the purpose of manufacturing bagels and
selling them to its subfranchisor and franchisees. In August 1995, NABCO sold
its bagel manufacturing operations, and on August 28, 1995, it officially
terminated operations and became an inactive shell company.
On January 26, 1998, the Company entered into an Agreement and Plan of
Reorganization with Sandale Holdings, Limited, to acquire a motorcycle
manufacturing company in China. The Plan of Reorganization was terminated on
August 14, 1998 (see Note I). In connection with the Plan of Reorganization,
the Company redomiciled in Nevada.
On April 15, 1998, NABCO entered into a merger with MCAI whereby all of the
outstanding shares of common stock in NABCO, amounting to 1,458,807 shares, were
issued to MCAI in exchange for 1,458,807 shares of the $.001 par value common
stock of MCAI. MCAI was the sole surviving corporation. The shares of NABCO
were cancelled following the merger. As a result of the merger, the Company
previously known as NABCO, Inc. became Motorcycle Centers of America, Inc.
On October 4, 1998, the Company entered into an Agreement and Plan of
Reorganization with DDA America, LLC to acquire all of the issued and
outstanding stock of DDA America, LLC. The Plan of Reorganization was
terminated on March 1, 1999 (see Note I).
On April 9, 1999, the Company entered into an Agreement and Plan of
Reorganization with Entertainment Universe, Inc. to acquire all of the issued
and outstanding stock of Entertainment Universe, Inc. (see Note J).
Note B: Related party transactions
- -----------------------------------
Three months ended March 31, 1999
- ---------------------------------
During the three months ended March 31, 1999, an officer advanced the Company
$25,000 for working capital. The Company repaid the officer $5,137 during 1999.
The remaining balance of $66,300 is included in the accompanying financial
statements as due to former officer.
During the three months ended March 31, 1999, the Company issued 2,000,000
shares of its $.001 par value common stock to an officer in exchange for
services. The transaction was valued at the cost of the services rendered of
$40,000 (see Note J).
During the three months ended March 31, 1999, the Company issued 78,000 shares
of its $.001 par value common stock to various shareholders in exchange for
services. The transaction was valued at the cost of the services rendered of
$30,060.
F-11
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
-----------------------------------
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
Note B: Related party transactions, continued
- ----------------------------------------------
1998
- ----
During the year ended December 31, 1998, an officer advanced the Company
$115,000 for working capital. The Company repaid the officer $68,563 during
1998. The remaining balance of $46,437 is included in the accompanying
financial statements as due to former officer.
1997
- ----
At January 1, 1997, an officer owed the Company $71,530 in advances. During
1997, the Company advanced the officer an additional $23,150, and the officer
repaid the total $94,680. The advances were repaid in cash totaling $48,080 and
marketable securities totaling $46,600. The Company recognized $12,938 in
realized gains and $15,000 in unrealized gains from marketable securities
received from the officer in 1997.
Note C: Marketable securities
- ------------------------------
Marketable securities consisted of the following at March 31, 1999 and December
31, 1998:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------------------------------- -------------------------------------
Estimated Estimated
Market Market
Cost Value Cost Value
-------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Equity securities ......................... $ - $ - $8,000 $8,000
====================================== =====================================
</TABLE>
Following is a summary of investment earnings recognized in income during the
three months ended March 31, 1999 and the years ended December 31, 1998 and
1997:
<TABLE>
<CAPTION>
March 31, December 31,
------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Trading securities:
Realized gains................................... $84,073 $ - $13,562
Realized losses.................................. - (6,440) -
--------------------- --------------------- ---------------------
Realized gains (losses), net 84,073 (6,440) 13,562
--------------------- --------------------- ---------------------
Unrealized gains................................. - - 15,000
Unrealized losses................................ - (10,780) (9,225)
--------------------- --------------------- ---------------------
Unrealized gains (losses), net - (10,780) 5,775
--------------------- --------------------- ---------------------
GAIN (LOSS) ON
TRADING SECURITIES, NET $84,073 $(17,220) $19,337
===================== ===================== =====================
</TABLE>
F-12
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
-----------------------------------
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
Note D: Furniture and equipment
- --------------------------------
Furniture and equipment consisted of the following at March 31, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------------- ---------------------
<S> <C> <C>
Office furniture ........................................... $ 2,500 $ 2,500
Computer equipment ......................................... 1,000 1,000
-------------------- ---------------------
3,500 3,500
Less: accumulated depreciation ........................................ (2,792) (2,667)
-------------------- ---------------------
$ 708 $ 833
==================== =====================
</TABLE>
Note E: Income taxes
A reconciliation of the U.S. statutory federal income tax rate to the effective
tax rate follows for the three months ended March 31, 1999 and the years ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
March 31, December 31,
-------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
U.S. statutory federal rate ........................ 15.00% 20.57% 15.00%
State income tax rate,
Net of federal benefit .......................... 4.25% 4.15% 4.25 %
Unrealized gains and losses on
marketable securities, net ...................... (0.00%) (2.75%) (8.21%)
Net operating loss for which no tax benefit
Is currently available .......................... (19.25%) (21.97%) (11.04%)
--------------------- --------------------- ---------------------
......................... -% -% -%
===================== ===================== =====================
</TABLE>
The current tax benefit (expense) for the three months ended March 31, 1999 and
the years ended December 31, 1998 and 1997 totaled $(795), $22,608 and $853,
respectively, which have been offset by the valuation allowance. The valuation
allowance offsets the net deferred tax asset for which there is no assurance of
recovery. The change in the valuation allowance for the three months ended
March 31, 1999 and the years ended December 31, 1998 and 1997 totaled $(795),
$22,608 and $853, respectively. The net operating loss carryforward expires
through the year 2019.
The valuation allowance will be evaluated at the end of each year, considering
positive and negative evidence about whether the deferred tax asset will be
realized. At that time, the allowance will either be increased or reduced;
reduction could result in the complete elimination of the allowance if positive
evidence indicates that the value of the deferred tax assets is no longer
impaired and the allowance is no longer required.
F-13
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
-----------------------------------
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
Note F: Shareholders' equity
- -----------------------------
Preferred stock
- ---------------
The Company is authorized to issue 40,000,000 preferred shares with a $.10 par
value. The Board of Directors has authority to determine the relative rights
and preferences of the preferred shares.
Common stock
- ------------
The Company is authorized to issue 250,000,000 common shares with a $.001 par
value. Shareholders do not have preemptive rights to purchase additional shares
and cumulative voting of common shares is not permitted.
Treasury stock
- --------------
As of January 1, 1996, the Company held 6,000 shares of treasury stock at a cost
of $9,750. During 1996, the Company purchased an additional 3,000 shares at a
cost of $3,375 and sold 8,000 shares for proceeds of $9,625. As a result, the
Company recorded a $2,375 charge against additional paid-in capital for the
excess of cost over proceeds from the sale.
As of January 1, 1997, the Company held 1,000 shares of treasury stock at a cost
of $1,125. During the year ended December 31, 1997, an officer repaid an
advance to the Company with 1,300 shares of NABCO stock with a value of $2,600;
and the Company sold 2,300 shares of treasury stock for proceeds of $1,363. As
a result, the Company recorded a $2,362 charge against additional paid-in
capital for the excess of cost over proceeds from the sale. As of December 31,
1997, the Company held no shares of treasury stock.
Reverse common stock splits
- ---------------------------
On April 1, 1999, the Board of Directors approved a 20 for one reverse split of
the Company's common stock for all shares outstanding as of March 31, 1999.
Every 20 shares held by a shareholder prior to the split was replaced by one
share as of April 28, 1999.
On August 1, 1997, the Board of Directors approved a 20 for one reverse split of
the Company's common stock for all shares outstanding as of August 1, 1997.
Every 20 shares held by a shareholder prior to the split was replaced by one
share as of August 11, 1997.
The accompanying financial statements have been restated to give effect to these
reverse splits for all periods presented.
F-14
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
-----------------------------------
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
Note G: Commitment and contingency
- -----------------------------------
Commitment
- ----------
The Company entered into an operating lease for office space during 1997, which
commenced December 1, 1997 and terminated on November 30, 1998. The Company
renewed the lease through December 31, 1999. Monthly rent payments during 1998
were $438 and the future minimum lease payments total $5,593 due in 1999.
Contingency
- -----------
As part of the sale of the Company's bagel manufacturing operations in 1995, the
Company sold a building with a mortgage payable totaling $91,349. Although the
building was sold, the Company remains contingently liable until the note is
satisfied.
Note H: Terminated plans of reorganization
- -------------------------------------------
Sandale Holdings, Limited (Sandale)
- -----------------------------------
On January 26, 1998, NABCO (subsequently Motorcycle Centers of America, Inc.)
entered into an Agreement and Plan of Reorganization with Sandale, a Bahamian
corporation. As part of the reorganization, Sandale agreed to exchange all
10,000,000 of its Ordinary A shares and common shares; for 5,000,000 (pre-split)
shares of NABCO's $.001 par value restricted common stock. As a result of the
reorganization, Sandale would have become a wholly owned subsidiary of NABCO and
the former shareholders of Sandale would have owned approximately 77 percent of
NABCO. The Agreement and Plan of Reorganization was terminated on August 14,
1998.
DDA America, LLC (DDA)
- ----------------------
On October 4, 1998, the Company entered into an Agreement and Plan of
Reorganization with DDA, a Delaware corporation. As part of the reorganization,
DDA agreed to exchange all of its common shares for 2,700,000 shares of the
Company's $.001 par value restricted common stock. As a result of the
reorganization, DDA would have become a wholly owned subsidiary of the Company
and the former shareholders of DDA would have owned approximately 67.5 percent
of the Company. The Agreement and Plan of Reorganization was terminated on
March 1, 1999. Earnest money lost in the failed agreement of $10,000 was
charged to expense in during the year ended December 31, 1998.
Note I: Year 2000 compliance
- -----------------------------
The Year 2000 issue (Y2K) is the result of computer programs written using two
digits rather than four to define the applicable year. Any of the Company's
computer and telecommunications programs that have date sensitive software may
recognize a date using "00" as the year 1900 instead of 2000. This could result
in system failure or miscalculations causing disruptions in operations,
including the ability to process transactions, send invoices, or engage in
similar normal business activities. The Company has determined that its
equipment is Y2K compliant.
F-15
<PAGE>
MOTORCYCLE CENTERS OF AMERICA, INC.
-----------------------------------
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
Note I: Year 2000 compliance, continued
- ----------------------------------------
The Company cannot determine the extent to which the Company is vulnerable to
third parties' failure to remediate their own Y2K problems. As a result, there
can be no guarantee that the systems of other companies on which the Company's
business relies will be timely converted, or that failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
have a material adverse affect on the Company. In view of the foregoing, there
can be no assurance that the Y2K issue will not have a material adverse effect
on the Company's business.
Note J: Subsequent events
- --------------------------
Agreement and Plan of Reorganization
- ------------------------------------
On April 9, 1999, the Company entered into an Agreement and Plan of
Reorganization with the shareholders of Entertainment Universe, Inc. (EUI), a
California corporation. EUI agreed to exchange all of its common shares for
12,904,000 shares of the Company's $.001 par value restricted common stock, and
all of its preferred shares for 1,832,812 shares of its Series A six percent
convertible preferred stock. As part of the reorganization, the Company agreed
to a 20 for 1 reverse split of its restricted common stock prior to the exchange
(see Note F). This acquisition will be accounted for as a recapitalization of
EUI, with the Company the legal surviving entity. Since the Company had, prior
to the recapitalization, no operations, the recapitalization has been accounted
for as the sale of 12,904,000 shares of the Company's restricted common stock
and 1,832,812 shares of its Series A six percent convertible preferred stock for
the net assets of EUI. As a result of the reorganization, EUI became a wholly
owned subsidiary of the Company and the former shareholders of EUI own
approximately 91.6 percent of the Company.
Subscription Agreement Securities Offering
- ------------------------------------------
The Company conducted an offering of its $.001 par value common stock from April
1, 1999 through April 6, 1999 pursuant to Rule 504 of Regulation D under the
Securities Act of 1933, as amended. A maximum of 900,000 shares was offered
pursuant to a Regulation D Subscription Agreement at a price of $1.00 per share.
Following the offering termination on April 6, 1999, the Company had received
subscriptions for 885,835 shares for a gross amount of $885,835.
Purchase of treasury stock
- --------------------------
On April 20, 1999, the Company purchased 1,845,000 shares of its outstanding
common stock from its former officer for $20,000. The shares were cancelled
following the purchase.
Note K: Unaudited pro forma information
- ----------------------------------------
The unaudited pro forma statement of shareholders' equity (deficit) has been
derived from the books and records of the Company to give effect to certain
events that occurred subsequent to March 31, 1999 as if they had occurred on
March 31, 1999. The unaudited pro forma statement is presented for informational
purposes only. The unaudited pro forma statement of shareholders' equity
(deficit) should be read in conjunction with Note J of the financial statements.
F-16
<PAGE>
CD UNIVERSE, INC.
FINANCIAL STATEMENTS
MARCH 31, 1999
<PAGE>
CD UNIVERSE, INC.
FINANCIAL STATEMENTS
MARCH 31, 1999
INDEX
-----
Independent Auditor's Report 1
Balance Sheet 2
Statement of Operations 3
Statement of Stockholder's Deficit 4
Statement of Cash Flows 5
Notes to Financial Statement 6 - 11
<PAGE>
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
CD UNIVERSE, INC.
We have audited the accompanying balance sheet of CD UNIVERSE, INC. as of March
31, 1999 and the related statements of operations, stockholder's deficit, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with 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 accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CD UNIVERSE, INC. as of March
31, 1999, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
May 14, 1999
<PAGE>
CD UNIVERSE, INC.
BALANCE SHEET
MARCH 31, 1999
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 11,335
Accounts Receivable, net of allowance for
doubtful accounts of $0 92,938
Inventory 22,647
Due from Officer 157,569
Prepaid Expenses and Other Current Assets 9,629
----------
Total Current Assets 294,118
Property and Equipment, net of accumulated
depreciation of $83,052 225,718
Organization Costs, net of accumulated
amortization of $340 510
Goodwill, net of accumulated amortization of $2,000 38,000
----------
TOTAL ASSETS $ 558,346
==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 942,322
Notes Payable - Officer 105,000
Due to Affiliates (Note 5) 30,000
----------
Total Current Liabilities 1,077,322
Commitments and Contingencies (Note 7) -
STOCKHOLDER'S DEFICIT
Common Stock - no par value; authorized 1,000
shares; 1,000 issued and outstanding 1,000
Accumulated Deficit ( 519,976)
----------
Total Stockholder's Deficit ( 518,976)
----------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 558,346
==========
The accompanying notes are an integral part of the financial statements.
- 2 -
<PAGE>
CD UNIVERSE, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1999
REVENUE $8,851,713
COST OF GOODS SOLD 8,264,306
----------
GROSS PROFIT 587,407
GENERAL AND ADMINISTRATIVE EXPENSES 995,584
----------
LOSS FROM OPERATIONS ( 408,177)
OTHER INCOME 1,013
----------
NET LOSS $( 407,164)
==========
NET LOSS PER COMMON SHARE
Basic $( 407.16)
==========
Diluted $( 407.16)
==========
The accompanying notes are an integral part of the financial statements.
- 3 -
<PAGE>
CD UNIVERSE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $( 407,164)
Adjustments to Reconcile Net Loss to Net
Cash Used in Operating Activities
Depreciation and Amortization 47,322
Changes in Certain Assets and Liabilities:
(Increase) in Accounts Receivable ( 92,938)
Decrease in Inventory 1,230
Decrease in Prepaid Expenses and Other Current Assets 33,402
Increase in Accounts Payable and Accrued Expenses 407,741
----------
Total Cash Used in Operating Activities ( 10,407)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in Property and Equipment ( 113,508)
----------
Total Cash Used in Investing Activities ( 113,508)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Notes Payable - Officer 150,000
Repayment of Notes Payable - Officer ( 45,000)
Loans from Affiliates 30,000
Repayment of Loans from Affiliates ( 110,395)
Loan to Officer ( 156,569)
----------
Total Cash Used By Financing Activities ( 131,964)
----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ( 255,879)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 267,214
---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 11,335
=========
CASH PAID DURING THE YEAR FOR:
Interest Expense $ 286
=========
Income Taxes $ -
=========
The accompanying notes are an integral part of the financial statements.
- 5 -
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Organization and Line of Business
---------------------------------
CD Universe, Inc. was incorporated under the laws of the State of
Connecticut on April 7, 1997. The Company was sold to new management
in April 1999.
The Company sells and distributes compact discs and other video
equipment to retail purchasers over the internet.
b) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results
could differ from those estimates.
c) Concentration of Credit Risk
----------------------------
The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances exceeded FDIC insured
levels at various times during the year.
d) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents
e) Accounts Receivable
-------------------
Accounts receivable consist primarily of credit card charges by
customers.
f) Inventory
---------
Inventory consists of compact discs, videos and packaging materials.
Inventory is valued at the lower of cost or market using the first-
in, first-out method.
g) Property and Equipment
----------------------
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives
of the assets. Maintenance and repairs are charged to expense as
incurred.
h) Goodwill
--------
Goodwill resulting from the acquisition of assets accounted for as a
purchase is being amortized over 40 years using the straight-line
method.
i) Organization Costs
------------------
Organization costs are being amortized over 5 years using the
straight-line method.
- 6 -
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
j) Income Taxes
------------
Provisions for income taxes are based on taxes payable or refundable
for the current year and deferred taxes on temporary differences
between the amount of taxable income and pretax financial income and
between the tax bases of assets and liabilities and their reported
amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or
settled as prescribed by Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
k) Fair Value of Financial Instruments
-----------------------------------
The carrying value of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximates fair
value due to the relatively short maturity of these instruments.
l) Long-Lived Assets
-----------------
Long-lived assets and certain identifiable intangibles to he held
and used are reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be held
and used are recognized based on the fair value of the assets and
long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.
m) Stock-Based Compensation
------------------------
The Company uses the intrinsic value method of accounting for stock-
based compensation in accordance with Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees"
and related interpretations.
n) Earnings Per Share
------------------
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share",
which requires presentation of basic earnings per share ("Basic
EPS") and diluted earnings per share ("Diluted EPS").
- 7 -
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
n) Earnings Per Share (continued)
------------------
The computation of basic EPS is computed by dividing income
available to common stockholders by the weighted average number of
outstanding common shares during the period. Diluted EPS gives
effect to all dilutive potential common shares outstanding during
the period. The computation of diluted EPS does not assume
conversion, exercise or contingent exercise of securities that would
have an anti-dilutive effect.
The shares used in the computation for the year ended March 31, 1999
was as follows:
Basic 1,000
=====
Diluted 1,000
=====
o) Comprehensive Income
--------------------
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was
issued. This statement establishes standards for the reporting and
display of comprehensive income and its components in the financial
statements. As of March 31, 1999, the Company has no items that
represent other comprehensive income and, therefore, has not
included a schedule of comprehensive income in the financial
statements.
p) Impact of Year 2000 Issue
-------------------------
During the year ended March 31, 1999, the Company conducted an
assessment of issues related to the Year 2000 and determined that it
was necessary to modify or replace portions of its software in order
to ensure that its computer systems will properly utilize dates
beyond December 31, 1999. The Company expects to complete any Year
2000 systems modifications and conversions by the middle of 1999.
Currently, the Company does not expect that costs associated with
becoming Year 2000 compliant to be material. At this time, the
Company cannot determine the impact the Year 2000 will have on its
key customers or suppliers. If the Company's customers or suppliers
do not convert their systems to become Year 2000 compliant, the
Company may be adversely impacted. The Company is addressing these
risks in order to reduce the impact on the Company.
q) Recent Accounting Pronouncements
--------------------------------
During 1998, the FASB issued SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information", which changes
the way public companies report information about segments. SFAS No.
131, which is based on the selected segment information quarterly
and entity-wide disclosures about products and services, major
customers and the material countries in which the entity holds
assets and reports revenue. This statement is effective for the
Company's fiscal year. The Company is in the process of evaluating
the disclosure requirements under this standard.
- 8 -
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
q) Recent Accounting Pronouncements (continued)
--------------------------------
Additionally, during 1998, the America Institute of Certified
Accountants' Executive Committee issued Statement of Position Number
98-1 (SOP 98-1), "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use". SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. Management believes
that the Company is substantially in compliance with this
pronouncement and that its implementation will not have a material
effect on the Company's financial position, results of operations or
cash flows.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at March 31, 1999:
Leasehold Improvements $ 40,000
Computer and Other Equipment 268,770
--------
308,770
Less: Accumulated Depreciation 83,052
--------
Property and Equipment, net $225,718
========
Depreciation expense for the year ended March 31, 1999 was $46,152.
NOTE 3 - INCOME TAXES
The components of the provision for income taxes for the year ended
March 31, 1999 are as follows:
Current Tax Expense
U.S. Federal $ -
State and Local -
------------
Total Current -
------------
Deferred Tax Expense
U.S. Federal $ -
State and Local -
------------
Total Deferred -
------------
Total Tax Provision from Continuing Operations $ -
============
- 9 -
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 3 - INCOME TAXES (continued)
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
Federal Income Tax Rate ( 34.0)%
Deferred Tax Charge (Credit) -
Effect on Valuation Allowance 34.0%
State Income Tax, Net of Federal Benefit -
---------
Effective Income Tax Rate 0.0%
=========
At March 31, 1999, the Company had net carryforward losses of
approximately $520,000 that can be utilized to offset future taxable
income through 2014. Utilization of these net carryforward losses is
subject to the limitations of Internal Revenue Code Section 382. The
full realization of the tax benefit associated with the carryforward
depends predominantly upon the Company's ability to generate taxable
income during the carryforward period. A valuation allowance equal
to the tax benefit for deferred taxes has been established due to
the uncertainty of realizing the benefit of the tax carryforward.
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's
deferred tax assets (liabilities) are as follows:
Loss Carryfowards $ 176,800
Less: Valuation Allowance ( 176,800)
-----------
Net Deferred Tax Assets (Liabilities) $ -
===========
NOTE 4 - NOTE PAYABLE - OFFICER
The Company is indebted to an officer at March 31, 1999 for
$105,000. The terms indicate interest is payable at 8% with loan
principal and interest payable upon demand.
Subsequent to March 31, 1999, the Note was paid down to $85,000.
This amount will be settled through a purchase price adjustment upon
the acquisition of the Company by Entertainment Universe, Inc.
NOTE 5 - RELATED PARTY TRANSACTIONS
In prior years, certain of the Company's fixed asset acquisitions
and certain expenses were paid for through advances by an entity
controlled by the Company's president. These advances, totaling
$110,395, were repaid during the year ended March 31, 1999.
During the current fiscal year, the Company received advances from
an entity controlled by the Company's chairman. These advances
totaled $30,000 and remain outstanding at March 31, 1999. Terms of
repayment and interest are being negotiated.
- 10 -
<PAGE>
CD UNIVERSE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 6 - MAJOR VENDOR
The Company purchased approximately 90% of its merchandise from one
vendor. At March 31, 1999, the balance due to that vendor was
approximately $600,000 which was paid in April 1999. The company
does not believe that the loss of this vendor would have a material
adverse effect on the Company.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company leases office space under non-cancelable operating lease
agreements that expire within the next three years. Future minimum
lease payments under these non-cancelable operating leases are as
follows:
March 31,
---------
2000 $117,000
2001 117,000
2002 107,250
--------
Total $341,250
========
Rent expense under the office lease for the year ending March 31,
1999 was $82,000.
On October 1, 1998, the Company entered into an agreement with
Charles Beilman. The agreement stipulates that Charles Beilman will
serve as Chief Operating Officer and Chief Technical Officer for an
annual compensation of $135,000 and the reimbursement of certain
expenditures, as defined in the related agreement. This agreement
becomes effective when the Company is acquired and its shares are
publicly traded. Mr. Beilman's employment will continue for at least
three years from the date the Company goes public.
NOTE 8 - SUBSEQUENT EVENTS
The Company was acquired by Entertainment Universe, Inc. in April,
1999 as a wholly owned subsidiary.
- 11 -
<PAGE>
CD UNIVERSE, INC.
STATEMENT OF STOCKHOLDER'S DEFICIT
FOR THE YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Total
Common Stock Accumulated Stockholder's
-------------------------
Shares Amount Deficit Deficit
------------ ----------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at March 31, 1998 1,000 $ 1,000 $( 112,812) $( 111,812)
Net Loss for the Year Ended
March 31, 1999 - - ( 407,164) ( 407,164)
------------ ----------- -------------- --------------
Balance at March 31, 1999 1,000 $ 1,000 $( 519,976) $( 518,976)
------------ ----------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
- 4 -
<PAGE>
CASES LADDER, INC.
FINANCIAL STATEMENTS
CONTENTS
--------
PAGE
----
Independent Auditors' Report 1
Balance Sheets 2 - 3
Statements of Operations 4
Statement of Stockholders' Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 7 - 11
<PAGE>
JONATHON P. REUBEN, CPA
An Accountancy Corporation
[LOGO]--------------------------------------------------------------------------
23440 Hawthorne Blvd. Suite 270 Torrance CA 90505
(310) 378-3609 . FAX (310) 378-3709
Independent Auditors' Report
Board of Directors
Cases Ladder, Inc.
Newbury Park, California
We have audited the accompanying balance sheets of Cases Ladder, Inc. (A
California corporation), as of February 28, 1999 and December 31, 1998, and the
related statements of operations, stockholders' equity (deficit), and cash
flows, for the two months ended February 28, 1999, and for the year ended
December 31, 1998. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cases Ladder, Inc. as of
February 28, 1999 and December 31, 1998, and the results of its operations and
its cash flows for the two months ended February 28, 1999 and for the year ended
December 31, 1998, in conformity with generally accepted accounting principles.
s/s Jonathon P. Reuben CPA
Jonathon P. Reuben,
Certified Public Accountant
April 9, 1999
<PAGE>
CASES LADDER, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
February December
28, 31,
1999 1998
-------------- ---------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 18,135 $ -
Accounts Receivable (Net of
Allowance for Bad Debts of $6,754 and $5,675) 77,674 65,262
Prepaid Expenses 3,130 -
Deferred Tax Asset 698 2,172
Deposits 685 -
-------------- --------------
Total Current Assets 100,322 67,434
Computer Equipment and Software 32,268 21,752
------------ --------------
Total Assets $ 132,590 $ 89,186
============ ==============
</TABLE>
See accompanying notes
2
<PAGE>
CASES LADDER, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
February December
28, 31,
1999 1998
--------------- -------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Bank Overdraft $ - $ 551
Accounts Payable 15,517 18,814
Accrued Payroll and Payroll Taxes 16,961 -
Accrued Interest 917 -
Income Tax Payable 1,679 800
Customer Deposits - 16,667
Notes Payable - Affiliate 8,349 9,028
Notes Payable - Shareholders 82,620 55,000
--------------- ------------------
Total Current Liabilities 126,043 100,860
Stockholders' Equity (Deficit)
Common Stock, No Par Value, authorized 40,000,000
shares, issued and outstanding 7,575,000 shares 2,750 2,750
Retained Earnings (Deficit) 3,797 (14,424)
--------------- ------------------
Total Stockholders' Equity (Deficit) 6,547 (11,674)
--------------- ------------------
Total Liabilities and Stockholders' Equity (Deficit) $ 132,590 $ 89,186
=============== ==================
</TABLE>
See accompanying notes
3
<PAGE>
CASES LADDER, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Two Months
Ended Year Ended
February, 28 December 31,
1999 1998
---------------- -----------------
<S> <C> <C>
Net Sales $ 184,556 $ 378,345
Cost of Sales (19,167) (33,660)
---------------- -----------------
Gross Profit 165,389 344,685
General and Administrative Expenses (144,815) (360,019)
---------------- -----------------
Net Income (Loss) Before Provision for
Corporate Income Tax 20,574 (15,334)
Benefit (Provision) for Corporate Income Tax (2,353) 1,372
---------------- -----------------
Net Income (Loss) $ 18,221 $ (13,962)
================ =================
</TABLE>
See accompanying notes
4
<PAGE>
CASES LADDER, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
Common Stock Retained Stockholders'
--------------------------------
Shares Amounts Earnings Equity
---------------- ------------- --------------- -------------------
<S> <C> <C> <C> <C>
Balances at January 1, 1998 - $ - $ (462) $ -
Original Issuance of Common Stock 7,500,000 2,000 - 2,000
Sale of Common Stock 75,000 750 - 750
Net Loss - - (13,962) (13,962)
---------------- ------------- --------------- -------------------
Balances at December 31, 1998 7,575,000 2,750 (14,424) (11,674)
Net Income - - 18,221 18,221
---------------- ------------- --------------- -------------------
Balances at February 28, 1999 7,575,000 $ 2,750 $ 3,797 $ 6,547
================ ============= =============== ===================
</TABLE>
See accompanying notes
5
<PAGE>
CASES LADDER, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Two Months
Ended Year Ended
February 28, December 31,
1999 1998
--------------- -----------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $ 18,221 $ (13,962)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided (Used) by Operations:
Depreciation 1,141 280
Allowance for Bad Debts 1,079 5,675
Changes in Operating Assets and Liabilities:
Decrease (Increase) in Assets:
Accounts Receivable (13,492) (70,936)
Prepaid Items and Deposits (3,815) -
Deferred Taxes 1,474 (2,172)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 14,032 19,363
Customer Deposits (16,667) 16,667
Income Tax Payable 879 800
--------------- -----------------
Net Cash Provided (Used) by Operating Activities 2,852 (44,285)
--------------- -----------------
Cash Flows from Investing Activities:
Equipment Acquisitions (11,658) (22,031)
--------------- -----------------
Net Cash Used by Investing Activities (11,658) (22,031)
--------------- -----------------
Cash Flows from Financing Activities:
Issuance of Common Stock - 2,750
Advances from Shareholders 27,620 55,000
Payments to Affiliates (679) (71,766)
Advances from Affiliates - 80,332
--------------- -----------------
Net Cash Provided by Financing Activities 26,941 66,316
--------------- -----------------
Net Increase (Decrease) in Cash and Cash Equivalents 18,135 -
Cash and Cash Equivalents - Beginning of Period -
--------------- -----------------
Cash and Cash Equivalents - End of Period $ 18,135 $ -
=============== =================
</TABLE>
See accompanying notes
6
<PAGE>
CASES LADDER, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Nature of Business
Cases Ladder, Inc. (the "Company") was incorporated under California
State law on August 19, 1998. The Company conducts business in the
Internet software and services industry.
Prior to incorporation, the Company operated through a bank account
under the name of Strategic Alliance Partners, Inc. d.b.a. Cases
Ladder. Strategic Alliance is an affiliate of the Company. The
fictitious business name statement (the "statement") was filed in Los
Angeles County on March 2, 1998. Management maintains that this bank
account was opened by the Bank in the wrong name. Management does not
know the individual who signed and filed the fictitious business name
statement. This individual was not authorized to perform such an act.
Further, Management maintains that the Company is not a continuation
of Strategic, and that each company is a separate and distinct entity.
Note 2 - Summary of Significant Accounting Policies
a) Cash
The Company maintains all of its cash deposits at one bank. The
Company's balance with this bank is insured up to $100,000 as provided
by the FDIC.
b) Computer Equipment and Software
The cost of Computer Equipment and Software is depreciated over the
estimated useful lives of the related assets. Depreciation is computed
on the straight-line method for both financial and tax reporting
purposes.
c) Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
7
<PAGE>
CASES LADDER, INC.
NOTES TO FINANCIAL STATEMENTS
Note 3 - Computer Equipment and Software
The following is a summary of computer equipment and software as of:
February 28, December 31,
1999 1998
------------ ------------
Computer Equipment $ 32,893 $ 21,236
Software 795 795
------------ ------------
33,688 22,031
(1,420) (280)
------------ ------------
Less: Accumulated Depreciation $ 32,268 $ 21,751
============ ============
Depreciation expense charged to operations for the two months ended
February 28, 1999 and the year ended December 31, 1998 was $1,140 and
$280, respectively.
Note 4 - Income Taxes
Income taxes are provided based on earnings reported for financial
statement purposes pursuant to the provisions of Statement of Financial
Accounting Standards No. 109 ("FASB 109").
FASB 109 uses the asset and liability method to account for income
taxes which requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary
differences between tax basis and financial reporting basis of assets
and liabilities.
Provision for income taxes for the two months and year ended, February
28, 1999 and December 31, 1998, respectively, consists of the
following:
February 28, December 31,
1999 1998
------------ ------------
Taxes currently payable -
Federal $ 79 -
State 800 800
------------ ------------
879 800
8
<PAGE>
CASES LADDER, INC.
NOTES TO FINANCIAL STATEMENTS
Note 4 - Income Taxes (continued)
<TABLE>
<CAPTION>
February 28, December 31,
1999 1998
----------------- --------------------
<S> <C> <C>
Deferred Taxes
Federal 214 (315)
State 1260 (1,857)
----------------- --------------------
1,474 (2,172)
----------------- --------------------
Income Tax Expense (Benefit) $ 2,353 $ (1,372)
================= ====================
</TABLE>
The deferred tax asset results primarily from a net operating loss
carryforward of $11,538 that is available for carryforward to offset
federal and state taxable income. It expires in 2018.
Note 5 - Notes Payable
Notes payable consist of the following at:
February 28, December 31,
1999 1998
------------ ------------
Affiliate $ 8,349 $ 9,028
Officers 82,620 55,000
------------ ------------
$ 90,969 $ 64,028
============ ============
Notes payable to affiliates and officers bear interest at 12% and 10%
per annum, respectively. All notes payable are unsecured, and are due
upon demand.
Note 6 - Stock Option Plan
The Company has a performance-based stock option plan. Under the plan,
the Company may grant options for up to 1.5 million shares of common
stock for which no vesting contingencies exist, other than being an
employee. The exercise price of each option is set at the discretion
of the Board of Directors at the time of each issuance. Management
believes that the exercise price of each option is equal to or greater
then the market value of the respective shares granted.
9
<PAGE>
CASES LADDER, INC.
NOTES TO FINANCIAL STATEMENTS
Note 6 - Stock Option Plan (Continued)
The Company applies APB Opinion 25 in accounting for its
performance-based stock option plan.
Following is a summary of the status of the plan during the two months
ended February 28, 1999 and the year ended December 31, 1998,
respectively:
Weighted
Average
Number of Exercise
Shares Price
------------------------------
Outstanding at 1-1-98 - $ -
Granted 160,000 0.20
Exercised - -
Forfeited - -
------------ ------------
Outstanding at 12-31-98 160,000 $ 0.20
============ ============
Options exercisable at 12-31-98 - $ -
============ ============
Weighted
Average
Number of Exercise
Shares Price
------------------------------
Outstanding at 1-1-99 160,000 $ 0.20
Granted 165,000 0.15
Exercised - -
Forfeited - -
------------ ------------
Outstanding at 2-28-99 325,000 $ 0.15
============ ============
Options exercisable at 2-28-99 - $ -
============ ============
10
<PAGE>
Note 7 - Supplemental Cash Flow Information
For the purpose of the statements of cash flows, all highly liquid
investments with a maturity of three months or less are considered to
be cash equivalents.
During the two months ended February 28, 1999 and the year ended
December 31, 1998, the Company paid approximately $4,828 and $181 in
interest respectively.
The Company did not pay any income taxes during the two periods
presented.
Note 8 - Sales to Major Customers
Sales to three major customers amounted to 29.6%, 25.6% and 15.0% of
total sales for the two months ended February 28, 1999. Sales to the
same three customers amounted to 38.9%, 16.1% and 14.5% of total sales
for the year ended December 31, 1998
Note 9 - Concentrations of Credit Risk
The Company extends credit to its customers, all of which are
companies in the internet software and services industry.
Note 10 - Related Parties
The Company sales a portion of its products and services to an
affiliate. Sales amounted to $466.15 and $7,345.90 for the two months
ended February 28, 1999 and December 31, 1998, respectively.
Note 11 - Subsequent Events
On April 1, 1999, the Board of Directors authorized a 5 for 4 stock
split of common stock to stockholders of record on March 14, 1999.
The Company is currently negotiating with an unrelated third party for
the purpose of selling its assets or a possible merger. Discussions
are at an early stage and no definitive plans have been formalized.
11
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eUniverse, Inc.
Date: June 11, 1999 By: /s/ Brad Greenspan
----------------------------
Chairman of the Board
<PAGE>
Exhibits
Exhibit No. Description
- ----------- -----------
3.01 Articles of Incorporation of the Company.
3.02 Amended Articles of Incorporation of the Company
regarding change of name.
3.03 Certificate of Amendment of Articles of Incorporation
regarding issuance of Preferred Stock.
3.04 Bylaws of the Company.
3.05 Designation of Preferred Stock of Motorcycle Centers of
America, Inc. dated April 7, 1999, as filed with the
Secretary of the State of Nevada, which defines the
rights and preferences of the Preferred Stock of the
Company.
10.01 Stock Purchase Agreement by and between Palisades
Capital, Inc. and Charles Beilman, dated as of October
1, 1998 (the "Stock Purchase Agreement").
10.02 Amendment to Stock Purchase Agreement, dated
December 29, 1998.
10.03 Amendment No. 2 to Stock Purchase Agreement, dated
February 11, 1999.
10.04 Amendment No. 3 to Stock Purchase Agreement, dated as of
March ___, 1999.
10.05 Amendment Number 4 to Stock Purchase Agreement, dated as
of June 9, 1999.
10.06 Agreement and Plan of Reorganization by and among
Motorcycle Centers of America, Inc., Entertainment
Universe, Inc. and the principal officers of
Entertainment Universe, Inc., dated April 9, 1999.
10.07 Entertainment Universe, Inc. Regulation D Subscription
Agreement, dated as of April ___, 1999.
<PAGE>
10.08 Entertainment Universe, Inc. Registration Rights
Agreement, dated as of April 1999.
10.09 Assignment and Assumption Agreement by and between
Entertainment Universe, Inc. and Motorcycle Centers of
America, Inc., dated as of April 14, 1999.
10.10 Stock Purchase Agreement by and among Motorcycle Centers
of America, Inc. and the shareholders of Case's Ladder,
Inc., dated as of April 21, 1999.
10.11 Employment Agreement by and between CD Universe, Inc.
and Charles Beilman, dated as of October 1, 1998.
10.12 Contract of Employment by and between Entertainment
Universe, Inc. and William R. Wagner, dated March 25,
1999.
10.13 Employment Agreement by and between eUniverse, Inc. and
Leland N. Silvas, dated as of April 14, 1999.
10.14 Letter agreement between Entertainment Universe, Inc.
and E.P. Opportunity Fund, L.L.C. regarding appointment
of a director of Entertainment Universe, Inc., dated
April 6, 1999.
10.15 Modification and Restatement of Lease by and between
Vincenzo Verna Trustee d/b/a Harvest Assoc-iates and CD
Universe, Inc. for the Company's office space in
Wallingford, Connecticut, dated as of February 1, 1999.
23.01 Consent of Jonathan P. Reuben, CPA
23.02 Consent of Cordovano & Harvey, PC
23.03 Consent of Merdinger, Fruchter, Rosen & Corso, PC
27.01 Financial Data Schedule
<PAGE>
EXHIBIT 3.01
FILED
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE
STATE OF NEVADA
APR 09 1998
No C7977.98
/s/ Dean Heller
DEAN HELLER, SECRETARY OF STATE
ARTICLES OF INCORPORATION
OF
Motorcycle Centers of America, Inc.
Pursuant to the provisions of the Nevada Private Corporations Act (Ch. 78,
NRS, as amended), the undersigned Corporation hereby adopts the following
Articles of Incorporation:
FIRST. The name of the Corporation is Motorcycle Centers of America, Inc.
SECOND. OFFICE: Its principal office in the State of Nevada is located at
Suite 3, 251 Jeanell Drive, Carson City, Nevada 89703. The name and address of
its resident agent is Corporate Advisory Services, Inc., Suite 3, 251 Jeanell
Drive, Carson City, Nevada 89703.
THIRD. PURPOSE: The nature of the business, or objects or purposes
proposed to be transacted, promoted or carried on are:
To engage in any lawful activity and to manufacture, purchase or otherwise
acquire, invest in, own, mortgage, pledge, sell, assign and transfer or
otherwise dispose of, trade, deal in and deal with minerals, goods, wares and
merchandise and personal property of every class and description.
To hold, purchase and convey real and personal estate and mortgage or
lease any such real and personal estate with its franchises and to take the same
by devise or bequest.
To acquire, and pay for in cash, stock or bonds of this corporation or
otherwise, the good will, rights, assets and property, and to undertake or
assume the whole or any part of the obligations or liabilities of any person,
firm, association or corporation.
To acquire, hold, use, sell, assign, lease, grant licenses in respect of,
mortgage, or otherwise dispose of letters patent of the United States or any
foreign country, patent rights, licenses and privileges, inventions,
improvements and processes, copyrights, trademarks and trade names, relating to,
or useful in connection with, works of art or any other business of this
Corporation.
To guarantee, purchase, hold, sell, assign, transfer, mortgage, pledge or
otherwise dispose of the shares of the capital stock of, or any bonds,
securities or evidences of the indebtedness created by any other corporation or
corporations of this state, or any other state or government, and while owner of
such stock, bonds, securities or evidences of indebtedness, to exercise all the
rights, powers and privileges of ownership, including the right to vote, if any.
1
<PAGE>
To borrow money and contract debts when necessary for the transaction of
its business, or for the exercise of its corporate rights, privileges or
franchises, or for any other lawful purpose of its incorporation; to issue
bonds, promissory notes, bills of exchange, debentures, and other obligations
and evidences of indebtedness, payable at specified time or times, or payable
upon the happening of a specified event or events, whether secured by mortgage,
pledge, or otherwise, or unsecured, for money borrowed, or in payment for
property purchased, or acquired, or for any other lawful objects.
To purchase, hold, sell and transfer shares of its own capital stock, and
use therefor its capital, capital surplus, surplus, or other property or funds;
provided it shall not use its funds or property for the purchase of its own
shares of capital stock when such use would cause any impairment of its capital;
and provided further, that shares of its own capital stock belonging to it shall
not be voted upon, directly or indirectly, nor counted as outstanding, for the
purpose of computing any stockholders' quorum or vote.
To conduct business, have one or more offices, and hold, purchase,
mortgage and convey real and personal property in this state, and in any of the
several states, territories, possessions and dependencies of the United States,
the District of Columbia, and in any foreign countries.
To do all and everything necessary and proper for the accomplishment of
the objects hereinbefore enumerated or necessary or incidental to the protection
and benefit of the corporation, and, in general, to carry on any lawful business
necessary or incidental to the attainment of the objects of the corporation,
whether or not such business is similar in nature to the objects hereinbefore
set forth.
The objects and purposes specified in the foregoing clauses shall, except
where otherwise expressed, be in no way limited or restricted by reference to or
inference from the terms of any other clause in these articles of incorporation
but shall be regarded as independent objects and purposes.
FOURTH. CAPITAL STOCK: The amount of the total authorized capital stock of
the corporation is Four Million Two Hundred Fifty Thousand Dollars ($4,250,000)
consisting of Two Hundred and Fifty Million (250,000,000) shares of one class of
common stock of the par value of One Mill ($.001) each; and Forty Million
(40,000,000) shares of preferred stock of the par value of Ten Cents ($.10)
each, to have such classes, series and preferences as the Board of Directors may
determine from time to time.
Any and all capital stock issued by the Corporation will be issued in
either registered or bearer form, as may be directed by the Board of Directors
from time to time, and the fixed consideration for which has been paid and
delivered shall be deemed fully paid and not liable for any further call or
assessment thereon, and the holders of such stock shall not be liable for any
further assessments.
2
<PAGE>
There shall be no preemptive rights in connection with the acquisition
any capital stock of the Corporation.
FIFTH DIRECTORS: The governing board of this Corporation shall be known
----- ---------
as directors, and the number of directors may from time to time be
increased or decreased in such manner as shall be provided by the by-
laws of this Corporation, provided that the number of directors shall
not be reduced to less than one (1).
The name and post office address of the first board of directors, which
shall be one (1) in number, is as follows:
NAME POST OFFICE ADDRESSES
---- ---------------------
Jay Boisdrenghein 6909 South Holly Circle
Suite 235
Englewood, CO 80112
SIXTH. INCORPORATORS: The name and post office address of the
------ -------------
incorporator signing the articles of incorporation is as follows:
David J. Wagner 8400 E. Prentice Ave.
Penthouse Suite
Englewood, Colorado 80111
SEVENTH. TERM: The Corporation is to have perpetual existence.
-------- ----
EIGHTH. AUTHORIZATIONS: In furtherance and not in limitation of the
------ --------------
powers conferred by statute, the board of directors is expressly authorized:
Subject to the by-laws, to make, alter or amend the by-laws of the
Corporation.
To fix the amount to be reserved as working capital over and above its
capital stock paid in, to authorize and cause to be executed mortgages and liens
upon the real and personal property of this Corporation.
By resolution passed by a majority of the whole board, to designate one
(1) or more committees, each committee to consist of one (1) or more of the
directors of the Corporation, which, to the extent provided in the resolution or
in the by-laws of the Corporation, shall have and may exercise the powers of the
board of directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it. Such committee or committees
<PAGE>
shall have such name or names as may be stated in the by-laws of the Corporation
or as may be determined from time to time by resolution adopted by the board of
directors.
When and as authorized by the affirmative vote of stockholders holding
stock entitling them to exercise at least a majority of the voting power given
at a stockholders' meeting called for that purpose, or when authorized by the
written consent of the holders of at least a majority of the voting stock issued
and outstanding, the board of directors shall have power and authority at any
meeting to sell, lease or exchange all of the property and assets of the
Corporation, including its good will and its corporate franchises, upon such
terms and conditions as its board of directors deems expedient, and for the best
interest of the Corporation.
NINTH. MEETINGS: Meetings of stockholders may be held outside the State
----- --------
of Nevada, if the by-laws provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of Nevada
at such place or places as may be designated from time to time by the board of
directors or in the by-laws of the Corporation.
TENTH. AMENDMENTS: This Corporation reserves the right to amend, alter,
----- ----------
change or repeal any provision contained in the articles of incorporation by
majority vote of the shareholders and in the manner now or hereafter prescribed
by statute, or by the articles of incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ELEVENTH. VOTING: There shall be no cumulative voting permitted in any
-------- ------
shareholder election of the Corporation.
TWELFTH. INDEMNIFICATION: The Corporation shall indemnify and hold
------- ---------------
harmless the officers and directors of the Corporation from any and all
liabilities or claims to the fullest extent now, or hereafter from time to time,
permitted pursuant to the General Corporation Law of the State of Nevada.
I, THE UNDERSIGNED, being the incorporator hereinbefore named for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Nevada, do make and file these
4
<PAGE>
articles of incorporation, hereby declaring and certifying that the facts herein
stated are true, and accordingly have hereunto set my hand this 17th day of
March, 1998.
/s/ David J. Wagner
-------------------
DAVID J. WAGNER
STATE OF COLORADO )
) SS:
COUNTY OF ARAPAHOE )
On this 17th day of March, 1998, before me, a Notary Public, personally
appeared DAVID J. WAGNER, who acknowledged that he executed the above
instrument.
/s/ Veronica Brownell
---------------------
NOTARY PUBLIC
My Commission Expires: 7-15-2000
5
<PAGE>
[LETTERHEAD OF STATE OF NEVADA OFFICE OF THE SECRETARY OF STATE]
FILED
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE
STATE OF NEVADA
APR 09 1998
No C7977.98
/s/ Dean Heller
DEAN HELLER, SECRETARY OF STATE
CERTIFICATE OF ACCEPTANCE
OF APPOINTMENT BY
RESIDENT AGENT
In the matter of Motorcycle Centers of America, Inc.,
------------------------------------
Name of Corporation
I, Corporate Advisory Service, Inc. with address at Suite #3,
--------------------------------
Name of Resident Agent
Street 251 Jeanell Drive,
City of Carson City, State of Nevada, Zip Code 89703,
hereby accept appointment as resident agent of the above-named corporation in
accordance with NRS 78.090.
(mailing address if different: Same as Above)
April 6, 1998 /s/ [ILLEGIBLE] President
-------------------------------
Signature of Resident Agent
NRS 78.090. Except during any period of vacancy described in NRS 78.097, every
corporation must have a resident agent, who may be either a natural person or a
corporation, resident, or located in this state. Every resident agent must have
a street address, where he maintains an office for the service of process, and
may have a separate mailing address such as a Post Office Box, which may be
different from the street address. The address of the resident agent is the
registered office of the corporation in this state. The resident agent may be
any bank or banking corporation or other corporation located and doing business
in this state. The Certificate of Acceptance must be filed at the time of the
initial filing of the corporate papers.
<PAGE>
SECRETARY OF STATE
[SEAL]
CORPORATE CHARTER
I, DEAN HELLER, the duly elected and qualified Nevada Secretary of State, do
hereby certify that MOTORCYCLE CENTERS OF AMERICA, INC. did on April 9, 1998
file in this office the original Articles of Incorporation; that said Articles
are now on file and of record in the office of the Secretary of State of the
State of Nevada, and further, that said Articles contain all the provisions
required by the law of said State of Nevada.
IN WITNESS WHEREOF, I have hereunto set my
hand and affixed the Great Seal of State,
at my office, in Carson City, Nevada, on
April 10, 1998.
[SEAL]
/s/ Dean Heller
Secretary of State
By: /s/ [ILLEGIBLE]
Certification Clerk
<PAGE>
EXHIBIT 3.02
AMENDED ARTICLES OF INCORPORATION
OF
Motorcycle Centers of America, Inc.
Pursuant to the provisions of Section 78.320 of the Nevada Revised
Statutes, the undersigned Corporation hereby adopts the following Amended
Articles of Incorporation as of this date:
FIRST. The name of the Corporation is Motorcycle Centers of America, Inc.
SECOND. The Articles of Incorporation were filed with the Secretary of
State on the 9th day at April, 1998.
THIRD. The name and address of the original incorporator is as follows:
David J. Wagner Penthouse Suite
8400 East Prentice Ave.
Englewood, Colorado 80111
FOURTH. A majority of the Shareholders of the Corporation, by written
consent dated April 22, 1999, adopted a resolution to amend the original
Articles as follows:
Article FIRST is hereby amended to read as follows:
FIRST. The name of the Corporation is eUniverse , Inc.
Leland Silvas is the President & CEO of the Corporation, and Charles
Boilman is the Secretary of the Corporation; and that they
1
<PAGE>
have been authorized to execute the foregoing certificate by resolution of the
Shareholders, adopted by written resolution dated April 22, 1999, and that the
foregoing certificate sets forth the text of the Articles of Incorporation as
amended to the date of this certificate.
Date April 22, 1999
Motorcycle Centers of America, Inc.
By /s/ Leland Silvas
--------------------------------
President
and /s/ Charles Boilman
-------------------------------
Secretary
STATE OF CT )
) SS: Wallingford
COUNTY OF New Haven )
On this 23rd day April, 1999, before me, a Notary Public, personally
appeared Leland Silvas, the President of Motorcycle Centers of America, Inc.,
who acknowledged that he had executed the above instrument.
/s/ Cecile P. Clavet
-----------------------------------
NOTARY PUBLIC
My Commission Expires:
CECILE P. CLAVET
NOTARY PUBLIC
MY COMMISSION EXPIRES MAY 31, 1999
2
<PAGE>
STATE OF Connecticut )
) SS: Wallingford
COUNTY OF New Haven )
On this 23rd day of April, 1999, before me, a Notary Public, personally
appeared Charles Boilman, the Secretary of Motorcycle Centers of America, Inc.,
who acknowledged that he had executed the above instrument.
/s/ Cecile P. Clavet
-----------------------------------
NOTARY PUBLIC
My Commission Expires:
CECILE P. CLAVET
NOTARY PUBLIC
MY COMMISSION EXPIRES MAY 31, 1999
3
<PAGE>
EXHIBIT 3.03
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
(After issuance of Stock)
OF
Motorcycle Centers of America, Inc.
We the undersigned, Jay Boisdrenghein, President, and David Wollins,
Assistant Secretary of Motorcycle Centers of America, Inc. (The Corporation) do
hereby certify:
That the Board of Directors of the Corporation, by resolution dated March
29, 1999, adopted a resolution to amend the original articles as follows:
Article FOURTH is hereby amended to add the following at the end of the
first paragraph thereof:
Section 1. Designation. The Corporation hereby establishes a new class of shares
of the Corporation's $0.10 per share Preferred Stock, which shall be designated
as Series A 6% Convertible Preferred Stock (the "Series A Preferred Stock") and
the number of shares constituting the Series A Preferred Stock shall be ten
million (10,000,000). The Series A Preferred Stock shall be offered at a
purchase price of Three Dollars and Sixty Cents ($3.60) per share (the "Original
Series A Issue Price"), with a six percent (6%) per annum accretion rate as set
forth herein.
Section 2. Rank. The Series A Preferred Stock shall rank: (a) junior to any
other class or series of capital stock of the Company other than Common Stock
(defined below) hereafter created specifically ranking by its terms senior to
the Series A Preferred Stock (collectively, the "Senior Securities"); (b) senior
and prior to all of the Company's Common Stock $.001 par value per share
("Common Stock"); (c) senior and prior to any class or series of capital stock
of the Company hereafter created not specifically ranking by its terms senior to
or on parity with any Series A Preferred Stock of whatever subdivision
(collectively, with the Common Stock, "Junior Securities"); and (d) on parity
with any class or series of capital stock of the Company hereafter created
specifically ranking by its terms on parity with the Series A Preferred Stock
("Parity
1
<PAGE>
Securities") in each case as to distributions of assets upon liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary (all
such distributions being referred to collectively as "Distributions").
Section 3. Dividends. The Series A Preferred Stock will bear no dividends, and
the holders of the Series A Preferred Stock ("Holders") shall not be entitled to
receive dividends on the Series A Preferred Stock.
Section 4. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
the Company ("Liquidation Event"), either voluntary of involuntary, the then
Holders of shares of Series A Preferred Stock shall be entitled to receive,
immediately after any distributions to Senior Securities required by the
Company's Certificate of Incorporation or any certificate of designation, and
prior in preference to any distribution to Junior Securities but in parity with
any distribution to Parity Securities, an amount per share equal to the sum of
(i) the Original Series A Issue Price for each outstanding share of Series A
Preferred Stock and (ii) an amount equal to six percent (6%) of the Original
Series A Issue Price, per annum, accruing daily, for the period that has passed
since the date that, in connection with the consummation of the purchase by
Holder of shares of Series A Preferred Stock from the Company, the escrow agent
first received in its possession funds representing full payment for the shares
of Series A Preferred Stock (such amount being referred to herein as the
"Premium"). If upon the occurrence of such event, and after payment in full of
the preferential amounts with respect to the Senior Securities, the assets and
funds available to be distributed among the Holders of the Series A Preferred
Stock and Parity Securities shall be insufficient to permit the payment to such
Holders of the full preferential amounts due to the Holders of the Series A
Preferred Stock and the Parity Securities, respectively, then the entire assets
and funds of the Company legally available for distribution shall be distributed
among the Holders of the Series A Preferred Stock and the Parity Securities, pro
rata, based on the respective liquidation amounts to which each such series of
stock is entitled by the Company's Certificate of Incorporation and any
certificate(s) of designation relating thereto.
(b) Upon the completion of the distribution required by Subsection
2
<PAGE>
4(a), if assets remain in this Company, they shall be distributed to holders of
Junior Securities in accordance with the Company's Certificate of Incorporation
including any duly adopted certificate(s) of designation.
(c) At each Holder's option, a sale, conveyance or disposition of
all or substantially all of the assets of the Company or the effectuation by the
Company of a transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of the Company is disposed of shall be
deemed to be a Liquidation Event as defined in Section 4(a) hereof; provided,
further that (i) a consolidation, merger, acquisition, or other business
combination of the Company with or into any other publicly traded company or
companies, including those trading on the OTC Bulletin Board, shall not be
treated as a Liquidation Event as defined in Section 4(a) but instead shall be
treated pursuant to Section 5(d) hereof, and (ii) a consolidation, merger,
acquisition, reorganization or other business combination of the Company with or
into any other non-publicly traded company or companies shall be treated as a
Liquidation Event as defined in Section 4(a). The Company shall not effect any
transaction described in Subsection 4(c)(ii) unless it first gives thirty (30)
business days prior written notice of such transaction during which time the
Holder shall be entitled to immediately convert any or all of its shares of
Series A Preferred Stock into Common Stock at the Conversion Price, as defined
below, then in effect.
(d) In the event that, immediately prior to the closing of a
transaction described in Section 4(c) hereof which would constitute a
Liquidation Event, the cash distributions required by Section 4(a) or otherwise
hereunder, have not been made, the Company shall either: (i) cause such closing
to be reasonably postponed until such cash distributions have been made, (ii)
cancel such transaction, in which event the fights of the Holders of Series A
Preferred Stock shall be the same as existing immediately prior to such proposed
transaction, or (iii) agree, and shall require that any successor company
remitting from a Liquidation Event agrees, to make such distributions as quickly
after the closing of such Liquidation Event as reasonably practicable, upon the
same terms and in the same amounts as the Company would have made if such
distribution was made immediately prior to the closing of such transaction.
3
<PAGE>
Section 5. Conversion. Subject to Section 4(c) herein, the record
Holder(s) of the Series A Preferred Stock shall have conversion rights as
follows (the "Conversion Rights"):
Right to Convert. At any time following six months after the Initial
Issuance Date, the record Holder of the Series A Preferred Stock
shall be entitled to convert any or all of the aggregate principal
amount of the Series A Preferred Stock at the office of the Company
or its designated transfer agent (the "Transfer Agent"), into that
number of fully-paid and non-assessable shares of Common Stock
calculated in accordance with the following formula (the "Conversion
Rate"):
Number of shares of Common Stock issued upon conversion of one (1) share of
Series A Preferred Stock =
(.06) (N/365) ($3.60) + $3.60 Conversion Price
where,
N = the number of days between (i) the date that, in connection with the
consummation of the initial purchase by Holder of shares of Series A
Preferred Stock from the Company, the escrow agent first received in its
possession funds representing full payment for the shares of Series A
Preferred Stock for which conversion is being elected, and (ii) the
applicable Date of Conversion (as defined in Section 5(b)(iv) below) for the
shares of Series A Preferred Stock for which conversion is being elected,
and
Conversion Price
(i) For the period commencing on the Initial Issuance Date, as defined
below, and ending seven (7) months thereafter, the Conversion Price is the
lesser of (a) $3.60; or (b) the Adjusted Conversion Price;
(ii) For the period commencing seven (7) months and one (1) day
after the Initial Issuance Date and ending nine months thereafter, the
Conversion Price is the lesser of (a) $3.60; (b) the Adjusted Conversion Price;
or (c) 100% of the average Closing Bid Price, as defined below, of the Company's
Common Stock for the thirty (30) trading days immediately preceding the date
which is
4
<PAGE>
seven months after the Initial Issuance Date, but in no event shall the
Conversion Price be less than $2.00;
(iii) After the period which is nine (9) months and one (1) day after the
Initial Issuance Date, the Conversion Price is the lesser of (a) $3.60, or (b)
the Conversion Price set forth in Section 5(a)(ii), or (c) 100% of the average
of the lowest three consecutive Closing Bid price of the Company's Common Stock
for the twenty (20) trading days immediately preceding the Date of Conversion.
As used herein, "Fixed Conversion Price" shall be $3.60. "Variable
Conversion Price" shall be any Conversion price set forth in Section 5(a) other
than $3.60.
As used herein, "Adjusted Conversion Price" shall mean the Adjusted
Conversion Price in the table set forth on Exhibit 1 hereto.
As used herein, "Initial Issuance Date" shall mean the date of the first
closing of a purchase and sale of the Series A Preferred Stock that occurs
pursuant to the offering of the Series A Preferred Stock by the Company.
For purposes hereof, any Holder which acquires shares of Series A
Preferred Stock from another Holder (the "Transferor") and not upon original
issuance from the Company shall be entitled to exercise such Holder's conversion
right as to the percentages of such shares specified under Section 5(a) in such
amounts and at such times such that the number of shares eligible for conversion
by such Holder at any time shall be in the same proportion that the number of
shares of Series A Preferred Stock acquired by such Holder from its Transferor
bears to the total number of shares of Series A Preferred Stock originally
issued by the Company to such Transferor (or its predecessor Transferor). For
purposes hereof, the term "Closing Bid Price" shall mean the closing bid price
of the Company's Common Stock on the NASDAQ SmallCap Market, or if no longer
traded on the NASDAQ SmallCap Market, the closing bid price on the principal
national securities exchange or the
5
<PAGE>
over-the-counter system on which the Common Stock is so traded and if not
available, the mean of the high and low prices on the principal national
securities exchange or the over-the-counter system on which the Common Stock is
so traded.
(b) Mechanics of Conversion. In order to convert Series A Preferred Stock into
full shares of Common Stock, the Holder shall send via facsimile, or otherwise
deliver, on or prior to 11:59 p.m., New York City time (the "Conversion Notice
Deadline") on the Date of Conversion, a copy of the fully executed notice of
conversion ("Notice of Conversion") to the Company at the office of the Company
and to its designated transfer agent (the "Transfer Agent") for the Series A
Preferred Stock stating that the Holder elects to convert, which notice shall
specify the Date of Conversion, the number of shares of Series A Preferred Stock
to be converted, the applicable Conversion Price and a calculation of the number
of shares of Common Stock issuable upon such conversion (together with a copy of
the front page of each certificate to be converted). Upon receipt by the Company
of a facsimile copy of a Notice of Conversion, the Company shall immediately
send, via facsimile, a confirmation of receipt of the Notice of Conversion to
the Holder which shall specify that the Notice of Conversion has been received
and the name and telephone number of a contact person at the Company whom the
Holder should contact regarding information related to the Conversion. No later
than one (1) business day after receipt of such confirmation of receipt of
Notice of Conversion, the Holder shall surrender to a common courier for
delivery to the office of the Company or the Transfer Agent, the original
certificates representing the Series A Preferred Stock being converted (the
"Preferred Stock Certificates"), duly endorsed for transfer; provided, however,
that the Company shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless either the Preferred
Stock Certificates are delivered to the Company or its Transfer Agent as
provided above, or the Holder notifies the Company or its Transfer Agent that
such certificates have been lost, stolen or destroyed (subject to the
requirements of subparagraph (i) below). In the case of a dispute as to the
calculation of the Conversion Rate, the Company shall promptly issue to the
Holder the number of Shares that are not disputed and shall submit the disputed
calculations to its outside accountant via facsimile within three (3) days of
receipt of Holder's Notice of Conversion. The Company shall cause the accountant
to perform the calculations and notify the
6
<PAGE>
Company and Holder of the results no later than two (2) business days from the
time it receives the disputed calculations. The accountant's calculation shall
be deemed conclusive absent manifest error.
(i) Lost or Stolen Certificates. Upon receipt by the Company of
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificates representing shares of Series A Preferred Stock, and (in the case
of loss, theft or destruction) of indemnity or security reasonably satisfactory
to the Company, and upon surrender and cancellation of the Preferred Stock
Certificate(s), if mutilated, the Company shall execute and deliver new
Preferred Stock Certificate(s) of like tenor and date. However, the Company
shall not be obligated to re-issue such lost or stolen Preferred Stock
Certificates if Holder contemporaneously requests the Company to convert such
Series A Preferred Stock into Common Stock.
(ii) Delivery of Common Stock Upon Conversion. The Company shall, or
shall cause the Transfer Agent, no later than the close of business on the third
(3rd) business day (the "Deadline") after receipt by the Company or the Transfer
Agent of a facsimile copy of a Notice of Conversion and receipt by Company or
the Transfer Agent of all necessary documentation duly executed and in proper
form required for conversion, including the original Preferred Stock
Certificates to be converted (or after provision for security or indemnification
in the case of lost or destroyed certificates, if required), to issue and
surrender to a common courier for either overnight or (if delivery is outside
the United States) two (2) day delivery to the Holder at the address of the
Holder as shown on the stock records of the Company (A) a certificate for the
number of shares of Common Stock to which the Holder shall be entitled as
aforesaid, and (B) certificate(s) representing the number of shares of Series A
Preferred Stock not being exchanged, if necessary.
(iii) No Fractional Shares. If any conversion of the Series A
Preferred Stock would create a fractional share of Common Stock or a fight to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion,
in the aggregate, shall be the next higher number of shares.
7
<PAGE>
(iv) Date of Conversion. The date on which conversion occurs (the
"Date of Conversion") shall be deemed to be the date set forth in such Notice of
Conversion, provided (i) that the advance copy of the Notice of Conversion is
sent via facsimile to the Company before 11:59 p.m., New York City time, on the
Date of Conversion, and (ii) that the original Preferred Stock Certificates
representing the shares of Series A Preferred Stock to be converted are
surrendered by depositing such certificates with a common courier, for delivery
to the Company or the Transfer Agent as provided above, as soon as practicable
after the Date of Conversion, provided that the Date of Conversion shall not
occur less than six (6) months after the Initial Issuance Date. The person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record Holder or Holders of
such shares of Common Stock on the Date of Conversion.
(v) Taxes. The Company shall pay any and all taxes (other than
transfer taxes) which may be imposed with respect to the issuance and delivery
of the shares of Common Stock pursuant to conversion of the Series A Preferred
Stock.
(c) Automatic Conversion or Redemption. If at any time after 12
months following the initial effectiveness of the required registration of the
Company's Common Stock (under Section 2 of the Company's Registration Rights
Agreement relating to its Series A Preferred Stock) the Closing Bid Price of the
Company's Common Stock is $16.00 or more for twenty (20) consecutive trading
days ("Automatic Conversion Event"), then at any time following the Automatic
Conversion Event (regardless of whether the Closing Bid Price of the Company's
Common Stock shall at any time following the Automatic Conversion Event be less
than $16.00), each share of Series A Preferred Stock outstanding on the date of
the Automatic Conversion Event or, if not a business day, the first business day
thereafter ("Termination Date") automatically, at the option of the Company,
shall either (i) be converted ("Automatic Conversion") into Common Stock on such
date at the Conversion Rate then in effect (calculated in accordance with the
formula in Section 5(a) above), and the Termination Date shall be deemed the
Date of Conversion with respect to such conversion for purposes of this
Certificate of Designation, or (ii) be redeemed ("Automatic Redemption") by the
Company for cash
8
<PAGE>
in an amount equal to the Stated Value (as defined below) of the shares of
Series A Preferred Stock being redeemed. If the Company elects to redeem, on the
Termination Date, the Company shall send to the Holders of outstanding Series A
Preferred Stock notice (the "Automatic Redemption Notice") via facsimile of its
intent to effect an Automatic Redemption of the outstanding Series A Preferred
Stock. If the Company does not send such notice to Holder on such date, an
Automatic Conversion shall be deemed to have occurred. If an Automatic
Conversion occurs, the Company and the Holders shall follow the applicable
conversion procedures set forth in this Certificate of Designation; provided,
however, that the Holders are not required to send the Notice of Conversion
contemplated by Section 5(b) hereof. If the Company elects t redeem, each Holder
of outstanding Series A Preferred Stock shall send their certificates
representing the Series A Preferred Stock to the Company within five (5) days of
the date of receipt of the Automatic Redemption Notice from the Company, and the
Company shall pay the applicable redemption price to each respective Holder
within five (5) days of the receipt of such certificates. The Company shall not
be obligated to deliver the redemption price unless the certificates
representing the Series A Preferred Stock are delivered to the Company, or, in
the event one or more certificates have been lost, stolen, mutilated or
destroyed, unless the Holder has complied with Section 5(b)(i). If the Company
elects to redeem under this Section 5(c) and the Company fails to pay the
Holders the redemption price within five (5) days of its receipt of the
certificates representing the shares of Series A Preferred Stock to be redeemed
as required by this Section 5(c), then an Automatic Conversion shall be deemed
to have occurred and, upon receipt of the Preferred Stock certificates, the
Company shall immediately deliver to the Holders the certificates representing
the number of shares of Common Stock to which the Holders would have been
entitled upon Automatic Conversion.
As used herein, "Last Closing Date" shall mean the date of the last
closing of a purchase and sale of the Series A Preferred Stock that occurs
pursuant to the offering of the Series A Preferred Stock by the Company, and
"Stated Value" shall mean the Original Series A Issue Price (as defined in
Section 1 hereof) together with the accreted but unpaid Premium as defined in
Section 4(a).
9
<PAGE>
(d) Adjustment to Conversion Rate.
(i) Adjustment to Fixed Conversion Price Due to Stock Split, Stock
Dividend, Etc. If, prior to the conversion of all of the Series A Preferred
Stock, the number of outstanding shares of Common Stock is increased by a stock
split, stock dividend, or other similar event, the Fixed Conversion Price shall
be proportionately reduced, or if the number of outstanding shares of Common
Stock is decreased by a combination or reclassification of shares, or other
similar event, the Fixed Conversion Price shall be proportionately increased.
(ii) Adjustment to Variable Conversion Price. If, at any time when
any shares of the Series A Preferred Stock are issued and outstanding, the
number of outstanding shares of Common Stock is increased or decreased by a
stock split, stock dividend or other similar event, which event shall have taken
place during the reference period for determination of the Conversion Price for
any conversion of the Series A Preferred Stock, then the Variable Conversion
Price shall be calculated giving appropriate effect to the stock split, stock
dividend, combination, reclassification or other similar event for all relevant
trading days immediately preceding the Date of Conversion.
(iii) Adjustment Due to Merger, Consolidation, Etc. If, prior to the conversion
of all Series A Preferred Stock, there shall be any merger, consolidation,
exchange of shares, recapitalization, reorganization, or other similar event, as
a result of which shares of Common Stock of the Company shall be changed into
the same or a different number of shares of the same or another class or classes
of stock or securities of the Company or another entity or there is a sale of
all or substantially all of the Company's assets or there is a change of control
transaction not deemed to be a Liquidation Event pursuant to Section 4(c), then
the Holders of Series A Preferred Stock shall thereafter have the right to
receive upon conversion of Series A Preferred Stock, upon the basis and upon the
terms and conditions specified herein in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such stock, securities and/or
other assets which the Holder would have been entitled to receive in such
transaction had the Series A Preferred Stock been converted immediately prior to
such transaction, and in any such case appropriate provisions shall be made with
respect to the rights
10
<PAGE>
and interests of the Holders of the Series A Preferred Stock to the end that the
provisions hereof (including, without limitation, provisions for the adjustment
of the Conversion Price and of the number of shares issuable upon conversion of
the Series A Preferred Stock) shall thereafter be applicable, as nearly as may
be practicable in relation to any securities thereafter deliverable upon the
exercise hereof. The Company shall not effect any transaction described in this
Subsection 5(d)(iii) unless (A) it first gives at least thirty (30) days prior
written notice of such merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event (during which time the
Holder shall be entitled to convert its shares of Series A Preferred Stock into
Common Stock) and (B) the resulting successor or acquiring entity (if not the
Company) assumes by written instrument the obligations of the Company under this
Certificate of Designation including this Subsection 5(d)(iii).
(iv) No Fractional Shares. If any adjustment under this Section 5(d)
would create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon conversion shall be the next
higher number of shares.
Section 6. Voting Rights. Except as otherwise provided herein or by law,
the Holder(s) of Series A Preferred Stock, by virtue of their ownership thereof,
shall be entitled to cast the number of votes per share thereof on each matter
submitted to the Company's holders of Common Stock for voting as equals the
number of votes which could be cast by the Holders of the number of shares of
Common Stock into which such shares of Series A Preferred Stock could be
converted pursuant hereto immediately prior to the taking of such vote
(including, without limitation, any shares of Common Stock which would be
issuable in payment of accrued and unpaid interest thereon if such shares were
converted on the record date and the Company elected to pay such interest in
Common Stock). Such vote shall be cast together with those cast by the Holders
of Common Stock and not as a separate class except as otherwise provided herein.
Section 7. Protective Provision. So long as shares of Series A Preferred
Stock are outstanding, the Company shall not without first obtaining the
approval (by vote or written consent,
11
<PAGE>
as provided by Nevada Law) of the Holders of at least seventy-five percent (75%)
of the then outstanding shares of Series A Preferred Stock, and at least
seventy-five percent (75%) of the then outstanding Holders:
(a) alter or change the rights, preferences or privileges of the
Series A Preferred Stock or any securities so as to affect adversely the Series
A Preferred Stock;
(b) create any new class or series of stock having a preference over
or on parity with the Series A Preferred Stock with respect to Distributions (as
defined in Section 2 above) or increase the size of the authorized number of
Series A Preferred Stock; or
(c) do any act or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation or the holders of
shares of the Series A Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as mended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time mended).
In the event Holders of at least seventy-five percent (75%) of the then
outstanding shares of Series A Preferred Stock and at least seventy-five percent
(75%) of the then outstanding Holders agree to allow the Company to alter or
change the rights, preferences or privileges of the shares of Series A Preferred
Stock, pursuant to Subsection (a) above, so as to affect the Series A Preferred
Stock, then the Company will deliver notice of such approved change to the
Holders of the Series A Preferred Stock that did not agree to such alteration or
change (the "Dissenting Holders") and Dissenting Holders shall have the right
for a period of thirty (30) business days to convert pursuant to the terms of
this Certificate of Designation as they exist prior to such alteration or change
(notwithstanding any other provision herein to the contrary) or continue to hold
their shares of Series A Preferred Stock, as amended.
Section 8. Status of Converted Stock In the event any shares of Series A
Preferred Stock shall be converted pursuant to Section 5 hereof, the shares of
Preferred Stock so converted shall be
12
<PAGE>
canceled, shall return to the status of authorized but unissued Preferred Stock
of no designated series, and shall not be re-issuable by the Company as Series A
Preferred Stock.
Section 9. Preference Rights. Nothing contained herein shall be construed
to prevent the Board of Directors of the Company from issuing one (1) or more
series of Preferred Stock with dividend and/or liquidation preferences junior to
the dividend and liquidation preferences of the Series A Preferred Stock.
Section 10. Authorization and Reservation of Shares of Common Stock.
(a) Authorized and Reserved Amount. The Company shall have
authorized and reserved and keep available for issuance not less than three
million nine hundred thousand (3,900,000) shares of Common Stock (subject to
adjustment for stock splits, stock dividends, reclassifications and similar
types of events) issuable upon conversion of all outstanding Series A Preferred
Stock for the purpose of effecting the conversion of the Series A Preferred
Stock (including any shares of Common Stock as a Conversion Failure Payment
under Section 11 hereof or issuable upon the failure of the Company to pay a
Redemption Amount in accordance with Section 5(c) hereof) issued or to be issued
to the Holders (the "Reserved Amount"). The Reserved Amount shall be at least
two hundred percent (200%) of the number of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock a sufficient number of shares of Common Stock to provide for the full
conversion of all outstanding Series A Preferred Stock, and issuance of the
shares of Common Stock in connection therewith. During any period in which the
Reserved Amount is less than two hundred percent (200%) of the number of shares
of Common Stock issuable on three (3) consecutive trading days upon conversion
of the outstanding Series A Preferred Stock (without giving effect to any
limitation on conversion or exercise thereof), the Company shall not reserve or
issue shares of Common Stock for any purposes other than the conversion of the
Series A Preferred Stock.
13
<PAGE>
(b) Increases to Reserved Amount. Without limiting any other
provision of this Section 10, if the Reserved Amount for any three (3)
consecutive trading days (the last of such three (3) trading days being the
"Reservation Trigger Date") is less than two hundred percent (200%) of the
number of shares of Common Stock issuable upon conversion of Series A Preferred
Stock on such trading days (a "Share Authorization Failure"), the Company shall
immediately notify all Holders of such occurrence and shall take all necessary
action to increase the Reserved Amount to two hundred percent (200%) of the
number of shares of Common Stock then issuable upon conversion of the Series A
Preferred Stock within (i) fifteen (15) days following a Reservation Trigger
Date if such increase requires solely approval of the Company's Board of
Directors and (ii) sixty (60) days following a Reservation Trigger Date if such
increase requires approval of the Company's shareholders.
(c) Reduction of Reserved Amount Under Certain Circumstances. Prior
to complete conversion of all Series A Preferred Stock, the Company shall not
reduce the number of shares required to be reserved for issuance under this
Section 10 without the written consent of all Holders except for a reduction
proportionate to a reverse stock split effected for a business purpose other
than affecting the obligations of Holder under this Section 10, which reverse
stock split affects all shares of Common Stock equally.
(d) Allocation of Reserved Amount. Each increase to the Reserved
Amount shall be allocated pro rata among the Holders based on the number of
Series A Preferred Stock held by each Holder at the time of the establishment of
or increase in the Reserved Amount. In the event a Holder shall sell or
otherwise transfer any of such Holder's Series A Preferred Stock, each
transferee shall be allocated a pro rata portion of such transferor's Reserved
Amount. Any portion of the Reserved Amount which remains allocated to any person
or entity which does not hold any Series A Preferred Stock shall be allocated to
the remaining Holders, pro rata based on the number of Series A Preferred Stock
then held by such Holders.
14
<PAGE>
Section 11. Failure To Satisfy Conversions.
(a) Conversion Failure Payments. If, at any time, (x) a Holder submits a Notice
of Conversion (or is deemed to submit such notice pursuant to Section 5(d)
hereof), and the Company fails for any reason to deliver, on or prior to the
expiration of the Deadline ("Period") for such conversion, such number of shares
of Common Stock (including, but not limited to, any published announcement) to
any Holder at any time of its conversion not to issue shares of Common Stock to
which such converting Holder is entitled upon such conversion, or (y) the
Company provides notice upon exercise by any Holder of its conversion rights in
accordance with the terms of this Certificate of Designation (each of (x) and
(y) being a "Conversion Failure"), then the Company shall pay to such Holder, in
the case of a Conversion Failure described in clause (x) above, and to all
Holders, in the case of a Conversion Failure described in clause (y) above,
damages in an amount equal to the lower of:
(i) "Damages Amount" x "D" x .005; and
(ii) the highest interest rate permitted by applicable law, where:
"D" means the number of days beginning the date of the Conversion Failure
through and including the Cure Date with respect to such Conversion Failure;
"Damages Amount" means the Original Series A Issue Price for each share of
Series A Preferred Stock subject to conversion plus all accrued and unpaid
interest thereon as of the first day of the Conversion Failure;
"Cure Date" means (i) with respect to a Conversion Failure described in
clause (x) of its definition, the date the Company effects the conversion of the
shares of Series A Preferred Stock submitted for conversion and (ii) with
respect to a Conversion Failure described in clause (y) of its definition, the
date the Company undertakes in writing to issue Common Stock in satisfaction of
all
15
<PAGE>
conversions of Series A Preferred Stock in accordance with the terms of this
Certificate of Designation.
The payments to which a Holder shall be entitled pursuant to this Section are
referred to herein as "Conversion Failure Payments." The parties agree that the
damages caused by a breach hereof would be difficult or impossible to estimate
accurately. A Holder may elect to receive accrued Conversion Failure Payments in
cash or to convert all or any portion of such accrued Conversion Failure
Payments, at any time, into Common Stock at the lowest Conversion Price in
effect during the period beginning on the date of the Conversion Failure through
the Cure Date for such Conversion Failure. In the event a Holder elects to
receive any Conversion Failure Payments in cash, it shall notify the Company in
writing no later than three (3) business days after the Deadline and failure to
so notify the Company shall entitle the Company, in its sole discretion, to
elect to make such Conversion Failure Payments in cash, Common Stock or some
combination of the two. In the event a Holder elects to convert all or any
portion of the Conversion Failure Payments, such Holder shall indicate on a
Notice of Conversion such portion of the Conversion Failure Payments which such
Holder elects to so convert in accordance with this Section 11(a) and such
conversion shall otherwise be effected in accordance with provisions of Section
5.
(b) Buy-In Cure. Unless a Conversion Failure described in clause (y)
of Section 11(a) hereof has occurred with respect to such a Holder, if (i) the
Company fails for any reason to deliver during the Delivery Period shares of
Common Stock to a Holder upon a conversion of the Series A Preferred Stock and
(ii) after the applicable Delivery Period with respect to such conversion, a
Holder purchases (in an open market transaction or otherwise) shares of Common
Stock to make delivery upon a sale by a Holder of the shares of Common Stock
(the "Sold Shares") which such Holder anticipated receiving upon such conversion
(a "Buy-In"), the Company shall pay such Holder (in addition to any other
remedies available to Holder) the amount by which (x) such Holder's total
purchase price (including brokerage commission, if any) for the shares of Common
Stock so purchased exceeds (y) the net proceeds received by such Holder from the
sale of the Sold Shares. For example, if a Holder purchases shares of Common
Stock having a total purchase price of $11,000
16
<PAGE>
to cover a Buy-In with respect to shares of Common Stock sold for $10,000, the
Company will be required to pay such Holder $1,000. A Holder shall provide the
Company written notification indicating any amounts payable to Holder pursuant
to this Section 11.
(c) Adjustment to Conversion Price. If a Holder has not received
certificates for all shares of Common Stock within five (5) business days
following the expiration of the Delivery Period with respect to a conversion of
any portion or any such Holder's Series A Preferred Stock for any reason, then
the Conversion Price for the affected Series A Preferred Stock shall thereafter
be the lesser of (i) the Fixed Conversion Price on the Conversion Date specified
in the Notice of Conversion which resulted in the Conversion Failure and (ii)
the lowest Conversion Price in effect during the period beginning on, and
including, such Conversion Date through and including the Cure Date. If there
shall occur a Conversion Failure of the type described in clause (y) of Section
11(a), then the Fixed Conversion Price with respect to any conversion thereafter
shall be the lowest Conversion Price in effect at any time during the period
beginning on, and including, the date of the occurrence of such Conversion
Failure through and including the Cure Date. The Conversion Price shall
thereafter be subject to further adjustment for any events described in Section
5(d).
Section 12. Event of Default.
(a) Holder's Option to Demand Prepayment. Upon the occurrence of an Event of
Default (as herein defined), each Holder shall have the right to elect at any
time and from time to time prior to the cure by Company of such Event of Default
to have all or any portion of such Holder's then outstanding Series A
Preferred Stock prepaid by the Company for an amount equal to the Holder Demand
Prepayment Amount (as herein defined).
(i) The right of a Holder to elect prepayment shall be exercisable
upon the occurrence of an Event of Default by such Holder in its sole discretion
by delivery of a Demand Prepayment
17
<PAGE>
Notice (as herein defined) in accordance with the procedures set forth in this
Section 12. Notwithstanding the exercise of such right, the Holder shall be
entitled to exercise all other rights and remedies available under the
provisions of this Certificate of Designation and at law or in equity.
(ii) A Holder shall effect each demand for prepayment under this
Section 12 by giving at least two (2) business days prior written notice (the
"Demand Prepayment Notice") of the date which such prepayment is to become
effective (the "Effective Date of Demand of Prepayment"), the Series A Preferred
Stock selected for prepayment and the Holder Demand Prepayment Amount to the
Company at the address and facsimile number provided in the stock records of the
Company, which Demand Prepayment Notice shall be deemed to have been delivered
on the business day after the date of transmission of Holder's facsimile (with a
copy sent by overnight courier to the Company) of such notice.
(iii) The Holder Demand Prepayment Amount shall be paid to a Holder
whose Series A Preferred Stock are being prepaid within one (1) business day
following the Effective Date of Demand of Prepayment; provided, however, that
the Company shall not be obligated to deliver any portion of the Holder Demand
Prepayment Amount until one (1) business day following either the date on which
the Series A Preferred Stock being prepaid are delivered to the office of the
Company or its transfer agent, or the date on which the Holder notifies the
Company or the Transfer Agent that such Series A Preferred Stock have been lost,
stolen or destroyed and delivers the documentation required in accordance with
Section 5(b)(i) hereof.
(b) Holder Demand Prepayment Amount. The "Holder Demand Prepayment
Amount" means the greater off (a) 1.3 times the Stated Value of the Series A
Preferred Stock for which demand is being made, plus all accrued and unpaid
interest thereon and accrued and unpaid Conversion Failure Payments (if any)
through the date of prepayment and (b) the product of (1) the highest price at
which the Common Stock is traded on the date of the Event of Default (or the
most recent highest closing bid price if the Common Stock is not traded on such
date) divided by the Conversion Price in effect as of the date of the Event of
Default, and (2) the sum of the Stated Value
18
<PAGE>
and all accrued and unpaid Conversion Failure Payments (if any) through the date
of prepayment.
(c) Events of Default. An "Event of Default" means any one of the following:
(i) a Conversion Failure described in Section 11(a) hereof;
(ii) a Share Authorization Failure described in Section 10(b)
hereof, if such Share Authorization Failure continues uncured for (x) fifteen
(15) days following a Reservation Trigger Date if such increase requires solely
the approval of the Company's Board of Directors and (y) sixty (60) days after
the Reservation Trigger Date if such increase requires approval of the Company's
shareholders;
(iii) the Company fails, and such failure continues uncured for
three (3) business days after the Company has been notified thereof in writing
by a Holder, to satisfy the share reservation requirements of Section 10 hereof;
(iv) the Company fails to maintain an effective registration
statement as required by Section 2, Section 3 or Section 6 of the Registration
Rights Agreement between the Company and the Holder(s) (the "Registration Rights
Agreement") except where such failure lasts no longer than three (3) consecutive
trading days and is caused solely by failure of the Securities and Exchange
Commission to timely review the customary submission of or respond to the
customary requests of the Company;
(v) for three (3) consecutive trading days or for an aggregate of
ten (10) trading days in any nine (9) month period, the Common Stock (including
any of the shares of Common Stock issuable upon conversion of the Series a
Preferred Stock and exercise of the Common Warrants) is (i) suspended from
trading on any of the NASDAQ SmallCap, NMS, NYSE, AMEX or the OTC Bulletin
Board, or (ii) is not qualified for trading on at least one of NASDAQ SmallCap,
NMS, NYSE, AMEX or the OTC Bulletin Board;
19
<PAGE>
(vi) the Company fails, and such failure continues uncured for three
(3) business days after the Company has been notified thereof in writing by a
Holder, to remove any restrictive legend on any certificate for any shares of
Common Stock issued to a Holder upon conversion of any Series A Preferred Stock
as and when required by this Certificate of Designation and the Subscription
Agreement, between the Company and the Holder(s) (the "Subscription Agreement")
or the Resignation Rights Agreement;
(vii) the Company breaches, and such breach continues uncured for
three (3) business days after the Company has been notified thereof in writing
by a Holder, any significant covenant or other material term or condition of
this Certificate of Designation, the Subscription Agreement or the Registration
Rights Agreement;
(viii) any representation or warranty of the Company made herein or
in any agreement, statement or certificate given in writing pursuant hereto or
in connection herewith (including, without limitation, the Subscription
Agreement and Registration Rights Agreement), shall be false or misleading in
any material respect when made;
(ix) the Company or any subsidiary of the Company shall make an
assignment for the benefit of its creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for a substantial part of its
property or business, or such receiver or trustee shall otherwise be appointed;
(x) bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Company or any
subsidiary of the Company (and such proceedings shall continue unstayed for
thirty (30) days); or
(xi) the Company fails to file a registration statement on Form 10
(to register securities pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934) within sixty (60) days of the Initial Issuance Date (as
defined in Section 5 of the Company's Certificate of Designation of
20
<PAGE>
Preferred Stock), or such registration statement is not declared effective
within one hundred fifty (150) days of the Initial Issuance Date.
(d) Failure to Pay Damages Amount. If the Company fails to pay the
Holder Demand Prepayment Amount within five (5) business days of its receipt of
a Demand Prepayment Notice, then such Holder shall have the right, at any time
and from time to time prior to the payment of the Holder Demand Prepayment
Amount, to require the Company, upon written notice, to immediately convert (in
accordance with the terms of Section 5) all or any portion of the Holder Demand
Prepayment Amount, into shares of Common Stock at the then current Conversion
Price, provided that if the Company has not delivered the full number of shares
of Common Stock issuable upon such conversion within five (5) business days
after the Company receives written notice of such conversion, the Conversion
Price with respect to such Holder Demand Prepayment Amount shall thereafter be
deemed to be at the lowest Conversion Price in effect during the period
beginning on the date of the Event of Default through the date on which the
Company delivers to the Holder the full number of freely tradable shares of
Common Stock issuable upon such conversion. In the event the Company is not able
to pay all amounts due and payable with respect to all Series A Preferred Stock
subject to Holder Demand Prepayment Notices, the Company shall pay the Holders
such amounts pro rata, based on the total amounts payable to such Holder
relative to the total amounts payable to all Holders.
This Amendment was duly adopted by the Board of Directors of the
Corporation as permitted under the authority of Section 78.1955 of the Nevada
Revised Statutes, as amended and the Corporation's Articles of Incorporation.
Date: April 7, 1999. Motorcycle Centers of America, Inc.
By
---------------------------------
President
and
-------------------------------
Secretary
21
<PAGE>
STATE OF COLORADO )
) SS:
COUNTY OF ARAPAHOE )
On this __ day of _________, 1999, before me, a Notary Public, personally
appeared Jay Boisdrenghein, the President of Motorcycle Centers of America,
Inc., who acknowledged that he executed the above instrument.
--------------------------
NOTARY PUBLIC
My Commission Expires:
STATE OF COLORADO )
) SS:
COUNTY OF ARAPAHOE )
On this __ day of _________, 1999, before me, a Notary Public, personally
appeared David Wollins, the Assistant Secretary of Motorcycle Centers of
America, Inc., who acknowledged that he executed the above instrument.
--------------------------
NOTARY PUBLIC
My Commission Expires:
22
<PAGE>
EXHIBIT 3.04
BYLAWS
OF
MOTORCYCLE CENTERS OF AMERICA, INC.
as of April 10, 1998
ARTICLE I
Offices
-------
The principal office of the Corporation shall initially be located at 6909
South Holly Street, Englewood, Colorado 80112 and other offices at such places
within or without the State of Nevada and as the Board of Directors may from
time to time establish.
ARTICLE II
Registered Office and Agent
---------------------------
The registered office of the Corporation shall be located at 251 Jeanell
Drive, Suite 3, Carson City, Nevada 89703, and the registered agent shall be
Corporate Advisory Service, Inc. The Board of Directors may, by appropriate
resolution from time to time, change the registered office and/or agent.
ARTICLE III
Meetings of Stockholders
------------------------
Section 1. Annual Meetings. The annual meeting of the Stockholders for
---------------
the election of Directors and for the transaction of such other business as may
properly come before such meeting shall be held at such time and date as the
Board of Directors shall designate from time to time by resolution duly adopted.
Section 2. Special Meetings. A special meeting of the Stockholders may
----------------
be called at any time by the President, the Chairman of the Board of Directors,
or the Board of Directors, and shall be called by the President or the Chairman
of the Board of Directors upon the written request of Stockholders of record
holding in the aggregate fifty-one percent (51%) or more of the
<PAGE>
outstanding shares of stock of the Corporation entitled to vote, such written
request to state the purpose or purposes of the meeting and to be delivered to
the President or the Chairman of the Board of Directors.
Section 3. Place of Meetings. All meetings of the Stockholders shall be
-----------------
held at the principal office of the Corporation or at such other place, within
or without the State of Nevada, as shall be determined from time to time by the
Board of Directors or the Stockholders of the Corporation.
Section 4. Change in Time or Place of Meetings. The time and place
-----------------------------------
specified in this Article III for annual meetings shall not be changed within
thirty (30) days next before the day on which such meeting is to be held. A
notice of any such change shall be given to each Stockholder at least twenty
(20) days before the meeting, in person or by letter mailed to his last known
post office address.
Section 5. Notice of Meetings. Written notice, stating the place, day
------------------
and hour of the meeting, and in the case of a special meeting, the purposes for
which the meeting is called, shall be given by or under the direction of either
the President, the Chairman of the Board of Directors, or Secretary at least ten
(10) days but not more than fifty (50) days before the date fixed for such
meeting. Notice shall be given to each Stockholder entitled to vote at such
meeting, of record at the close of business on the day fixed by the Board of
Directors as a record date for the determination of the Stockholders entitled to
vote at such meeting, or if no such date has been fixed, of record at the close
of business on the day next preceding the day on which notice is given. Notice
shall be in writing and shall be delivered to each Stockholder in person or sent
by United States Mail, postage prepaid, addressed as set forth on the books of
the Corporation. A waiver of such notice, in writing, signed by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent to such notice. Except as otherwise
required by statute, notice of any adjourned meeting of the Stockholders shall
not be required.
Section 6. Quorum. Except as may otherwise be required by statute, the
------
presence at any meeting, in person or by proxy, of the holders of record of one-
third of the shares then issued and outstanding and entitled to vote shall be
necessary and sufficient to constitute a quorum for the transaction of business.
In the absence of a quorum, a majority in interest of the Stockholders entitled
to vote, present in person or by proxy, or, if no
<PAGE>
Stockholder entitled to vote is present in person or by proxy, any Officer
entitled to preside or act as secretary of such meeting, may adjourn the meeting
from time to time for a period not exceeding sixty (60) days in any one case. At
any such adjourned meeting at which a quorum may be present, any business may be
transacted which might have been transacted at the meeting as originally called.
The Stockholders present at a duly organized meeting may continue to do business
until adjournment, notwithstanding the withdrawal of enough Stockholders to
leave less than a quorum.
Section 7. Voting. Except as may otherwise be provided by statute or
------
these Bylaws, including the provisions of Section 4 of Article VIII hereof, each
Stockholder shall at every meeting of the Stockholders be entitled to one (1)
vote, in person or by proxy, for each share of the voting capital stock held by
such Stockholder. However, no proxy shall be voted on after eleven (11) months
from its date, unless the proxy provides for a longer period. At all meetings of
the Stockholders, except as may otherwise be required by statute, the Articles
of Incorporation of this Corporation, or these Bylaws, if a quorum is present,
the affirmative vote of the majority of the shares represented at the meeting
and entitled to vote on the subject matter shall be the act of the Stockholders.
Persons holding stock in a fiduciary capacity shall be entitled to vote the
shares so held, and persons whose stock is pledged shall be entitled to vote,
unless in the transfer by the pledgor on the books of the Corporation he shall
have expressly empowered the pledgee to vote thereon, in which case only the
pledgee or his proxy may represent said stock and vote thereon.
Shares of the capital stock of the Corporation belonging to the Corporation
shall not be voted directly or indirectly.
Section 8. Consent of Stockholders in Lieu of Meeting. Whenever the vote
------------------------------------------
of Stockholders at a meeting thereof is required or permitted to be taken in
connection with any corporate action, by any provision of statute, these Bylaws,
or the Articles of Incorporation, the meeting and vote of Stockholders may be
dispensed with if all the Stockholders who would have been entitled to vote upon
the action if such meeting were held shall consent in writing to such corporate
action being taken.
3
<PAGE>
Section 9. Telephonic Meeting. Any meeting held under this Article III
------------------
may be held by telephone, in accordance with the provisions of the Nevada
Private Corporations Act.
Section 10. List of Stockholders Entitled to Vote. The Officer who has
-------------------------------------
charge of the stock ledger of the Corporation shall prepare and make, at least
ten (10) days before every annual meeting, a complete list of the Stockholders
entitled to vote at such meeting, arranged in alphabetical order, and showing
the address of each Stockholder and the number of shares registered in the name
of each Stockholder. Such list shall be open to the examination of any
Stockholder during ordinary business hours, for a period of at least ten (10)
days prior to election, either at a place within the city, town or village where
the election is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where said meeting is to be held.
The list shall be produced and kept at the time and place of election during the
whole time thereof and be subject to the inspection of any Stockholder who may
be present.
ARTICLE IV
Board of Directors
------------------
Section 1. General Powers. The business and affairs of the Corporation
--------------
shall be managed by the Board of Directors, except as otherwise provided by
statute, the Articles of Incorporation of the Corporation, or these Bylaws.
Section 2. Number and Qualifications. The Board of Directors shall
-------------------------
consist of at least one (1) member, and not more than nine (9) members, as shall
be designated by the Board of Directors from time to time, and in the absence of
such designation, the Board of Directors shall consist of one (1) member. This
number may be changed from time to time by resolution of the Board of Directors.
Directors need not be residents of the State of Nevada or Stockholders of the
Corporation. Directors shall be natural persons of the age of eighteen (18)
years or older.
Section 3. Election and Term of Office. Members of the initial Board of
---------------------------
Directors of the Corporation shall hold office until the first annual meeting of
Stockholders. At the first annual
4
<PAGE>
meeting of Stockholders, and at each annual meeting thereafter, the Stockholders
shall elect Directors to hold office until the next succeeding annual meeting.
Each Director shall hold office until his successor is duly elected and
qualified, unless sooner displaced. Election of Directors need not be by ballot.
Section 4. Compensation. The Board of Directors may provide by
------------
resolution that the Corporation shall allow a fixed sum and reimbursement of
expenses for attendance at meetings of the Board of Directors and for other
services rendered on behalf of the Corporation. Any Director of the Corporation
may also serve the Corporation in any other capacity, and receive compensation
therefor in any form, as the same may be determined by the Board in accordance
with these Bylaws.
Section 5. Removals and Resignations. Except as may otherwise be
-------------------------
provided by statute, the Stockholders may, at any special meeting called for the
purpose, by a vote of the holders of the majority of the shares then entitled to
vote at an election of Directors, remove any or all Directors from office, with
or without cause.
A Director may resign at any time by giving written notice to either the
Board of Directors, the President, the Chairman of the Board of Directors, or
the Secretary of the Corporation. The resignation shall take effect immediately
upon the receipt of the notice, or at any later period of time specified
therein. The acceptance of such resignation shall not be necessary to make it
effective, unless the resignation requires acceptance for it to be effective.
Section 6. Vacancies. Any vacancy occurring in the office of a
---------
Director, whether by reason of an increase in the number of directorships or
otherwise, may be filled by a majority of the Directors then in office, though
less than a quorum. A Director elected to fill a vacancy shall be elected for
the unexpired term of his predecessor in office, unless sooner displaced.
When one or more Directors resign from the Board, effective at a future
date, a majority of the Directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies, the vote thereon
to take effect when such resignation or resignations shall become effective.
Each Director so chosen shall hold office as herein provided in the filling of
5
<PAGE>
other vacancies.
Section 7. Committees. By resolution adopted by a majority of the Board
----------
of Directors, the Board may designate one or more committees, including an
Executive Committee, each consisting of one (1) or more Directors. The Board of
Directors may designate one (1) or more Directors as alternate members of any
such committee, who may replace any absent or disqualified member at any meeting
of such committee. Any such committee, to the extent provided in the resolution
and except as may otherwise be provided by statute, shall have and may exercise
the powers of the Board of Directors in the management of the business and
affairs of the Corporation and may authorize the seal of the Corporation to be
affixed to all papers which may require the same. The designation of such
committee and the delegation thereto of authority shall not operate to relieve
the Board of Directors, or any member thereof, of any responsibility imposed
upon it or him by law. If there be more than two (2) members on such committee,
a majority of any such committee may determine its action and may fix the time
and place of its meetings, unless provided otherwise by the Board. If there be
only two (2) members, unanimity of action shall be required. Committee action
may be by way of a written consent signed by all committee members. The Board
shall have the power at any time to fill vacancies on committees, to discharge
or abolish any such committee, and to change the size of any such committee.
Except as otherwise prescribed by the Board of Directors, each committee
may adopt such rules and regulations governing its proceedings, quorum, and
manner of acting as it shall deem proper and desirable.
Each such committee shall keep a written record of its acts and proceedings
and shall submit such record to the Board of Directors. Failure to submit such
record, or failure of the Board to approve any action indicated therein will
not, however, invalidate such action to the extent it has been carried out by
the Corporation prior to the time the record of such action was, or should have
been, submitted to the Board of Directors as herein provided.
ARTICLE V
Meetings of Board of Directors
------------------------------
6
<PAGE>
Section 1. Annual Meetings. The Board of Directors shall meet each year
---------------
immediately after the annual meeting of the Stockholders for the purpose of
organization, election of Officers, and consideration of any other business that
may properly be brought before the meeting. No notice of any kind to either old
or new members of the Board of Directors for such annual meeting shall be
necessary.
Section 2. Regular Meetings. The Board of Directors from time to time
----------------
may provide by resolution for the holding of regular meetings and fix the time
and place of such meetings. Regular meetings may be held within or without the
State of Nevada. The Board need not give notice of regular meetings provided
that the Board promptly sends notice of any change in the time or place of such
meetings to each Director not present at the meeting at which such change was
made.
Section 3. Special Meetings. The Board may hold special meetings of the
----------------
Board of Directors at any place, either within or without the State of Nevada,
at any time when called by the President, the Chairman of the Board of
Directors, or two or more Directors. Notice of the time and place thereof shall
be given to and received by each Director at least three (3) days before the
meeting. A waiver of such notice in writing, signed by the person or persons
entitled to said notice, either before or after the time stated therein, shall
be deemed equivalent to such notice. Notice of any adjourned special meeting of
the Board of Directors need not given.
Section 4. Quorum. The presence, at any meeting, of a majority of the
------
total number of Directors shall be necessary and sufficient to constitute a
quorum for the transaction of business. Except as otherwise required by statute,
the act of a majority of the Directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors; however, if only two (2)
Directors are present, unanimity of action shall be required. In the absence of
a quorum, a majority of the Directors present at the time and place of any
meeting may adjourn such meeting from time to time until a quorum is present.
Section 5. Consent of Directors in Lieu of Meeting. Unless otherwise
---------------------------------------
restricted by statute, the Board may take any action required or permitted to be
taken at any meeting of the Board of Directors without a meeting, if a written
consent thereto is signed
7
<PAGE>
by all members of the Board, and such written consent is filed with the minutes
of proceedings of the Board.
Section 6. Telephonic Meeting. Any meeting held under this Article V
------------------
may be held by telephone, in accordance with the provisions of the Nevada
Private Corporations Act.
Section 7. Attendance Constitutes Waiver. Attendance of a Director at a
-----------------------------
meeting constitutes a waiver of any notice to which the Director may otherwise
have been entitled, except where a Director attends a meeting for the express
purpose of objecting the transaction of any business because the meeting is not
lawfully called or convened.
ARTICLE VI
Officers
--------
Section 1. Number. The Corporation shall have a Chairman of the Board,
------
a President, one or more Vice Presidents as the Board may from time to time
elect, a Secretary and a Treasurer, and such other Officers and Agents as may be
deemed necessary. One person may hold any two offices.
Section 2. Election, Term of Office, and Qualifications. The Board shall
--------------------------------------------
choose the Officers specifically designated in Section 1 of this Article VI at
the annual meeting of the Board of Directors and such Officers shall hold office
until their successors are chosen and qualified, unless sooner displaced.
Officers need not be Directors of the Corporation.
Section 3. Subordinate Officers. The Board of Directors, from time to
--------------------
time, may appoint other Officers and Agents, including one or more Assistant
Secretaries and one or more Assistant Treasurers, each of whom shall hold office
for such period, and each of whom shall have such authority and perform such
duties as are provided in these Bylaws or as the Board of Directors from time to
time may determine. The Board of Directors may delegate to any Officer or the
Chairman of the Board of Directors the power to appoint any such subordinate
Officers and Agents and to prescribe their respective authorities and duties.
Section 4. Removals and Resignations. The Board of
-------------------------
8
<PAGE>
Directors may, by vote of a majority of their entire number, remove from office
any Officer or Agent of the Corporation, appointed by the Board of Directors.
Any Officer may resign at any time by giving written notice to the Board of
Directors. The resignation shall take effect immediately upon the receipt of
the notice, or any later period of time specified therein. The acceptance of
such resignation shall not be necessary to make it effective, unless the
resignation requires acceptance for it to be effective.
Section 5. Vacancies. Whenever any vacancy shall occur in any office by
---------
death, resignation, removal, or otherwise, it shall be filled for the unexpired
portion of the term in the manner prescribed by these Bylaws for the regular
election or appointment to such office, at any meeting of Directors.
Section 6. The Chairman of the Board. The Chairman of the Board shall be
-------------------------
the Chief Executive Officer of the Corporation and, subject to the direction and
under the supervision of the Board of Directors, shall have general charge of
all of the affairs of the Corporation. The Chairman shall preside at all
meetings of the Stockholders and of the Board of Directors at which he is
present.
Section 7. The President. The President shall be the chief operating
-------------
officer of the Corporation and, subject to the direction and under the
supervision of the Board of Directors, shall have general charge of the day-to-
day operations and of the property of the Corporation, and shall have control
over its Officers, Agents and Employees. The President shall preside at all
meetings of the Stockholders and of the Board of Directors at which the Chairman
is not present. The President shall do and perform such other duties and may
exercise such other powers as these Bylaws or the Board of Directors from time
to time may assign to him.
Section 8. The Vice President. At the request of the President or in
------------------
the event of his absence or disability, the Vice President, or in case there
shall be more than one Vice President, the Vice President designated by the
President, or in the absence of such designation, the Vice President designated
by the Board of Directors, shall perform all the duties of the President, and
when so acting, shall have all the powers of, and be subject to all the
restrictions upon, the President. Any Vice President shall perform such other
duties and may exercise such her powers as from time to
9
<PAGE>
time these Bylaws or by the Board of Directors or the President be assign to
him.
Section 9. The Secretary. The Secretary shall:
-------------
a. record all the proceedings of the meetings of the Corporation and
Directors in a book to be kept for that purpose;
b. have charge of the stock ledger (which may, however, be kept by any
transfer agent or agents of the Corporation under the direction of
the Secretary), an original or duplicate of which shall be kept at
the principal office or place of business of the Corporation;
c. see that all notices are duly and properly given;
d. be custodian of the records of the Corporation and the Board of
Directors, and the and of the seal of the Corporation, and see that
the seal is affixed to all stock certificates prior to their
issuance and to all documents for which the Corporation has
authorized execution on its behalf under its seal;
e. see that all books, reports, statements, certificates, and other
documents and records required by law to be kept or filed are
properly kept or filed;
f. in general, perform all duties and have all powers incident to the
office of Secretary, and perform such other duties and have such
other powers as these Bylaws, the Board of Directors, the Chairman
of the Board of Directors, or the President from time to time may
assign to him; and
g. prepare and make, at least ten (10) days before every election of
Directors, a complete list of the Stockholders entitled to vote at
said election, arranged in alphabetical order.
Section 10. The Treasurer. The Treasurer shall:
-------------
10
<PAGE>
a. have supervision over the funds, securities, receipts and
disbursements of the Corporation;
b. cause all moneys and other valuable effects of the Corporation to
be deposited in its name and to its credit, in such depositories as
the Board of Directors or, pursuant to authority conferred by the
Board of Directors, its designee shall select;
c. cause the funds of the Corporation to be disbursed by checks or
drafts upon the authorized depositaries of the Corporation, when
such disbursements shall have been duly authorized;
d. cause proper vouchers for all moneys disbursed to be taken and
preserved;
e. cause correct books of accounts of all its business and
transactions to be kept at the principal office of the Corporation;
f. render an account of the financial condition of the Corporation and
of his transactions as Treasurer to the President, the Chairman of
the Board of Directors, or the Board of Directors, whenever
requested;
g. be empowered to require from the Officers or Agents of the
Corporation reports or statements giving such information as he may
desire with respect to any and all financial transactions of the
Corporation; and
h. in general, perform all duties and have all powers incident to the
office of Treasurer and perform such other duties and have such
other powers as from time to time may be assigned to him by these
Bylaws or by the Chairman of the Board of Directors, the Board of
Directors or the President.
Section 11. Salaries. The Board of Directors shall from time to time fix
--------
the salaries of the Officers of the Corporation. The Board of Directors may
delegate to any person the power to fix the salaries or other compensation of
any Officers or Agents appointed, in accordance with the provisions of Section 3
of this
11
<PAGE>
Article VI. No Officer shall be prevented from receiving such salary by
reason of the fact that he is also a Director of the Corporation. Nothing
contained in this Bylaw shall be construed so as to obligate the Corporation to
pay any Officer a salary, which is within the sole discretion of the Board of
Directors.
Section 12. Surety Bond. The Board of Directors may in its discretion
-----------
secure the fidelity of any or all of the Officers of the Corporation by bond or
otherwise.
ARTICLE VII
Execution of Instruments
------------------------
Section 1. Checks, Drafts, Etc. The President or the Chairman of the
---------------------------------
Board of Directors and the Secretary or Treasurer shall sign all checks, drafts,
notes, bonds, bills of exchange, and orders for the payment of money of the
Corporation, and all assignments or endorsements of stock certificates,
registered bonds, or other securities, owned by the Corporation, unless
otherwise directed by the Board of Directors, or unless otherwise required by
law.. The Board of Directors or the Chairman of the Board of Directors may,
however, authorize any Officer or the Chairman of the Board to sign any of such
instruments for and on behalf of the Corporation without necessity of
countersignature, and may designate Officers, or Employees of the Corporation
other than those named above who may, in the name of the Corporation, sign such
instruments.
Section 2. Execution of Instruments Generally. Subject always to the
----------------------------------
specific direction of the Board of Directors, the President or the Chairman of
the Board of Directors shall execute all deeds and instruments of indebtedness
made by the Corporation and all other written contracts and agreements to which
the Corporation shall be a party, in its name, attested by the Secretary. The
Secretary, when necessary required, shall affix the corporate seal thereto.
Section 3. Proxies. The President, the Chairman of the Board and the
-------
Secretary or an Assistant Secretary of the Corporation or by any other person or
persons duly authorized by the Board of Directors may execute and deliver
proxies to vote with respect to shares of stock of other corporations owned by
or
12
<PAGE>
standing in the name of the Corporation from time to time on behalf of the
Corporation.
ARTICLE VIII
Capital Stock
-------------
Section 1. Certificates of Stock. Every holder of stock in the
---------------------
Corporation shall be entitled to have a certificate, signed in the name of the
Corporation by either the Chairman of the Board of Directors or the President
and by the Secretary of the Corporation, certifying the number of shares owned
by that person in the Corporation.
Certificates of stock shall be in such form as shall, in conformity to law,
be prescribed from time to time by the Board of Directors.
Section 2. Transfer of Stock. Shares of stock of the Corporation shall
-----------------
only be transferred on the books of the Corporation by the holder of record
thereof or by his attorney duly authorized in writing, upon surrender to the
Corporation of the certificates for such shares endorsed by the appropriate
person or persons, with such evidence of the authenticity of such endorsement,
transfer, authorization and other matters as the Corporation may reasonably
require. Surrendered certificates shall be canceled and shall be attached to
their proper stubs in the stock certificate book.
Section 3. Rights of Corporation with Respect to Registered Owners.
-------------------------------------------------------
Prior to the surrender to the Corporation of the certificates for shares of
stock with a request to record the transfer of such shares, the Corporation may
treat the registered owner as the person entitled to receive dividends, to vote,
to receive notifications, and otherwise to exercise all the rights and powers of
an owner.
Section 4. Closing Stock Transfer Book. The Board of Directors may
---------------------------
close the Stock Transfer Book of the Corporation for a period not exceeding
fifty (50) days preceding the date of any meeting of Stockholders, the date for
payment of any dividend, the date for the allotment of rights, the date when any
change, conversion or exchange of capital stock shall go into effect, or
13
<PAGE>
for a period of not exceeding fifty (50) days in connection with obtaining the
consent of Stockholders for any purpose. However, in lieu of closing the Stock
Transfer Book, the Board of Directors may in advance fix a date, not exceeding
fifty (50) days preceding the date of any meeting of Stockholders, the date for
the payment of any dividend, the date for the allotment of rights, the date when
any change or conversion or exchange of capital stock shall go into effect, or a
date in connection with obtaining such consent, as a record date for the
determination of the Stockholders entitled to notice of, and to vote at, any
such meeting and any adjournment thereof, or entitled to receive payment of any
such dividend, or to any such allotment of rights, or to exercise the rights in
respect of any such change, conversion or exchange of capital stock, or to give
such consent. In such case such Stockholders of record on the date so fixed, and
only such Stockholders shall be entitled to such notice of, and to vote at, such
meeting and any adjournment thereof, or to receive payment of such dividend, or
to receive such allotment of rights, or to exercise such rights, or to give such
consent, as the case may be, notwithstanding any transfer of any stock on the
books of the Corporation after any such record date fixed as aforesaid.
Section 5. Lost, Destroyed and Stolen Certificates. The Corporation may
---------------------------------------
issue a new certificate of shares of stock in the place of any certificate
theretofore issued and alleged to have been lost, destroyed or stolen. However,
the Board of Directors may require the owner of such lost, destroyed or stolen
certificate or his legal representative, to: (a) request a new certificate
before the Corporation has notice that the shares have been acquired by a bona
fide purchaser; (b) furnish an affidavit as to such loss, theft or destruction;
(c) file with the Corporation a sufficient indemnity bond; or (d) satisfy such
other reasonable requirements, including evidence of such loss, destruction, or
theft as may be imposed by the Corporation.
ARTICLE IX
Dividends
---------
Section 1. Sources of Dividends. The Directors of the Corporation,
--------------------
subject to the Nevada Revised Statutes, as amended, may declare and pay
dividends upon the shares of the capital stock of the Corporation.
14
<PAGE>
Section 2. Reserves. Before the payment of any dividend, the Directors
--------
of the Corporation may set apart out of any of the funds of the Corporation
available for dividends a reserve or reserves for any proper purpose, and the
Directors may abolish any such reserve in the manner in which it was created.
Section 3. Reliance on Corporate Records. A Director in relying in good
-----------------------------
faith upon the books of account of the Corporation or statements prepared by any
of its officials as to the value and amount of the assets, liabilities, and net
profits of the Corporation, or any other facts pertinent to the existence and
amount of surplus or other funds from which dividends might properly be declared
and paid shall be fully protected.
Section 4. Manner of Payment. Dividends may be paid in cash, in
-----------------
property, or in shares of the capital stock of the Corporation.
ARTICLE X
Seal and Fiscal Year
--------------------
Section 1. Seal. The corporate seal, subject to alteration by the Board
----
of Directors, shall be in the form of a circle, shall bear the name of the
Corporation, and shall indicate its formation under the laws of the State of
Nevada and the year of incorporation. Such seal may be used by causing it or a
facsimile thereof to be impressed, affixed, or otherwise re- produced.
Section 2. Fiscal Year. The Board of Directors shall, in its sole
-----------
discretion, designate a fiscal year for the Corporation.
ARTICLE XI
Amendments
----------
Except as may otherwise be provided herein, a majority vote of the whole
Board of Directors at any meeting of the Board, is required to amend or repeal
any provision of these Bylaws.
ARTICLE XII
15
<PAGE>
Indemnification of Officers and Directors
-----------------------------------------
Section 1. Exculpation. No Director or Officer of the Corporation shall
-----------
be liable for the acts, defaults, or omissions of any other Director or Officer,
or for any loss sustained by the Corporation, unless the same has resulted from
his own willful misconduct, willful neglect, or gross negligence.
Section 2. Indemnification. Each Director and Officer of the
---------------
Corporation and each person who shall serve at the Corporation's request as a
director or officer of another corporation in which the Corporation owns shares
of capital stock or of which it is a creditor shall be indemnified by the
Corporation to the fullest extent permitted from time to time by the Nevada
Revised Statutes against all reasonable costs, expenses and liabilities
(including reasonable attorneys' fees) actually and necessarily incurred by or
imposed upon him in connection with, or resulting from any claim, action, suit,
proceeding, investigation, or inquiry of whatever nature in which he may be
involved as a party or otherwise by reason of his being or having been a
Director or Officer of the Corporation or such director or officer of such other
corporation, whether or not he continues to be a Director or Officer of the
Corporation or a director or officer of such other corporation, at the time of
the incurring or imposition of such costs, expenses or liabilities, except in
relation to matters as to which he shall be finally adjudged in such action,
suit, proceeding, investigation, or inquiry to be liable for willful misconduct,
willful neglect, or gross negligence toward or on behalf of the Corporation in
the performance of his duties as such Director or Officer of the Corporation or
as such director or officer of such other corporation. As to whether or not a
Director or Officer was liable by reason of willful misconduct, willful neglect,
or gross negligence toward or on behalf of the Corporation in the performance of
his duties as such Director or Officer of the Corporation or as such director or
officer of such other corporation, in the absence of such final adjudication of
the existence of such liability, the Board of Directors and each Director and
Officer may conclusively rely upon an opinion of independent legal counsel
selected by or in the manner designated by the Board of Directors. The foregoing
right to indemnification shall be in addition to and not in limitation of all
other rights which such person may be entitled as a matter of law, and shall
inure to his legal representatives' benefit.
16
<PAGE>
Section 3. Liability Insurance. The Corporation may purchase and
-------------------
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation or who is or was serving at the request of
the Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, association, or other enterprise
against any liability asserted against him and incurred by him in any such
capacity or arising out of his status as such, whether or not he is indemnified
against such liability by this Article XII.
17
<PAGE>
EXHIBIT 3.05
FILED
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE
STATE OF NEVADA
APR 13 1998
No. C7977-98
---------------
/s/ Dean Heller
DEAN HELLER, SECRETARY OF STATE
DESIGNATION OF STOCK
OF
Motorcycle Centers of America, Inc.
We the undersigned, Jay Boisdrenghein, President, and David Wollins,
Assistant Secretary of Motorcycle Centers of America, Inc. (The Corporation) do
hereby certify:
That the Board of Directors of the Corporation, by resolution dated March
29, 1999, adopted a resolution to amend the original articles as follows:
Section 1. Designation. The Corporation hereby establishes a new class of shares
of the Corporation's $0.10 per share Preferred Stock, which shall be designated
as Series A 6% Convertible Preferred Stock (the "Series A Preferred Stock") and
the number of shares constituting the Series A Preferred Stock shall be ten
million (10,000,000). The Series A Preferred Stock shall be offered at a
purchase price of Three Dollars and Sixty Cents ($3.60) per share (the "Original
Series A Issue Price"), with a six percent (6%) per annum accretion rate as set
forth herein.
Section 2. Rank. The Series A Preferred Stock shall rank: (a) junior to any
other class or series of capital stock of the Company other than Common Stock
(defined below) hereafter created specifically ranking by its terms senior to
the Series A Preferred Stock (collectively, the "Senior Securities"); (b) senior
and prior to all of the Company's Common Stock, $.001 par value per share
("Common Stock"); (c) senior and prior to any class or series of capital stock
of the Company hereafter created not specifically ranking by its terms senior to
or on parity with any Series A Preferred Stock of whatever subdivision
(collectively, with the Common Stock, "Junior Securities"); and (d) on parity
with any class or series of capital stock of the Company hereafter created
specifically ranking by its terms on parity with the Series A Preferred Stock
("Parity
1
<PAGE>
Securities") in each case as to distributions of assets upon liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary (all
such distributions being referred to collectively as "Distributions").
Section 3. Dividends. The Series A Preferred Stock will bear no dividends, and
the holders of the Series A Preferred Stock ("Holders") shall not be entitled to
receive dividends on the Series A Preferred Stock.
Section 4. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
the Company ("Liquidation Event"), either voluntary of involuntary, the then
Holders of shares of Series A Preferred Stock shall be entitled to receive,
immediately after any distributions to Senior Securities required by the
Company's Certificate of Incorporation or any certificate of designation, and
prior in preference to any distribution to Junior Securities but in parity with
any distribution to Parity Securities, an amount per share equal to the sum of
(i) the Original Series A Issue Price for each outstanding share of Series A
Preferred Stock and (ii) an amount equal to six percent (6%) of the Original
Series A Issue Price, per annum, accruing daily, for the period that has passed
since the date that, in connection with the consummation of the purchase by
Holder of shares of Series A Preferred Stock from the Company, the escrow agent
first received in its possession funds representing full payment for the shares
of Series A Preferred Stock (such amount being referred to herein as the
"Premium"). If upon the occurrence of such event, and after payment in full of
the preferential amounts with respect to the Senior Securities, the assets and
funds available to be distributed among the Holders of the Series A Preferred
Stock and Parity Securities shall be insufficient to permit the payment to such
Holders of the full preferential amounts due to the Holders of the Series A
Preferred Stock and the Parity Securities, respectively, then the entire assets
and funds of the Company legally available for distribution shall be distributed
among the Holders of the Series A Preferred Stock and the Parity Securities, pro
rata, based on the respective liquidation amounts to which each such series of
stock is entitled by the Company's Certificate of Incorporation and any
certificate(s) of designation relating thereto. (b) Upon the completion of the
distribution required by Subsection
2
<PAGE>
4(a), if assets remain in this Company, they shall be distributed to holders of
Junior Securities in accordance with the Company's Certificate of Incorporation
including any duly adopted certificate(s) of designation.
(c) At each Holder's option, a sale, conveyance or disposition of
all or substantially all of the assets of the Company or the effectuation by the
Company of a transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of the Company is disposed of shall be
deemed to be a Liquidation Event as defined in Section 4(a) hereof; provided,
further that (i) a consolidation, merger, acquisition, or other business
combination of the Company with or into any other publicly traded company or
companies, including those trading on the OTC Bulletin Board, shall not be
treated as a Liquidation Event as defined in Section 4(a) but instead shall be
treated pursuant to Section 5(d) hereof, and (ii) a consolidation, merger,
acquisition, reorganization or other business combination of the Company with or
into any other non-publicly traded company or companies shall be treated as a
Liquidation Event as defined in Section 4(a). The Company shall not effect any
transaction described in Subsection 4(c)(ii) unless it first gives thirty (30)
business days prior written notice of such transaction during which time the
Holder shall be entitled to immediately convert any or all of its shares of
Series A Preferred Stock into Common Stock at the Conversion Price, as defined
below, then in effect.
(d) In the event that, immediately prior to the closing of a
transaction described in Section 4(c) hereof which would constitute a
Liquidation Event, the cash distributions required by Section 4(a) or otherwise
hereunder, have not been made, the Company shall either: (i) cause such closing
to be reasonably postponed until such cash distributions have been made, (ii)
cancel such transaction, in which event the fights of the Holders of Series A
Preferred Stock shall be the same as existing immediately prior to such proposed
transaction, or (iii) agree, and shall require that any successor company
resulting from a Liquidation Event agrees, to make such distributions as quickly
after the closing of such Liquidation Event as reasonably practicable, upon the
same terms and in the same amounts as the Company would have made if such
distribution was made immediately prior to the closing of such transaction.
3
<PAGE>
Section 5. Conversion. Subject to Section 4(c) herein, the record
Holder(s) of the Series A Preferred Stock shall have conversion rights as
follows (the "Conversion Rights"):
Right to Convert. At any time following six months after the Initial
Issuance Date, the record Holder of the Series A Preferred Stock
shall be entitled to convert any or all of the aggregate principal
amount of the Series A Preferred Stock at the office of the Company
or its designated transfer agent (the "Transfer Agent"), into that
number of fully-paid and non-assessable shares of Common Stock
calculated in accordance with the following formula (the "Conversion
Rate"):
Number of shares of Common Stock issued upon conversion of one (1) share of
Series A Preferred Stock =
(.06) (N/365) ($3.60) + $3.60 Conversion Price
-----------------------------
where,
N = the number of days between (i) the date that, in connection with the
consummation of the initial purchase by Holder of shares of Series A
Preferred Stock from the Company, the escrow agent first received in its
possession funds representing full payment for the shares of Series A
Preferred Stock for which conversion is being elected, and (ii) the
applicable Date of Conversion (as defined in Section 5(b)(iv) below) for
the shares of Series A Preferred Stock for which conversion is being
elected, and
Conversion Price
(i) For the period commencing on the Initial Issuance Date, as defined
below, and ending seven (7) months thereafter, the Conversion Price is the
lesser of (a) $3.60; or (b) the Adjusted Conversion Price;
(ii) For the period commencing seven (7) months and one (1) day after the
Initial Issuance Date and ending nine months thereafter, the Conversion Price is
the lesser of (a) $3.60; (b) the Adjusted Conversion Price; or (c) 100% of the
average Closing Bid Price, as defined below, of the Company's Common Stock for
the thirty (30) trading days immediately preceding the date which is
4
<PAGE>
seven months after the Initial Issuance Date, but in no event shall the
Conversion Price be less than $2.00;
(iii) After the period which is nine (9) months and one (1) day after the
Initial Issuance Date, the Conversion Price is the lesser of (a) $3.60, or (b)
the Conversion Price set forth in Section 5(a)(ii), or (c) 100% of the average
of the lowest three consecutive Closing Bid price of the Company's Common Stock
for the twenty (20) trading days immediately preceding the Date of Conversion.
As used herein, "Fixed Conversion Price" shall be $3.60. "Variable
Conversion Price" shall be any Conversion price set forth in Section 5(a) other
than $3.60.
As used herein, "Adjusted Conversion Price" shall mean the Adjusted
Conversion Price in the table set forth on Exhibit 1 hereto.
As used herein, "Initial Issuance Date" shall mean the date of the first
closing of a purchase and sale of the Series A Preferred Stock that occurs
pursuant to the offering of the Series A Preferred Stock by the Company.
For purposes hereof, any Holder which acquires shares of Series A
Preferred Stock from another Holder (the "Transferor") and not upon original
issuance from the Company shall be entitled to exercise such Holder's conversion
right as to the percentages of such shares specified under Section 5(a) in such
amounts and at such times such that the number of shares eligible for conversion
by such Holder at any time shall be in the same proportion that the number of
shares of Series A Preferred Stock acquired by such Holder from its Transferor
bears to the total number of shares of Series A Preferred Stock originally
issued by the Company to such Transferor (or its predecessor Transferor). For
purposes hereof, the term "Closing Bid Price" shall mean the closing bid price
of the Company's Common Stock on the NASDAQ SmallCap Market, or if no longer
traded on the NASDAQ SmallCap Market, the closing bid price on the principal
national securities exchange or the
5
<PAGE>
over-the-counter system on which the Common Stock is so traded and if not
available, the mean of the high and low prices on the principal national
securities exchange or the over-the-counter system on which the Common Stock is
so traded.
(b) Mechanics of Conversion. In order to convert Series A Preferred Stock into
full shares of Common Stock, the Holder shall send via facsimile, or otherwise
deliver, on or prior to 11:59 p.m., New York City time (the "Conversion Notice
Deadline") on the Date of Conversion, a copy of the fully executed notice of
conversion ("Notice of Conversion") to the Company at the office of the Company
and to its designated transfer agent (the "Transfer Agent") for the Series A
Preferred Stock stating that the Holder elects to convert, which notice shall
specify the Date of Conversion, the number of shares of Series A Preferred Stock
to be converted, the applicable Conversion Price and a calculation of the number
of shares of Common Stock issuable upon such conversion (together with a copy of
the front page of each certificate to be converted). Upon receipt by the Company
of a facsimile copy of a Notice of Conversion, the Company shall immediately
send, via facsimile, a confirmation of receipt of the Notice of Conversion to
the Holder which shall specify that the Notice of Conversion has been received
and the name and telephone number of a contact person at the Company whom the
Holder should contact regarding information related to the Conversion. No later
than one (1) business day after receipt of such confirmation of receipt of
Notice of Conversion, the Holder shall surrender to a common courier for
delivery to the office of the Company or the Transfer Agent, the original
certificates representing the Series A Preferred Stock being converted (the
"Preferred Stock Certificates"), duly endorsed for transfer; provided, however,
that the Company shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless either the Preferred
Stock Certificates are delivered to the Company or its Transfer Agent as
provided above, or the Holder notifies the Company or its Transfer Agent that
such certificates have been lost, stolen or destroyed (subject to the
requirements of subparagraph (i) below). In the case of a dispute as to the
calculation of the Conversion Rate, the Company shall promptly issue to the
Holder the number of Shares that are not disputed and shall submit the disputed
calculations to its outside accountant via facsimile within three (3) days of
receipt of Holder's Notice of Conversion. The Company shall cause the accountant
to perform the calculations and notify the
6
<PAGE>
Company and Holder of the results no later than two (2) business days from the
time it receives the disputed calculations. The accountant's calculation shall
be deemed conclusive absent manifest error.
(i) Lost or Stolen Certificates. Upon receipt by the Company of
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificates representing shares of Series A Preferred Stock, and (in the case
of loss, theft or destruction) of indemnity or security reasonably satisfactory
to the Company, and upon surrender and cancellation of the Preferred Stock
Certificate(s), if mutilated, the Company shall execute and deliver new
Preferred Stock Certificate(s) of like tenor and date. However, the Company
shall not be obligated to re-issue such lost or stolen Preferred Stock
Certificates if Holder contemporaneously requests the Company to convert such
Series A Preferred Stock into Common Stock.
(ii) Delivery of Common Stock Upon Conversion. The Company shall, or
shall cause the Transfer Agent, no later than the close of business on the third
(3rd) business day (the "Deadline") after receipt by the Company or the Transfer
Agent of a facsimile copy of a Notice of Conversion and receipt by Company or
the Transfer Agent of all necessary documentation duly executed and in proper
form required for conversion, including the original Preferred Stock
Certificates to be converted (or after provision for security or indemnification
in the case of lost or destroyed certificates, if required), to issue and
surrender to a common courier for either overnight or (if delivery is outside
the United States) two (2) day delivery to the Holder at the address of the
Holder as shown on the stock records of the Company (A) a certificate for the
number of shares of Common Stock to which the Holder shall be entitled as
aforesaid, and (B) certificate(s) representing the number of shares of Series A
Preferred Stock not being exchanged, if necessary.
(iii) No Fractional Shares. If any conversion of the Series A
Preferred Stock would create a fractional share of Common Stock or a fight to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion,
in the aggregate, shall be the next higher number of shares.
7
<PAGE>
(iv) Date of Conversion. The date on which conversion occurs (the
"Date of Conversion") shall be deemed to be the date set forth in such Notice of
Conversion, provided (i) that the advance copy of the Notice of Conversion is
sent via facsimile to the Company before 11:59 p.m., New York City time, on the
Date of Conversion, and (ii) that the original Preferred Stock Certificates
representing the shares of Series A Preferred Stock to be converted are
surrendered by depositing such certificates with a common courier, for delivery
to the Company or the Transfer Agent as provided above, as soon as practicable
after the Date of Conversion, provided that the Date of Conversion shall not
occur less than six (6) months after the Initial Issuance Date. The person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record Holder or Holders of
such shares of Common Stock on the Date of Conversion.
(v) Taxes. The Company shall pay any and all taxes (other than
transfer taxes) which may be imposed with respect to the issuance and delivery
of the shares of Common Stock pursuant to conversion of the Series A Preferred
Stock.
(c) Automatic Conversion or Redemption. If at any time after 12
months following the initial effectiveness of the required registration of the
Company's Common Stock (under Section 2 of the Company's Registration Rights
Agreement relating to its Series A Preferred Stock) the Closing Bid Price of the
Company's Common Stock is $16.00 or more for twenty (20) consecutive trading
days ("Automatic Conversion Event"), then at any time following the Automatic
Conversion Event (regardless of whether the Closing Bid Price of the Company's
Common Stock shall at any time following the Automatic Conversion Event be less
than $16.00), each share of Series A Preferred Stock outstanding on the date of
the Automatic Conversion Event or, if not a business day, the first business day
thereafter ("Termination Date") automatically, at the option of the Company,
shall either (i) be converted ("Automatic Conversion") into Common Stock on such
date at the Conversion Rate then in effect (calculated in accordance with the
formula in Section 5(a) above), and the Termination Date shall be deemed the
Date of Conversion with respect to such conversion for purposes of this
Certificate of Designation, or (ii) be redeemed ("Automatic Redemption") by the
Company for cash
8
<PAGE>
in an amount equal to the Stated Value (as defined below) of the shares of
Series A Preferred Stock being redeemed. If the Company elects to redeem, on the
Termination Date, the Company shall send to the Holders of outstanding Series A
Preferred Stock notice (the "Automatic Redemption Notice") via facsimile of its
intent to effect an Automatic Redemption of the outstanding Series A Preferred
Stock. If the Company does not send such notice to Holder on such date, an
Automatic Conversion shall be deemed to have occurred. If an Automatic
Conversion occurs, the Company and the Holders shall follow the applicable
conversion procedures set forth in this Certificate of Designation; provided,
however, that the Holders are not required to send the Notice of Conversion
contemplated by Section 5(b) hereof. If the Company elects to redeem, each
Holder of outstanding Series A Preferred Stock shall send their certificates
representing the Series A Preferred Stock to the Company within five (5) days of
the date of receipt of the Automatic Redemption Notice from the Company, and the
Company shall pay the applicable redemption price to each respective Holder
within five (5) days of the receipt of such certificates. The Company shall not
be obligated to deliver the redemption price unless the certificates
representing the Series A Preferred Stock are delivered to the Company, or, in
the event one or more certificates have been lost, stolen, mutilated or
destroyed, unless the Holder has complied with Section 5(b)(i). If the Company
elects to redeem under this Section 5(c) and the Company fails to pay the
Holders the redemption price within five (5) days of its receipt of the
certificates representing the shares of Series A Preferred Stock to be redeemed
as required by this Section 5(c), then an Automatic Conversion shall be deemed
to have occurred and, upon receipt of the Preferred Stock certificates, the
Company shall immediately deliver to the Holders the certificates representing
the number of shares of Common Stock to which the Holders would have been
entitled upon Automatic Conversion.
As used herein, "Last Closing Date" shall mean the date of the last
closing of a purchase and sale of the Series A Preferred Stock that occurs
pursuant to the offering of the Series A Preferred Stock by the Company, and
"Stated Value" shall mean the Original Series A Issue Price (as defined in
Section 1 hereof) together with the accreted but unpaid Premium as defined in
Section 4(a).
9
<PAGE>
(d) Adjustment to Conversion Rate.
(i) Adjustment to Fixed Conversion Price Due to Stock Split, Stock
Dividend, Etc. If, prior to the conversion of all of the Series A Preferred
Stock, the number of outstanding shares of Common Stock is increased by a stock
split, stock dividend, or other similar event, the Fixed Conversion Price shall
be proportionately reduced, or if the number of outstanding shares of Common
Stock is decreased by a combination or reclassification of shares, or other
similar event, the Fixed Conversion Price shall be proportionately increased.
(ii) Adjustment to Variable Conversion Price. If, at any time when
any shares of the Series A Preferred Stock are issued and outstanding, the
number of outstanding shares of Common Stock is increased or decreased by a
stock split, stock dividend or other similar event, which event shall have taken
place during the reference period for determination of the Conversion Price for
any conversion of the Series A Preferred Stock, then the Variable Conversion
Price shall be calculated giving appropriate effect to the stock split, stock
dividend, combination, reclassification or other similar event for all relevant
trading days immediately preceding the Date of Conversion.
(iii) Adjustment Due to Merger, Consolidation, Etc. If, prior to the
conversion of all Series A Preferred Stock, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Company shall
be changed into the same or a different number of shares of the same or another
class or classes of stock or securities of the Company or another entity or
there is a sale of all or substantially all of the Company's assets or there is
a change of control transaction not deemed to be a Liquidation Event pursuant to
Section 4(c), then the Holders of Series A Preferred Stock shall thereafter have
the right to receive upon conversion of Series A Preferred Stock, upon the basis
and upon the terms and conditions specified herein in lieu of the shares of
Common Stock immediately theretofore issuable upon conversion, such stock,
securities and/or other assets which the Holder would have been entitled to
receive in such transaction had the Series A Preferred Stock been converted
immediately prior to such transaction, and in any such case appropriate
provisions shall be made with respect to the rights
10
<PAGE>
and interests of the Holders of the Series A Preferred Stock to the end that the
provisions hereof (including, without limitation, provisions for the adjustment
of the Conversion Price and of the number of shares issuable upon conversion of
the Series A Preferred Stock) shall thereafter be applicable, as nearly as may
be practicable in relation to any securities thereafter deliverable upon the
exercise hereof. The Company shall not effect any transaction described in this
Subsection 5(d)(iii) unless (A) it first gives at least thirty (30) days prior
written notice of such merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event (during which time the
Holder shall be entitled to convert its shares of Series A Preferred Stock into
Common Stock) and (B) the resulting successor or acquiring entity (if not the
Company) assumes by written instrument the obligations of the Company under this
Certificate of Designation including this Subsection 5(d)(iii).
(iv) No Fractional Shares. If any adjustment under this Section 5(d)
would create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon conversion shall be the next
higher number of shares.
Section 6. Voting Rights. Except as otherwise provided herein or by law,
the Holder(s) of Series A Preferred Stock, by virtue of their ownership thereof,
shall be entitled to cast the number of votes per share thereof on each matter
submitted to the Company's holders of Common Stock for voting as equals the
number of votes which could be cast by the Holders of the number of shares of
Common Stock into which such shares of Series A Preferred Stock could be
converted pursuant hereto immediately prior to the taking of such vote
(including, without limitation, any shares of Common Stock which would be
issuable in payment of accrued and unpaid interest thereon if such shares were
convened on the record date and the Company elected to pay such interest in
Common Stock). Such vote shall be cast together with those cast by the Holders
of Common Stock and not as a separate class except as otherwise provided herein.
Section 7. Protective Provision. So long as shares of Series A Preferred
Stock are outstanding, the Company shall not without first obtaining the
approval (by vote or written consent,
11
<PAGE>
as provided by Nevada Law) of the Holders of at least seventy-five percent (75%)
of the then outstanding shares of Series A Preferred Stock, and at least
seventy-five percent (75%) of the then outstanding Holders:
(a) alter or change the rights, preferences or privileges of the
Series A Preferred Stock or any securities so as to affect adversely the Series
A Preferred Stock;
(b) create any new class or series of stock having a preference over
or on parity with the Series A Preferred Stock with respect to Distributions (as
defined in Section 2 above) or increase the size of the authorized number of
Series A Preferred Stock; or
(c) do any act or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation of the holders of
shares of the Series A Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as mended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time mended).
In the event Holders of at least seventy-five percent (75%) of the then
outstanding shares of Series A Preferred Stock and at least seventy-five percent
(75%) of the then outstanding Holders agree to allow the Company to alter or
change the rights, preferences or privileges of the shares of Series A Preferred
Stock, pursuant to Subsection (a) above, so as to affect the Series A Preferred
Stock, then the Company will deliver notice of such approved change to the
Holders of the Series A Preferred Stock that did not agree to such alteration or
change (the "Dissenting Holders") and Dissenting Holders shall have the right
for a period of thirty (30) business days to convert pursuant to the terms of
this Certificate of Designation as they exist prior to such alteration or change
(notwithstanding any other provision herein to the contrary) or continue to hold
their shares of Series A Preferred Stock, as amended.
Section 8. Status of Converted Stock In the event any shares of Series A
Preferred Stock shall be converted pursuant to Section 5 hereof, the shares of
Preferred Stock so converted shall be
12
<PAGE>
canceled, shall return to the status of authorized but unissued Preferred Stock
of no designated series, and shall not be re-issuable by the Company as Series A
Preferred Stock.
Section 9. Preference Rights. Nothing contained herein shall be construed
to prevent the Board of Directors of the Company from issuing one (1) or more
series of Preferred Stock with dividend and/or liquidation preferences junior to
the dividend and liquidation preferences of the Series A Preferred Stock.
Section 10. Authorization and Reservation of Shares of Common Stock
(a) Authorized and Reserved Amount. The Company shall have
authorized and reserved and keep available for issuance not less than three
million nine hundred thousand (3,900,000) shares of Common Stock (subject to
adjustment for stock splits, stock dividends, reclassifications and similar
types of events) issuable upon conversion of all outstanding Series A Preferred
Stock for the purpose of effecting the conversion of the Series A Preferred
Stock (including any shares of Common Stock as a Conversion Failure Payment
under Section 11 hereof or issuable upon the failure of the Company to pay a
Redemption Amount in accordance with Section 5(c) hereof) issued or to be issued
to the Holders (the "Reserved Amount"). The Reserved Amount shall be at least
two hundred percent (200%) of the number of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock a sufficient number of shares of Common Stock to provide for the full
conversion of all outstanding Series A Preferred Stock, and issuance of the
shares of Common Stock in connection therewith. During any period in which the
Reserved Amount is less than two hundred percent (200%) of the number of shares
of Common Stock issuable on three (3) consecutive trading days upon conversion
of the outstanding Series A Preferred Stock (without giving effect to any
limitation on conversion or exercise thereof), the Company shall not reserve or
issue shares of Common Stock for any purposes other than the conversion of the
Series A Preferred Stock.
13
<PAGE>
(b) Increases to Reserved Amount. Without limiting any other
provision of this Section 10, if the Reserved Amount for any three (3)
consecutive trading days (the last of such three (3) trading days being the
"Reservation Trigger Date") is less than two hundred percent (200%) of the
number of shares of Common Stock issuable upon conversion of Series A Preferred
Stock on such trading days (a "Share Authorization Failure"), the Company shall
immediately notify all Holders of such occurrence and shall take all necessary
action to increase the Reserved Amount to two hundred percent (200%) of the
number of shares of Common Stock then issuable upon conversion of the Series A
Preferred Stock within (i) fifteen (15) days following a Reservation Trigger
Date if such increase requires solely approval of the Company's Board of
Directors and (ii) sixty (60) days following a Reservation Trigger Date if such
increase requires approval of the Company's shareholders.
(c) Reduction of Reserved Amount Under Certain Circumstances. Prior
to complete conversion of all Series A Preferred Stock, the Company shall not
reduce the number of shares required to be reserved for issuance under this
Section 10 without the written consent of all Holders except for a reduction
proportionate to a reverse stock split effected for a business purpose other
than affecting the obligations of Holder under this Section 10, which reverse
stock split affects all shares of Common Stock equally.
(d) Allocation of Reserved Amount. Each increase to the Reserved
Amount shall be allocated pro rata among the Holders based on the number of
Series A Preferred Stock held by each Holder at the time of the establishment of
or increase in the Reserved Amount. In the event a Holder shall sell or
otherwise transfer any of such Holder's Series A Preferred Stock, each
transferee shall be allocated a pro rata portion of such transferor's Reserved
Amount. Any portion of the Reserved Amount which remains allocated to any person
or entity which does not hold any Series A Preferred Stock shall be allocated to
the remaining Holders, pro rata based on the number of Series A Preferred Stock
then held by such Holders.
14
<PAGE>
Section 11. Failure To Satisfy Conversions.
(a) Conversion Failure Payments. If, at any time, (x) a Holder submits a Notice
of Conversion (or is deemed to submit such notice pursuant to Section 5(d)
hereof), and the Company fails for any reason to deliver, on or prior to the
expiration of the Deadline ("Period") for such conversion, such number of shares
of Common Stock (including, but not limited to, any published announcement) to
any Holder at any time of its conversion not to issue shares of Common Stock to
which such converting Holder is entitled upon such conversion, or (y) the
Company provides notice upon exercise by any Holder of its conversion rights in
accordance with the terms of this Certificate of Designation (each of (x) and
(y) being a "Conversion Failure"), then the Company shall pay to such Holder, in
the case of a Conversion Failure described in clause (x) above, and to all
Holders, in the case of a Conversion Failure described in clause (y) above,
damages in an amount equal to the lower of:
(i) "Damages Amount" x "D" x .005; and
(ii) the highest interest rate permitted by applicable law, where:
"D" means the number of days beginning the date of the Conversion Failure
through and including the Cure Date with respect to such Conversion Failure;
"Damages Amount" means the Original Series A Issue Price for each share of
Series A Preferred Stock subject to conversion plus all accrued and unpaid
interest thereon as of the first day of the Conversion Failure;
"Cure Date" means (i) with respect to a Conversion Failure described in
clause (x) of its definition, the date the Company effects the conversion of the
shares of Series A Preferred Stock submitted for conversion and (ii) with
respect to a Conversion Failure described in clause (y) of its definition, the
date the Company undertakes in writing to issue Common Stock in satisfaction of
all
15
<PAGE>
conversions of Series A Preferred Stock in accordance with the terms of this
Certificate of Designation.
The payments to which a Holder shall be entitled pursuant to this Section are
referred to herein as "Conversion Failure Payments." The parties agree that the
damages caused by a breach hereof would be difficult or impossible to estimate
accurately. A Holder may elect to receive accrued Conversion Failure Payments in
cash or to convert all or any portion of such accrued Conversion Failure
Payments, at any time, into Common Stock at the lowest Conversion Price in
effect during the period beginning on the date of the Conversion Failure through
the Cure Date for such Conversion Failure. In the event a Holder elects to
receive any Conversion Failure Payments in cash, it shall notify the Company in
writing no later than three (3) business days after the Deadline and failure to
so notify the Company shall entitle the Company, in its sole discretion, to
elect to make such Conversion Failure Payments in cash, Common Stock or some
combination of the two. In the event a Holder elects to convert all or any
portion of the Conversion Failure Payments, such Holder shall indicate on a
Notice of Conversion such portion of the Conversion Failure Payments which such
Holder elects to so convert in accordance with this Section 11(a) and such
conversion shall otherwise be effected in accordance with provisions of Section
5.
(b) Buy-In Cure. Unless a Conversion Failure described in clause
(y) of Section 11(a) hereof has occurred with respect to such a Holder, if (i)
the Company fails for any reason to deliver during the Delivery Period shares of
Common Stock to a Holder upon a conversion of the Series A Preferred Stock and
(ii) after the applicable Delivery Period with respect to such conversion, a
Holder purchases (in an open market transaction or otherwise) shares of Common
Stock to make delivery upon a sale by a Holder of the shares of Common Stock
(the "Sold Shares") which such Holder anticipated receiving upon such conversion
(a "Buy-In"), the Company shall pay such Holder (in addition to any other
remedies available to Holder) the amount by which (x) such Holder's total
purchase price (including brokerage commission, if any) for the shares of Common
Stock so purchased exceeds (y) the net proceeds received by such Holder from the
sale of the Sold Shares. For example, if a Holder purchases shares of Common
Stock having a total purchase price of $11,000
16
<PAGE>
to cover a Buy-In with respect to shares of Common Stock sold for $10,000, the
Company will be required to pay such Holder $1,000. A Holder shall provide the
Company written notification indicating any amounts payable to Holder pursuant
to this Section 11.
(c) Adjustment to Conversion Price. If a Holder has not received
certificates for all shares of Common Stock within five (5) business days
following the expiration of the Delivery Period with respect to a conversion of
any portion of any such Holder's Series A Preferred Stock for any reason, then
the Conversion Price for the affected Series A Preferred Stock shall thereafter
be the lesser of (i) the Fixed Conversion Price on the Conversion Date specified
in the Notice of Conversion which resulted in the Conversion Failure and (ii)
the lowest Conversion Price in effect during the period beginning on, and
including, such Conversion Date through and including the Cure Date. If there
shall occur a Conversion Failure of the type described in clause (y) of Section
11(a), then the Fixed Conversion Price with respect to any conversion thereafter
shall be the lowest Conversion Price in effect at any time during the period
beginning on, and including, the date of the occurrence of such Conversion
Failure through and including the Cure Date. The Conversion Price shall
thereafter be subject to further adjustment for any events described in Section
5(d).
Section 12. Event of Default.
(a) Holder's Option to Demand Prepayment. Upon the occurrence of an Event of
Default (as herein defined), each Holder shall have the right to elect at any
time and from time to time prior to the cure by Company of such Event of Default
to have all or any portion of such Holder's then outstanding Series A
Preferred Stock prepaid by the Company for an amount equal to the Holder Demand
Prepayment Amount (as herein defined).
(i) The right of a Holder to elect prepayment shall be exercisable
upon the occurrence of an Event of Default by such Holder in its sole discretion
by delivery of a Demand Prepayment
17
<PAGE>
Notice (as herein defined) in accordance with the procedures set forth in this
Section 12. Notwithstanding the exercise of such right, the Holder shall be
entitled to exercise all other rights and remedies available under the
provisions of this Certificate of Designation and at law or in equity.
(ii) A Holder shall effect each demand for prepayment under this
Section 12 by giving at least two (2) business days prior written notice (the
"Demand Prepayment Notice") of the date which such prepayment is to become
effective (the "Effective Date of Demand of Prepayment"), the Series A Preferred
Stock selected for prepayment and the Holder Demand Prepayment Amount to the
Company at the address and facsimile number provided in the stock records of the
Company, which Demand Prepayment Notice shall be deemed to have been delivered
on the business day after the date of transmission of Holder's facsimile (with a
copy sent by overnight courier to the Company) of such notice.
(iii) The Holder Demand Prepayment Amount shall be paid to a Holder
whose Series A Preferred Stock are being prepaid within one (1) business day
following the Effective Date of Demand of Prepayment; provided, however, that
the Company shall not be obligated to deliver any portion of the Holder Demand
Prepayment Amount until one (1) business day following either the date on which
the Series A Preferred Stock being prepaid are delivered to the office of the
Company or its transfer agent, or the date on which the Holder notifies the
Company or the Transfer Agent that such Series A Preferred Stock have been lost,
stolen or destroyed and delivers the documentation required in accordance with
Section 5(b)(i) hereof
(b) Holder Demand Prepayment Amount. The "Holder Demand Prepayment
Amount" means the greater off (a) 1.3 times the Stated Value of the Series A
Preferred Stock for which demand is being made, plus all accrued and unpaid
interest thereon and accrued and unpaid Conversion Failure Payments (if any)
through the date of prepayment and (b) the product of (1) the highest price at
which the Common Stock is traded on the date of the Event of Default (or the
most recent highest closing bid price if the Common Stock is not traded on such
date) divided by the Conversion Price in effect as of the date of the Event of
Default, and (2) the sum of the Stated Value
18
<PAGE>
and all accrued and unpaid Conversion Failure Payments (if any) through the date
of prepayment.
(c) Events of Default. An "Event of Default" means any one of the following:
(i) a Conversion Failure described in Section 11(a) hereof;
(ii) a Share Authorization Failure described in Section 10(b)
hereof, if such Share Authorization Failure continues uncured for (x) fifteen
(15) days following a Reservation Trigger Date if such increase requires solely
the approval of the Company's Board of Directors and (y) sixty (60) days alter
the Reservation Trigger Date if such increase requires approval of the Company's
shareholders;
(iii) the Company fails, and such failure continues uncured for
three (3) business days after the Company has been notified thereof in writing
by a Holder, to satisfy the share reservation requirements of Section 10 hereof;
(iv) the Company fails to maintain an effective registration
statement as required by Section 2, Section 3 or Section 6 of the Registration
Rights Agreement between the Company and the Holder(s) (the "Registration Rights
Agreement") except where such failure lasts no longer than three (3) consecutive
trading days and is caused solely by failure of the Securities and Exchange
Commission to timely review the customary submission of or respond to the
customary requests of the Company;
(v) for three (3) consecutive trading days or for an aggregate often
(10) trading days in any nine (9) month period, the Common Stock (including any
of the shares of Common Stock issuable upon conversion of the Series a Preferred
Stock, and exercise of the Common Warrants) is (i) suspended from trading on any
of the NASDAQ SmallCap, NMS, NYSE, AMEX or the OTC Bulletin Board, or (ii) is
not qualified for trading on at least one of NASDAQ SmallCap, NMS, NYSE, AMEX or
the OTC Bulletin Board;
19
<PAGE>
(vi) the Company fails, and such failure continues uncured for three
(3) business days after the Company has been notified thereof in writing by a
Holder, to remove any restrictive legend on any certificate for any shares of
Common Stock issued to a Holder upon conversion of any Series A Preferred Stock
as and when required by this Certificate of Designation and the Subscription
Agreement, between the Company and the Holder(s) (the "Subscription Agreement")
or the Resignation Rights Agreement;
(vii) the Company breaches, and such breach continues uncured for
three (3) business days after the Company has been notified thereof in writing
by a Holder, any significant covenant or other material term or condition of
this Certificate of Designation, the Subscription Agreement or the Registration
Rights Agreement;
(viii) any representation or warranty of the Company made herein or
in any agreement, statement or certificate given in writing pursuant hereto or
in connection herewith (including, without limitation, the Subscription
Agreement and Registration Rights Agreement), shall be false or misleading in
any material respect when made;
(ix) the Company or any subsidiary of the Company shall make an
assignment for the benefit of its creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for a substantial part of its
property or business, or such receiver or trustee shall otherwise be appointed;
(x) bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Company or any
subsidiary of the Company (and such proceedings shall continue unstayed for
thirty (30) days); or
(xi) the Company fails to file a registration statement on Form 10
(to register securities pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934) within sixty (60) days of the Initial Issuance Date (as
defined in Section 5 of the Company's Certificate of Designation of
20
<PAGE>
Preferred Stock), or such registration statement is not declared effective
within one hundred fifty (150) days of the Initial Issuance Date.
(d) Failure to Pay Damages Amount. If the Company fails to pay the
Holder Demand Prepayment Amount within five (5) business days of its receipt of
a Demand Prepayment Notice, then such Holder shall have the right, at any time
and from time to time prior to the payment of the Holder Demand Prepayment
Amount, to require the Company, upon written notice, to immediately convert (in
accordance with the terms of Section 5) all or any portion of the Holder Demand
Prepayment Amount, into shares of Common Stock at the then current Conversion
Price, provided that if the Company has not delivered the full number of shares
of Common Stock issuable upon such conversion within five (5) business days
after the Company receives written notice of such conversion, the Conversion
Price with respect to such Holder Demand Prepayment Amount shall thereafter be
deemed to be at the lowest Conversion Price in effect during the period
beginning on the date of the Event of Default through the date on which the
Company delivers to the Holder the full number of freely tradable shares of
Common Stock issuable upon such conversion. In the event the Company is not able
to pay all amounts due and payable with respect to all Series A Preferred Stock
subject to Holder Demand Prepayment Notices, the Company shall pay the Holders
such amounts pro rata, based on the total amounts payable to such Holder
relative to the total amounts payable to all Holders.
This Amendment was duly adopted by the Board of Directors of the
Corporation as permitted under the authority of Section 78.1955 of the Nevada
Revised Statutes, as amended and the Corporation's Articles of Incorporation.
Date: April 7, 1999. Motorcycle Centers of America, Inc.
By [ILLEGIBLE]
-------------------------------------
President
and /s/ David Wollins
-------------------------------------
Asst. Secretary
21
<PAGE>
STATE OF COLORADO )
) SS:
COUNTY OF ARAPAHOE )
On this 7th day of April, 1999, before me, a Notary Public, personally
appeared Jay Boisdrenghein, the President of Motorcycle Centers of America,
Inc., who acknowledged that he executed the above instrument.
MY COMMISSION EXPIRES 2/28/2001 /s/ [ILLEGIBLE]
-------------------------------------
My Commission Expires: NOTARY PUBLIC
STATE OF COLORADO )
) SS:
COUNTY OF ARAPAHOE )
On this 8th day of April, 1999, before me, a Notary Public, personally
appeared David Wollins, the Assistant Secretary of Motorcycle Centers of
America, Inc., who acknowledged that he executed the above instrument.
/s/ Jennifer A. Demori
-------------------------------------
NOTARY PUBLIC
[SEAL]
My Commission Expires: 12-30-02
22
<PAGE>
EXHIBIT 10.01
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is dated as of 01 October, 1998 by
and between Palisades Capital, Inc., a California corporation ("Buyer") and
Charles Beilman, an individual ("Seller"), the sole shareholder of CD Universe,
Inc., a Connecticut corporation ("CD").
This Agreement sets forth the terms and conditions upon which Seller has agreed
to sell and Buyer has agreed to purchase from Seller 85% of all outstanding
shares of the common stock of CD (the "Shares"). Seller represents and warrants
that he owns the remaining 15% of the outstanding shares of the common stock of
CD, and that no class of shares exists other than as set forth herein.
In consideration of the mutual agreements contained herein and for other good
and valuable consideration, the receipt and sufficiency or which are hereby
acknowledged, the parties hereto agree as follows:
1. SALE OF THE SHARES
1.01 Shares Being Sold
Subject to the terms and conditions of this Agreement, Seller is selling,
assigning and delivering the Shares to Buyer at the closing provided for
in Section 1.03 hereof (the "Closing"), free and clear of all liens,
charges, claims or encumbrances of any kind or nature whatsoever.
1.02 Consideration
Subject to the terms and conditions of this Agreement, and in reliance
upon the representations, warranties and agreements of Seller contained
herein and in consideration for the sale, assignment and delivery of the
Shares and in full payment therefor:
1.02(a)
Buyer shall pay to Seller the sum of Four Million Dollars ($4,000,000) as
follows:
(i) Twenty Five Thousand Dollars ($25,000) upon Buyer's signature
hereon.
(ii) On or before
(A) three calendar weeks after the date of the signature or Buyer
hereon, or
(B) the completion and approval by Buyer of the audit as set forth
in Section 1.02(c), whichever is
1
<PAGE>
later, Buyer shall pay Seller an additional One Hundred
Thousand Dollars ($100,000).
(iii) On or before
(A) sixty one (61) calendar days after the date of the signature
of Buyer hereon, or
(B) forty (40) days after the completion and approval by Buyer of
the audit set forth in section A, whichever is later, Buyer
shall pay Seller an additional One Hundred Thousand Dollars
($100,000).
(iv) on or before
(A) one hundred one (101) calendar days after the date of the
signature of Buyer hereon, or
(B) eighty (80) days after the completion and approval by Buyer of
the audit set forth in Section 1.02(c), whichever is later,
Buyer shall pay Seller the remainder of the purchase price
($3,775,000).
1.02(b)
The parties agree that time is of the essence with respect to all payments
to be made hereunder.
1.02(c)
On or before October 16, 1998, Seller shall perform, at Seller's own
expense, an audit of all of the business of CD, including but not limited
to any and all financial records, inventories, accounts receivable and
payable, and lists of equipment. Seller shall then transmit to Buyer a
copy of said audit not more than five calendar days later. Buyer shall
then have five additional business days to approve or reject the audit.
1.02(d)
In the event that Buyer disapproves of any part of the audit, any document
submitted by Seller in the course of this transaction, any representation
made by Seller in the course thereof, or for any other reason, Buyer does
not proceed with this transaction, Buyer and Seller agree that the amount
of damages Seller would suffer thereby would be difficult to ascertain and
would be incapable of being proven with any certainty. As a result, Buyer
and Seller agree that any amounts previously paid by Buyer at the time
Buyer notifies Seller that it will not complete the transaction will
constitute liquidated damages for such failure by Buyer, and shall
constitute Seller's only remedy and compensation therefor.
2
<PAGE>
1.02(e)
(i) As additional consideration hereunder, Seller shall have a seat on
the Board of Directors of CD after this transaction is completed,
and shall be president thereof. Seller shall also have a seat on the
Board of Directors of any public company into which CD may be
merged.
(ii) Seller's compensation for services as a Director as set forth in the
preceding subparagraph shall be commensurate with the compensation
paid to other Board members for acting in such capacity.
(iii) After this transaction is completed, Seller shall serve as an
Employee of CD or any company into which CD is thereafter merged, on
the terms and conditions set forth in that certain Employment
Agreement attached hereto as Exhibit A.
(iv) Seller represents that he has undertaken no transaction or transfer
of any asset of CD in the calendar year preceding the date of his
signature hereon, except in the ordinary course of business. Seller
further represents that he will not make any transfer of any asset
of CD during the pendency of this transaction, other than in the
ordinary course of business.
1.02(f)
On the Closing Date, Buyer will terminate Seller's authority to write
checks against, or have outstanding checks honored from the funds in CD's
bank account. Seller shall continue to have the authority to issue checks
from CD's checking account (1) not in excess of $2,000 each, (2) not to
Seller or any entity owned or controlled by Seller, and (3) not to Trak
Systems, Inc. without, in each case, the prior written approval (as a
co-signer on such checks or otherwise) of Brad Greenspan or his designee.
Notwithstanding the foregoing, Beilman may issue the following checks
without the approval of Brad Greenspan: to Valley Media and MSI of Miami
several times per week; to Muze, Inc., Enso and Harvest Park Associates
monthly; and to the United States Postal Service several times per month.
On the Closing Date, Seller shall also deliver to Buyer a schedule setting
forth those checks of CD that remain outstanding (the "Outstanding CD
Checks"). To provide funds for the Outstanding CD Checks, Buyer shall, on
the Closing Date, deposit into a conventional checking account, in the
name of CD, funds sufficient to pay all Outstanding CD Checks, and shall
cooperate with Seller to enable such funds to be used in fully satisfying
all
3
<PAGE>
Outstanding CD checks. Buyer shall thereafter indemnify Seller from and
against all claims and liabilities attributable to Outstanding CD Checks.
1.02(g)
(i) Although Seller will retain 15% of all outstanding shares in said
company, as well as a seat on the Board of Directors of CD Universe
after this transaction closes, Buyer and Seller are aware that
disagreements may occur with respect to the running of the company
after Buyer's purchase is completed. As a result thereof, should
such disagreements arise, Buyer and Seller agree that their sole
remedy hereunder with respect to Seller's ownership of stock,
participation on the Board of Directors of CD Universe, and any
rights acquired thereunder, shall be as follows.
(ii) In the event that Seller and Buyer disagree as to the running of the
company at any time after this transaction is completed, Buyer or
Seller may notify the other party, or any successor thereto in
writing that they wish to invoke the provisions of this paragraph.
Upon such notice, seller shall sell any shares he then owns in
either CD or any company into which CD is merged, to Buyer on the
terms and conditions set forth herein. In addition, if such notice
is given, Seller shall resign from all relevant Boards of Directors
as set forth hereinbelow.
(iii) If Seller gives such notice, Seller shall concurrently tender his
resignation, in writing, from the Board of Directors of both CD and
any company into which CD is merged. If Buyer gives such notice,
then Seller shall tender his resignation within five business days
thereafter.
(iv) If at the time Buyer or Seller give notice pursuant to subparagraph
(ii) hereinabove, CD or any company into which CD was merged is
publicly traded on any national or international exchange, NASDAQ or
any over-the-counter market the value of Buyer's shares shall be
determined by the average share closing price over the five trading
days preceding the date of the notice.
(v) If, at the time Buyer or Seller give notice, neither CD nor any
company into which CD was merged is publicly traded on any national
or international exchange, NASDAQ or any over-the-counter market
4
<PAGE>
then Buyer and Seller shall independently retain objective qualified
third party evaluators to value the shares then owned by Seller.
Said valuations shall be completed not later than 45 calendar days
from the date Seller or Buyer have given notice pursuant to
subparagraph (ii) hereinabove.
(vi) The valuations of Seller's valuator and Buyer's valuator shall then
be averaged, and the result thereof shall be deemed the value of
Seller's shares for all purposes hereunder.
(vii) Buyer shall then tender said sum to Seller not more than 45 calendar
days after the date of the latest valuation report.
1.03 The Closing
The Closing of the transactions provided for in Sections 1.04 and 1.05
shall take place at the offices of Buyer's counsel, 1801 Century Park
East, Suite 2500, Los Angeles, California, 90067, simultaneously with the
execution and delivery of this Agreement.
1.04 Delivery by Seller
At the Closing, Seller shall transfer custody or deliver to Buyer at such
place as Buyer shall designate:
(i) a certificate or certificates representing the Shares endorsed in
blank and otherwise in form acceptable for transfer on the books of
CD or a Lost Stock Certificate Declaration and Agreement in the form
annexed hereto as Exhibit 4.1;
(ii) all contracts, books and records of CD not previously delivered to
Buyer;
(iii) the certificates of the officers of Seller in the form annexed
hereto as Exhibit 4.2;
(iv) the resignations of the officers and directors of CD, with the
exception of Charles Beilman as set forth herein; and
(v) the opinion of Neistat & Mason, counsel to Seller, in the form
annexed hereto as Exhibit B.
1.05 Delivery by Buyer
Buyer shall make to Seller the payments provided in Section
5
<PAGE>
1.02(a) hereof.
2. ASSUMPTION OF CERTAIN LIABILITIES BY SELLER
Seller hereby assumes all liability claims by employees of CD, except for
accrued payroll and benefits as of the Closing Date for which Seller shall
have no responsibility, attributable to occurrences prior to the Closing
Date and agrees to indemnify and hold Buyer harmless from and against any
and all liabilities, claims, costs and expenses, including attorney's
fees, expended or incurred by Buyer with respect thereto. All such claims
made or, after diligent inquiry are known to Seller, are set forth on
Exhibit 5 hereto.
3. REPRESENTATIONS AND WARRANTIES BY SELLER
Seller hereby represents, warrants and covenants to Buyer as follows:
3.01(a)
CD is a corporation duly organized, validly existing, and in good standing
under the laws of the state of Connecticut and is duly qualified to do
business in all states in which such qualification is necessary.
3.01(b)
(i) The authorized capital stock of CD consists of 1,000 shares of
common stock, no par value, all of which are validly issued and
outstanding, fully paid and nonassessable. Seller owns all of such
shares and shall deliver on the Closing Date 850 (85%) of such
Shares, free and clear of any liens, claims, options, charges or
encumbrances of any kind or nature whatsoever.
(ii) Seller has the unqualified right to sell, assign and deliver the
Shares to Buyer and upon consummation of the transactions
contemplated by this Agreement, Buyer will acquire good and valid
title to the Shares free and clear of all liens, claims, options,
charges and encumbrances of any nature whatsoever, except
restrictions on resale imposed by applicable federal and/or state
laws and regulations.
(iii) There are no outstanding options, warrants or rights or other
agreements of any nature requiring or relating to the issuance by CD
of any shares of its capital stock.
6
<PAGE>
3.01(c)
CD has the corporate power and authority to carry on its business as
presently conducted.
3.01(d)
All obligations of Seller and CD under any Lease (as defined in Section
5.03 below) are current as of the Closing Date.
3.02 No Violation
Neither the execution and delivery of this Agreement nor the consummation
of the transactions contemplated hereby will constitute a violation or
default under any term or provision of the articles of incorporation or
bylaws of CD or of any material contract, commitment, indenture or other
agreement or restriction of any kind or character to which CD or Seller is
a party or by which CD or Seller is or may be bound.
3.03 Financial Statement
Seller has delivered to Buyer the unaudited Financial Statement of CD (the
"Financial Statement") as June 30, 1998 (the "Valuation Date"), a copy of
which is attached hereto as Exhibit 3. The Financial Statement is true and
correct in all material respects and a fair and accurate representation of
the financial condition and assets and liabilities (whether accrued,
absolute, contingent or otherwise) of CD as of such date, stated on a
basis consistent with that of previous periods.
3.04 Tax Returns
CD has duly filed all tax reports and returns required to be filed by it
and has duly paid or accrued (except as set forth below) all taxes and
other charges claimed to be due from it by federal, state or local taxing
authorities (including, without limitation, those due in respect of its
properties, income, franchises, licenses, sales and payrolls); there are
no tax liens upon any of CD's property or assets except for liens for
current taxes not yet due and payable or as set forth on Exhibit 6 hereto;
and except as may be noted on the Financial Statement, there are not now
nor does Seller have knowledge, after reasonable inquiry, of any pending
matters relating to or claims asserted for taxes or assessments against CD
or any of its assets except as disclosed herein. Buyer agrees to make CD's
books and records available to Seller at reasonable times in CD's or
Buyer's facility for review and copying during the pendency of this
transaction.
7
<PAGE>
3.05 Title to Properties; Encumbrances
CD has good and marketable title to all of its properties and assets, real
and personal, tangible and intangible, including without limitation the
property and assets reflected on the Financial Statement (except for
inventory and other properties and assets that have been sold or otherwise
disposed of in the ordinary course of the business of CD since the
Valuation Date). No such properties are subject to mortgage, pledge, lien,
conditional sale agreement, encumbrance or charge of any nature whatsoever
except: (a) liens shown on Exhibit 6 as securing specified liabilities
(with respect to which no default exists); (b) liens for current taxes not
yet due; and (c) minor imperfections of title and encumbrances, if any,
that are not substantial in amount, do not materially detract from the
value of the property subject thereto or materially impair the operations
of CD and have arisen only in the ordinary course of business consistent
with past practice.
3.06 Patents, Trademarks, Trade Names, Etc.
All patents, trademarks, trade names and assumed names, copyrights or
licenses therefor held by CD, all of which are set forth on Exhibit 12,
are valid and in good standing and free and clear of all liens and
encumbrances of any and every nature and are not involved in any pending
or threatened interference proceeding; to the best knowledge of Seller,
after reasonable inquiry, none of the products manufactured or sold by CD
and none of the formulae, processes, know-how or designations used in the
business of CD infringes on any patent, trade secret, trademark, trade
name or copyright of any other person.
3.07 Accounts Receivable
All accounts receivable of CD, as reflected in the Financial Statement, as
adjusted for ordinary business transactions between the Valuation Date and
the Closing Date, represent sales actually made in the ordinary course of
business and the reserve for collectibility of receivables as reflected in
the Financial Statement is adequate and was calculated in a way consistent
with past practice. Except to the extent set forth in Exhibit 7 hereto, or
for which adequate reserves have been established as reflected on the
Financial Statement, there are not now any questions, controversies or
disputes relating to any accounts receivable of CD.
3.08 Inventory, Equipment and All Other Assets
Inventory, equipment, and all other assets of CD reflected on the
Financial Statement, as adjusted for normal business transactions between
the Valuation Date and the Closing Date,
8
<PAGE>
except for any positive or negative cash balance which is excluded from
the transaction contemplated herein, are stated on the basis of actual
cost (less depreciation in the case of equipment) (the "Accounting
Value"). Immediately after the Closing Date, Buyer may engage an
independent public accountant, at Buyer's sole cost and expense, to audit
the inventory, equipment and other asset amounts for the purpose of
verifying the Accounting Value, i.e., the accounting methodology used to
determine the Accounting Value as opposed to fair market or net realizable
value. Such audit shall be completed within 30 days of the Closing Date or
Buyer shall be deemed to have waived its right to challenge, and shall be
deemed to have accepted, the Accounting Value. If the Accounting Value as
determined by such audit is more than five per cent (5%) less than that
represented by Seller, Seller and Buyer shall mutually select another
independent accountant to determine the Accounting Value, with such
determination being final. In such event, Seller and Buyer shall evenly
divide the cost and expense of the independent accountant. Buyer shall be
credited, dollar for dollar, with the amount by which the Accounting Value
as determined by the independent accountant is less than the Accounting
Value represented by Seller.
3.09 Undisclosed Liabilities
Except to the extent reflected or reserved against in the Financial
Statement, as of the Valuation Date CD had no liabilities or obligations
of any nature, whether absolute, accrued, contingent or otherwise and
whether due or to become due, except those that are not required by
generally accepted accounting principles to be included in the Financial
Statements. Further, Seller, following reasonable inquiry, does not know
or have any reasonable ground to know of any basis for the assertion
against CD as of the Valuation Date, of any liability or obligation of any
nature or in any amount not fully reflected or reserved against in the
Financial statement.
3.10 Absence of Certain Changes
CD has not, since the Valuation Date;
3.10(a)
Suffered any material adverse change in its financial condition, assets,
liabilities, business or prospects, except those set forth in Exhibit 20
hereto;
3.10(b)
Incurred any obligation or liability (whether absolute,
9
<PAGE>
accrued, contingent or otherwise) other than in the ordinary course of
business and consistent with past practice or with respect to the Lease;
3.10(c)
Paid any claim or discharged or satisfied any lien or encumbrance or paid
or satisfied any liability (whether absolute, accrued, contingent or
otherwise) other than liabilities shown or reflected in the Financial
Statement or liabilities incurred since the Valuation Date in the ordinary
course of business and consistent with past practice;
3.10(d)
Permitted or allowed any of its assets, tangible or intangible, to be
mortgaged, pledged or subjected to any liens or encumbrances;
3.10(e)
Written down the value of any inventory or written off as uncollectible
any notes or accounts receivable or any portion thereof except for write
offs of such items in the ordinary course of business;
3.10(f)
Cancelled any other debts or claims or waived any rights of substantial
value or sold or transferred any of its assets or properties, tangible or
intangible, other than in the ordinary course of business and consistent
with past practice;
3.10(g)
Disposed of or permitted to lapse any material patent, trademark or
copyright or any application for any material patent, trademark or
copyright;
3.10(h)
Disposed of or disclosed to any person any trade secret, formula, process
or other know-how except pursuant to inquiries to purchase CD or its
assets for which Confidentiality Agreements were obtained by Seller, all
of which agreements are annexed hereto as Exhibit 8;
3.10(i)
Granted any general uniform increase in the compensation of employees
(including any increase pursuant to any bonus, pension, profit-sharing or
plan or commitment) or any
10
<PAGE>
substantial increase in any compensation payable or to become payable to
any officer or employee, and no such increase (whether general or
otherwise) is required pursuant to any existing employment agreements or
otherwise;
3.10(j)
Made any capital expenditures or commitments in excess of $10,000 for
additions to property, plant or equipment;
3.10(k)
Declared, paid or set aside for payment to its stockholders, any dividend
or other distribution in respect of its capital stock or redeemed or
purchased or otherwise acquired any of its capital stock or any options
relating thereto or agree to take any such action; or
3.10(l)
Made any material change in any method of accounting or accounting
practice.
3.11 Litigation
Except to the extent set forth in Exhibit 9 hereto there are no actions,
proceedings or investigations pending or, after reasonable inquiry to the
knowledge of Seller, threatened against CD and Seller does not know or
have any reason to know of any basis for any such action, proceeding or
investigation.
3.12 Disclosure
Seller has disclosed to Buyer all facts material to the assets, prospects
and business of CD known to Seller. No representation or warranty by
Seller contained in this Agreement and no statement contained in any
exhibit, list, certificate or writing furnished to Buyer pursuant to the
provisions hereof or in connection with the transactions contemplated
hereby contains any untrue statement of a material fact or omits to state
a material fact necessary in order to make the statements contained herein
or therein not misleading or necessary in order to provide a prospective
purchaser of the business of CD with accurate and complete information
which any reasonable purchaser of CD would desire as to CD and its
affairs.
3.13 Exhibits
Each of the Exhibits to this Agreement is incorporated into this Agreement
and made a part hereof, and is true, accurate and complete.
11
<PAGE>
3.15 Material Events or Conditions
After reasonable inquiry, to the best knowledge of Seller, there is no
event or condition of any kind or character pertaining to the business,
assets or prospects of CD that may materially or adversely affect such
business, assets or prospects.
4. REPRESENTATIONS AND WARRANTIES BY BUYER
Buyer hereby represents, warrants and covenants to Seller as follows:
4.01 Organization, Etc.
Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the state of California.
4.02 Authority
The execution and delivery of this Agreement by Buyer and the consummation
by Buyer of the transactions contemplated hereby have been duly authorized
by the board of directors of Buyer. The officers of Buyer acting on behalf
of Buyer with respect to these transactions and executing this Agreement
on behalf of Buyer have been duly authorized by all necessary and
appropriate corporate action to take such actions and to execute this
Agreement.
4.03 No Violation
Neither the execution nor the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby will constitute any
violation or default under any term or provision of the articles of
incorporation or bylaws of Buyer or of any material contract, commitment,
indenture or other agreement or restriction of any kind or character to
which Buyer is a party or by which Buyer is bound.
4.04 Investment Experience
Buyer has significant knowledge and experience in financial and business
matters enabling it to evaluate the significant risks associated with its
acquisition of the Shares.
4.05 Insurance
Seller hereby assigns to Buyer the benefits under and proceeds of each and
all existing policies of insurance coverage relating to products or
services provided by CD of which policies Seller or CD is a beneficiary.
Copies of all such policies shall be delivered to Buyer at the Closing.
Seller
12
<PAGE>
further agrees to cause CD to be named the sole insured under such
policies and to deliver evidence thereof satisfactory to Buyer within 30
days of the Closing Date. Such benefits and proceeds shall be utilized in
satisfaction of claims, liabilities, costs and expenses of CD, if any,
related to occurrences prior to the Closing Date. Following the payment of
such benefits and proceeds, the indemnification provisions of Section 5.02
of this Agreement shall apply.
5. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
5.01 Survival of Representations
All representations, warranties and agreements made by any party in this
Agreement or pursuant hereto shall survive the execution and delivery
hereof for a period of three years.
5.02 Indemnification
(a) Seller shall indemnify Buyer in respect of all claims, demands,
losses and damages (collectively, "Damages") that Buyer or CD shall
incur or suffer which arise from or are attributable to any
inaccuracy or breach of Seller's representations and warranties
relating to occurrences which may have taken place prior to the
Closing Date. The indemnification provided for under this Section
shall include but not be limited to all costs, claims, damages,
liabilities and expenses of any nature arising out of or based upon
the operations of CD and product warranty claims against CD
including reasonable costs of investigation, attorneys' fees and
expenses.
(b) Assertion by Buyer of its right to indemnification under this
Section 5.02 shall not preclude the assertion by Buyer of any other
rights or the seeking of any other remedies against Seller.
(c) In case any claim, investigation or action shall arise against CD
for which Seller shall be liable to indemnify Buyer hereunder
(referred to herein as a "claim") the defense of any such claim
shall be undertaken by Seller utilizing counsel of Seller's choice
who shall be reasonably satisfactory to Buyer. In the event that
Buyer shall seek to employ separate counsel to defend its interests
with respect to any claim, it shall do so at its own cost and
expense and Buyer shall not be entitled to indemnification from
Seller with respect thereto. Promptly after receipt by either Buyer
or Seller of notice of a claim, the party receiving such notice
shall notify the other party. Buyer shall cooperate in all respects
with Seller and counsel selected by Seller in
13
<PAGE>
connection with the investigation and defense of any claim.
5.03 Existing Lease
Exhibit 10 contains a true and complete copy of the Lease Agreement dated
February 12, 1997 between Harvest Associates as landlord and Prime
Software, Inc., dba Trak Systems as tenants on Seller's business premises,
commonly described as 101 North Plains Ind. Road, Harvest Park Building
#5, Wallingford, Connecticut (the "Premises").
As further consideration for the purchase hereunder, Buyer agrees to
assume and fulfill Seller's obligations to pay all rent under the Lease
after the Closing Date for so long as CD may continue to occupy the
Premises, and to indemnify and hold the Seller harmless from any claims
by, or demands from, the Landlord under the Lease related to, or arising
from any failure to make such payments. Buyer will indemnify Seller from
any liabilities and expenses resulting from its and/or CD's occupancy of
the Premises and termination of the Lease following the Closing Date.
6. MISCELLANEOUS
6.01 Expenses
All fees and expenses incurred by Seller in connection with the
transactions contemplated by this Agreement shall be borne by Seller and
all fees and expenses incurred by Buyer in connection with the
transactions contemplated by this Agreement shall be borne by the Buyer.
6.02 Further Assurances
From time to time, at Buyer's request and without further consideration,
Seller at its own expense will execute and transfer such documents and
will take such other action as Buyer may reasonably request in order to
more effectively consummate the transactions contemplated hereby.
6.03 Parties and Interests
All the terms and provisions of this Agreement shall be binding upon,
shall inure to the benefit of and shall be enforceable by the respective
heirs, beneficiaries, representatives, successors and permitted assigns of
the parties hereto.
6.04 Prior Agreements; Amendments
This Agreement supersedes all prior agreements and
14
<PAGE>
understandings between the parties with respect to the subject matter
hereof. This Agreement may be amended only by a written instrument duly
executed by the parties hereto or their respective successors or assigns.
6.05 Headings
The section and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretations of this Agreement.
6.06 Governing Law and Judicial Proceedings
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the state of California without regard to its
conflict of laws rules. Any judicial proceedings brought by Buyer against
Seller with respect to this Agreement must be brought in a court of
competent jurisdiction in the County of Los Angeles, State of California.
6.07 Notices
All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered or
mailed (registered or certified mail, postage prepaid, return receipt
requested) as follows:
If to Buyer:
Palisades Capital, Inc.
264 South La Cienega, Suite 305
Beverly Hills, California 90211
Attn: President
Telephone: (310) 546 - 5437
Facsimile: (310) 546 - 2807
With a copy to:
David L. Kagel, Esq.
1801 Century Park East, 25th Floor
Los Angeles, California 90067-2327
Telephone: (310) 553 - 9009
Facsimile: (310) 553 - 9693
and
15
<PAGE>
Klint James McKay, Esq.
McKay, Meyer and Herbert
1801 Century Park East, 25th Floor
Los Angeles, California 90067-2327
Telephone: (310) 772 - 0836
Facsimile: (310) 772 - 0239
If to Seller:
Charles Beilman
CD Universe
101 North Plains Industrial Road
Wallingford, Connecticut 06492
Telephone: (203) 265 - 3440
Facsimile: (203) 269 - 3930
With a copy to:
Kevin Mason, Esq.
Neistat & Mason
47 East Cedar Street
Newington, Connecticut 06111
Telephone: (860) 666 - 6022
Facsimile: (860) 666 - 6710
7.08 Counterparts
This Agreement may be executed simultaneously in several Counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
7.09 No Third Party Beneficiaries
This Agreement is for the benefit of Buyer and Seller only and is not
intended to nor shall it operate to create any third party beneficiary or
other rights in any other person or entity.
7.10 Assignment
Neither party may assign its rights under this Agreement or delegate its
duties or obligations hereunder absent the prior written consent of the
other party.
16
<PAGE>
7.11 Brokers
If either party has retained, or is claimed to have retained, a broker or
finder in connection with this transaction, the party which so retained,
or is claimed to have retained, the broker or finder shall indemnify and
hold the other party harmless from any and all claims, fees and/or
compensation sought by such actual or alleged broker or finder.
IN WITNESS WHEREOF this Agreement has been duly executed by the parties hereto
on the date first above written.
PALISADES CAPITAL, INC.
By: /s/ Brad Greenspan
---------------------------------
Brad Greenspan, President
CD UNIVERSE, INC.
By: /s/ Charles Beilman, President
---------------------------------
Charles Beilman, President
/s/ Charles Beilman
- -------------------------------------
Charles Beilman, an individual
17
<PAGE>
EXHIBIT 10.2
AMENDMENT TO STOCK PURCHASE AGREEMENT
This amendment ("Amendment") to the Stock Purchase Agreement dated as of 01
October, 1998 by and between Palisades Capital, Inc. and Charles Beilman (the
"Agreement") is dated as of __ December, 1998. Each and all of the defined
terms in the Agreement are adopted and incorporated into the Amendment.
The Agreement is hereby amended as follows:
1) Section 1.02(a) of the Agreement as presently existing is hereby
deleted and the following substituted therefor:
"Buyer shall pay to Seller the sum of two million dollars ($2,000,000) as
follows: (i) two hundred twenty five thousand dollars ($225,000) receipt of
which is hereby acknowledged by Seller; (ii) thirty thousand dollars
($30,000) on or before January 16, 1998; and (iii) the balance of one
million seven hundred forty five thousand dollars ($1,745,000) on February
26, 1998."
2) Section 1.02(e)(i) of the Agreement as presently existing is hereby
deleted and the following is substituted therefor:
"As additional consideration hereunder, Seller shall have a seat on the
Board of Directors of CD after this transaction is completed and shall be
Chief Operating Officer of CD. Seller shall also have a seat on the Board
of Directors of any public company into which CD may be merged. Seller
shall enter into an employment agreement as set forth in Exhibit A. Seller
shall serve as the Chief Operating Officer and the Chief Technical Officer
of CD or any company into which it shall be merged."
3) The following Section 1.02(h) is hereby added to the Agreement:
"(i) Buyer contemplates the acquisition of control of a public company
("Public Company") whose shares are trading on the Electronic Bulletin
Board operated by the National Association of Securities Dealers, Inc.
Seller has agreed to reduce the balance of the cash purchase price of CD
Universe as previously set forth in Section 1.02(a) from $3,745,000 to
$1,745,000. In consideration therefor, Seller shall be issued, in addition
to shares of common stock to which he would be entitled upon exchange of
his shares in CD Universe, shares of common stock of the Public Company
having a
<PAGE>
value of $3,000,000. The number of shares to be issued shall be valued
based upon the average of the closing bid prices of the shares of Public
Company, as reported on the Electronic Bulletin Board for the first twenty
trading days after CD Universe has been merged with or acquired by the
Shell."
"(ii) As "downside protection" Seller will receive no less than 1,000,000
shares of common stock of the Public Company pursuant to Paragraph (i) of
this Section 1.02(h). Such shares will be issued as soon as possible
following the acquisition of control of the Public Company."
4) In all other respects the Agreement remains unchanged and in full force
and effect as of the date hereof.
IN WITNESS WHEREOF this Amendment has been duly executed by the parties hereto
on the date first above written.
PALISADES CAPITAL, INC. CD UNIVERSE, INC.
By:__________________________ By:___________________________
Brad Greenspan, President Charles Beilman, President
_________________________________
Charles Beilman, an individual
<PAGE>
EXHIBIT 10.03
AMENDMENT NO. 2 TO STOCK PURCHASE AGREEMENT
This Amendment No. 2 ("Amendment") to Stock Purchase Agreement is dated
February 11, 1999 and is entered into by and between Palisades Capital Inc. a
California corporation ("Buyer"), Charles Beilman, an individual ("Seller") and
the Entertainment Universe, Inc. a California corporation ("Entertainment
Universe"). This Amendment to Stock Purchase Agreement ("Agreement") amends the
original Stock Purchase Agreement between the parties dated October 1, 1998 as
amended by Amendment to Stock Purchase Agreement dated as of December, 1998.
The Agreement is hereby amended as follows:
1. Section 1.02(a) of the Agreement, as presently existing, is hereby
deleted and the following substituted therefor:
"Buyer shall pay to Seller the sum of $2,000,000 as follows:
(i) $255,000, receipt of which is hereby acknowledged by Seller; and
either (ii) or (iii) below at the discretion of Buyer;
(ii) $250,000 on or before February 19, 1999, and the balance of
$1,495,000 on or before April 30, 1999; or
(iii) $1,745,000 on or before February 26, 1999.
2. Section 1.02(b) of the Agreement as presently existing is hereby
deleted and the following substituted therefor:
"Buyer contemplates the acquisition of control of a public company
("Public Company") whose shares are traded on the Electronic Bulletin Board
operated by the National Association of Securities Dealers, Inc. Seller has
agreed to reduce the balance of the cash purchase price for the shares of CD
Universe as previously set forth in Section 1.02(a) from $4,000.000 to
$2,000,000. In consideration, therefore, and in consideration of the other terms
of this Amendment, Seller shall be issued shares in the Public Company equal to
(i) 1,500,000 shares plus (ii) the greater of 1,000,000 shares or shares of the
Public Company having a value of $3,000,000. The number of shares to be issued
shall be valued based upon the average of the closing bid prices of the shares
of the Public Company, as reported on the Electronic Bulletin Board for the
first 20 trading days after CD Universe has been merged with or acquired by the
public shell. Such shares will be issued as soon as possible following the
acquisition of control of the Public Company, in accordance with applicable
securities laws.
<PAGE>
3. Section 1.02(g)(i) shall provide that Seller shall sell 100% of the
outstanding shares in CD Universe pursuant to the Amendment. In addition, the
second paragraph of the Agreement on Page 1 shall reflect that this Agreement is
for 100% of all outstanding shares of the common stock of CD Universe.
4. Section 7.10 to the Agreement, as presently existing is deleted and
the following substituted therefor: "Palisades Capital, Inc. as of the date of
this Amendment, hereby assigns for rights under this Agreement and delegates its
duties and obligations under this Agreement to the Entertainment Universe, Inc.
a California corporation.
5. In all other respects the Agreement remains unchanged and in full force
and effect as of the date hereof.
IN WITNESS WHEREOF, this Amendment has been duly executed by the parties
hereby on the date first written above.
PALISADES CAPITAL INC.
By:
------------------------------
Brad Greenspan, President
CD UNIVERSE, INC.
By: /s/ Charles Beilman
------------------------------
Charles Beilman, President and
Charles Beilman an individual
THE ENTERTAINMENT UNIVERSE, INC.
By:
------------------------------
Brad Greenspan, Chairman
<PAGE>
EXHIBIT 10.04
AMENDMENT NO. 3 TO STOCK PURCHASE AGREEMENT
This Amendment No. 3 ("Amendment") to Stock Purchase Agreement is dated as
of March __, 1999 and is entered into by and between Palisades Capital Inc. a
California corporation ("Buyer"), Charles Beilman, an individual ("Seller") and
the Entertainment Universe, Inc. a California corporation ("Entertainment
Universe"). This Amendment to Stock Purchase Agreement ("Agreement") amends the
original Stock Purchase Agreement between the parties dated October 1, 1998, as
amended by Amendment to Stock Purchase Agreement dated as of December, 1998 and
Amendment No. 2 to Stock Purchase Agreement dated as of February 11, 1999.
The Agreement is hereby amended as follows:
1. Section 1.02(a) of the Agreement, as presently existing, is hereby
deleted and the following substituted therefor:
"Buyer shall pay to Seller the sum of $2,000,000 as follows:
(i) $255,000, receipt of which is hereby acknowledged by Seller; and
either (ii) or (iii) below at the discretion of Buyer;
(ii) $250,000 on or before March 5, 1999, and the balance of
$1,495,000 on or before May 5, 1999; or
(iii) $1,745,000 on or before March 5, 1999.
[Remainder of page intentionally left blank.]
<PAGE>
2. In all other respects the Agreement remains unchanged and in full force
and effect as of the date hereof.
IN WITNESS WHEREOF, this Amendment has been duly executed by the parties
hereby on the date first written above.
PALISADES CAPITAL INC.
By: /s/ Brad Greenspan
------------------------------
Brad Greenspan, President
CD UNIVERSE, INC.
By: /s/ Charles Beilman
------------------------------
Charles Beilman, President and
Charles Beilman an individual
THE ENTERTAINMENT UNIVERSE, INC.
By: /s/ Brad Greenspan
------------------------------
Brad Greenspan, Chairman
<PAGE>
EXHIBIT 10.05
Amendment Number 4 to Stock Purchase Agreement
This agreement dated as of June 9, 1999 between eUniverse, Inc. f/k/a
Entertainment Universe, Inc., a Nevada Corporation ("eUniverse") and Charles
Beilman, an individual (the "Seller").
RECITALS:
1. A predecessor in interest of eUniverse, Palisades Capital, Inc., a
California corporation ("Palisades"), and the Seller entered to a certain Stock
Purchase Agreement dated October 1, 1998 ("Original Purchase Agreement"),
whereby Palisades would purchase all of the outstanding shares of capital stock
of CD Universe, Inc., a Connecticut corporation ("CD Universe"), from the
Seller. The Original Purchase Agreement was amended by an Amendment to Stock
Purchase Agreement dated as of December, 1998 and an Amendment No. 2 to Stock
Purchase Agreement dated February 11, 1999 (the Original Purchase Agreement and
the amendments are collectively referred to as the "Purchase Agreement").
2. The transactions contemplated by the Purchase Agreement were closed on
April 14, 1999 (the "Closing").
3. Following the closing, an audit was performed for the fiscal year ended
March 31, 1999 and the parties have agreed to certain adjustments to the
Purchase Agreement and financial statements of CD Universe as a result of such
audit.
AGREEMENT:
1. Audit Items. The audit of CD Universe identified the following items
(the "Audit Items"):
(a) $110,395 of expenses paid by Trak Systems, Inc., an affiliate of CD
Universe ("Trak"), on behalf of CD Universe were not included in the
CD Universe financial information provided to eUniverse prior to the
Closing. As a result, the original projected earnings for the period
ending March 31, 1999 was not correct, and the financial statements
resulted in the recognition of an additional $110,000 loss for that
period;
(b) The compensation of the Seller as an officer of CD Universe for the
fiscal year 1999 exceeded the projected compensation by $100,000; and
(c) The accounts payable of CD Universe at the Closing exceeded the
projected accounts payable by approximately $400,000 which required a
$400,000 advance by eUniverse immediately following the Closing in
order to reduce the excess accounts payable balance.
<PAGE>
2. Purchase Price and Other Adjustments.
(a) In order to resolve the Audit Adjustments, the Seller and eUniverse
hereby agree as follows:
(i) the CD Universe accounts payable of $110,395 due to Trak, is
hereby eliminated and CD Universe is released from any
liability to Trak up to and including the date of this
Agreement;
(ii) the net amount due by CD Universe to the Seller prior to the
adjustments indicated in (iii) - (v) below equals $85,000
($150,000 due by CD Universe to the Seller pursuant to a
promissory note dated February 15, 1999 less repayments of
$65,000);
(iii) the Seller owes to CD Universe the amount of $57,568,
representing advances received by Seller up to March 31, 1999;
(iv) the compensation of the Seller for fiscal year ended March 31,
1999 shall be reduced by $100,000 resulting in an additional
$100,000 due by Seller to CD Universe;
(v) the total cash portion of the purchase price as provided in
Section 1.02(a) of the Purchase Agreement shall be reduced by
$85,000. Seller and eUniverse acknowledge that this is in full
settlement of any adjustments previously agreed between the
Seller and eUniverse; and
(vi) the total number of eUniverse shares received by the Seller
under the Purchase Agreement shall be reduced by 75,000 shares
to 2,425,000 shares of common stock of eUniverse.
(b) The items identified in Sections 2(a)(ii)through (iv) above in the
total amount of $157,568 (i.e., $57,568 in Subsection (iii) plus $100,000 in
Subsection (iv) plus $85,000 in Subsection (v) less $85,000 in Subsection (ii))
shall be paid in cash upon execution of this Agreement. The adjustment to the
share portion of the Purchase Price as indicated in Section 2(a)(iv) above,
shall be accomplished as of date of this agreement and the total shares of
eUniverse in the name of the Seller shall be reissued to the Seller.
3. Full Settlement of Audit Items. eUniverse hereby agrees to release
and forever discharge, the Seller and his heirs, executors and administrators,
from any and all manner of action and actions, cause and causes of action,
claims and demands whatsoever, in law or in equity, including any claims under
the Purchase Agreement, which eUniverse has ever had, now has or which eUniverse
hereafter can, shall or may have against the Seller for, upon or by reason of
any matter, cause or thing whatsoever relating to the Audit Items.
Specifically, but not in any way limiting the generality of the foregoing, the
Purchase Price and other adjustments provided in Section 2 above shall be in
complete settlement of any potential claims of eUniverse relating to the
valuation of
<PAGE>
CD Universe in determining the purchase price under the Purchase Agreement;
provided that nothing herein shall be construed to release the Seller from any
third party claims for which the Seller continues to be responsible under the
Purchase Agreement.
4. Governing Law. This Agreement is governed by, and shall be
construed in accordance with, the laws of the State of Connecticut without
regard to conflicts of laws principles thereof.
5. Binding Effect. This Agreement is binding upon, and shall inure to
the benefit of and be enforceable by, each of the parties and their respective
successors and assigns, or his heirs, executors and administrators, as the case
may be.
6. Headings. The headings contained in this Agreement are for
convenience only and are not a part of this Agreement and shall not be used in
construing or interpreting the provisions hereof.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the
date first above written.
eUniverse, Inc.
By_______________________
Its: Chief Financial Officer
"Seller"
Charles Beilman
__________________________
<PAGE>
EXHIBIT 10.06
AGREEMENT AND PLAN OF REORGANIZATION
April 9, 1999
MOTORCYCLE CENTERS OF AMERICA, INC.
ACQUISITION OF
ENTERTAINMENT UNIVERSE, INC.
<PAGE>
TABLE OF CONTENTS
Page
Recitals................................................................... 1
Agreement.................................................................. 1
1. Plan of Reorganization........................................ 1
2. Exchange of Shares............................................ 1
3. Delivery of Shares............................................ 2
4. Representations of Principal Officers and Acquiree............ 2
5. Representations of Acquiring Corporation...................... 4
6. Closing Date.................................................. 6
7. Conditions Precedent to the Obligations of Acquiree........... 6
8. Conditions Precedent to the Obligations of Acquiror........... 8
9. Indemnification............................................... 9
10. Nature and Survival of Representations........................ 10
11. Documents at Closing.......................................... 10
12. Miscellaneous................................................. 11
Signature Page................................................ 12
-ii-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
------------------------------------
This Agreement and Plan of Reorganization is entered into this 9th day of
April, 1999, by and between MOTORCYCLE CENTERS OF AMERICA, INC., a Nevada
corporation, (hereinafter "Acquiror"); and ENTERTAINMENT UNIVERSE, INC., a
California corporation; (hereinafter referred to as "Acquiree"); and the
undersigned Principal Officers of Acquiree, (hereinafter collectively referred
to as "Principal Officers").
RECITALS
--------
Acquiror desires to acquire all of the issued and outstanding stock of
Acquiree, making Acquiree a wholly-owned subsidiary of Acquiror, and
Stockholders of Acquiree (defined to include both holders of common and
preferred stock) desire to make a tax-free exchange solely of their shares in
Acquiree for shares of Acquiror's capital stock to be exchanged as set out
herein with the Stockholders of Acquiree.
NOW, THEREFORE, for the mutual consideration set out herein, the parties
agree as follows:
AGREEMENT
---------
1. Plan of Reorganization. Stockholders of Acquiree are the owners of all
----------------------
the issued and outstanding capital stock of said Acquiree. It is the
intention of the parties hereto that all of the issued and outstanding
common stock of Acquiree shall be acquired by Acquiror in exchange solely
for newly issued Acquiror voting stock. Further, all preferred stock of
Acquiree shall be acquired by Acquiror in exchange solely for newly issued
Acquiror preferred stock of the same rights and preferences. It is the
intention, but not a requirement, of the parties hereto that this
transaction qualify as a tax-free reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended.
2. Exchange of Shares. Acquiror and Acquiree agree that all of the issued
------------------
and outstanding securities of Acquiree shall be exchanged with Acquiror for
a total of 12,600,000 shares, in the aggregate, of restricted common stock
of Acquiror, after giving effect to a one-for-twenty reverse split of the
Acquiror's common stock and a total of 1,937,500 shares of Series A 6%
Convertible Preferred Shares of Acquiror. The Acquiror shares will, on the
date of delivery to the Stockholders of Acquiree, (which is defined as the
date in Paragraph 6 herein), be delivered to the Stockhold ers of Acquiree
in exchange for its shares in Acquiree.Stockholders of Acquiree will
represent and warrant under their individual investment letters that each
will hold such securities of Acquiror for investment purposes and not for
further public distribution and agree that the securities shall be
appropriately restricted. As of the Delivery Date, Acquiror shall have no
more than 1,205,000 post-split common shares issued and outstanding (such
amount shall include approximately 900,000 common shares which will have
been issued pursuant to Rule 504 prior to the Delivery Date at a price not
to exceed $1.00 per share and the cancelation of 1,845,000 restricted
shares).
3. Delivery of Shares. On the Delivery Date (which is defined as the date
-------------------
in Paragraph 6 herein),Stockholders of Acquiree will deliver certificates
or other evidence of ownership of Acquiree duly endorsed so as to make
Acquiror the sole holder thereof free and clear of all claims and
encumbrances. On the Delivery Date, delivery of the Acquiror shares, which
1
<PAGE>
will be appropriately restricted as to transfer, will be made to the
Stockholders of Acquiree as set forth herein. A list of the shares of
Acquiree, the owner thereof, and shares of Acquiror to be received by said
Stockholders of Acquiree is attached hereto as Exhibit "A" and by this
reference is incorporated herein.
4. Representations of Principal Officers and Acquiree. The Principal
--------------------------------------------------
Officers and Acquiree, hereby represent and warrant that, with respect to
shares of the Stockholders of Acquiree and as to the Acquiree, effective
this date, the Closing Date (which is defined as the date in Paragraph 6
herein), and the Delivery Date, the representations listed below are true
and correct to the best of their knowledge, information, and belief. Said
representations are meant and intended by all parties to apply to the
Acquiree:
(a) The listed Stockholders of Acquiree on Exhibit "A" are the sole owners of
all of the issued and outstanding securities of Acquiree; such shares are
free from claims, liens, or other encumbrances; and Stockholders of
Acquiree hasve the unqualified right to transfer and dispose of such
shares.
(b) The issued shares of Acquiree constitute validly issued shares of Acquiree,
fully-paid and nonassessable.
(c) The audited year-end financial statements of CD Universe, Inc., the wholly-
owned subsidiary of Acquiree, for the fiscal years ended March 31, 1997 and
1998, as well as the interim unaudited financial statements for the period
ended December 31, 1998, which have been delivered to Acquiror, are
complete, accurate and fairly present the financial condition as of the
dates thereof and the results of its operations for the periods covered.
There are no liabilities, either fixed or contingent, not reflected in such
financial statements other than contracts or obligations in the ordinary
and usual course of business; and no such contracts or obligations in the
usual course of business constitute liens or other liabilities which, if
disclosed, would alter substantially the financial condition of CD
Universe, Inc. as reflected in such financial statements.
(d) Prior to and as of the Closing Date and the Delivery Date, there will not
be any negative material changes in the financial position of Acquiree,
except changes arising in the ordinary course of business, which changes
will in no event adversely affect the financial position of said Acquiree.
(e) Except as previously disclosed in the financial statements, to the best of
Acquiree's knowledge, information and belief, it is not involved in, and
has not received judicial notice of any pending litigation or governmental
investigation or proceeding not reflected in such financial statement, or
otherwise disclosed in writing to Acquiror and, to the best knowledge of
Acquiree and Principal Officers, no material litigation, claims, or assess
ments, or governmental investigation or proceeding is threatened against
Acquiree, its principal shareholders or properties.
(f) As of the Closing Date and the Delivery Date, Acquiree will be in good
standing in its jurisdiction of incorporation, and will be in good standing
and in the process of becoming duly qualified to do business in each
jurisdiction where required to be so qualified.
2
<PAGE>
(g) Acquiree has complied with all applicable laws in connection with its
formation, issuance of securities, organization, capitalization and opera
tions, and to the best of Acquiree's knowledge, information and belief, no
contingent liabilities have been threatened or claims made, and no basis
for the same exists with respect to said operations, formation or
capitalization, including claims for violation of any US state or federal
securities laws.
(h) Acquiree has filed all governmental, tax or related returns and reports due
or required to be filed and has paid all taxes or assessments which have or
which shall become due as of the Closing Date and the Delivery Date.
(i) Except as disclosed in this Agreement or on any Exhibit, Acquiree has not
breached any material agreement to which it individually or collectively
may be a party.
(j) Acquiree has one subsidiary, CD Universe, Inc.
(k) The corporate financial records, minute books, and other documents and
records of Acquiree are to be available to present management of Acquiror
prior to the Closing Date and turned over to new management of Acquiror in
their entirety on the Delivery Date.
(l) The execution of this Agreement will not violate or breach any agreement,
contract, or commitment to which Acquiree or Stockholders of Acquiree are a
party and has been duly authorized by all appropriate and necessary action.
(m) All outstanding shares have been duly authorized, validly issued and are
fully paid and nonassessable with no personal liability attaching to the
ownership thereof. There are no outstanding convertible securities, war
rants, options or commitments of any nature which may cause authorized but
unissued shares to be issued to any person.
(n) To the best knowledge of the Principal Officers and Acquiree, Acquiree is
not subject to any material labor disputes or disagreements, either actual
or contingent.
(o) To the best knowledge of Principal Officers and Acquiree, Acquiree's
products, materials and brochures do not infringe the patent or copyright
rights of any other person or entity.
(p) At the date of this Agreement, the Principal Officers have, and at the
Closing Date and the Delivery Date, they will have to the best of its
knowledge, disclosed all events, conditions and facts materially affecting
the business and prospects of Acquiree and its assets.Principal Officers
have not now and will not have, at the Closing Date or the Delivery Date,
withheld knowledge of any such events, conditions, and facts which it
knows, or has reasonable grounds to know, may materially affect the
business and prospects of Acquiree or its assets.
5. Representations of Acquiring Corporation. Acquiror hereby represents
----------------------------------------
and warrants as follows, effective this date, the Closing Date, and the
Delivery Date, the
3
<PAGE>
representations listed below are true and correct to the best of its knowledge,
information, and belief:
(a) As of the Delivery Date, the Acquiror shares to be delivered to the
Stockholders of Acquiree will constitute valid and legally issued shares of
Acquiror, fully-paid and nonassessable, and will be legally equivalent in
all respects to the capital stock of Acquiror issued and outstanding as of
the date thereof.
(b) The officers of Acquiror are duly authorized to execute this Agreement and
have taken all actions required by law and agreements, charters, and
bylaws, to properly and legally execute this Agreement.
(c) Acquiror has made available to Acquiree combined audited financial
statements for the fiscal year ended December 31, 1997, which shall be
true, complete and accurate; there are and shall be no substantial
liabilities, either fixed or contingent, not reflected in such financial
statements and records or to which the Acquiree has not been made aware.
Said financial statements fairly and accurately reflect the financial
condition of the Acquiror as of the date thereof and the results of
operations for the period reflected therein. Such statements shall have
been prepared in accordance with US Generally Accepted Accounting
Principles, consistently applied.
(d) Prior to and as of the Closing Date and the Delivery Date, there will not
be any material changes in the financial position of Acquiror, except
changes arising in the ordinary course of business, which changes will in
no event adversely affect the financial condition of the Acquiror;
provided, however, that Acquiror will have sold or transferred all of its
operations as of the Delivery Date.
(e) Except as previously disclosed, Acquiror is not involved in any pending
litigation, claims, or governmental investigation or proceeding not
reflected in such financial statements or otherwise disclosed in writing to
the Principal Officers, and there are otherwise no lawsuits, claims,
assessments, investigations, or similar matters, to the best knowledge of
management, threatened or contemplated against Acquiror, its management or
properties.
(f) As of the Closing Date and the Delivery Date, Acquiror is duly organized,
validly existing and in good standing under the laws of the State of
Nevada; it has the corporate power to own its property and to carry on its
business as now being conducted and is duly qualified to do business in any
jurisdic tion where so required.
(g) Except as previously disclosed, Acquiror has not breached, nor is there any
pending or threatened claims or any legal basis for a claim that Acquiror
has breached, any of the terms or conditions of any agreements, contracts
or commitments to which it is a party or is bound and the execution and
performance hereof will not violate any provisions of applicable law of any
agreement to which Acquiror is subject.
(h) All outstanding shares have been duly authorized, validly issued, and fully
paid. There are not outstanding or presently authorized securities,
warrants, options or related commitments of any nature.
4
<PAGE>
(i) Acquiror has no subsidiary corporations.
(j) The shares of restricted securities of Acquiror to be issued to
Stockholders of Acquiree as of the Delivery Date, will be validly issued,
nonassessable and fully-paid under Nevada corporation law and will be
issued in a non-public offering and exempted transaction under federal and
state securities laws.
(k) At the date of this Agreement, Acquiror has, and at the Closing Date, and
as of the Delivery Date it will have, disclosed all events, conditions and
facts materially affecting the business and prospects of Acquiror. Acquiror
has not now and will not have, at the Closing Date, or at the Delivery
Date, withheld disclosure of any such events, conditions, and facts which
it, through management has knowledge of, or has reasonable grounds to know,
may materially affect the business and prospects of Acquiror.
(l) Acquiror is a public company and represents that, except as previously
disclosed, it has no existing or threatened liabilities, claims, lawsuits,
or basis for the same with respect to its shareholders, the public,
brokers, the U.S. Securities and Exchange Commission, state agencies or
other persons. This includes matters relating to state or federal
securities laws as well as general common law or state corporation law
principles.
6. Closing and Delivery Date. The Closing Date herein referred to shall be
-------------------------
upon such date as the parties hereto may mutually agree for the execution
of this Agreement but is expected to be on or about April 9, 1999. This
Agreement is executed by the parties as of the Closing Date and effective
as of the Deliver Date hereof. The date of delivery of all of the
documentation shall be known as the Delivery Date. Certain exhibits, etc.
may be delivered subsequent to the Delivery Date upon the mutual agreement
of the parties hereto. The Principal Officers will be deemed to have
accepted, as of the Delivery Date, delivery of the certificates of stock
to be issued in its name, and in connection therewith will make delivery of
its stock in Acquiree to Acquiror.
7. Conditions Precedent to the Obligations of Acquiree. All obligations of
---------------------------------------------------
Acquiree and Principal Officers under this Agreement are subject to the
fulfillment, prior to, as of the Closing Date, or at the Delivery Date, of
each of the following conditions:
(a) The representations and warranties by or on behalf of Acquiror contained
in this Agreement or in any certificate or document delivered to
Acquiree pursuant to the provisions hereof shall be true in all material
respects at and as of the Closing Date and the Delivery Date as though
such representations and warranties were made at and as of such time.
(b) Acquiror shall have performed and complied with all covenants,
agreements, and conditions required by this Agreement to be performed or
complied with by it prior to or at the Closing Date, subject only to the
conditions required on the Delivery Date.
(c) The Directors of Acquiror shall have approved and ratified this
transaction, shall have approved a change of the name of the Acquiror to
such name as may be
5
<PAGE>
reasonably selected by Principal Officers, and such other reasonable
matters as requested by Acquiree as pertaining to this transaction.
(d) The management of Acquiror shall have resigned and shall have been
replaced by management selected by the Principal Officers of Acquiree.
(e) Acquiree shall have received an opinion from the counsel to Acquiror,
dated the Delivery Date, in form and substance satisfactory to counsel for the
Acquiree, to the effect that:
(1) The Acquiror is a corporation duly organized, validly
existing and in good standing under the laws of the State of Nevada
and has full corporate power and authority to carry on its business as
it now is being conducted;
(2) The outstanding shares of capital stock of the Acquiror as
shown on the attached shareholder list are fully paid and are duly and
validly issued and non-assessable;
(3) All legal and corporate proceedings necessary to be taken by
and on the part of the Acquiror in connection with the transactions
contemplated by this Agreement and necessary to make the same effective
have been duly and validly taken, this Agreement has been duly and validly
authorized, executed and delivered by the Acquiror and constitutes the
valid and binding agreement of the Acquiror as limited by applicable
bankruptcy, insolvency, reorganization or similar laws at the time in
effect;
(4) Neither the execution and delivery of this Agreement nor the
consum mation of the transactions contemplated hereby is an event
which, of itself or with the giving of notice or the passage of
time or both, could: (i) consti tute a violation of or conflict
with or result in any breach of the Articles of Incorporation or
Bylaws of the Acquiror or, to the knowledge of such counsel, any
material agreement or instrument to which the Acquiror is bound
or any judgment, decree, or order to which it is subject; or (ii)
to the knowledge of such counsel result in the creation or
imposition of any lien, charge or encumbrance of any nature
whatsoever on the property or assets of the Acquiror, and no such
event of itself or with the giving of notice or the passage of
time or both will result in the acceleration of the due date of
any obligation of the Acquiror ; and
(5) To the knowledge of such counsel, there is no action or
proceeding pending or threatened against the Acquiror or any of
its properties or assets before any court or governmental
department, agency or commission to restrain or prohibit, or to
obtain substantial damages in respect of, this Agreement or the
consummation of the transactions contemplated hereby.
8. Conditions Precedent to the Obligations of Acquiror. All obligations of
---------------------------------------------------
the Acquiror under this Agreement are subject to the fulfillment, prior to,
as of the Closing Date, or at the Delivery Date, of each of the following
conditions:
(a) The representations and warranties contained in this Agreement or in
any certificate or document delivered to Acquiror pursuant to the
provisions hereof
6
<PAGE>
shall be true at and as of the Closing Date and the Delivery Date as
though such representations and warranties were made at and as of such
time.
(b) Acquiree, Stockholders of Acquiree, and Principal Officers, as
applicable, shall have performed and complied with all covenants,
agreements, and conditions required by this Agreement to be performed or
complied with by it prior to or at the Closing Date, subject only to the
conditions on the Delivery Date.
(c) Stockholders of Acquiree shall deliver to Acquiror a letter commonly
known as an "investment letter" agreeing that the shares of stock in
Acquiror are being acquired for investment purposes, and not with a view
to resale.
(d) Stockholders of Acquiree shall state, and reaffirm as of the Delivery
Date, that the materials, including, current financial statements,
prepared and delivered by Acquiror to Stockholders of Acquiree, have
been read and understood by Stockholders of Acquiree, that they are
familiar with the business of Acquiror, that they are acquiring the
Acquiror shares under Section 4(2), commonly known as the private
offering exemption of the Securities Act of 1933, and that the shares
are restricted and may not be resold, except in reliance on an exemption
under the Act.
(e) The Directors shall have approved and ratified this transaction,
respectively, and such other reasonable matters as requested by Acquiree
as pertaining to this transaction.
(f) The management of Acquiror shall have resigned and shall have been
replaced by management selected by the Principal Officers.
(g) Acquiror shall have received an opinion from the counsel to Acquiree,
dated the Delivery Date, in form and substance satisfactory to counsel
for the Acquiror, to the effect that:
(1) The Acquiree is a corporation duly organized, validly existing and
in good standing under the laws of the State of California and has full
corporate power and authority to carry on its business as it now is being
conducted;
(2) The outstanding shares of capital stock of the Acquiree as shown on
the attached shareholder list are fully paid and are duly and validly
issued and non-assessable;
(3) All legal and corporate proceedings necessary to be taken by and on
the part of the Acquiree in connection with the transactions contemplated
by this Agreement and necessary to make the same effective have been duly
and validly taken, this Agreement has been duly and validly authorized,
executed and delivered by the Acquiree and constitutes the valid and
binding agreement of the Acquiree as limited by applicable bankruptcy,
insolvency, reorganization or similar laws at the time in effect;
(4) Neither the execution and delivery of this Agreement nor the consum
mation of the transactions contemplated hereby is an event which, of itself
or with the giving of notice or the passage of time or both, could: (i)
constitute a violation
7
<PAGE>
of or conflict with or result in any breach of the Articles of
Incorporation or Bylaws of the Acquiree or its subsidiary, or, to the
knowledge of such counsel, any material agreement or instrument to which
the Acquiree or its subsidiary is bound or any judgment, decree, or order
to which it is subject; or (ii) to the knowledge of such counsel result in
the creation or imposition of any lien, charge or encumbrance of any nature
whatsoever on the property or assets of the Acquiree or its subsidiary, and
no such event of itself or with the giving of notice or the passage of time
or both will result in the acceleration of the due date of any obligation
of the Acquiror or its subsidiary ; and
(5) To the knowledge of such counsel, there is no action or proceeding
pending or threatened against the Acquiror or any of its properties or
assets before any court or governmental department, agency or commission to
restrain or prohibit, or to obtain substantial damages in respect of, this
Agreement or the consummation of the transactions contemplated hereby.
9. Indemnification. Within the period provided in paragraph 10 herein and
---------------
in accordance with the terms of that paragraph, each party to this Agreement,
shall indemnify and hold harmless each other party at all times after the
date of this Agreement against and in respect of any liability, damage or
deficiency, all actions, suits, proceedings, demands, assessments, judgments,
costs and expenses including attorney's fees incident to any of the
foregoing, resulting from any misrepresen tations, breach of covenant or
warranty or non-fulfillment of any agreement on the part of such party under
this Agreement or from any misrepresentation in or omission from any
certificate furnished or to be furnished to a party hereunder. Subject to the
terms of this Agreement, the defaulting party shall reimburse the other party
or parties on demand, for any reasonable payment made by said parties at any
time after the Closing, in respect of any liability or claim to which the
foregoing indemnity relates, if such payment is made after reasonable notice
to the other party to defend or satisfy the same and such party failed to
defend or satisfy the same.
10. Nature and Survival of Representations. All representations, warranties
--------------------------------------
and covenants made by any party in this Agreement shall survive the Closing
hereunder and the consummation of the transactions contemplated hereby for
two years from the date hereof. All of the parties hereto are executing and
carrying out the provisions of this Agreement in reliance solely on the
representations, warranties and covenants and agreements contained in this
Agreement and not upon any investigation upon which it might have made or any
representations, warranty, agreement, promise or information, written or
oral, made by the other party or any other person other than as specifically
set forth herein.
11. Documents at Closing. Between the date hereof and the Delivery Date,
--------------------
the following transactions shall occur, all of such transactions being deemed
to occur simultaneously:
(a) Principal Officers will deliver, or cause to be delivered, to Acquiror
the following:
(1) stock certificates for the stock of Acquiree being tendered
hereunder, duly endorsed in blank,
8
<PAGE>
(2) all corporate records of Acquiree, including without
limitation corporate minute books (which shall contain copies of the
Articles of Incorporation and Bylaws, as amended to the Delivery Date),
stock books, stock transfer books, corporate seals, and such other
corporate books and records as may reasonably requested for review by
Acquiror and its counsel;
(3) a certificate of the President of Acquiree to the effect that all
representations and warranties of Acquiree made under this Agreement are
reaffirmed on the Closing Date and the Delivery Date, the same as though
originally given on said date;
(4) such other instruments, documents and certificates, if any, as are
required to be delivered pursuant to the provisions of this Agreement or
which may be reasonably requested in furtherance of the provisions of
this Agreement;
(b) Acquiror will deliver or cause to be delivered to Stockholders of
Acquiree, Principal Officers and Acquiree:
(1) stock certificates for Common and Preferred Stock to be issued as a
part of the exchange as listed on Exhibit "A" after the date of approval
of this transaction by the Acquiror shareholders;
(2) a certificate of the President of Acquiror to the effect that all
representations and warranties of Acquiror made under this Agreement are
reaffirmed on the Closing Date and the Delivery Date, the same as though
originally given on said date;
(3) certified copies of resolutions by Acquiror's Board of Directors
authorizing this transaction;
(4) such other instruments and documents as are required to be delivered
pursuant to the provisions of this Agreement.
12. Miscellaneous.
-------------
(a) Further Assurances. At any time, and from time to time, after the
------------------
effective date, each party will execute such additional instruments and
take such action as may be reasonably requested by the other party to
confirm or perfect title to any property transferred hereunder or
otherwise to carry out the intent and purposes of this Agreement.
(b) Waiver. Any failure on the part of any party hereto to comply
------
with any of its obligations, agreements or conditions hereunder may be
waived in writing by the party to whom such compliance is owed.
(c) Notices. All notices and other communications hereunder shall be
-------
in writing and shall be deemed to have been given if delivered in person
or sent by prepaid first class registered or certified mail, return
receipt requested.
9
<PAGE>
(d) Headings. The section and subsection headings in this Agreement
--------
are inserted for convenience only and shall not affect in any way
the meaning or interpretation of this Agreement.
(e) Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument.
(f) Governing Law. This Agreement was negotiated and is being
-------------
contracted for in the State of Nevada, and shall be governed by the laws
of the State of Nevada, and the securities being issued herein are being
issued and delivered in accordance with the isolated transaction and non-
public offering exemption of the Act.
(g) Binding Effect. This Agreement shall be binding upon the parties
--------------
hereto and inure to the benefit of the parties, their respective
heirs, administrators, executors, successors and assigns.
(h) Entire Agreement. This Agreement is the entire agreement of the
----------------
parties covering everything agreed upon or understood in the transaction.
There are no oral promises, conditions, representations, understandings,
interpreta tions or terms of any kind of condition or inducements to the
execution hereof.
(i) Time. Time is of the essence.
----
(j) Severability. If any part of this Agreement is deemed to be
------------
unenforceable the balance of the Agreement shall remain in full
force and effect.
(k) Default Costs. In the event any party hereto has to resort to
-------------
legal action to enforce any of the terms hereof, such party shall be
entitled to collect attorneys fees and other costs from the party in
default.
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first above written.
MOTORCYCLE CENTERS OF AMERICA, INC.
a Nevada Corporation
By:
________________________
President
ENTERTAINMENT UNIVERSE, INC.
a California Corporation
By:
_________________________
President
PRINCIPAL OFFICERS:
10
<PAGE>
------------------------------
Brad D. Greenspan
- ------------------------------
Leland Silvas
MOTORCYCLE CENTERS OF AMERICA, INC.
OFFICER'S CERTIFICATE
---------------------
The undersigned, President of MOTORCYCLE CENTERS OF AMERICA, INC.
("Acquiror"), does hereby certify that he is a duly elected, qualified and
acting officer of Acquiror, a Nevada corporation, and as such is familiar with
the business affairs of said corporation, and is familiar with and has read that
certain Agreement and Plan of Reorganization between Acquiror and Acquiree,
dated April 9, 1999.
The undersigned does hereby state that the representations and warranties
made by Acquiror contained in said Agreement, to the best of his knowledge, are
true and correct at and as of the time of closing and the date of delivery of
Acquiror's shares. In addition, the undersigned hereby states that to the best
of his knowledge, Acquiror has performed and complied with all covenants,
agreements and conditions required by the Agreement to be performed or complied
with by Acquiror prior to or at the Closing Date or the Delivery Date.
IN WITNESS WHEREOF, the undersigned, has hereunto duly executed this
Certificate this 9th day of April, 1999.
MOTORCYCLE CENTERS OF AMERICA, INC.
By:
_________________________________
President
<PAGE>
ENTERTAINMENT UNIVERSE, INC.
OFFICER'S CERTIFICATE
---------------------
The undersigned, President of ENTERTAINMENT UNIVERSE, INC. ("Acquiree"),
does hereby certify that he is a duly elected, qualified and acting officer of
Acquiree, a California corporation, and as such is familiar with the business
affairs of said corporation, and is familiar with and has read that certain
Agreement and Plan of Reorganization between Acquiror and Acquiree, dated April
9, 1999.
The undersigned does hereby state that the representations and warranties
made by Acquiree contained in said Agreement, to the best of his knowledge, are
true and correct at and as of the time of closing and the date of delivery of
the Acquiror's shares. In addition, the undersigned hereby states that to the
best of his knowledge, Acquiree has performed and complied with all covenants,
agreements and conditions required by the Agreement to be performed or complied
with by Acquiree prior to or at the Closing Date or the Delivery Date.
IN WITNESS WHEREOF, the undersigned, has hereunto duly executed this
Certificate this 9th day of April, 1999.
ENTERTAINMENT UNIVERSE, INC.
By:
______________________________
President
<PAGE>
EXHIBIT A
Common Shares
Name Number of Shares
- ---- ----------------
Brad Greenspan 8,061,000
Chuck Beilman 2,500,000
Joseph W. & Patricia G. Abrams Living Trust 839,000
Matthew R. Abrams Irrevocable Trust 350,000
Sarah E. Abrams Irrevocable Trust 350,000
Lee Silvas 200,000
Emanuel Gerard IRA Rollover #2 100,000
Gerard Klauer Mattison & Mattison Co., Inc.401(k) Plan 50,000
Gerard Klauer Mattison & Mattison Co. 50,000
Dominic Petito 30,000
Michael P. O'Hare 10,000
Hamed Hoghaddam 10,000
Total 12,550,000
Preferred Shares
Name Number of Shares
- ---- ----------------
Joan Vogelsang 6,000
Gordon Landies 6,000
Paul Jakab 6,000
James Haiduck 6,000
George Gitschel 12,200
Ed Roffman 6000
Jeffrey S. Cooper and Patricia G. Cobb 6250
David R. Fulton 5,000
Frank Michalik 5,000
Wayne C. Johnson 7,500
Baer Family Charitable Remainder Trust 12,500
Edward L. Bernstein 2,500
Bernice Brauser 41,667
KB Electronics, Inc. 12,500
John A. Friedmann 12,500
Stanford Miller 25,000
Cory Bihr and Mary Bihr 6,000
LBI Group, Inc. 555,556
EIK Investors, Inc. 25,000
Jeffrey Benton 12,500
James A. Carruthers 5,000
Paul S. Freyer 7,500
Eric Singer 5,000
Name Number of Shares
- ---- ----------------
Robert Brooks 12,500
Robert Murphy 25,000
Michael Nichols 12,500
<PAGE>
James N. Oliphant 12,500
RPM Asset Management 50,000
Patrick E. Murphy 25,000
Joseph Creen, Jr. 12,500
Nottinghill Resources, Ltd. 50,000
The Cooper Family Trust 11,250
Mark Mitola 15,000
Side Cape Holdings, Ltd. 365,740
Gregory F. Whitten and Ruth Ann Whitten 75,000
JRA Enterprises 12,500
EP Opportunity Fund International, Ltd. 15,000
EP Opportunity Fund, LLC 235,000
Lawrence Equity Group, LLC 56,250
<PAGE>
person any compensation for soliciting another to purchase any other securities
of the Company.
4.27 No Other Registration Arrangements. There are no contracts,
----------------------------------
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Act with respect to any securities of the Company or to require the Company
to include such securities with the Conversion Shares registered pursuant to any
registration statement, which are not disclosed in the Disclosure Documents.
4.28 Adequacy of Disclosures. The Memorandum and the other Disclosure
-----------------------
Documents contain all material statements which are required to be stated
therein in accordance with the Act and the rules and regulations of the SEC
promulgated thereunder, and in all material respects conform to the requirements
of the Act and the rules and regulations promulgated thereunder; the offering
documents, taken as a whole, do not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, except that the representations and
warranties contained in this Paragraph 4.28 shall not apply to statements in or
omissions from the Memorandum (or any supplement or amendment thereto) based
upon information relating to a Placement Agent furnished to the Company on
behalf of a Placement Agent expressly for use therein or inaccurate statements
in or omissions from the Memorandum or the other Disclosure Documents as a
result of arms-length negotiations between the Company and the Subscriber.
4.29 Representations Correct. The foregoing representations, warranties
-----------------------
and agreements are true, correct and complete in all material respects, and
shall survive the Closing and the issuance of the shares of Preferred Stock.
5. Covenants of the Company.
-------------------------
5.1 Independent Auditors. The Company shall, until at least three (3)
--------------------
years after the date of the Last Closing, maintain as its independent auditors
an accounting firm authorized to practice before the SEC.
5.2 Corporate Existence and Taxes. The Company shall, until at least the
-----------------------------
later of (a) the date that is three (3) years after the date of the Last Closing
or (b) the conversion or redemption of all of the Preferred Stock purchased
pursuant to this Agreement maintain its corporate existence in good standing
(provided, however, that the foregoing covenant shall not prevent the Company
from entering into any merger or corporate reorganization as long as the
surviving entity in such transaction, if not the Company, assumes the Company's
obligations with respect to the Preferred Stock and has Common Stock listed for
trading on
16
<PAGE>
a stock exchange or on Nasdaq and is a "Reporting Issuer") and shall
pay all its taxes when due except for taxes which the Company disputes.
5.3 Registration Rights. The Company will enter into a registration
-------------------
rights agreement covering the resale of the Conversion Shares and the
registration of the Company's Securities substantially in the form of the
Registration Rights Agreement attached as Exhibit C.
5.4 Notification of Last Closing Date by Company. Within five (5)
--------------------------------------------
business days after the Last Closing, the Company shall notify Subscriber in
writing that the Last Closing has occurred, the date of the Last Closing, the
date of Subscriber's Closing, the dates that Subscriber is entitled to convert
Subscriber's Preferred Stock, the value of the Fixed Conversion Price, as that
term is defined in the Certificate of Designation, and the name and telephone
number of an administrative contact person at the Company whom Subscriber may
contact regarding information related to conversion of the Preferred Stock as
contemplated by the Certificate of Designation.
5.5 Filing of SB-2 Registration Statement. The Company shall, no later
-------------------------------------
than one hundred fifty (150) days after the date of the Initial Issuance Date,
as defined in the Certificate of Designation, file a registration statement or a
post-effective amendment to an effective registration statement (collectively,
the "Registration Statement") on Form SB-2 (or other suitable form, at the
Company's discretion but subject to the reasonable approval of Subscribers) with
the SEC, covering the resale of the Conversion Shares issuable to all
Subscribers in this Offering. The Company shall, within ten (10) days of the
filing of the Registration Statement, send a copy of the Registration Statement
to Subscribers. Such Registration Statement, and the rights and obligations of
the Company and the Subscribers in connection therewith, shall be in conformance
with and subject to Section 2 of the Registration Rights Agreement attached
hereto as Exhibit C. The Company shall use its best efforts to have the
Registration Statement declared effective as soon as possible. The Company
covenants to use its best efforts to remain eligible to use Form SB-2 for the
registration required by this Section 5.5 (and Sections 2 and 3 of the
Registration Rights Agreement) during all applicable times contemplated by this
Agreement.
5.6 Capital Raising Limitations; Rights of First Refusal.
-----------------------------------------------------
5.6.1 Capital Raising Limitations. Except as hereinafter set forth, for a
---------------------------
period of one hundred eighty (180) days following the date of Last Closing,
the Company shall not issue or agree to issue, except (a) as contemplated
hereunder, (b) pursuant to any employee stock purchase plan or employee
stock option plan of the Company in effect on the date of the Closing, and
disclosed in the Disclosure Documents, (c) pursuant to any security,
option, warrant, scrip, call or commitment or right disclosed in the
Memorandum, any equity securities of the Company (or any security
convertible into or exercisable or exchangeable, directly or indirectly,
for equity securities of the
17
<PAGE>
Company) if such securities are issued at a price (or in the case of
securities which are convertible into or exercisable or exchangeable,
directly or indirectly, for Common Stock, if such securities are
convertible, exercisable or exchangeable, as appropriate, at a conversion
price, exercise price or exchange price) less than the Fixed Conversion
Price (as defined in the Certificate of Designation), (d) pursuant to any
acquisition by the Company provided that the purchase price of such
acquisition is paid solely with shares of Common Stock and the price per
share of the Common Stock is the greater of $3.60 or the then closing bid
price of the Common Stock on the date the purchase price is determined, or
(e) pursuant to a private placement if the closing bid price of the Common
Stock is $5.00 or greater, provided that the sale price of the Common Stock
to be issued in connection with the private placement is at the market
price or above. In addition, during such period, the Company shall not
issue, or agree to issue, any debt securities which are issued at a
discount to the principal amount thereof.
5.6.2 Right of First Offer. The Company agrees that, during the period
--------------------
beginning on the date hereof and terminating on the first anniversary of
the date of the Last Closing, the Company will not, without the prior
written consent of each Subscriber (which shall be deemed given for any
warrants to purchase Common Stock issued or to be issued to the Placement
Agent in consideration of its services in connection with this Agreement
and the transactions contemplated hereby) issue or sell, or agree to issue
or sell any equity or debt securities of the Company or any of its
subsidiaries (or any security convertible into exercisable or exchangeable,
directly or indirectly, for equity or debt securities of the Company or any
of its subsidiaries) ("Future Offering") unless the Company shall have
first delivered to each Subscriber at least thirty (30) days prior to the
closing of such Future Offering, written notice describing the proposed
Future Offering, including, the terms and conditions thereof, and providing
each Subscriber and its affiliates an option during the twenty (20) day
period following delivery of such notice to purchase up to the full amount
of the securities being offered in the Future Offering on the same terms as
contemplated by such Future Offering (the limitations referred to in this
sentence are collectively referred to as the "Capital Raising
Limitations"). Notwithstanding the foregoing, if any Subscriber chooses
not to participate in any Future Offering, then any debt or equity security
issued as a result of said Future Offering will be ineligible for resale
and/or conversion, as the case may be, until the date which is nine (9)
months after the Last Closing. The Capital Raising Limitations shall not
apply to any transaction involving issuances of securities in connection
with a merger, consolidation, acquisition or sale of assets, or in
connection with any strategic partnership or joint venture (the primary
purpose of which is not to raise equity capital), or in connection with the
disposition or acquisition of a business, product or license by the Company
or exercise of options by employees, consultants or directors. The Capital
Raising Limitations also shall not apply to (a) the issuance of securities
pursuant to an underwritten public offering, (b) the issuance of securities
upon exercise or conversion of (including issuances as a result
18
<PAGE>
of the anti-dilution provisions, if any, applicable to such options,
warrants or convertible securities) the Company's options, warrants or
other convertible securities outstanding as of the date hereof or (c) the
grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option or restricted stock plan for the
benefit of the Company's employees, directors or consultants.
5.6.3 Entitlement to Participate in Rule 504 Offering. As a condition
-----------------------------------------------
precedent to any business combination or reorganization with or into the
Public Entity, the Public Entity shall offer to each Subscriber that
purchases Preferred Stock the option to purchase shares of common stock of
the Public Entity (the "P.E. Common Stock") under Securities and Exchange
Commission Rule 504 at the rate of $100,000 of P.E. Common Stock for each
purchase of $900,000 of Preferred Stock in this placement; but in no event
shall no more than $1,000,000 of P.E. Common Stock be issued. The purchase
price for each share of Common Stock hereunder shall be the "adjusted
pricing point" as set forth in Exhibit 1 to the Certificate of Designation
of Preferred Stock, a copy of which is attached hereto as Exhibit A. Any
of such shares of P.E. Common Stock purchased as aforesaid shall be freely
tradeable by the holder without restriction or limitation under any
agreement, arrangement, law or regulation.
5.7 Annual and Quarterly Reports on Form 10-K(SB) and Form 10-Q(SB) and
-------------------------------------------------------------------
Current Reports on Form 8-K. The Company shall make available to the Subscriber
- ---------------------------
copies of its annual reports on Form 10-K(SB), quarterly reports on Form 10-
Q(SB) and current reports on Form 8-K for as long as the Preferred Stock may
remain outstanding.
5.8.1 Opinion of Counsel. Subscribers shall, upon purchase of the
------------------
Preferred Stock pursuant to this Agreement, receive an opinion letter from
Jeffer, Mangels, Butler & Mamaro, LLP ("Counsel"), counsel to the Company,
to the effect that (a) the Company is duly incorporated and validly
existing; (b) this Agreement, the issuance of the Preferred Stock at
Closing and the issuance of the Conversion Shares upon conversion of the
Preferred Stock have been duly approved by all required corporate action,
and that all such securities, upon due issuance, shall be validly issued,
fully paid and non-assessable; (c) this Agreement, the Registration Rights
Agreement, the Irrevocable Instructions to Transfer Agent and the Escrow
Agreement are valid and binding obligations of the Company, enforceable in
accordance with their terms, except as enforceability of the
indemnification provisions may be limited by principles of public policy,
and subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of laws governing specific
performance and other equitable remedies; (d) based upon the
representations and acknowledgments of Subscribers contained in Sections 2
and 3 hereof, the Preferred Stock has been, and the Conversion Shares will
be, issued in a transaction that is exempt from the registration
requirements of the Act and applicable state securities laws; (e) the
Conversion Shares are authorized for listing on the Nasdaq market,
19
<PAGE>
including OTC Bulletin Board, where the Company's Common Stock is then
trading, subject to notice of issuance; and (f) the Certificate of
Designation has been duly authorized and adopted by the Company and has
been or forthwith will be duly filed and/or recorded under applicable law.
5.8.2 Opinion of Special Counsel. Subscriber shall, upon purchase of
--------------------------
the P.E. Common Stock, receive an opinion letter from David L. Kagel, Esq.
("Special Counsel"), Special Counsel to the Company and the Public Entity,
to the effect that (a) any P.E. Common Stock subscribed for on or prior to
April 7, 1999 is, or when actually issued will be, freely tradable without
registration or further action by the holder(s) thereof under Rule 504
promulgated by the Securities and Exchange Commission and in effect on or
prior to said date, and (b) that the offering of the Preferred Stock and
the separate offering of the P.E. Common Stock are not subject to the
"integration doctrine" as originally promulgated in Securities Act Release
4552, as such "integration doctrine" has been amended or applied since such
promulgation.
5.9 Removal of Legend Upon Conversion. As contemplated by the
---------------------------------
Certificate of Designation, upon conversion of the Preferred Stock, Subscriber
shall submit a Notice of Conversion. The Legend shall be removed and the Company
shall issue a certificate without such Legend to the holder of any Security upon
which it is stamped, and a certificate for a security shall be originally issued
without the Legend, if, unless otherwise required by state securities laws, (a)
the sale of such Security is registered under the Act, or (b) such holder
provides the Company with an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions (the reasonable
cost of which shall be borne by the Company), to the effect that a public sale
or transfer of such Security may be made without registration under the Act, or
(c) such holder provides the Company with reasonable assurances that such
Security may be sold pursuant to Rule 144. Each Subscriber agrees to sell all
Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
pursuant to an effective registration statement relating thereto and to deliver
a prospectus in connection with such sale or in compliance with an exemption
from the registration requirements of the Act. If the Legend is removed from any
Security or any Security is issued without the Legend and thereafter the
effectiveness of a registration statement covering the resale of such Security
is suspended or the Company determines that a supplement or amendment thereto is
required by applicable securities laws, then upon reasonable advance notice to
Subscriber holding such Security, the Company may require that the Legend be
placed on any such Security that cannot then be sold pursuant to an effective
registration statement or Rule 144 or with respect to which the opinion referred
to in clause (b) next above has not been rendered, which Legend shall be removed
when such Security may be sold pursuant to an effective registration statement
or Rule 144 or such holder provides the opinion with respect thereto described
in clause (b) next above.
20
<PAGE>
5.10 Listing. Subject to the remainder of this Section 5.10, the Company
-------
shall use its best efforts to ensure that its shares of Common Stock (including
all Conversion Shares) are approved and included for quotation on the Nasdaq
Small Cap Market ("NASDAQ"). Thereafter, the Company shall (a) use its best
efforts to continue the quotation of its Common Stock on the NASDAQ, or on the
Nasdaq National Market System ("NMS"), the New York Stock Exchange ("NYSE"), or
the American Stock Exchange ("AMEX") or any other national exchange or over-the-
counter market system; (b) take all action necessary to cause and maintain the
quotation of its Common Stock on the OTC Bulletin Board at any time the Common
Stock is not included for quotation on NASDAQ, NMS, NYSE or AMEX; and (c) comply
in all respects with the Company's reporting. filing, and other obligations
under the by-laws or rules of the National Association of Securities Dealers
("NASD") and such exchanges, as applicable.
5.11 The Company's Instructions to Transfer Agent. The Company will
--------------------------------------------
issue to its Transfer Agent the Irrevocable Instructions to Transfer Agent
substantially in the form of Exhibit E instructing the Transfer Agent to issue
certificates, registered in the name of each Subscriber or its nominee, for the
Conversion Shares in such amounts as specified from time to time by such
Subscriber to the Company upon conversion of the Preferred Stock. Such
certificates shall bear a Legend only to the extent permitted by Section 5.9
hereof. The Company warrants that no instruction, other than such instructions
referred to in Section 5.9 hereof or in this Section 5.11 and stop transfer
instructions to give effect to Section 3.7 hereof in the case of Conversion
Shares prior to registration of the Conversion Shares under the Act, will be
given by the Company to its Transfer Agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights Agreement.
Nothing in this Section shall affect in any way each Subscriber's obligations
and agreement set forth in Sections 2.3.3 or 2.3.4 hereof to resell the
Securities pursuant to an effective registration statement and to deliver a
prospectus in connection with such sale or in compliance with an exemption from
the registration requirements of applicable securities laws. If (a) a Subscriber
provides the Company with an opinion of counsel, which opinion of counsel shall
be in form, substance and scope customary for opinions of counsel in comparable
transactions and acceptable to counsel for the Company (the reasonable cost of
which shall be borne by the Company), to the effect that the Securities to be
sold or transferred may be sold or transferred pursuant to an exemption from
registration or (b) a Subscriber transfers Securities to an affiliate which is
an accredited investor as defined under the Act, the Company shall permit the
transfer, and, in the case of Conversion Shares, promptly instruct its transfer
agent to issue one or more certificates in such name and in such denomination as
specified by such Subscriber. The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to a Subscriber by
violating the intent and purpose of the transaction contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations under this Section 5.11 will be inadequate and agrees, in the event
of a breach or threatened breach by the Company of the provisions of this
Section 5.11, that a Subscriber
21
<PAGE>
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required. The Company hereby agrees that it will not unilaterally
terminate its relationship with the Transfer Agent for any reason prior to the
date which is three (3) years after the Last Closing or one (1) month after the
first date that no Preferred Stock is outstanding, whichever is earlier (the
"Ending Date"). In the event the Company's agency relationship with the Transfer
Agent should be terminated for any other reason prior to the date which is three
(3) years after the Last Closing, the Company's Transfer Agent shall continue
acting as transfer agent pursuant to the terms of the Irrevocable Instructions
to Transfer Agent until such time that a successor transfer agent (i) is
appointed by the Company; (ii) is approved by seventy-five percent (75%) of the
Subscribers of outstanding Preferred Stock; and (iii) executes and agrees to be
bound by the terms of the Irrevocable Instructions to Transfer Agent.
5.12 Filing of Form 10-SB to Register Under Section 12(b) or 12(g) of the
--------------------------------------------------------------------
Exchange Act. The Company shall, no later than sixty (60) days after the
- ------------
Initial Issuance Date (as defined in Section 5 of the Company's Certificate of
Designation of Preferred Stock), file a registration statement on Form 10-SB
with the SEC registering the Securities under Section 12(b) or 12(g) of the
Exchange Act. The Company shall, within ten (10) days of the filing of such
registration statement on Form 10-SB, send a copy to Subscribers. The Company
shall use its best efforts to have such registration statement declared
effective within one hundred fifty (150) days after the Initial Issuance Date.
6. Subscriber Covenant/Miscellaneous.
----------------------------------
6.1 Representations and Warranties Survive the Closing; Severability.
----------------------------------------------------------------
Subscriber's and the Company's representations and warranties, including but not
limited to the Public Entity, shall survive the Closing of the transactions
contemplated by this Agreement notwithstanding any due diligence investigation
made by or on behalf of the party seeking to rely thereon. In the event that any
provision of this Agreement becomes or is declared by a court of competent
jurisdiction to be illegal, unenforceable or void, this Agreement shall continue
in full force and effect without said provision; provided that no such
severability shall be effective if it materially changes the economic benefit of
this Agreement to any party.
6.2 Successors and Assigns. The terms and conditions of this Agreement
----------------------
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties. Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. Subscriber may assign Subscriber's rights hereunder, in
connection with any private sale of the Preferred Stock of such Subscriber, so
long as, as a condition precedent to
22
<PAGE>
such transfer, the transferee executes an acknowledgment agreeing to be bound by
the applicable provisions of this Agreement.
6.3 Governing Law. This Agreement shall be governed by and construed under
-------------
the laws of the State of Delaware without regard to its conflict of laws rules
or principles.
6.4 Execution in Counterparts Permitted. This Agreement may be executed in
------------------------------------
any number of counterparts, each of which shall be enforceable against the
parties actually executing such counterparts, and all of which together shall
constitute one (1) instrument.
6.5 Titles and Subtitles; Gender. The titles and subtitles used in this
----------------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement. The use in this Agreement of a
masculine, feminine or neither pronoun shall be deemed to include a reference to
the others.
6.6 Written Notices, Etc. Any notice, demand or request required or
---------------------
permitted to be given by the Company or Subscriber pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally, or by facsimile (with a hard copy to follow by two (2) day courier),
addressed to the parties at the addresses and/or facsimile telephone number of
the parties set forth at the end of this Agreement or such other address as a
party may request by notifying the other in writing.
6.7 Expenses. Each of the Company and Subscriber shall pay all costs and
--------
expenses that it respectively incurs, with respect to the negotiation,
execution, delivery and performance of this Agreement.
6.8 Entire Agreement; Written Amendments Required. This Agreement,
---------------------------------------------
including the Exhibits attached hereto, the Certificate of Designation, the
Preferred Stock certificates, the Registration Rights Agreement, the Escrow
Agreement, the Irrevocable Instructions to Transfer Agent and the other
documents delivered pursuant hereto constitute the full and entire understanding
and agreement between the parties with regard to the subjects hereof and
thereof, and no party shall be liable or bound to any other party in any manner
by any warranties, representations or covenants except as specifically set forth
herein or therein. Except as expressly as provided herein, neither this
Agreement nor any term hereof may be amended, waived, discharged or terminated
other than by a written instrument signed by the party against whom enforcement
of any such amendment, waiver, discharge or termination is sought.
6.9 Arbitration. Any controversy or claim arising out of or related to
-----------
this Agreement or the breach thereof, shall be settled by binding arbitration in
Chicago, Illinois in accordance with the Expedited Procedures (Rules 53-57) of
the Commercial Arbitration Rules of the American Arbitration Association
("AAA"). A proceeding shall be commenced
23
<PAGE>
upon written demand by Company or any Subscriber to the other. The arbitrator(s)
shall enter a judgment by default against any party which fails or refuses to
appear in any properly noticed arbitration proceeding. The proceeding shall be
conducted by one (1) arbitrator, unless the amount alleged to be in dispute
exceeds two hundred fifty thousand dollars ($250,000), in which case three (3)
arbitrators shall preside. The arbitrator(s) will be chosen by the parties from
a list provided by the AAA, and if they are unable to agree within ten (10)
days, the AAA shall select the arbitrator(s). The arbitrators must be experts in
securities law and financial transactions. The arbitrators shall assess costs
and expenses of the arbitration, including all attorneys' and experts' fees, as
the arbitrators believe is appropriate in light of the merits of the parties'
respective positions in the issues in dispute. Each party submits irrevocably to
the jurisdiction of any state court sitting in Chicago, Illinois or to the
United States District Court sitting in Chicago for purposes of enforcement of
any discovery order, judgment or award in connection with such arbitration. The
award of the arbitrator(s) shall be final and binding upon the parties and may
be enforced in any court having jurisdiction. The arbitration shall be held in
such place as set by the arbitrator(s) in accordance with Rule 55.
7. Subscription and Wiring Instructions; Irrevocabilitv.
-----------------------------------------------------
7.1 Subscription
------------
(a) Wire Transfer of Subscription Funds. Subscriber shall send this
-----------------------------------
signed Agreement by facsimile to Company at 310-546-2870, and send the
subscription funds by wire transfer, to the Escrow Agent as follows:
American National Bank and Trust Company of Chicago
ABA 071000770
Account Number 4326350 - Corporate Trust Clearing Account
Attention: Brian Terwilliger
"Entertainment"
(b) Irrevocable Subscription. Subscriber hereby acknowledges and agrees,
------------------------
subject to the provisions of any applicable laws providing for the refund
of subscription amounts submitted by Subscriber, that this Agreement is
irrevocable and that Subscriber is not entitled to cancel, terminate or
revoke this Agreement or any other agreements executed by such Subscriber
and delivered pursuant hereto, and that this Agreement and such other
agreements shall survive the death or disability of such Subscriber and
shall be binding upon and inure to the benefit of the parties and their
heirs, executors, administrators, successors, legal representatives and
assigns. If the Securities subscribed for are to be owned by more than one
person, the obligations of all such owners under this Agreement shall be
joint and several, and the agreements, representations, warranties and
acknowledgments herein contained shall be deemed to be made by and be
binding upon each such person and his heirs, executors,
24
<PAGE>
administrators, successors, legal representatives and assigns.
Notwithstanding the foregoing, (i) if any material condition to Closing
required to be satisfied by a party other than Subscriber is not satisfied
or (ii) if the Disclosure Documents are discovered prior to Closing to
contain statements which are materially inaccurate, or omit statements of
material fact, Subscriber may revoke or cancel this Agreement.
(c) Company's Right to Reject Subscription. Subscriber understands
--------------------------------------
that this Agreement is not binding on the Company until the Company accepts
it. This Agreement shall be accepted by the Company when the Company
countersigns this Agreement. Subscriber hereby confirms that the Company
has full right in its sole and absolute discretion, for any reason or no
reason, to accept or reject the subscription of Subscriber, in whole or in
part, provided that, if the Company decides to reject such subscription,
the Company must do so promptly and in writing. In the case of rejection,
the Company will promptly return any rejected payments and (if rejected in
whole) copies of all executed subscription documents (including without
limitation this Agreement) to Subscriber. In the event of rejection, no
interest will be payable by the Company to Subscriber on any return of
payment, provided however, that any such interest accrued on such funds in
the Escrow Account shall be returned to the Subscriber by the Escrow Agent.
7.2 Acceptance of Subscription. In the case of acceptance of
--------------------------
Subscriber's subscription, ownership of the number of securities being purchased
hereby will pass to Subscriber upon the Closing.
7.3 Subscriber to Forward Original Signed Subscription Agreement to
---------------------------------------------------------------
Company. Subscriber agrees to courier to Company his, her or its original inked
- -------
signed Subscription Agreement within two (2) days after faxing said signed
agreement to Placement Agent.
8. Indemnification.
----------------
The Company and Brad Greenspan agree, jointly and severally, to
indemnify and hold harmless Subscriber and the Escrow Agent and each of their
respective officers, directors, employees and agents, and each person who
controls Subscriber or the Escrow Agent within the meaning of the Act or the
Exchange Act (each, a "Subscriber Indemnified Party") against any losses,
claims, damages or liabilities, joint or several, to which it, they or any of
them, may become subject and not otherwise reimbursed arising from any material
breach of any representation or warranty made by the Company or the Public
Entity contained in this Agreement, in writing to the Subscriber, in any
statements contained in the Disclosure Documents or otherwise disclosed.
25
<PAGE>
Subscriber agrees to indemnify and hold harmless the Company and the Escrow
Agent and each of their respective officers, directors, employees and agents,
and each person who controls Company or the Escrow Agent within the meaning of
the Act or the Exchange Act (each, a "Company Indemnified Party") (a Subscriber
Indemnified Party or a Company Indemnified Party may be hereinafter referred to
singularly as "Indemnified Party") against any losses, claims, damages or
liabilities, joint or several, to which it, they or any of them, may become
subject and not otherwise reimbursed arising from any material breach of any
representation or warranty made by Subscriber contained in this Agreement.
Promptly after receipt by an Indemnified Party of notice of the
commencement of any action pursuant to which indemnification may be sought, such
Indemnified Party will, if a claim in respect thereof is to be made against the
other party (hereinafter "Indemnitor") under this Section 8, deliver to the
Indemnitor a written notice of the commencement thereof and the Indemnitor shall
have the right to participate in and to assume the defense thereof with counsel
reasonably selected by the Indemnitor, provided, however, that an Indemnified
Party shall have the right to retain its own counsel, with the reasonably
incurred fees and expenses of such counsel to be paid by the Indemnitor, if
representation of such Indemnified Party by the counsel retained by the
Indemnitor would be inappropriate due to actual or potential conflicts of
interest between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
Indemnitor within a reasonable time of the commencement of any such action, if
prejudicial to the Indemnitor's ability to defend such action, shall relieve the
Indemnitor of any liability to the Indemnified Party under this Section 8, but
the omission to so deliver written notice to the Indemnitor will not relieve it
of any liability that it may have to any Indemnified Party other than under this
Section 8 to the extent it is prejudicial.
9. Number of Shares and Purchase Price. Subscriber subscribes for shares
-----------------------------------
of Preferred Stock against payment by wire transfer in the amount of ("Purchase
Price") as set forth on the last page of this Agreement.
10. Accredited Investor. Subscriber is an "accredited investor" because
-------------------
(check all applicable boxes):
(a) [ ] it is an organization described in Section 501(c)(3) of the
Internal Revenue Code, or a corporation, business trust, or
partnership not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000.
(b) [ ] any trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the securities offered,
whose purchase is directed by a sophisticated person who has such
knowledge and experience in financial and business matters that
he is capable of evaluating the merits and risks of the
prospective investment.
26
<PAGE>
(c) [ ] a natural person, who:
[ ] is a director, executive officer or general partner of the issuer
of the securities being offered or sold or a director, executive
officer or general partner of a general partner of that issuer.
[ ] has an individual net worth, or joint net worth with that
person's spouse, at the time of his purchase exceeding
$1,000,000.
[ ] had an individual income in excess of $200,000 in each of the two
most recent years or joint income with that person's spouse in
excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current
year.
(d) [ ] an entity each equity owner of which is an entity described in
a - b above or is an individual who could check one (1) of the
last three (3) boxes under subparagraph (c) above.
(e) [ ] other [specify]
11. If Subscriber is using the services of a Purchaser Representative,
such Purchaser Representative is _________________________.
The undersigned acknowledges that this Agreement and the subscription
represented hereby shall not be effective unless accepted by the Company as
indicated below.
27
<PAGE>
IN WITNESS WHEREOF, the undersigned Subscriber does represent and certify
under penalty of perjury that the foregoing statements are true and correct and
that Subscriber by the following signature(s) executed this Agreement.
Dated this _____ day of April, 1999.
______________________________ ________________________________________
Your Signature PRINT EXACT NAME IN WHICH YOU WANT THE
SECURITIES TO BE REGISTERED
______________________________ DELIVERY INSTRUCTIONS:
----------------------
Name: Please Print Please type or print address where your
security is to be delivered
______________________________ ATTN:__________________________________
Title/Representative Capacity
(if applicable)
______________________________ _______________________________________
Name of Company You Represent (if applicable) Street Address
___________________________________ _______________________________________
Place of Execution of this Agreement City, State or Province, Country,
Offshore Postal Code
Aggregate number of shares of Preferred
_______________________________________
Stock subscribed for: ________________________ Phone number (for Federal
Express) and Fax Number (re: Notice)
Amount Subscribed for: $_____________________
(number of shares subscribed
for x $_______ per share)
THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF $___________ ON
THE ____ DAY OF APRIL, 1999.
_________________________________
By:______________________________
Name:____________________________
Title:_____________________________
Agreed To and Accepted By:
__________________________________
Brad Greenspan
28
<PAGE>
EXHIBIT 10.07
ENTERTAINMENT UNIVERSE, INC.
________________________________________
Regulation D Subscription Agreement
<PAGE>
ENTERTAINMENT UNIVERSE, INC.
REGULATION D SUBSCRIPTION AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW, AND MAY
NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF OR
EXERCISED UNLESS (i) A REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE
STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR
(ii) AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR
TRANSFER.
THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES DESCRIBED
HEREIN BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. THESE SECURITIES HAVE NOT BEEN
RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES AUTHORITIES, NOR HAVE SUCH
AUTHORITIES REVIEWED OR DETERMINED THE ACCURACY OF THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SUBSCRIBERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND
ASSESSMENT OF THE RISKS INVOLVED.
SEE ADDITIONAL LEGENDS AT SECTION 3.7 AND ATTACHED AS EXHIBIT B.
THIS REGULATION D SUBSCRIPTION AGREEMENT (the "Agreement") is made as of
the ____ day of April, 1999, by and among Entertainment Universe, Inc., a
corporation duly organized and existing under the laws of the State of
California ("EUI" or the "Company"), Brad Greenspan, and the undersigned
subscriber executing this Agreement ("Subscriber"). The Company shall assign
this Agreement, on or prior to the closing date of this Offering, to a publicly
traded shell corporation (the "Public Entity") of which EUI intends to be the
wholly-owned subsidiary by the closing of this Offering. Upon such assignment,
references to the Company shall mean the Public Entity.
THE PARTIES HEREBY AGREE AS FOLLOWS:
<PAGE>
This Agreement is executed by Subscriber in connection with the offer by
the Company and the purchase by Subscriber of Series A Preferred Stock, $.001
par value (the "Preferred Stock"), of the Company. The Preferred Stock is being
offered at a purchase price of Three Dollars and Sixty Cents ($3.60), U.S., per
share, in minimum subscription amounts of at least Twenty-Seven Thousand, Seven
Hundred Seventy Eight (27,778) shares ($100,000.80), with a minimum aggregate
offering amount, placed on a "best efforts" basis, of Six Hundred Eighty Seven
Thousand Five Hundred (687,500) shares of Preferred Stock, or Two Million Four
Hundred Seventy-Five Thousand Dollars ($2,475,000) (the "Minimum Amount"), and
up to a maximum aggregate amount, placed on a "best efforts" basis, of One
Million Nine Hundred Thirty-Seven Thousand Five Hundred (1,937,500) shares of
Preferred Stock, or Six Million Nine Hundred Seventy-Five Thousand Dollars
($6,975,000) (the "Maximum Amount") (collectively, the "Offering"). The terms
of the Preferred Stock, including the terms on which the Preferred Stock may be
converted into common stock, $.001 par value, of the Company (the "Common
Stock"), are set forth in the Certificate of Designation of Preferred Stock (the
"Certificate of Designation"), substantially in the form attached hereto as
Exhibit A. The solicitation of this subscription and, if accepted by the
Company, the offer and sale of the Preferred Stock are being made in reliance
upon the provisions of Section 4(2) of and Regulation D ("Regulation D")
promulgated under the Securities Act of 1933, as amended ("the Act"). The
Preferred Stock and the Common Stock issuable upon conversion thereof (the
"Conversion Shares"), are sometimes referred to herein singularly as "Security"
and collectively as the "Securities."
It is agreed as follows:
1. Offering
--------
1.1 Offer to Subscribe; Purchase Price and Closing; and Placement Fees.
------------------------------------------------------------------
Subject to satisfaction of the conditions to Subscriber's obligations set forth
in Section 1.2 below, Subscriber hereby offers to subscribe for and purchase
Preferred Stock for the aggregate purchase price in the amount set forth on the
last page of this Agreement, in accordance with the terms and conditions of this
Agreement. Assuming that the Minimum Amount and corresponding subscription
agreements accepted by the Company are received into the Company's designated
escrow account for this Offering established pursuant to the Escrow Agreement
(the "Escrow Agreement") by and between the Company and American National Bank
and Trust Company of Chicago (the "Escrow Agent") (the "Escrow Account"), the
closing of a sale and purchase of Preferred Stock and the P.E. Common Stock (as
hereinafter defined) as to each Subscriber (the "Closing") shall be deemed to
occur when this Agreement has been executed by both Subscriber and the Company
and full payment shall have been made by Subscriber, by wire transfer to the
Escrow Account as set forth in Section 7.1(a) for payment in consideration for
the Company's delivery of certificates representing the Preferred Stock
subscribed for.
2
<PAGE>
1.2 Conditions to Subscriber's Obligations. Subscriber's obligations
--------------------------------------
hereunder are conditioned upon all of the following:
(a) the following documents shall have been deposited with the Escrow
Agent: the Registration Rights Agreement, substantially in the form attached
hereto as Exhibit C (the "Registration Rights Agreement") executed by the
Company, an opinion of counsel, substantially in the form attached hereto as
Exhibit D (the "Opinion of Counsel") signed by the Company's counsel, the
Irrevocable Instructions to Transfer Agent, substantially in the form attached
hereto as Exhibit E (the "Irrevocable Instructions to Transfer Agent")
executed by the Company and the Company's transfer agent (the "Transfer
Agent"), and the Certificate of Designation, substantially in the form
attached hereto as Exhibit A, together with evidence showing that it has been
filed with the Secretary of State of California; certificates representing the
Preferred Stock and the P.E. Common Stock issued in the name of the
Subscriber;
(b) the Company's Common Stock shall be included for quotation on the
Nasdaq Stock Market (including the OTC Bulletin Board);
(c) there shall have been no material adverse changes in the Company's
business prospects or financial condition since the date of the last balance
sheet included in the Disclosure Documents (defined below in Section 2.2.4),
including but not limited to incurring material liabilities;
(d) the representations and warranties of the Company and Brad Greenspan
shall be true and correct in material respects at the Closing as if made on
such date, and the Company and Brad Greenspan shall deliver a certificate,
signed by an officer of the Company, to such effect to the Escrow Agent;
(e) the Minimum Amount and corresponding subscription agreements accepted
by the Company shall have been received by the Escrow Agent;
(f) the Company shall have reserved for issuance a sufficient number of
shares of Common Stock to effect conversions of the Preferred Stock, which
number of shares shall initially be equal to or greater than two hundred
percent (200%) of the number of shares of Common Stock issuable upon
conversion of the Preferred Stock on the date the Preferred Stock is issued to
the Subscriber; and
(g) the Subscriber shall have received an opinion of counsel to the Company
satisfactory to Subscriber's counsel to the effect that any shares of P.E.
Common Stock purchased by Subscriber under Section 5.6.3 hereof are freely
tradeable without restriction or limitation under any arrangement, agreement,
law or regulation to which such shares or the Company are subject.
3
<PAGE>
2. Representations and Warranties of Subscriber. Subscriber hereby
--------------------------------------------
represents and warrants to the Company as follows:
2.1 Accredited Investor. Subscriber is an accredited investor, as defined
-------------------
in Rule 501 of Regulation D, and has checked the applicable box set forth in
Section 10 of this Agreement. Subscriber shall notify the Company immediately of
any material change in any of such information occurring prior to and after the
Closing of the purchase of any Preferred Stock and Additional Common Stock.
2.2 Investment Experience; Access to Information; Independent
---------------------------------------------------------
Investigation.
- --------------
2.2.1 Access to Information. Subscriber or Subscriber's professional
---------------------
advisor has been granted the opportunity to ask questions of and receive
answers from representatives of the Company, its officers, directors,
employees and agents concerning the terms and conditions of this Offering,
the Company and its business and prospects, and to obtain any additional
information which Subscriber or Subscriber's professional advisor deems
necessary to verify the accuracy and completeness of the information
received.
2.2.2 Reliance on Own Advisors. Subscriber has relied completely on
------------------------
the advice of, or has consulted with, Subscriber's own personal tax,
investment, legal or other advisors and has not relied on the Company or
any of its affiliates, officers, directors, attorneys, accountants or any
affiliates of any thereof and each other person, if any, who controls any
thereof, within the meaning of Section 15 of the Act for any tax or legal
advice (other than reliance on information in the Disclosure Documents as
defined in Section 2.2.4 below and on the Opinion of Counsel). The
foregoing, however, does not limit or modify Subscriber's right to rely
upon representations and warranties of the Company in Section 4 of this
Agreement.
2.2.3 Capability to Evaluate. Subscriber has such knowledge and
----------------------
experience in financial and business matters so as to enable such
Subscriber to utilize the information made available to it in connection
with the Offering in order to evaluate the merits and risks of the
prospective investment, which are substantial, including without limitation
those set forth in the Disclosure Documents (as defined in Section 2.2.4
below).
2.2.4 Disclosure Documents. Subscriber, in making Subscriber's
investment decision to subscribe for the Securities hereunder, represents
that (a) Subscriber has received and had an opportunity to review the
Company's Confidential Private Placement Memorandum, dated March 12, 1999
(the "Memorandum") and Subscriber has read, reviewed, and relied solely on
the Memorandum, the Company's
4
<PAGE>
representations and warranties and other information in this Agreement,
including the exhibits, any other written information prepared by the
Company which has been specifically provided to Subscriber in connection
with this Offering (the documents described in this Section 2.2.4 (a) are
collectively referred to as the "Disclosure Documents"), and an independent
investigation made by Subscriber and Subscriber's representatives, if any;
and (b) Subscriber is not relying on any oral representation of the Company
or any other person, nor any written representation or assurance from the
Company other than those referred to in Section 4 or otherwise contained in
the Disclosure Documents or incorporated herein or therein. The foregoing,
however, does not limit or modify Subscriber's right to rely upon
representations and warranties of the Company in Section 4 of this
Agreement.
2.2.5 Investment Experience; Fend for Self. Subscriber has substantial
------------------------------------
experience in investing in securities and he, she or it has made
investments in securities other than those of the Company. Subscriber
acknowledges that Subscriber is able to fend for Subscriber's self in the
transaction contemplated by this Agreement, that Subscriber has the ability
to bear the economic risk of Subscriber's investment pursuant to this
Agreement and that Subscriber is an "Accredited Investor" by virtue of the
fact that Subscriber meets the investor qualification standards set forth
in Section 2.1 above. Subscriber has not been organized for the purpose of
investing in securities of the Company, although such investment is
consistent with Subscriber's purposes.
2.2.6 Purchaser Representative. The Subscriber understands if he, she
------------------------
or it uses the services of a Purchaser Representative(s), as such term is
defined in Rule 501 of Regulation D and applicable state securities laws
("Purchaser Representative"), acceptable to the Company in connection
herewith, either by the Subscriber's choice or pursuant to the Company's
request, that:
(a) the Subscriber must acknowledge, in writing by so indicating
in Section 11 of this Agreement prior to his, her or its purchase of
Securities, that such Purchaser Representative(s) is the Subscriber's
Purchaser Representative(s) in connection with evaluating the merits
and risks of the Subscriber's prospective investment in the Company;
(b) such Purchaser Representative(s) must disclose to the
Subscriber, in writing, prior to the acknowledgment referred to above,
any material relationship between such Purchaser Representative(s) or
its affiliates and you or your affiliates which now exists or is
mutually understood to be contemplated or which has existed at any
time during the previous two years, and any compensation received or
to be received in connection with the offering of the Securities; and
5
<PAGE>
(c) the Subscriber must furnish true and complete copies of the
foregoing instruments to the Company promptly upon their execution.
2.3 Exempt Offering Under Regulation D.
-----------------------------------
2.3.1 Investment; No Distribution. Subscriber is acquiring the
---------------------------
Securities to be issued and sold hereunder for his, her or its own account
(or a trust account if such Subscriber is a trustee) for investment and not
as a nominee and not with a present view to the re-distribution thereof.
Subscriber is aware that there are legal and practical limits on
Subscriber's ability to sell or dispose of the Securities and, therefore,
that Subscriber must bear the economic risk of the investment for an
indefinite period of time and has adequate means of providing for
Subscriber's current needs and possible personal contingencies and has need
for only limited liquidity of this investment. Subscriber's commitment to
illiquid investments is reasonable in relation to Subscriber's net worth.
By making the representations in this Section 2.3.1, the Subscriber does
not agree to hold the Securities for any minimum or other specific term and
reserves the right to dispose of the Securities at any time in accordance
with or pursuant to a registration statement or an exemption from
registration under the Act, except as otherwise required in this Agreement
or in the Registration Rights Agreement.
2.3.2 No General Solicitation. The Securities were not offered
-----------------------
to Subscriber through, and Subscriber is not aware of, any form of general
solicitation or general advertising, including, without limitation, (a) any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio,
and (b) any seminar or meeting whose attendees have been invited by any
general solicitation or general advertising.
2.3.3 Restricted Securities. Subscriber understands that the
---------------------
Preferred Stock issued at Closing is, and the Conversion Shares will be,
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving any public offering and that under such laws and applicable
regulations such securities may not be transferred or resold without
registration under the Act or pursuant to an exemption therefrom. In this
connection, Subscriber represents that Subscriber is familiar with Rule 144
under the Act, as presently in effect, and understands the resale
limitations imposed thereby and by the Act.
2.3.4 Disposition. Without in any way limiting the
-----------
representations set forth above, Subscriber further agrees not to make any
disposition of all or any portion of the Securities unless and until:
6
<PAGE>
(a) There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) (i) Subscriber shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement
of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, Subscriber shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company,
that such disposition is made in accordance with the rules and regulations
of the Act. It is agreed that the Company will not require opinions of
counsel for transactions made pursuant to Rule 144 unless required by its
Transfer Agent or as otherwise reasonably requested by the Company.
2.4 Due Authorization.
------------------
2.4.1 Authority. Subscriber, if executing this Agreement in a
---------
representative or fiduciary capacity, has full power and authority to
execute and deliver this Agreement and each other document included herein
for which a signature is required in such capacity and on behalf of the
subscribing individual, partnership, limited liability company, trust,
estate, corporation or other entity for whom or which Subscriber is
executing this Agreement. Subscriber has reached the age of majority (if
an individual) according to the laws of the state in which he or she
resides, has adequate means for providing for his or her current needs and
personal contingencies, is able to bear the economic risk of his or her
investment in the Securities for an indefinite period of time and can
afford a complete loss of such investment. Subscriber's commitment to
illiquid investments is reasonable in relation to Subscriber's net worth.
2.4.2 Due Authorization. If Subscriber is a corporation, Subscriber
-----------------
is duly and validly organized, validly existing and in good tax and
corporate standing as a corporation under the laws of the jurisdiction of
its incorporation with full power and authority to purchase the Securities
to be purchased by Subscriber and to execute and deliver this Agreement.
2.4.3 Partnership; Limited Liability Company. If Subscriber is a
--------------------------------------
partnership or a limited liability company, the representations,
warranties, agreements and understandings set forth above are true with
respect to all partners or members of Subscriber (and if any such partner
or member is itself a partnership or limited liability company, all persons
holding an interest in such partnership or limited liability company,
directly or indirectly, including through one or more partnerships or
limited liability companies), and the person executing this Agreement has
made due inquiry to determine the truthfulness of the representations and
warranties made hereby.
7
<PAGE>
2.4.4 Representatives. If Subscriber is purchasing in a
---------------
representative or fiduciary capacity, the representations and warranties
shall be deemed to have been made on behalf of the person or persons for
whom Subscriber is so purchasing.
3. Acknowledgments. Subscriber is aware that:
---------------
3.1 Risks of Investment. Subscriber recognizes that an
-------------------
investment in the Company involves substantial risks, including the potential
loss of Subscriber's entire investment herein. Subscriber recognizes that this
Agreement and the exhibits hereto do not purport to contain all the information
which would be contained in a registration statement under the Act.
3.2 No Government Approval. No federal or state agency has passed
----------------------
upon the Securities, recommended or endorsed the Offering, or made any finding
or determination as to the fairness of this transaction.
3.3 No Registration. The Securities and any component thereof
---------------
have not been registered under the Act or any applicable state securities laws
by reason of exemptions from the registration requirements of the Act and such
laws, and may not be sold, pledged, assigned or otherwise disposed of in the
absence of an effective registration of the Securities and any component thereof
under the Act or unless an exemption from such registration is available.
3.4 Restrictions on Transfer. Subscriber may not attempt to
------------------------
sell, transfer, assign, pledge or otherwise dispose of all or any portion of the
Securities or any component thereof in the absence of either an effective
registration statement or an exemption from the registration requirements of the
Act and applicable state securities laws.
3.5 No Assurances of Registration. There can be no assurance
-----------------------------
that any registration statement will become effective at the scheduled time.
Therefore, Subscriber may bear the economic risk of Subscriber's investment for
an indefinite period of time.
3.6 Exempt Transaction. Subscriber understands that the
------------------
Securities are being offered and sold in reliance on specific exemptions from
the registration requirements of federal and state law and that the
representations, warranties, agreements, acknowledgments and understandings set
forth herein are being relied upon by the Company in determining the
applicability of such exemptions and the suitability of Subscriber to acquire
such Securities.
3.7 Legends. It is understood that the certificates evidencing
-------
the Preferred Stock and the Conversion Shares shall bear substantially the
following legend (the "Legend"), prior to registration as provided in Section
5.3:
8
<PAGE>
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended, or applicable state securities laws,
nor the securities laws of any other jurisdiction. They may not be sold or
transferred in the absence of an effective registration statement under
those securities laws or pursuant to an exemption therefrom."
4. Representations and Warranties of the Company. The Company and Brad
---------------------------------------------
Greenspan, jointly and severally, hereby make the following representations and
warranties to Subscriber (which shall be true at the signing of this Agreement,
as of Closing, and as of any such later date as contemplated hereunder) and
agree with Subscriber that:
4.1 Organization, Good Standing, and Qualification. The Company is a
----------------------------------------------
corporation duly organized, validly existing, and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to carry on its business as now conducted and as proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on the business or properties of the Company and its
subsidiaries taken as a whole. The Company is not the subject of any pending,
threatened or, to its knowledge, contemplated investigation or administrative or
legal proceeding by the Internal Revenue Service, the taxing authorities of any
state or local jurisdiction, or the Securities and Exchange Commission ("SEC"),
or any state securities commission, or any other governmental entity, which have
not been disclosed in the Disclosure Documents.
4.2 Corporate Condition. The Company's condition is, in all material
-------------------
respects, as described in the Disclosure Documents, except for changes in the
ordinary course of business. Since the date as of which information is given in
the Memorandum (exclusive of any amendments or supplements thereto subsequent to
the date of this Agreement other than as set forth in the Memorandum), (a) there
has been no material adverse change or any development involving a prospective
material adverse change to the Company's business, condition, financial or
otherwise, or the earnings, business management, operations or prospects since
the date of such Memorandum; (b) there has not been any material adverse change
in the capital stock or in the long term debt of the Company; and (c) the
Company has not incurred any liability or obligation, direct or contingent, not
in the ordinary course of business and not consistent with past practices. The
financial statements contained in the Disclosure Documents have been prepared in
accordance with generally accepted accounting principles, consistently applied
(except as otherwise permitted by Regulation S-X under the Securities Exchange
Act of 1934, as amended, ("Exchange Act"), and fairly present the consolidated
financial condition of the Company as of the dates of the balance sheets
included therein and the consolidated results of its operations and cash flows
for the periods then ended; and all the other financial and statistical
information and data set forth in the Memorandum (and any amendment or
supplement thereto) are, in all material respects,
9
<PAGE>
accurately presented and prepared on a basis consistent with such financial
statements and the books and records of the Company. Without limiting the
foregoing, there are no material liabilities, contingent or actual, that are not
disclosed in the Disclosure Documents (other than liabilities incurred by the
Company in the ordinary course of its business, consistent with its past
practice, after the period covered by the Disclosure Documents). The Company has
paid all material taxes which are due, except for taxes which it reasonably
disputes and which have been disclosed to Subscriber. There is no material
claim, litigation, or administrative proceeding pending, or, to the best of the
Company's knowledge, threatened against the Company, except as disclosed in the
Disclosure Documents. This Agreement and the Disclosure Documents do not contain
any untrue statement of a material fact and do not omit to state any material
fact required to be stated therein or herein necessary to make the statements
contained therein or herein not misleading in the light of the circumstances
under which they were made. The Company is not prompted to sell the Preferred
Stock by any material information that is not contained in the Disclosure
Documents.
4.3 Authorization. Except for the filing of the Certificate of
-------------
Designation, all corporate action on the part of the Company by its officers,
directors and shareholders necessary for the authorization, execution and
delivery of this Agreement, the performance of all obligations of the Company
hereunder and the authorization, issuance and delivery of the Preferred Stock
being sold hereunder and the issuance (and/or the reservation for issuance) of
the Conversion Shares have been taken, and this Agreement, the Certificate of
Designation, the Irrevocable Instructions to Transfer Agent, the Escrow
Agreement and the Registration Rights Agreement constitute valid and legally
binding obligations of the Company, enforceable in accordance with the terms,
except insofar as the enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, or other similar laws affecting creditors' rights
generally or by principles governing the availability of equitable remedies.
The Company has obtained all consents and approvals required for it to execute,
deliver and perform each agreement referenced in the previous sentence.
4.4 Valid Issuance of Preferred Stock and Common Stock. The Preferred
--------------------------------------------------
Stock, when issued, sold and delivered in accordance with the terms hereof, for
the consideration expressed herein, will be validly issued, fully paid and
nonassessable and, based in part upon the representations of Subscriber in this
Agreement, will be issued in compliance with all applicable U.S. federal and
state securities laws. The Conversion Shares when issued in accordance with the
terms of the Certificate of Designation shall be duly and validly issued and
outstanding, fully paid and nonassessable, and based in part on the
representations and warranties of Subscriber of the Preferred Stock, will be
issued in compliance with all applicable U.S. federal and state securities laws.
The Preferred Stock and the Conversion Shares will be issued free of any
preemptive rights. The Company currently has that number of shares of its
Common Stock required by the Registration Rights Agreement reserved for issuance
upon conversion of the Preferred Stock.
10
<PAGE>
4.5 Compliance with Other Instruments. The Company is not in violation or
---------------------------------
default of any provisions of its Certificate of Incorporation or Bylaws each as
it may be amended and in effect on and as of the date of the Agreement or of any
provision of any instrument or contract to which it is a party or by which it is
bound or, to its knowledge, of any provision of any federal or state judgment,
writ, decree, order, statute, rule or governmental regulation applicable to the
Company, which would have a material adverse effect on the Company's business or
prospects, except as described in the Disclosure Documents. There exists no
condition that, with notice, the passage of time or otherwise, would constitute
a default under any such instrument or contract, except where such a default
would not have a material adverse effect. The execution, delivery and
performance of this Agreement and the other agreements entered into in
conjunction with the Offering and the consummation of the transactions
contemplated hereby will not result in any such violation or be in conflict with
or constitute, with of without the passage of time and giving of notice, either
a default under any such provision, instrument or contract or an event which
results in the creation of any lien, charge or encumbrance upon any assets of
the Company.
4.6 Reporting Company. No later than sixty (60) days following the
-----------------
Initial Issuance Date (as defined in Section 5 of the Certificate of Designation
of Preferred Stock), the Company will file a registration statement on Form 10
to register its Securities under Section 12(b) or 12(g) of the Exchange. At all
times following the effective date of such registration statement, the Company
will be in material compliance with the reporting requirements of the Exchange
Act and will file all reports required by the Exchange Act. The Company
undertakes to furnish Subscriber with copies of such reports as may be
reasonably requested by Subscriber after consummation of this Offering and to
make such reports available, as long as Subscriber holds the Securities. The
Company is not in violation of the listing requirements of the Nasdaq SmallCap
Market and does not reasonably anticipate that the Common Stock will be delisted
by the Nasdaq SmallCap Market, if listed thereon, for the foreseeable future.
4.7 Capitalization. The capitalization of the Company as set forth in the
--------------
Company's Private Placement Memorandum dated March 12, 1999, is, and the
capitalization as of the Closing, after taking into account the offering of the
Securities contemplated by this Agreement and all other share issuances
occurring prior to this Offering, will be, as set forth in the Memorandum.
Except as disclosed in the Memorandum, as of the date of this Agreement, (a)
there are no outstanding options, warrants, scrip, rights to subscribe for,
calls or commitments of any character whatsoever relating to, or securities or
rights convertible into or exercisable or exchangeable for, any shares of
capital stock of the Company or any of its subsidiaries, or arrangements by
which the Company or any of its subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its subsidiaries,
and (b) other than the Registration Rights Agreement there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of its or their securities under the Act.
11
<PAGE>
4.8 Intellectual Property. Except as described in the Memorandum, the
---------------------
Company has valid, unrestricted and exclusive ownership or possession of all
patents, trademarks, trademark registrations, trade names, copyrights, know-how,
technology and other intellectual property necessary to the conduct of its
business. To the best of the Company's knowledge, the Company is not infringing
on the intellectual property rights of any third party, nor is any third party
infringing on the Company's intellectual property rights. There are no
restrictions in any material agreements, licenses, franchises, or other
instruments which preclude the Company from engaging in its business as
presently conducted.
4.9 Use of Proceeds. As of the date hereof, the Company expects to use
---------------
the proceeds from this Offering (less fees and expenses) for the purposes and in
the approximate amounts set forth in the Memorandum. These purposes and amounts
are estimates and are subject to change without notice to any Subscriber.
4.10 No Rights of Participation. No person or entity, including, but not
--------------------------
limited to, current or former shareholders of the Company, underwriters,
brokers, agents or other third parties, has any right of first refusal,
preemptive right, right of participation, or any similar right to participate
in the financing contemplated by this Agreement which has not been waived.
4.11 Company Acknowledgment. The Company hereby acknowledges that
----------------------
Subscriber may elect to hold the Securities for various periods of time, as
permitted by the terms of this Agreement, the Certificate of Designation, and
other agreements contemplated hereby, and the Company further acknowledges that
Subscriber and the Placement Agent, if any, have made no representations or
warranties, either written or oral, as to how long the Securities will be held
by Subscriber or regarding Subscriber's trading history or investment
strategies.
4.12 Termination Date of Offering. In no event shall the last closing
----------------------------
("Last Closing") of a sale and purchase of the Preferred Stock occur later than
April 9, 1999, which date can be extended by up to ten (10) days upon written
approval by the Company and the Placement Agent, if any.
4.13 Underwriter's Fees and Rights of First Refusal. The Company is not
----------------------------------------------
obligated to pay any compensation or other fees, costs or related expenditures
in cash or securities to any underwriter, broker, agent or other representative
other than the Placement Agent in connection with this Offering.
4.14 Current Public Information. The Company is currently eligible to
--------------------------
register the resale of its Common Stock on a registration statement on Form SB-2
under the Act.
12
<PAGE>
4.15 No Integrated Offering. Neither the Company, nor any of its
----------------------
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any of the Company's securities or
solicited any offers to buy any security under circumstances that would prevent
the parties hereto from consummating the transactions contemplated hereby
pursuant to an exemption from registration under the Act pursuant to the
provisions of Regulation D.
4.16 Acknowledgment of Dilution. The number of Conversion Shares issuable
--------------------------
upon conversion of the Preferred Stock may increase substantially in certain
circumstances, including the circumstance wherein the trading price of the
Common Stock declines. The Company's executive officers and directors have
studied and fully understand the nature of the Securities being sold hereunder
and recognize that they have a potential dilutive effect. The board of
directors of the Company has concluded in its good faith business judgment that
such issuance is in the best interests of the Company. The Company acknowledges
that its obligation to issue Conversion Shares upon conversion of the Preferred
Stock is binding upon it and enforceable regardless of the dilution that such
issuance may have on the ownership interests of the other stockholders.
4.17 Foreign Corrupt Practices. Neither the Company, nor, to the best of
-------------------------
its knowledge, any of its subsidiaries, nor any director, officer, agent,
employee or other person acting on behalf of the Company or any subsidiary has,
in the course of its actions for, or on behalf of, the Company, used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official or employee from
corporate funds; violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate,
payoff, influence payment, kickback or other unlawful payment to any foreign or
domestic government official or employee.
4.18 Key Employees. No Key Employee (as defined below), to the best
-------------
knowledge of the Company and its subsidiaries, is, or is now expected to be, in
violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement, non-competition agreement, or
any other contract or agreement or any restrictive covenant, and the continued
employment of each Key Employee does not subject the Company or any of its
subsidiaries to any liability with respect to any of the foregoing matters. No
Key Employee has, to the best knowledge of the Company and its subsidiaries, any
intention to terminate his employment with, or services to, the Company or any
of its subsidiaries. "Key Employee" means each of Brad Greenspan, Chairman;
Leland Silvas, Chief Executive Officer; and Charles Beilman, Chief Operating and
Chief Technical Officer.
13
<PAGE>
4.19 No Proceedings. Except as disclosed in the Memorandum, there are no
--------------
legal or governmental proceedings pending or, to the knowledge of the Company,
threatened to which the Company is a party or to which any of their respective
property is subject (a) that would be required to be set forth in a registration
statement on Form SB-2, (b) that could reasonably be expected to result, singly
or in the aggregate, in a material adverse effect, or (c) that could reasonably
be expected to adversely effect the issuance or validity of the Securities to be
issued and sold by the Company hereunder or the issuance of the Conversion
Shares. No contract or document of a character that would be required to be
described in the Memorandum if the Memorandum were a prospectus included in a
registration statement on Form SB-2 filed with the SEC is not so described.
4.20 Environmental, ERISA Compliance. The Company has not violated any
-------------------------------
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environmental or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws") or any provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
the rules and regulations promulgated thereunder, except for such violations
which , singly or in the aggregate, would not have a material adverse effect.
4.21 Approvals. The Company has such permits, licenses, consents,
---------
exemptions, franchises, authorizations and other approvals (each, an
"Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including without limitation, under any applicable
environmental laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect. Each such
authorization is valid and in full force and effect. The Company is in
compliance with all the terms and conditions thereof and with the rules and
regulations of the authorities and governing bodies having jurisdiction with
respect thereto; and no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which allows or,
after notice or lapse of time or both, would allow, revocation, suspension or
termination of any such Authorization or results or, after notice or lapse of
time or both, would result in any other impairment of the rights of the holder
of any such Authorization; and such Authorizations contain no restrictions that
are burdensome to the Company; except where such failure to be valid and in full
force and effect or to be in compliance, the occurrence of any such event or the
presence of any such restriction would not, singly or in the aggregate, have a
material adverse effect.
4.22 Title to Properties. The Company has good and marketable title in
-------------------
fee simple to all real property and good and marketable title to all personal
property owned by it which is material to the business of the Company, in each
case free and clear of all liens and defects, except such as are described in
the Memorandum or such as do not materially affect
14
<PAGE>
the value of such property and do not interfere with the use made and proposed
to be made of such property by the Company; and any real property and buildings
held under lease by the Company are held by the Company under valid, subsisting
and enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company, in each case except as described in the Memorandum.
All leases to which the Company is a party are valid and binding and no default
by the Company has occurred and is continuing thereunder, which could reasonably
be expected to have a material adverse effect.
4.23 Insurance. The Company is insured by insurers of recognized
---------
financial responsibility against such losses and risks and in such amounts as
are adequate in accordance with customary industry practice; and the Company (a)
has not received notice from any insurer or agent of such insurer that
substantial capital improvements or other material expenditures will have to be
made in order to continue such insurance or (b) has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers at a cost
that would not have a material adverse effect. All such insurance is
outstanding and duly in force on the date hereof and will be outstanding and
fully in force on the Last Closing.
4.24 Conflicts. Except as disclosed in the Memorandum, no relationship,
---------
direct or indirect, exists between or among the Company on the one hand, and the
directors, officers, stockholders, customers or suppliers of the Company on the
other hand, which would be required by the Act to be described in the Memorandum
if the Memorandum were a prospectus included in a registration statement filed
with the SEC.
4.25 Internal Controls. The Company maintains a system of internal
-----------------
accounting controls sufficient to provide reasonable assurance that (a)
transactions are executed in accordance with management's general or specific
authorizations; (b) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (c) access to assets is
permitted only in accordance with management's general or specific
authorization; and (d) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
4.26 Regulation M Compliance. The Company (a) has not taken, directly or
-----------------------
indirectly (provided that no representation or warranty is made as to the
Placement Agent or any persons acting on its behalf), any action designed to, or
that might reasonably be expected to, cause or result in stabilization or
manipulation of the price of any securities of the Company to facilitate the
sale of the Securities or the resale of the Conversion Shares or (b) since the
date of the Memorandum, has not (i) sold, bid for, purchased or paid any person
any compensation for soliciting purchases of the Securities or (ii) paid or
agreed to pay to any
15
<PAGE>
person any compensation for soliciting another to purchase any other securities
of the Company.
4.27 No Other Registration Arrangements. There are no contracts,
----------------------------------
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Act with respect to any securities of the Company or to require the Company
to include such securities with the Conversion Shares registered pursuant to any
registration statement, which are not disclosed in the Disclosure Documents.
4.28 Adequacy of Disclosures. The Memorandum and the other Disclosure
-----------------------
Documents contain all material statements which are required to be stated
therein in accordance with the Act and the rules and regulations of the SEC
promulgated thereunder, and in all material respects conform to the requirements
of the Act and the rules and regulations promulgated thereunder; the offering
documents, taken as a whole, do not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, except that the representations and
warranties contained in this Paragraph 4.28 shall not apply to statements in or
omissions from the Memorandum (or any supplement or amendment thereto) based
upon information relating to a Placement Agent furnished to the Company on
behalf of a Placement Agent expressly for use therein or inaccurate statements
in or omissions from the Memorandum or the other Disclosure Documents as a
result of arms-length negotiations between the Company and the Subscriber.
4.29 Representations Correct. The foregoing representations, warranties
-----------------------
and agreements are true, correct and complete in all material respects, and
shall survive the Closing and the issuance of the shares of Preferred Stock.
5. Covenants of the Company.
-------------------------
5.1 Independent Auditors. The Company shall, until at least three (3)
--------------------
years after the date of the Last Closing, maintain as its independent auditors
an accounting firm authorized to practice before the SEC.
5.2 Corporate Existence and Taxes. The Company shall, until at least the
-----------------------------
later of (a) the date that is three (3) years after the date of the Last Closing
or (b) the conversion or redemption of all of the Preferred Stock purchased
pursuant to this Agreement maintain its corporate existence in good standing
(provided, however, that the foregoing covenant shall not prevent the Company
from entering into any merger or corporate reorganization as long as the
surviving entity in such transaction, if not the Company, assumes the Company's
obligations with respect to the Preferred Stock and has Common Stock listed for
trading on
16
<PAGE>
a stock exchange or on Nasdaq and is a "Reporting Issuer") and shall
pay all its taxes when due except for taxes which the Company disputes.
5.3 Registration Rights. The Company will enter into a registration
-------------------
rights agreement covering the resale of the Conversion Shares and the
registration of the Company's Securities substantially in the form of the
Registration Rights Agreement attached as Exhibit C.
5.4 Notification of Last Closing Date by Company. Within five (5)
--------------------------------------------
business days after the Last Closing, the Company shall notify Subscriber in
writing that the Last Closing has occurred, the date of the Last Closing, the
date of Subscriber's Closing, the dates that Subscriber is entitled to convert
Subscriber's Preferred Stock, the value of the Fixed Conversion Price, as that
term is defined in the Certificate of Designation, and the name and telephone
number of an administrative contact person at the Company whom Subscriber may
contact regarding information related to conversion of the Preferred Stock as
contemplated by the Certificate of Designation.
5.5 Filing of SB-2 Registration Statement. The Company shall, no later
-------------------------------------
than one hundred fifty (150) days after the date of the Initial Issuance Date,
as defined in the Certificate of Designation, file a registration statement or a
post-effective amendment to an effective registration statement (collectively,
the "Registration Statement") on Form SB-2 (or other suitable form, at the
Company's discretion but subject to the reasonable approval of Subscribers) with
the SEC, covering the resale of the Conversion Shares issuable to all
Subscribers in this Offering. The Company shall, within ten (10) days of the
filing of the Registration Statement, send a copy of the Registration Statement
to Subscribers. Such Registration Statement, and the rights and obligations of
the Company and the Subscribers in connection therewith, shall be in conformance
with and subject to Section 2 of the Registration Rights Agreement attached
hereto as Exhibit C. The Company shall use its best efforts to have the
Registration Statement declared effective as soon as possible. The Company
covenants to use its best efforts to remain eligible to use Form SB-2 for the
registration required by this Section 5.5 (and Sections 2 and 3 of the
Registration Rights Agreement) during all applicable times contemplated by this
Agreement.
5.6 Capital Raising Limitations; Rights of First Refusal.
-----------------------------------------------------
5.6.1 Capital Raising Limitations. Except as hereinafter set forth, for a
---------------------------
period of one hundred eighty (180) days following the date of Last Closing,
the Company shall not issue or agree to issue, except (a) as contemplated
hereunder, (b) pursuant to any employee stock purchase plan or employee
stock option plan of the Company in effect on the date of the Closing, and
disclosed in the Disclosure Documents, (c) pursuant to any security,
option, warrant, scrip, call or commitment or right disclosed in the
Memorandum, any equity securities of the Company (or any security
convertible into or exercisable or exchangeable, directly or indirectly,
for equity securities of the
17
<PAGE>
Company) if such securities are issued at a price (or in the case of
securities which are convertible into or exercisable or exchangeable,
directly or indirectly, for Common Stock, if such securities are
convertible, exercisable or exchangeable, as appropriate, at a conversion
price, exercise price or exchange price) less than the Fixed Conversion
Price (as defined in the Certificate of Designation), (d) pursuant to any
acquisition by the Company provided that the purchase price of such
acquisition is paid solely with shares of Common Stock and the price per
share of the Common Stock is the greater of $3.60 or the then closing bid
price of the Common Stock on the date the purchase price is determined, or
(e) pursuant to a private placement if the closing bid price of the Common
Stock is $5.00 or greater, provided that the sale price of the Common Stock
to be issued in connection with the private placement is at the market
price or above. In addition, during such period, the Company shall not
issue, or agree to issue, any debt securities which are issued at a
discount to the principal amount thereof.
5.6.2 Right of First Offer. The Company agrees that, during the period
--------------------
beginning on the date hereof and terminating on the first anniversary of
the date of the Last Closing, the Company will not, without the prior
written consent of each Subscriber (which shall be deemed given for any
warrants to purchase Common Stock issued or to be issued to the Placement
Agent in consideration of its services in connection with this Agreement
and the transactions contemplated hereby) issue or sell, or agree to issue
or sell any equity or debt securities of the Company or any of its
subsidiaries (or any security convertible into exercisable or exchangeable,
directly or indirectly, for equity or debt securities of the Company or any
of its subsidiaries) ("Future Offering") unless the Company shall have
first delivered to each Subscriber at least thirty (30) days prior to the
closing of such Future Offering, written notice describing the proposed
Future Offering, including, the terms and conditions thereof, and providing
each Subscriber and its affiliates an option during the twenty (20) day
period following delivery of such notice to purchase up to the full amount
of the securities being offered in the Future Offering on the same terms as
contemplated by such Future Offering (the limitations referred to in this
sentence are collectively referred to as the "Capital Raising
Limitations"). Notwithstanding the foregoing, if any Subscriber chooses
not to participate in any Future Offering, then any debt or equity security
issued as a result of said Future Offering will be ineligible for resale
and/or conversion, as the case may be, until the date which is nine (9)
months after the Last Closing. The Capital Raising Limitations shall not
apply to any transaction involving issuances of securities in connection
with a merger, consolidation, acquisition or sale of assets, or in
connection with any strategic partnership or joint venture (the primary
purpose of which is not to raise equity capital), or in connection with the
disposition or acquisition of a business, product or license by the Company
or exercise of options by employees, consultants or directors. The Capital
Raising Limitations also shall not apply to (a) the issuance of securities
pursuant to an underwritten public offering, (b) the issuance of securities
upon exercise or conversion of (including issuances as a result
18
<PAGE>
of the anti-dilution provisions, if any, applicable to such options,
warrants or convertible securities) the Company's options, warrants or
other convertible securities outstanding as of the date hereof or (c) the
grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option or restricted stock plan for the
benefit of the Company's employees, directors or consultants.
5.6.3 Entitlement to Participate in Rule 504 Offering. As a condition
-----------------------------------------------
precedent to any business combination or reorganization with or into the
Public Entity, the Public Entity shall offer to each Subscriber that
purchases Preferred Stock the option to purchase shares of common stock of
the Public Entity (the "P.E. Common Stock") under Securities and Exchange
Commission Rule 504 at the rate of $100,000 of P.E. Common Stock for each
purchase of $900,000 of Preferred Stock in this placement; but in no event
shall no more than $1,000,000 of P.E. Common Stock be issued. The purchase
price for each share of Common Stock hereunder shall be the "adjusted
pricing point" as set forth in Exhibit 1 to the Certificate of Designation
of Preferred Stock, a copy of which is attached hereto as Exhibit A. Any
of such shares of P.E. Common Stock purchased as aforesaid shall be freely
tradeable by the holder without restriction or limitation under any
agreement, arrangement, law or regulation.
5.7 Annual and Quarterly Reports on Form 10-K(SB) and Form 10-Q(SB) and
-------------------------------------------------------------------
Current Reports on Form 8-K. The Company shall make available to the Subscriber
- ---------------------------
copies of its annual reports on Form 10-K(SB), quarterly reports on Form 10-
Q(SB) and current reports on Form 8-K for as long as the Preferred Stock may
remain outstanding.
5.8.1 Opinion of Counsel. Subscribers shall, upon purchase of the
------------------
Preferred Stock pursuant to this Agreement, receive an opinion letter from
Jeffer, Mangels, Butler & Mamaro, LLP ("Counsel"), counsel to the Company,
to the effect that (a) the Company is duly incorporated and validly
existing; (b) this Agreement, the issuance of the Preferred Stock at
Closing and the issuance of the Conversion Shares upon conversion of the
Preferred Stock have been duly approved by all required corporate action,
and that all such securities, upon due issuance, shall be validly issued,
fully paid and non-assessable; (c) this Agreement, the Registration Rights
Agreement, the Irrevocable Instructions to Transfer Agent and the Escrow
Agreement are valid and binding obligations of the Company, enforceable in
accordance with their terms, except as enforceability of the
indemnification provisions may be limited by principles of public policy,
and subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of laws governing specific
performance and other equitable remedies; (d) based upon the
representations and acknowledgments of Subscribers contained in Sections 2
and 3 hereof, the Preferred Stock has been, and the Conversion Shares will
be, issued in a transaction that is exempt from the registration
requirements of the Act and applicable state securities laws; (e) the
Conversion Shares are authorized for listing on the Nasdaq market,
19
<PAGE>
including OTC Bulletin Board, where the Company's Common Stock is then
trading, subject to notice of issuance; and (f) the Certificate of
Designation has been duly authorized and adopted by the Company and has
been or forthwith will be duly filed and/or recorded under applicable law.
5.8.2 Opinion of Special Counsel. Subscriber shall, upon purchase of
--------------------------
the P.E. Common Stock, receive an opinion letter from David L. Kagel, Esq.
("Special Counsel"), Special Counsel to the Company and the Public Entity,
to the effect that (a) any P.E. Common Stock subscribed for on or prior to
April 7, 1999 is, or when actually issued will be, freely tradable without
registration or further action by the holder(s) thereof under Rule 504
promulgated by the Securities and Exchange Commission and in effect on or
prior to said date, and (b) that the offering of the Preferred Stock and
the separate offering of the P.E. Common Stock are not subject to the
"integration doctrine" as originally promulgated in Securities Act Release
4552, as such "integration doctrine" has been amended or applied since such
promulgation.
5.9 Removal of Legend Upon Conversion. As contemplated by the
---------------------------------
Certificate of Designation, upon conversion of the Preferred Stock, Subscriber
shall submit a Notice of Conversion. The Legend shall be removed and the Company
shall issue a certificate without such Legend to the holder of any Security upon
which it is stamped, and a certificate for a security shall be originally issued
without the Legend, if, unless otherwise required by state securities laws, (a)
the sale of such Security is registered under the Act, or (b) such holder
provides the Company with an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions (the reasonable
cost of which shall be borne by the Company), to the effect that a public sale
or transfer of such Security may be made without registration under the Act, or
(c) such holder provides the Company with reasonable assurances that such
Security may be sold pursuant to Rule 144. Each Subscriber agrees to sell all
Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
pursuant to an effective registration statement relating thereto and to deliver
a prospectus in connection with such sale or in compliance with an exemption
from the registration requirements of the Act. If the Legend is removed from any
Security or any Security is issued without the Legend and thereafter the
effectiveness of a registration statement covering the resale of such Security
is suspended or the Company determines that a supplement or amendment thereto is
required by applicable securities laws, then upon reasonable advance notice to
Subscriber holding such Security, the Company may require that the Legend be
placed on any such Security that cannot then be sold pursuant to an effective
registration statement or Rule 144 or with respect to which the opinion referred
to in clause (b) next above has not been rendered, which Legend shall be removed
when such Security may be sold pursuant to an effective registration statement
or Rule 144 or such holder provides the opinion with respect thereto described
in clause (b) next above.
20
<PAGE>
5.10 Listing. Subject to the remainder of this Section 5.10, the Company
-------
shall use its best efforts to ensure that its shares of Common Stock (including
all Conversion Shares) are approved and included for quotation on the Nasdaq
Small Cap Market ("NASDAQ"). Thereafter, the Company shall (a) use its best
efforts to continue the quotation of its Common Stock on the NASDAQ, or on the
Nasdaq National Market System ("NMS"), the New York Stock Exchange ("NYSE"), or
the American Stock Exchange ("AMEX") or any other national exchange or over-the-
counter market system; (b) take all action necessary to cause and maintain the
quotation of its Common Stock on the OTC Bulletin Board at any time the Common
Stock is not included for quotation on NASDAQ, NMS, NYSE or AMEX; and (c) comply
in all respects with the Company's reporting. filing, and other obligations
under the by-laws or rules of the National Association of Securities Dealers
("NASD") and such exchanges, as applicable.
5.11 The Company's Instructions to Transfer Agent. The Company will
--------------------------------------------
issue to its Transfer Agent the Irrevocable Instructions to Transfer Agent
substantially in the form of Exhibit E instructing the Transfer Agent to issue
certificates, registered in the name of each Subscriber or its nominee, for the
Conversion Shares in such amounts as specified from time to time by such
Subscriber to the Company upon conversion of the Preferred Stock. Such
certificates shall bear a Legend only to the extent permitted by Section 5.9
hereof. The Company warrants that no instruction, other than such instructions
referred to in Section 5.9 hereof or in this Section 5.11 and stop transfer
instructions to give effect to Section 3.7 hereof in the case of Conversion
Shares prior to registration of the Conversion Shares under the Act, will be
given by the Company to its Transfer Agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights Agreement.
Nothing in this Section shall affect in any way each Subscriber's obligations
and agreement set forth in Sections 2.3.3 or 2.3.4 hereof to resell the
Securities pursuant to an effective registration statement and to deliver a
prospectus in connection with such sale or in compliance with an exemption from
the registration requirements of applicable securities laws. If (a) a Subscriber
provides the Company with an opinion of counsel, which opinion of counsel shall
be in form, substance and scope customary for opinions of counsel in comparable
transactions and acceptable to counsel for the Company (the reasonable cost of
which shall be borne by the Company), to the effect that the Securities to be
sold or transferred may be sold or transferred pursuant to an exemption from
registration or (b) a Subscriber transfers Securities to an affiliate which is
an accredited investor as defined under the Act, the Company shall permit the
transfer, and, in the case of Conversion Shares, promptly instruct its transfer
agent to issue one or more certificates in such name and in such denomination as
specified by such Subscriber. The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to a Subscriber by
violating the intent and purpose of the transaction contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations under this Section 5.11 will be inadequate and agrees, in the event
of a breach or threatened breach by the Company of the provisions of this
Section 5.11, that a Subscriber
21
<PAGE>
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required. The Company hereby agrees that it will not unilaterally
terminate its relationship with the Transfer Agent for any reason prior to the
date which is three (3) years after the Last Closing or one (1) month after the
first date that no Preferred Stock is outstanding, whichever is earlier (the
"Ending Date"). In the event the Company's agency relationship with the Transfer
Agent should be terminated for any other reason prior to the date which is three
(3) years after the Last Closing, the Company's Transfer Agent shall continue
acting as transfer agent pursuant to the terms of the Irrevocable Instructions
to Transfer Agent until such time that a successor transfer agent (i) is
appointed by the Company; (ii) is approved by seventy-five percent (75%) of the
Subscribers of outstanding Preferred Stock; and (iii) executes and agrees to be
bound by the terms of the Irrevocable Instructions to Transfer Agent.
5.12 Filing of Form 10-SB to Register Under Section 12(b) or 12(g) of the
--------------------------------------------------------------------
Exchange Act. The Company shall, no later than sixty (60) days after the
- ------------
Initial Issuance Date (as defined in Section 5 of the Company's Certificate of
Designation of Preferred Stock), file a registration statement on Form 10-SB
with the SEC registering the Securities under Section 12(b) or 12(g) of the
Exchange Act. The Company shall, within ten (10) days of the filing of such
registration statement on Form 10-SB, send a copy to Subscribers. The Company
shall use its best efforts to have such registration statement declared
effective within one hundred fifty (150) days after the Initial Issuance Date.
6. Subscriber Covenant/Miscellaneous.
----------------------------------
6.1 Representations and Warranties Survive the Closing; Severability.
----------------------------------------------------------------
Subscriber's and the Company's representations and warranties, including but not
limited to the Public Entity, shall survive the Closing of the transactions
contemplated by this Agreement notwithstanding any due diligence investigation
made by or on behalf of the party seeking to rely thereon. In the event that any
provision of this Agreement becomes or is declared by a court of competent
jurisdiction to be illegal, unenforceable or void, this Agreement shall continue
in full force and effect without said provision; provided that no such
severability shall be effective if it materially changes the economic benefit of
this Agreement to any party.
6.2 Successors and Assigns. The terms and conditions of this Agreement
----------------------
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties. Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. Subscriber may assign Subscriber's rights hereunder, in
connection with any private sale of the Preferred Stock of such Subscriber, so
long as, as a condition precedent to
22
<PAGE>
such transfer, the transferee executes an acknowledgment agreeing to be bound by
the applicable provisions of this Agreement.
6.3 Governing Law. This Agreement shall be governed by and construed under
-------------
the laws of the State of Delaware without regard to its conflict of laws rules
or principles.
6.4 Execution in Counterparts Permitted. This Agreement may be executed in
------------------------------------
any number of counterparts, each of which shall be enforceable against the
parties actually executing such counterparts, and all of which together shall
constitute one (1) instrument.
6.5 Titles and Subtitles; Gender. The titles and subtitles used in this
----------------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement. The use in this Agreement of a
masculine, feminine or neither pronoun shall be deemed to include a reference to
the others.
6.6 Written Notices, Etc. Any notice, demand or request required or
---------------------
permitted to be given by the Company or Subscriber pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally, or by facsimile (with a hard copy to follow by two (2) day courier),
addressed to the parties at the addresses and/or facsimile telephone number of
the parties set forth at the end of this Agreement or such other address as a
party may request by notifying the other in writing.
6.7 Expenses. Each of the Company and Subscriber shall pay all costs and
--------
expenses that it respectively incurs, with respect to the negotiation,
execution, delivery and performance of this Agreement.
6.8 Entire Agreement; Written Amendments Required. This Agreement,
---------------------------------------------
including the Exhibits attached hereto, the Certificate of Designation, the
Preferred Stock certificates, the Registration Rights Agreement, the Escrow
Agreement, the Irrevocable Instructions to Transfer Agent and the other
documents delivered pursuant hereto constitute the full and entire understanding
and agreement between the parties with regard to the subjects hereof and
thereof, and no party shall be liable or bound to any other party in any manner
by any warranties, representations or covenants except as specifically set forth
herein or therein. Except as expressly as provided herein, neither this
Agreement nor any term hereof may be amended, waived, discharged or terminated
other than by a written instrument signed by the party against whom enforcement
of any such amendment, waiver, discharge or termination is sought.
6.9 Arbitration. Any controversy or claim arising out of or related to
-----------
this Agreement or the breach thereof, shall be settled by binding arbitration in
Chicago, Illinois in accordance with the Expedited Procedures (Rules 53-57) of
the Commercial Arbitration Rules of the American Arbitration Association
("AAA"). A proceeding shall be commenced
23
<PAGE>
upon written demand by Company or any Subscriber to the other. The arbitrator(s)
shall enter a judgment by default against any party which fails or refuses to
appear in any properly noticed arbitration proceeding. The proceeding shall be
conducted by one (1) arbitrator, unless the amount alleged to be in dispute
exceeds two hundred fifty thousand dollars ($250,000), in which case three (3)
arbitrators shall preside. The arbitrator(s) will be chosen by the parties from
a list provided by the AAA, and if they are unable to agree within ten (10)
days, the AAA shall select the arbitrator(s). The arbitrators must be experts in
securities law and financial transactions. The arbitrators shall assess costs
and expenses of the arbitration, including all attorneys' and experts' fees, as
the arbitrators believe is appropriate in light of the merits of the parties'
respective positions in the issues in dispute. Each party submits irrevocably to
the jurisdiction of any state court sitting in Chicago, Illinois or to the
United States District Court sitting in Chicago for purposes of enforcement of
any discovery order, judgment or award in connection with such arbitration. The
award of the arbitrator(s) shall be final and binding upon the parties and may
be enforced in any court having jurisdiction. The arbitration shall be held in
such place as set by the arbitrator(s) in accordance with Rule 55.
7. Subscription and Wiring Instructions; Irrevocabilitv.
-----------------------------------------------------
7.1 Subscription
------------
(a) Wire Transfer of Subscription Funds. Subscriber shall send this
-----------------------------------
signed Agreement by facsimile to Company at 310-546-2870, and send the
subscription funds by wire transfer, to the Escrow Agent as follows:
American National Bank and Trust Company of Chicago
ABA 071000770
Account Number 4326350 - Corporate Trust Clearing Account
Attention: Brian Terwilliger
"Entertainment"
(b) Irrevocable Subscription. Subscriber hereby acknowledges and agrees,
------------------------
subject to the provisions of any applicable laws providing for the refund
of subscription amounts submitted by Subscriber, that this Agreement is
irrevocable and that Subscriber is not entitled to cancel, terminate or
revoke this Agreement or any other agreements executed by such Subscriber
and delivered pursuant hereto, and that this Agreement and such other
agreements shall survive the death or disability of such Subscriber and
shall be binding upon and inure to the benefit of the parties and their
heirs, executors, administrators, successors, legal representatives and
assigns. If the Securities subscribed for are to be owned by more than one
person, the obligations of all such owners under this Agreement shall be
joint and several, and the agreements, representations, warranties and
acknowledgments herein contained shall be deemed to be made by and be
binding upon each such person and his heirs, executors,
24
<PAGE>
administrators, successors, legal representatives and assigns.
Notwithstanding the foregoing, (i) if any material condition to Closing
required to be satisfied by a party other than Subscriber is not satisfied
or (ii) if the Disclosure Documents are discovered prior to Closing to
contain statements which are materially inaccurate, or omit statements of
material fact, Subscriber may revoke or cancel this Agreement.
(c) Company's Right to Reject Subscription. Subscriber understands
--------------------------------------
that this Agreement is not binding on the Company until the Company accepts
it. This Agreement shall be accepted by the Company when the Company
countersigns this Agreement. Subscriber hereby confirms that the Company
has full right in its sole and absolute discretion, for any reason or no
reason, to accept or reject the subscription of Subscriber, in whole or in
part, provided that, if the Company decides to reject such subscription,
the Company must do so promptly and in writing. In the case of rejection,
the Company will promptly return any rejected payments and (if rejected in
whole) copies of all executed subscription documents (including without
limitation this Agreement) to Subscriber. In the event of rejection, no
interest will be payable by the Company to Subscriber on any return of
payment, provided however, that any such interest accrued on such funds in
the Escrow Account shall be returned to the Subscriber by the Escrow Agent.
7.2 Acceptance of Subscription. In the case of acceptance of
--------------------------
Subscriber's subscription, ownership of the number of securities being purchased
hereby will pass to Subscriber upon the Closing.
7.3 Subscriber to Forward Original Signed Subscription Agreement to
---------------------------------------------------------------
Company. Subscriber agrees to courier to Company his, her or its original inked
- -------
signed Subscription Agreement within two (2) days after faxing said signed
agreement to Placement Agent.
8. Indemnification.
----------------
The Company and Brad Greenspan agree, jointly and severally, to
indemnify and hold harmless Subscriber and the Escrow Agent and each of their
respective officers, directors, employees and agents, and each person who
controls Subscriber or the Escrow Agent within the meaning of the Act or the
Exchange Act (each, a "Subscriber Indemnified Party") against any losses,
claims, damages or liabilities, joint or several, to which it, they or any of
them, may become subject and not otherwise reimbursed arising from any material
breach of any representation or warranty made by the Company or the Public
Entity contained in this Agreement, in writing to the Subscriber, in any
statements contained in the Disclosure Documents or otherwise disclosed.
25
<PAGE>
Subscriber agrees to indemnify and hold harmless the Company and the Escrow
Agent and each of their respective officers, directors, employees and agents,
and each person who controls Company or the Escrow Agent within the meaning of
the Act or the Exchange Act (each, a "Company Indemnified Party") (a Subscriber
Indemnified Party or a Company Indemnified Party may be hereinafter referred to
singularly as "Indemnified Party") against any losses, claims, damages or
liabilities, joint or several, to which it, they or any of them, may become
subject and not otherwise reimbursed arising from any material breach of any
representation or warranty made by Subscriber contained in this Agreement.
Promptly after receipt by an Indemnified Party of notice of the
commencement of any action pursuant to which indemnification may be sought, such
Indemnified Party will, if a claim in respect thereof is to be made against the
other party (hereinafter "Indemnitor") under this Section 8, deliver to the
Indemnitor a written notice of the commencement thereof and the Indemnitor shall
have the right to participate in and to assume the defense thereof with counsel
reasonably selected by the Indemnitor, provided, however, that an Indemnified
Party shall have the right to retain its own counsel, with the reasonably
incurred fees and expenses of such counsel to be paid by the Indemnitor, if
representation of such Indemnified Party by the counsel retained by the
Indemnitor would be inappropriate due to actual or potential conflicts of
interest between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
Indemnitor within a reasonable time of the commencement of any such action, if
prejudicial to the Indemnitor's ability to defend such action, shall relieve the
Indemnitor of any liability to the Indemnified Party under this Section 8, but
the omission to so deliver written notice to the Indemnitor will not relieve it
of any liability that it may have to any Indemnified Party other than under this
Section 8 to the extent it is prejudicial.
9. Number of Shares and Purchase Price. Subscriber subscribes for shares
-----------------------------------
of Preferred Stock against payment by wire transfer in the amount of ("Purchase
Price") as set forth on the last page of this Agreement.
10. Accredited Investor. Subscriber is an "accredited investor" because
-------------------
(check all applicable boxes):
(a) [ ] it is an organization described in Section 501(c)(3) of the
Internal Revenue Code, or a corporation, business trust, or
partnership not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000.
(b) [ ] any trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the securities offered,
whose purchase is directed by a sophisticated person who has such
knowledge and experience in financial and business matters that
he is capable of evaluating the merits and risks of the
prospective investment.
26
<PAGE>
(c) [ ] a natural person, who:
[ ] is a director, executive officer or general partner of the issuer
of the securities being offered or sold or a director, executive
officer or general partner of a general partner of that issuer.
[ ] has an individual net worth, or joint net worth with that
person's spouse, at the time of his purchase exceeding
$1,000,000.
[ ] had an individual income in excess of $200,000 in each of the two
most recent years or joint income with that person's spouse in
excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current
year.
(d) [ ] an entity each equity owner of which is an entity described in
a - b above or is an individual who could check one (1) of the
last three (3) boxes under subparagraph (c) above.
(e) [ ] other [specify]
11. If Subscriber is using the services of a Purchaser Representative,
such Purchaser Representative is _________________________.
The undersigned acknowledges that this Agreement and the subscription
represented hereby shall not be effective unless accepted by the Company as
indicated below.
27
<PAGE>
IN WITNESS WHEREOF, the undersigned Subscriber does represent and certify
under penalty of perjury that the foregoing statements are true and correct and
that Subscriber by the following signature(s) executed this Agreement.
Dated this _____ day of April, 1999.
______________________________ ________________________________________
Your Signature PRINT EXACT NAME IN WHICH YOU WANT THE
SECURITIES TO BE REGISTERED
______________________________ DELIVERY INSTRUCTIONS:
----------------------
Name: Please Print Please type or print address where your
security is to be delivered
______________________________ ATTN:__________________________________
Title/Representative Capacity
(if applicable)
______________________________ _______________________________________
Name of Company You Represent (if applicable) Street Address
___________________________________ _______________________________________
Place of Execution of this Agreement City, State or Province, Country,
Offshore Postal Code
Aggregate number of shares of Preferred
_______________________________________
Stock subscribed for: ________________________ Phone number (for Federal
Express) and Fax Number (re: Notice)
Amount Subscribed for: $_____________________
(number of shares subscribed
for x $_______ per share)
THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF $___________ ON
THE ____ DAY OF APRIL, 1999.
_________________________________
By:______________________________
Name:____________________________
Title:_____________________________
Agreed To and Accepted By:
__________________________________
Brad Greenspan
28
<PAGE>
ENTERTAINMENT UNIVERSE, INC.
_______________________________________
Registration Rights Agreement
<PAGE>
EXHIBIT 10.08
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of
April, 1999, by and among Entertainment Universe, Inc., a corporation duly
incorporated and existing under the laws of the State of California ("EUI" or
the "Company"), and the Subscribers (hereinafter collectively referred to as
"Subscribers") to the Company's offering, ("Offering") of up to Six Million Nine
Hundred Seventy-Five Thousand Dollars ($6,975,000) of Series A 6% Convertible
Preferred Stock (the "Preferred Stock") pursuant to the Regulation D
Subscription Agreement between the Company and each of the Subscribers (the
"Subscription Agreement"). This Agreement is between the Company and
Subscriber. The Company shall assign this Agreement, on or prior to the closing
date of this Offering, to a publicly traded shell corporation (the "Public
Entity") of which EUI intends to be the wholly-owned subsidiary by the closing
of this Offering. Upon such assignment, references to the Company shall mean
the Public Entity.
1. Definitions. For purposes of this Agreement:
-----------
(a) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Act"), and pursuant to Rule 415 under the Act or any successor rule, and the
declaration or ordering of effectiveness of such registration statement or
document; provided, however, notwithstanding the foregoing, when referring to a
registration on Form 10-SB (relating to the registration of securities pursuant
to Section 12(b) or 12(g) of the Securities Exchange Act of 1934 ("Exchange
Act"), the foregoing terms "register", "registered" and "registration" refers to
the registration effected on Form 10-SB and not one effected under the Act.
(b) For purposes hereof, the term "Registrable Securities" means the
shares of the Company's Common Stock together with any capital stock issued in
replacement of, in exchange for or otherwise in respect of such Common Stock
(the "Common Stock"), issuable or issued upon conversion of the Preferred Stock.
Notwithstanding the above, any Registrable Securities resold in a public
transaction shall cease to constitute Registrable Securities.
(c) The number of shares of "Registrable Securities then outstanding"
shall be determined by the number of shares of Common Stock which have been
issued or are issuable upon conversion of the Preferred Stock.
(d) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any permitted assignee thereof.
<PAGE>
(e) The term "Due Date" means the date which is seven (7) months after the
date of the first closing of a sale and purchase of Preferred Stock that occurs
pursuant to the Offering.
2. Required Registration.
---------------------
(a) The Company shall, within one hundred fifty (150) days after the
Initial Issuance Date (as defined in Section 5 of the Company's Certificate of
Designation of Preferred Stock) of the Offering (such one hundred fiftieth day
hereinafter the "Filing Date"), file a registration statement on Form SB-2 (or
other suitable form), or a post-effective amendment to an effective registration
statement (collectively, a "Registration Statement") at the Company's
discretion, but subject to the reasonable approval of Subscribers, covering the
resale of all shares of Registrable Securities then outstanding or issuable upon
conversion of all the outstanding Preferred Stock. Such Registration Statement
shall initially cover at least two hundred percent (200%) of the number of
shares of Common Stock issuable upon conversion of each share of Preferred Stock
then outstanding, including without limitation, any accrued and unpaid interest
on such date and shall cover, to the extent allowed by applicable law, such
additional indeterminate number of shares of Common Stock as are required to
effect conversion of the Preferred Stock due to fluctuations in the price of the
Company's Common Stock. The Company shall use its best efforts to have the
Registration Statement declared effective by the Due Date. If for any three (3)
consecutive trading days after the Due Date (the last of such three (3) trading
days being the "Registration Shortfall Date") the Registration Statement does
not cover a sufficient number of shares of Common Stock to effect the resales of
a number of shares of Common Stock equal to two hundred percent (200%) of the
number of shares of Common Stock issuable to each Subscriber upon conversion of
all outstanding Preferred Stock then eligible for conversion, at the Conversion
Rate (as defined in the Certificate of Designation of the Series A Preferred
Stock) (the "Assumed Conversion Rate"), (a "Registration Shortfall"), the
Company shall, within five (5) business days of the Registration Shortfall Date,
amend the Registration Statement or file a new Registration Statement (an
"Amended" or "New" Registration Statement, respectively), as appropriate, to add
such number of additional shares as would be necessary to effect the resales of
a number of shares of Common Stock equal to two hundred percent (200%) of the
number of shares of Common Stock issuable to each Subscriber upon conversion of
all outstanding Preferred Stock then eligible for conversion, at the Assumed
Conversion Price then in effect.
In addition, the Company shall, within sixty (60) days of the Initial
Issuance Date, file a registration statement on Form 10 registering the
Company's securities pursuant to Section 12(b) or 12(g) of the Exchange Act.
(b) The Company agrees that the holders of Registrable Securities will
suffer damages if the Company fails to fulfill its obligations pursuant to
Section 2(a) hereof and that it would not be possible to ascertain the extent of
such damages. Accordingly, in the event of
-2-
<PAGE>
such failure by the Company to fulfill such obligations, the Company hereby
agrees to pay liquidated damages ("Liquidated Damages") to each holder of shares
then convertible into Registrable Securities ("Restricted Preferred Shares") who
has complied with such holder's obligations under this Agreement under the
circumstances and to the extent set forth below (clauses (i) through (vi)
individually, a "Registration Default"):
(i) if the Registration Statement has not been filed on or prior to the
Filing Date; or
(ii) if the Registration Statement is not declared effective on or prior
to the Due Date; or
(iii) if the New Registration Statement or Amended Registration Statement
is not declared effective within seven business days of the Registration
Shortfall Date; or
(iv) if the number of Registrable Securities registered pursuant to the
Registration Statement is a Registration Shortfall on the effective date or
thereafter in accordance with Section 2(a) hereof;
(v) if the Registration Statement has been declared effective and
thereafter ceases to be effective or usable for any reason including, but not
limited to, a Black Out (under Section 6 hereof) in excess of sixty (60) days,
provided that any such failure of the use of the Registration Statement which is
a result of (A) a required disclosure by the Company in the form of a
Registration Statement amendment relating solely to an acquisition or
disposition of assets by the Company, an acquisition of a business by the
Company, a merger, consolidation or reorganization of the Company or a tender
offer by or for the Company and which does not exceed a period of sixty (60)
calendar days or (B) a performance of its obligations pursuant to Section 5
hereof and does not exceed a period of seven (7) calendar days shall not be
deemed a Registration Default; or
(vi) if a registration on Form 10-SB registering the Company's Securities
pursuant to Section 12(b) or 12(g) of the Exchange Act has not been filed within
sixty (60) days, or declared effective within one hundred twenty (120) days,
after the Initial Issuance Date;
then the Company shall pay Liquidated Damages to each holder of Restricted
Preferred Shares during the first 30-day period immediately following the
occurrence of such Registration Default in the form of a special payment on each
share of Restricted Preferred Shares and each share of Additional Common Stock
as to which the underlying Registrable Securities are not so registered in an
amount equal to 1% of the initial purchase price paid per share under the
Subscription Agreement for the first
-3-
<PAGE>
30-day period, or part thereof, and in an amount equal to 2% of the initial
purchase price paid per share for each subsequent 30-day period, or part
thereof, in cash, or at the Holder's option, in the number of shares of
Common Stock equal to the quotient of (x) the dollar amount of the
Liquidated Damages on the Payment Date (as defined below) by (y) the
Conversion Rate on the date of the Registration Default, accruing daily,
until all Registration Defaults have been cured. The Liquidated Damages
payable pursuant hereto shall be payable within five (5) business days from
the end of the calendar month commencing on the first calendar month in
which the Registration Default occurs (each, a "Payment Date"). In the
event the Holder elects to receive the Liquidated Damages amount in shares
of Common Stock, such shares shall also be considered Registrable
Securities. A Registration Default under clause (i) above shall be deemed
cured on the date that the Registration Statement is filed; a Registration
Default under clause (ii) above or clause (iii) above shall be cured on the
date that the Registration Statement or the New Registration Statement or
Amended Registration Statement, as the case may be, is declared effective;
a Registration Default under clause (iv) above shall be cured on the date
on which the Registration Statement covers the Registration Shortfall and
is declared effective; a Registration Default under clause (v) above shall
be deemed cured on the date the Registration Statement is again declared
effective or the Prospectus contained therein again becomes usable, or the
expiration of twenty four (24) months after the Initial Issuance Date; and
(vi) a Registration Default under clause (vi) above shall be deemed cured
on the date the registration on Form 10 is filed (if the Registration
Default is the failure to file the registration within sixty (60) days from
the Initial Issuance Date) or on the date the registration on Form 10 is
declared effective (if the Registration Default is the failure to be
declared effective within the hundred twenty (120) days from the Initial
Issuance Date).
Upon conversion of each share of Preferred Stock, the Company shall issue
to the Subscriber the number of shares of Common Stock determined as set forth
in Section 5(a) of the Certificate of Designation, plus an additional number of
shares of Common Stock attributable to such share of Preferred Stock (the
"Additional Shares") determined as set forth below:
Additional Shares = Liquidated Damages
------------------
Conversion Rate
With respect to the Preferred Stock, "Conversion Rate" has the definition
ascribed to it in the Certificate of Designation.
Such Additional Shares shall also be deemed "Registrable Securities" as
defined herein. The Company covenants to use its best efforts to use Form SB-2
for the registration required by this Section during all applicable times
contemplated by this Agreement.
-4-
<PAGE>
(c) The Registration Statement shall be prepared as a "shelf"
registration statement under Rule 415, and shall be maintained effective until
all Registrable Securities cease to exist.
(d) The Company represents that it is presently eligible to effect the
registration contemplated hereby on Form SB-2 for secondary offerings and will
use its best efforts to continue to take such actions as are necessary to
maintain such eligibility.
(e) Notwithstanding anything to the contrary contained in this Agreement,
the Registration Statement shall include only the Registrable Securities, except
that the Registration Statement may include securities underlying stock options
issued to officers, directors and employees of the Company.
(f) Notwithstanding anything to the contrary contained in this Agreement,
the Company shall not pay any Liquidated Damages if the failure of the Company
to fulfill its obligations pursuant to Section 2(a) hereof arises from (i) the
failure of any Holder materially to comply with such holder's obligation under
this Agreement or (ii) failure of any Holder materially to comply with the
applicable SEC rules and regulations.
3. Piggyback Registration. If the Registration Statement described
-----------------------
in Section 2 is not effective by the Due Date, and if (but without any
obligation to do so) the Company proposes to register (including for this
purpose a registration to be effected by the Company for shareholders other than
the Holders) any of its Common Stock under the Act in connection with the public
offering of such securities solely for cash (other than a registration relating
solely for the sale of securities to participants in a Company stock plan or a
registration on Form S-4 promulgated under the Act or any successor or similar
form registering stock issuable upon a reclassification, upon a business
combination involving an exchange of securities or upon an exchange offer for
securities of the issuer or another entity), the Company shall, at such time,
promptly give each Holder written notice of such registration (a "Piggyback
Registration Statement"). Upon the written request of each Holder given by fax
within ten (10) days after mailing of such notice by the Company, the Company
shall cause to be included in such registration statement under the Act all of
the Registrable Securities that each such Holder has requested to be registered
("Piggyback Registration") to the extent such inclusion does not violate the
registration rights of any other securityholder of the Company granted prior to
the date hereof; nothing herein shall prevent the Company from withdrawing or
abandoning the registration statement prior to its effectiveness. The election
of initiating Holders to participate in a Piggyback Registration Statement shall
not impact the amount payable to investors pursuant to Section 2(a) or 2(b)
herein except that the Liquidated Damages shall cease to accrue as of the date
of effectiveness of the Piggyback Registration Statement.
4. Limitation on Obligations to Register.
-------------------------------------
-5-
<PAGE>
(a) In the case of a Piggyback Registration on an underwritten public
offering by the Company, if the managing underwriter determines and advises in
writing that the inclusion in the registration statement of all Registrable
Securities proposed to be included would interfere with the successful marketing
of the securities proposed to be registered by the Company, then the number of
such Registrable Securities to be included in the registration statement, to the
extent such Registrable Securities may be included in such Piggyback
Registration Statement, shall be allocated among all Holders who had requested
Piggyback Registration pursuant to the terms hereof, in the proportion that the
number of Registrable Securities which each such Holder seeks to register bears
to the total number of Registrable Securities sought to be included by all
Holders. If required by the managing underwriter of such an underwritten public
offering, the Holders shall enter into a reasonable agreement limiting the
number of Registrable Securities to be included in such Piggyback Registration
Statement and the terms, if any, regarding the future sale of such Registrable
Securities.
(b) In the event the Company believes that shares sought to be registered
under Section 2 or Section 3 by Holders do not constitute "Registrable
Securities" by virtue of Section 1(b) of this Agreement, and the status of those
shares as Registrable Securities is disputed, the Company shall provide, at its
expense, an opinion of counsel reasonably acceptable to the Holders of the
purported Registrable Securities at issue and their counsel (and satisfactory to
the Company's transfer agent to permit the sale and transfer) that those
securities may be sold immediately, without volume limitation, without
registration under the Act, by virtue of Rule 144 or other exemptive provisions
as may be applicable thereto.
5. Obligations of the Company. Whenever required under this Agreement,
--------------------------
or under a post-effective amendment to an effective registration statement, to
effect the registration or continued registration of any Registrable Securities,
the Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the Securities and Exchange Commission ("SEC")
a registration statement, or such a post-effective amendment, with respect to
such Registrable Securities and use its best efforts to cause such registration
statement to become and remain effective;
(b) Prepare and file with the SEC such amendments and supplements to such
registration statement, or such a post-effective amendment, and the prospectus
used in connection with such registration statement, as may be necessary to
comply with the provisions of the Act and the rules and regulations promulgated
thereunder with respect to the disposition of all securities covered by such
registration statement;
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such
-6-
<PAGE>
other documents as they may reasonably request in order to facilitate the
disposition of Registrable Securities owned by them;
(d) Use its best efforts to register and qualify the securities covered by
such registration statement under such other state securities or Blue Sky laws
of such jurisdictions as shall be reasonably requested by the Holders of the
Registrable Securities covered by such Registration Statement, provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions;
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement;
(f) As promptly as practicable after becoming aware of such event, notify
each Holder of Registrable Securities of the happening of any event of which
the Company has knowledge, as a result of which the prospectus included in the
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and subject to Section 6 hereof use its
best efforts promptly to prepare a supplement or amendment to the registration
statement to correct such untrue statement or omission, and deliver a number of
copies of such supplement or amendment to each Holder as such Holder may
reasonably request;
(g) Provide Holders with written notice of the date that a registration
statement registering the resale of the Registrable Securities is declared
effective by the SEC, and the date or dates when the Registration Statement is
no longer effective;
(h) Provide Holders and their representatives the opportunity to conduct a
reasonable due diligence inquiry of Company's pertinent financial and other
records and make available its officers, directors and employees for questions
regarding such information as it relates to information contained in the
registration statement;
(i) Provide Holders and their representatives the opportunity to review
the registration statement and all amendments thereto a reasonable period of
time prior to their filing with the SEC if so requested by Holder in writing.
6. Black Out. If, during the time that the Registration Statement is
---------
effective, the Company reasonably determines, based upon advice of counsel, that
due to the existence of material non-public information, disclosure of such
material non-public information would be required to make the statements
contained in the Registration Statement
-7-
<PAGE>
not misleading, and the Company has a bona fide business purpose for preserving
as confidential such material non-public information, the Company shall have the
right to suspend the effectiveness of the Registration Statement, and no Holder
shall be permitted to sell any Registrable Securities pursuant thereto, until
such time as such suspension is no longer advisable; provided, however, that
such time shall not exceed a period of sixty (60) days. As soon as such
suspension is no longer advisable, the Company shall, if required, promptly, but
in no event later than the date the Company files any documents with the SEC
referencing such material information, file with the SEC an amendment to the
Registration Statement disclosing such information and use its best efforts to
have such amendment declared effective as soon as possible.
In the event the effectiveness of the Registration Statement is suspended
by the Company pursuant hereto, the Company shall promptly notify all Holders
whose securities are covered by the Registration Statement of such suspension,
and shall promptly notify each such Holder as soon as the effectiveness of the
Registration Statement has been resumed. The Company shall be entitled to
effect no more than one such suspension for one (1) year following the Last
Closing (as defined in the Subscription Agreement).
7. Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Company to take any action pursuant to this Agreement with
regard to each selling Holder that such selling Holder shall furnish to the
Company such information regarding Holder, the Registrable Securities held by
it, and the intended method of disposition of such securities as shall be
required to effect the registration of its Registrable Securities or to
determine that registration is not required pursuant to Rule 144 or other
applicable exemptive provision under the Act.
8. Registration Expenses.
---------------------
(a) All fees and expenses incident to the performance of or compliance with
this Agreement by the Company shall be borne by it whether or not any
Registration Statement (or registration on Form 10-SB) is filed or becomes
effective and whether or not any securities are issued or sold pursuant to any
Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with the National Association of Securities Dealers, Inc.,
(B) in compliance with state securities or Blue sky laws (including, without
limitation and in addition to that provided for in (b) below, reasonable fees
and disbursements of counsel for the underwriters or Special Counsel for the
Holders in connection with Blue Sky qualifications of the Registrable
Securities, and determination of the eligibility of the Registrable Securities
for investment under the laws of such jurisdictions as the managing
underwriters, if any, or Holders of a majority (on a fully converted basis) may
designate) and (C) the fees payable in connection with the printing of
prospectuses if the printing of prospectuses is requested by the managing
underwriters, if any),
-8-
<PAGE>
(ii) messenger, telephone and delivery expenses, (iii) fees and disbursements of
counsel for the Company and Special Counsel for the Holders (plus any local
counsel, in accordance with the provisions of Section 8(b) hereof), (iv) fees
and disbursements of all independent certified special audit and "cold comfort"
letters required by or incident to such performance, (v) Securities Act
liability insurance, if the Company so desires such insurance, and (vi) fees and
expenses of all other persons retained by the Company. In addition, the Company
shall pay its internal expenses (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
the expense of any annual audit, and the fees and expenses incurred in
connection with the listing of the securities to be registered on any securities
exchange.
(b) In connection with any registration hereunder, the Company shall
reimburse the Holders of Registrable Securities being registered in such
registration for the reasonable fees and disbursements, not to exceed $25,000 in
the aggregate, of not more than one firm of attorneys representing the selling
Holders (in addition to any local counsel for which reimbursement shall be
separate), which firm, if any, shall be chosen by the majority number of shares
of Registrable Securities of Holders (on a fully diluted basis).
9. Indemnification. In the event any Registrable Securities are included
---------------
in a Registration Statement or a post-effective amendment to an effective
Registration Statement or a Piggyback Registration Statement or in a
registration on Form 10-SB under the Exchange Act under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Holder, the officers, directors, members, partners, attorneys,
agents and employees of each Holder, any underwriter (as defined in the Act) for
such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Act or the Securities Exchange Act of 1934, as amended
(the "1934 Act"), against any losses, claims, damages, liabilities, judgments,
actions and expenses (including without limitation and as incurred,
reimbursement of all reasonable costs of investigating, preparing, pursuing or
defending any claim or action, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, including the reasonable
fees and expenses of counsel), joint or several, to which they may become
subject under the Act, the 1934 Act or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon: (i) any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement, including
any preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereto, or in any registration statement on Form 10-
SB or (ii) the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the statements therein not
misleading, or (iii) any other material violation of the Federal or state
securities laws, and the Company will reimburse each such Holder, officer,
director, member, partner, attorney, agent, employee, underwriter or controlling
person for any legal or other expenses reasonably
-9-
<PAGE>
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, the Company shall not be
liable in any such case for any such loss, claim, damage, liability, or action
to the extent that it is caused by a violation which occurs in reliance upon and
in conformity with written information furnished expressly for use in connection
with such registration by any such Holder, officer, director, member, partner,
attorney, agent, employee, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder, severally and not
jointly, will indemnify and hold harmless the Company, each of its directors,
each of its officers who have signed the registration statement, each person, if
any, who controls the Company within the meaning of the Act, any underwriter and
any other Holder selling securities in such registration statement or any of its
directors or officers or any person who controls such Holder, against any
losses, claims, damages, liabilities, judgments, actions and expenses (including
without limitation and as incurred, reimbursement of all reasonable costs of
investigating, preparing, pursuing or defending any claim or action, or any
investigation or proceedings by any governmental agency or body, commenced or
threatened, including the reasonable fees and expenses of counsel), joint or
several, to which the Company or any such director, officer, controlling person,
or underwriter or controlling person, or other such Holder or director, officer
or controlling person may become subject, under the Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any statement or
omission in each case to the extent (and only to the extent) that such statement
or omission is made in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with the Registration
Statement or in any registration statement on Form 10-SB; and each such Holder
will reimburse any legal or other expenses reasonably incurred by the Company
and any such director, officer, controlling person, underwriter or controlling
person, other Holder, officer, director, or controlling person in connection
with investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement contained in this
subsection 9(b) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Holder, which consent shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under this Section 9 of
notice of the commencement of any action (including any governmental action),
such indemnified party will, if a claim in respect thereof is to be made
against any indemnifying party under this Section 9, deliver to the indemnifying
party a written notice of the commencement thereof and the indemnifying party
shall have the right to participate in, and, to the extent the indemnifying
party so desires, jointly with any other indemnifying party similarly noticed,
to assume the defense thereof with counsel mutually satisfactory to the parties;
provided, however, that an indemnified party shall have the right to retain its
own counsel, with the reasonably incurred fees and expenses of one such counsel
to be paid by the indemnifying party, if representation of such indemnified
party by the counsel retained by the
-10-
<PAGE>
indemnifying party would be inappropriate due to actual or potential conflicting
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
9, but the omission so to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 9.
(d) In the event that the indemnity provided in paragraph (a) or (b) of
this Section 9 is unavailable to or insufficient to hold harmless an indemnified
party for any reason, the Company and each Holder agree to contribute to the
aggregate claims, losses, damages and liabilities (including legal or other
expenses reasonably incurred in connection with investigating or defending same)
(collectively "Losses") to which the Company and one or more of the Holder may
be subject in such proportion as is appropriate to reflect the relative fault of
the Company and the Holders in connection with the statements or omissions which
resulted in such Losses. Relative fault shall be determined by reference to
whether any alleged untrue statement or omission relates to information provided
by the Company or by the Holders. The Company and the Holders agree that it
would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph (d), no person guilty of engaging in fraudulent transactions or
the use of any manipulative or deceptive device or contrivance (within the
meaning of Section 17 of the Act or Section 10(b) of the 1934 Act) shall be
entitled to contribution from any person who was not guilty thereof. For
purposes of this Section 9, each person who controls a Holder of Registrable
Securities within the meaning of either the Act or the 1934 Act and each
director, officer, member, partner, employee and agent of a Holder shall have
the same rights to contribution as such Holder, and each person who controls the
Company within the meaning of either the Act or the 1934 Act and each director
of the Company, and each officer of the Company who has signed the Registration
Statement, shall have the same rights to contribution as the Company, subject in
each case to the applicable terms and conditions of this paragraph (d).
(e) The obligations of the Company and Holders under this Section 9 shall
survive the redemption, exercise or conversion, if any, of the Preferred Stock,
the completion of any offering of Registrable Securities in a Registration
Statement under this Agreement, and otherwise.
10. Reports Under Securities Exchange Act of 1934. With a view to
--------------------------------------------------
making available to the Holders the benefits of Rule 144 promulgated under the
Act and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration, the
Company agrees to:
-11-
<PAGE>
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) use its best efforts to file with the SEC in a timely manner all
reports and other documents required of the Company under the Act and the 1934
Act.
11. Amendment of Registration Rights. Any provision of this Agreement
--------------------------------
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders of a majority of the Registrable
Securities provided that the amendment treats all Holders equally. Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon each Holder, each future Holder, and the Company.
12. Notices. All notices required or permitted under this Agreement
-------
shall be made in writing signed by the party making the same, shall specify the
section under this Agreement pursuant to which it is given, and shall be
addressed if to (a) the Company at: 264 South LaCienega, Suite 305, Beverly
Hills, California 90211; and (b) the Holders at their respective last address
of the party as shown on the records of the Company. Any notice, except as
otherwise provided in this Agreement, shall be made by fax and shall be deemed
given at the time of transmission of the fax.
13. Termination. This Agreement shall terminate on the date all
-----------
Registrable Securities cease to exist; but without prejudice to (a) the parties'
rights and obligations arising from breaches of this Agreement occurring prior
to such termination (b) other indemnification obligations under this Agreement.
14. Assignment. No assignment, transfer or delegation, whether by
----------
operation of law or otherwise, of any rights or obligations under this Agreement
by the Company or any Holder, respectively, shall be made without the prior
written consent of the majority in interest of the Holders or the Company,
respectively; provided that the rights of a Holder may be transferred to a
subsequent holder of the Holder's Registrable Securities (provided such
transferee shall provide to the Company, together with or prior to such
transferee's request to have such Registrable Securities included in a Required
or Piggyback Registration, a writing executed by such transferee agreeing to be
bound as a Holder by the terms of this Agreement); and provided further that the
Company may transfer its rights and obligations under this Agreement to a
purchaser of all or a substantial portion of its business if the obligations of
the Company under this Agreement are assumed in connection with such transfer,
either by merger or other operation of law (which may include without limitation
a transaction whereby the Registrable Securities are converted into securities
of the successor in interest) or by specific assumption executed by the
transferee.
15. Miscellaneous.
-------------
-12-
<PAGE>
(a) Remedies. Each Holder of Registrable Securities or the Company,
--------
in addition to being entitled to exercise all rights provided herein, or granted
by law, including recovery of damages, will be entitled to specific performance
of its rights under this Agreement. The Company and each Holder of Registrable
Securities agrees that monetary damages would not be adequate compensation for
any loss incurred by reason of a breach by the Company of the provisions of this
Agreement and hereby agrees to waive the defense in any action for specific
performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company shall not enter into any
--------------------------
agreement with respect to its securities that is inconsistent with the rights
granted to the holders of Registrable Securities in this Agreement or otherwise
conflicts with the provisions hereof.
(c) No Piggyback on Registrations. The Company shall not include and
-----------------------------
shall not grant to any of its securities holders, including, without limitation,
any Placement Agents (other than the Holders of Registrable Securities in such
capacity) the right to include any of its securities in any Registration
Statement other than Registrable Securities, except any such rights that exist
as of the date hereof. Notwithstanding the foregoing, nothing shall prevent the
Company from filing a registration statement simultaneously with the
Registration Statement so long as the Holders of Registrable Securities have
full priority with respect to the removal of any restrictive legend upon the
resale by such Holder of the Registrable Securities.
16. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware applicable to
agreements made in and wholly to be performed in that jurisdiction, except for
matters arising under the Act or the 1934 Act, which matters shall be construed
and interpreted in accordance with such laws.
17. Execution in Counterparts Permitted. This Agreement may be
--------------------------------------
executed in any number of counterparts, each of which shall be enforceable
against the parties actually executing such counterparts, and all of which
together shall constitute one (1) instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of this
_______ day of April, 1999.
COMPANY:
ENTERTAINMENT UNIVERSE, INC.
By:________________________________
Brad D. Greenspan, President
Address: 264 South LaCienega
-13-
<PAGE>
Suite 305
Beverly Hills, CA 90211
SUBSCRIBER(S):
___________________________________
Investor's Name
By:________________________________
(Signature)
Address: _________________________________
_________________________________
_________________________________
-14-
<PAGE>
EXHIBIT 10.09
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (this "Assignment") is made as of
the 14th day of April, 1999, by and between Entertainment Universe, Inc., a
California corporation (the "Assignor"), and Motorcycle Centers of America,
Inc., a Nevada corporation (the "Assignee").
WHEREAS, in connection with an offering of the Series A 6% Convertible
Preferred Stock of Assignor to certain investors (the "Investors"), the Assignor
entered into those certain Registration Rights Agreements, by and between
Assignor and each Investor (collectively, the "Registration Right Agreements"),
and those certain Irrevocable Instructions to Transfer Agent among Assignor,
each Investor and Corporate Stock Transfer, Inc. (collectively, the "Irrevocable
Instructions"); and
WHEREAS, Assignor and Assignee entered into that certain Agreement and
Plan of Reorganization pursuant to which Assignor exchanged all of its capital
stock for the capital stock of Assignee (the "Exchange");
WHEREAS, in connection with the Exchange, Assignor desires to assign and
transfer all of its rights, title, and interest in and to the Registration
Rights Agreements and the Irrevocable Instructions to Assignee, and Assignee
desires to accept said assignment and transfer upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the covenants and conditions contained
herein, the receipt and sufficiency of which are hereby acknowledged, Assignor
and Assignee hereby agree as follows:
1. Assignment. Assignor hereby assigns and transfers to Assignee any and
all of Assignor's right, title and interest in and to the Registration Rights
Agreements and the Irrevocable Instructions.
2. Acceptance and Assumption. Assignee hereby accepts the foregoing
assignment and transfer, and assumes and agrees to keep, perform and be bound by
all of the terms, covenants, conditions and obligations which are required to be
performed by Assignee under or in connection with the Registration Rights
Agreements and the Irrevocable Instructions.
3. Successors and Assigns. This Assignment shall be binding upon, inure to
the benefit of and be enforceable by the parties hereto, their successors in
interest, administrators, legal representatives and permitted assigns.
<PAGE>
4. Governing Law. This Assignment has been negotiated in, and shall be
governed by, and construed and enforced in accordance with, the laws of the
State of California, without regard to its conflicts of law principals.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment
as of the date first above written.
ASSIGNOR:
ENTERTAINMENT UNIVERSE, INC., a
California corporation
By: /s/ Brad Greenspan
----------------------------------
Brad Greenspan, President
ASSIGNEE:
MOTORCYCLE CENTERS OF AMERICA, INC.,
a Nevada corporation
By: /s/ Brad Greenspan
----------------------------------
Brad Greenspan, President
<PAGE>
EXHIBIT 10.10
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is dated as of April 21, 1999 by and
between Motorcycle Centers of America, Inc., a Nevada corporation ("Buyer") and
the persons whose names are set forth on the signature page of this Agreement or
on Schedule A hereto (collectively referred to herein as "Seller"), and
Management which includes Hilts, Westall and Rusnak, the holders of all of the
outstanding shares of Case's Ladder, Inc., a California corporation ("CL").
This Agreement sets forth the terms and conditions upon which Seller has agreed
to sell and Buyer has agreed to purchase from Seller all of the outstanding
shares of the common stock of CL (the "CL Shares"). Seller represents and
warrants that Seller owns all of the outstanding shares of the common stock of
CL, and that no class of shares or securities requiring the issuance of common
or preferred stock of CL exists other than as set forth herein.
In consideration of the mutual agreements contained herein and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. SALE OF THE SHARES
1.01 Shares Being Sold
Subject to the terms and conditions of this Agreement, Seller is selling,
assigning and delivering the CL Shares to Buyer at the closing provided for in
Section 1.03 hereof (the "Closing"), free and clear of all liens, charges,
claims or encumbrances of any kind or nature whatsoever.
1.02 Consideration
Subject to the terms and conditions of this Agreement, and in reliance upon the
representations, warranties and agreements of Seller contained herein and in
consideration for the sale, assignment and delivery of the CL Shares and in full
payment therefor:
1.02(a) Buyer shall issue to Seller at the Closing an aggregate of 700,000
shares of common stock of Buyer (the "Buyer Shares") in the form of
certificates registered in the names and amounts as listed in Schedule A
hereto. The Buyer Shares shall be "restricted securities" as that term is
defined in Rule 144 ("Rule 144") under the Securities Act of 1933, as
amended (the "Act").
1
<PAGE>
1.02(b) For one (1) year from the Closing, Seller and each of them, shall
have the right and privilege, at their option, to have their Buyer Shares
registered for sale at Buyers expense (except for commissions to brokers
or underwriters, which shall be paid by Buyer) as part of any registration
the Company files and to sell their shares in the Company's offering of
its shares to the public to the extent, and only to the extent, that the
Company's directors and/or officers, or any of them have such registration
rights and sale privileges. If Rule 144 shall be available to any Buyer,
Buyer shall utilize Rule 144 to effect the sale of Buyer's Shares to the
greatest extent possible.
1.02(c) On or before April 17, 1999, Seller shall perform, at Seller's own
expense, an audit of all of the business of CL, including but not limited
to any and all financial records, inventories, accounts receivable and
payable, and lists of equipment. Seller shall promptly transmit to Buyer a
copy of said audit. Buyer shall then have ten business days after receipt
thereof to approve or reject the audit.
1.02(d) In the event that Buyer disapproves of any part of the audit, any
document submitted by Management in the course of this transaction, any
representation made by Management in the course thereof, or for any other
reason, Buyer does not proceed with this transaction, Buyer and Management
agree that the amount of damages Management would suffer thereby would be
difficult to ascertain and would be incapable of being proven with any
certainty. As a result, Buyer and Management agree that any amounts
previously paid by Buyer at the time Buyer notifies Management that it
will not complete the transaction will constitute liquidated damages for
such failure by Buyer, and shall constitute Management's only remedy and
compensation therefor.
1.02(e)
(i) After this transaction is completed, Frank Westall, Chip Hilts
and Jeremy Rusnak shall each serve as Employees of CL on the terms
and conditions set forth in the Employment Agreements attached
hereto as Exhibit 1.02(d).
(ii) Management represents that neither Seller nor CL has undertaken
any transaction or transfer of any asset of CL in the calendar year
preceding the date hereof, except in the ordinary course of
business. Management further represents that Seller will make no
transfer of any asset of CL prior to the Closing, other than in the
ordinary course of business.
2
<PAGE>
1.02(f) On the Closing Date, except as set forth herein, Buyer will
terminate Management's authority to write checks against, or have
outstanding checks honored from the funds in CL's bank account. The
persons set forth on Exhibit 1.02(f) shall have the authority to
issue checks from CL's checking account not in excess of $2,000
each; but not to any of Seller or Seller's affiliates. Any checks so
issued shall only be pursuant to internal account procedures
established by Buyer. On the Closing Date, Management shall also
deliver to Buyer a schedule setting forth those checks of CL that
remain outstanding (the "Outstanding CL Checks"). To provide funds
for the Outstanding CL Checks, Buyer shall, on the Closing Date,
deposit into a conventional checking account, in the name of CL,
funds sufficient to pay all Outstanding CL Checks, and shall
cooperate with Management to enable such funds to be used in fully
satisfying all Outstanding CL Checks. Buyer shall thereafter
indemnify Management from and against all claims and liabilities
attributable to Outstanding CL Checks.
1.03 The Closing
The Closing of the transactions provided for in Sections 1.04 and 1.05
shall take place at the offices of Buyer's counsel, David L. Kagel, Esq.,
1801 Century Park East, Suite 2500, Los Angeles, California 90067, within
21 days of the date of this Agreement or at such time and place as shall
be mutually agreed upon by Buyer and Seller. The date of the Closing is
referred to herein as the "Closing Date".
1.04 Delivery by Seller
At the Closing, Management shall deliver to Buyer:
(i) a certificate or certificates representing the CL Shares
endorsed in blank and otherwise in form acceptable to Buyer for
transfer on the books of CL;
(ii) all contracts, books and records of CL not previously delivered
to Buyer;
(iii) the certificates of the officers of Seller in the form annexed
hereto as Exhibit 1.04(iii); and
(iv) the opinion of C. Timothy Smoot, Esq., counsel to Seller, in
the form annexed hereto as Exhibit 1.04(iv).
1.05 Delivery by Buyer
Buyer shall make to Seller the payments provided in Section 1.02(a)
hereof.
3
<PAGE>
2. ASSUMPTION OF CERTAIN LIABILITIES BY SELLER
For a period of four months, Management hereby assumes, jointly and severally,
all liability claims by employees of CL as of the Closing Date attributable to
occurrences prior to the Closing Date and agrees to indemnify and hold Buyer
harmless from and against any and all liabilities, claims, costs and expenses,
including attorney's fees, expended or incurred by Buyer with respect thereto.
All such claims made or, after diligent inquiry are known to Management, are set
forth on Exhibit 2 hereto.
3. REPRESENTATIONS AND WARRANTIES BY SELLER
Management, jointly and severally, hereby represents, warrants and covenants to
Buyer as follows:
3.01(a)
CL is a corporation duly organized, validly existing, and in good standing
under the laws of the state of California and is duly qualified to do
business in all states in which such qualification is necessary.
3.01(b)
(i) The authorized capital stock of CL consists of 30,000,000
million shares of common stock, no par value, of which 10,585,061,
shares are validly issued and outstanding, fully paid and
nonassessable. Seller owns and shall deliver on the Closing Date all
of such CL Shares, free and clear of any liens, claims, options,
charges or encumbrances of any kind or nature whatsoever.
(ii) Seller has the unqualified right to sell, assign and deliver
the CL Shares to Buyer, has given no other person or entity any
right in or to such CL Shares and upon consummation of the
transactions contemplated by this Agreement, Buyer will acquire good
and valid title to the CL Shares free and clear of all liens,
claims, options, charges and encumbrances of any nature whatsoever,
except restrictions on resale imposed by applicable federal and/or
state laws and regulations.
(iii) There are no outstanding options, warrants or rights or other
agreements of any nature requiring or relating to the issuance by CL
of any shares of its capital stock.
4
<PAGE>
3.01(c)
CL has the corporate power and authority to carry on its business as
presently conducted except as set forth on Exhibit 3.01(c).
3.01(d)
All obligations of Seller and CL under any Lease (as defined in Section
5.03 below) are current as of the Closing Date.
3.02 No Violation
Neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will constitute a violation or default under
any term or provision of the articles of incorporation or bylaws of CL or of any
material contract, commitment, indenture or other agreement or restriction of
any kind or character to which CL or Seller is a party or by which CL or Seller
is or may be bound.
3.03 Financial Statements
Seller has delivered to Buyer the audited Financial Statements of CL (the
"Financial Statements") as of December 31, 1998 and February 28, 1999 (the
"Valuation Date"), copies of which are attached hereto as Exhibit 3.03. The
Financial Statements are true and correct in all material respects and a fair
and accurate representation of the financial condition and assets and
liabilities (whether accrued, absolute, contingent or otherwise) of CL as of
such dates, stated on a basis consistent with that of previous periods.
3.04 Tax Returns
CL has duly filed all tax reports and returns required to be filed by it and has
duly paid or accrued (except as set forth below) all taxes and other charges
claimed to be due from it by federal, state or local taxing authorities
(including, without limitation, those due in respect of its properties, income,
franchises, licenses, sales and payrolls); there are no tax liens upon any of
CL's property or assets except for liens for current taxes not yet due and
payable or as set forth on Exhibit 3.04 hereto; and except as may be noted on
the Financial Statement, there are not now nor does Seller have knowledge, after
reasonable inquiry, of any pending matters relating to or claims asserted for
taxes or assessments against CL or any of its assets except as disclosed herein.
Buyer agrees to make CL's books and records available to Seller at reasonable
times in CL's or Buyer's facility for review and copying during the pendency of
this transaction.
5
<PAGE>
3.05 Title to Properties; Encumbrances
CL has good and marketable title to all of its properties and assets, real and
personal, tangible and intangible, including without limitation the property and
assets reflected on the Financial Statement (except for inventory and other
properties and assets that have been sold or otherwise disposed of in the
ordinary course of the business of CL since the Valuation Date). No such
properties are subject to mortgage, pledge, lien, conditional sale agreement,
encumbrance or charge of any nature whatsoever except: (a) liens shown on
Exhibit 3.05 as securing specified liabilities (with respect to which no default
exists); (b) liens for current taxes not yet due; and (c) minor imperfections of
title and encumbrances, if any, that are not substantial in amount, do not
materially detract from the value of the property subject thereto or materially
impair the operations of CL and have arisen only in the ordinary course of
business consistent with past practice.
3.06 Patents, Trademarks, Trade Names, Etc.
All patents, trademarks, trade names and assumed names, copyrights or licenses
therefor held by CL, all of which are set forth on Exhibit 3.06, are valid and
in good standing and free and clear of all liens and encumbrances of any and
every nature and are not involved in any pending or threatened interference
proceeding; to the best knowledge of Seller, after reasonable inquiry, none of
the products manufactured or sold by CL and none of the formulae, processes,
know-how or designations used in the business of CL infringe on any patent,
trade secret, trademark, trade name or copyright of any other person.
3.07 Accounts Receivable
All accounts receivable of CL, as reflected in the Financial Statements, as
adjusted for ordinary business transactions between the Valuation Date and the
Closing Date, represent sales actually made in the ordinary course of business
and the reserve for collectibility of receivables as reflected in the Financial
Statements is adequate and was calculated in a way consistent with past
practice. Except to the extent set forth in Exhibit 3.07 hereto, or for which
adequate reserves have been established as reflected on the Financial
Statements, there are not now any questions, controversies or disputes relating
to any accounts receivable of CL.
3.08 Undisclosed Liabilities
Except to the extent reflected or reserved against in the Financial Statements,
as of the Valuation Date CL had no liabilities or obligations of any nature,
whether absolute, accrued, contingent or
6
<PAGE>
otherwise and whether due or to become due, except those that are not required
by generally accepted accounting principles to be included in the Financial
Statements. Further, Seller, following reasonable inquiry, does not know or have
any reasonable ground to know of any basis for the assertion against CL as of
the Valuation Date, of any liability or obligation of any nature or in any
amount not fully reflected or reserved against in the Financial Statements.
3.09 Financial Statement Errors
If subsequent to closing, Buyer discovers that there is a material variance
between the assets and/or liabilities as disclosed in CL's audited Financial
Statements and actual assets and/or liabilities, the Parties agree to negotiate
any differences in good faith and if differences are agreed to, to adjust the
amount of stock issued to Seller paid for CL's Shares. Such adjustment shall be
based upon the closing bid price of Buyer's Shares at the time of signing this
Agreement. Any dispute not settled by good faith negotiations shall be submitted
to mediation in accordance with the dispute resolution paragraph of this
Agreement.
3.10 Absence of Certain Changes
CL has not, since the Valuation Date and will not have from the Valuation Date
to the Closing Date:
3.10(a)
Suffered any material adverse change in its financial condition, assets,
liabilities, business or prospects, except those set forth in Exhibit
3.10(a) hereto;
3.10(b)
Incurred any obligation or liability (whether absolute, accrued,
contingent or otherwise) other than in the ordinary course of business and
consistent with past practice or with respect to any agreement to which CL
is subject or bound by;
3.10(c)
Paid any claim or discharged or satisfied any lien or encumbrance or paid
or satisfied any liability (whether absolute, accrued, contingent or
otherwise) other than liabilities shown or reflected in the Financial
Statements or liabilities incurred since the Valuation Date in the
ordinary course of business and consistent with past practice;
7
<PAGE>
3.10(d)
Permitted or allowed any of its assets, tangible or intangible, to be
mortgaged, pledged or subjected to any liens or encumbrances;
3.10(e)
Written down the value of any inventory or written off as uncollectible
any notes or accounts receivable or any portion thereof except for write
offs of such items in the ordinary course of business;
3.10(f)
Canceled any other debts or claims or waived any rights of substantial
value or sold or transferred any of its assets or properties, tangible or
intangible, other than in the ordinary course of business and consistent
with past practice;
3.10(g)
Disposed of or permitted to lapse any material patent, trademark or
copyright or any application for any material patent, trademark or
copyright;
3.10(h)
Disposed of or disclosed to any person any trade secret, formula, process
or other know-how except pursuant to inquiries to purchase CL or its
assets for which Confidentiality Agreements were obtained by Seller, all
of which agreements are annexed hereto as Exhibit 3.10(h);
3.10(i)
Granted any general uniform increase in the compensation of employees
(including any increase pursuant to any bonus, pension, profit-sharing or
plan or commitment) or any substantial increase in any compensation
payable or to become payable to any officer or employee, and no such
increase (whether general or otherwise) is required pursuant to any
existing employment agreements or otherwise;
3.10(j)
Made any capital expenditures or commitments in excess of $20,000 for
additions to its property, plant or equipment;
3.10(k)
8
<PAGE>
Declared, paid or set aside for payment to its stockholders, any dividend
or other distribution in respect of its capital stock or redeemed or
purchased or otherwise acquired any of its capital stock or any options
relating thereto or agreed to take any such action; or
3.10(1)
Made any material change in any method of accounting or accounting
practice.
3.11 Litigation
Except to the extent set forth in Exhibit 3.11 hereto there are no actions,
proceedings or investigations pending or, after reasonable inquiry and to the
knowledge of Seller, threatened against CL and Management does not know or have
any reason to know of any basis for any such action, proceeding or
investigation.
3.12 Disclosure
Management has disclosed to Buyer all facts material to the assets, prospects
and business of CL known to Management. No representation or warranty by
Management contained in this Agreement and no statement contained in any
exhibit, list, certificate or writing furnished to Buyer pursuant to the
provisions hereof or in connection with the transactions contemplated hereby
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein or therein not
misleading or necessary in order to provide a prospective purchaser of the
business of CL with accurate and complete information which any reasonable
purchaser of CL would desire as to CL and its affairs.
3.13 Exhibits
Each of the Exhibits to this Agreement is incorporated into this Agreement and
made a part hereof, and is true, accurate and complete.
3.14 Material Events or Conditions
After reasonable inquiry, to the best knowledge of Management, there is no event
or condition of any kind or character pertaining to the business, assets or
prospects of CL that may materially or adversely affect such business, assets or
prospects.
4. REPRESENTATIONS AND WARRANTIES BY BUYER
9
<PAGE>
Buyer hereby represents, warrants and covenants to Seller as follows:
4.01 Organization, Etc.
Buyer is a corporation duly organized, validly existing and in good standing
under the laws of the state of Nevada.
4.02 Authority
The execution and delivery of this Agreement by Buyer and the consummation by
Buyer of the transactions contemplated hereby have been duly authorized by the
board of directors of Buyer. The officers of Buyer acting on behalf of Buyer
with respect to these transactions and executing this Agreement on behalf of
Buyer have been duly authorized by all necessary and appropriate corporate
action to take such actions and to execute this Agreement.
4.03 No Violation
Neither the execution nor the delivery of this Agreement, nor the consummation
of the transactions contemplated hereby will constitute any violation or default
under any term or provision of the articles of incorporation or bylaws of Buyer
or of any material contract, commitment, indenture or other agreement or
restriction of any kind or character to which Buyer is a party or by which Buyer
is bound.
4.04 Investment Experience
Buyer has significant knowledge and experience in financial and business matters
enabling it to evaluate the significant risks associated with its acquisition of
the CL Shares.
5. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
5.01 Survival of Representations
All representations, warranties and agreements made by any party in this
Agreement or pursuant hereto shall survive the execution and delivery hereof for
a period of one year.
5.02 Existing Lease
Exhibit 5.02 contains a true and complete copy of the Lease Agreement dated
January 4, 1999 (the "Lease") on Seller's business premises located at 11372
Trask Avenue, Garden Grove, CA 92643 (the "Premises").
10
<PAGE>
As further consideration for the purchase hereunder, Buyer agrees to assume and
fulfill CL's obligations to pay all rent under the Lease after the Closing Date
for so long as CL may continue to occupy the Premises, and to indemnify and hold
the Seller harmless from any claims by, or demands from, the Landlord under the
Lease related to, or arising from any failure to make such payments. Buyer will
indemnify Seller from any liabilities and expenses resulting from its and/or
CL's occupancy of the Premises and termination of the Lease following the
Closing Date.
6. MISCELLANEOUS
6.01 Expenses
All fees and expenses incurred by CL in connection with the transactions
contemplated by this Agreement shall be borne by CL and all fees and expenses
incurred by Buyer in connection with the transactions contemplated by this
Agreement shall be borne by Buyer.
6.02 Insurance
Seller hereby assigns to Buyer the benefits under and proceeds of each and all
existing policies of insurance coverage relating to products or services
provided by CL of which policies Seller or CL is a beneficiary. Copies of all
such policies shall be delivered to Buyer at the Closing. Seller further agrees
to cause CL to be named the sole insured under such policies and to deliver
evidence thereof satisfactory to Buyer within 30 days of the Closing Date. Such
benefits and proceeds shall be utilized in satisfaction of claims, liabilities,
costs and expenses of CL, if any, related to occurrences prior to the Closing
Date. Following the payment of such benefits and proceeds, the indemnification
provisions of Section 5.02 of this Agreement shall apply.
6.03 Further Assurances
From time to time, at Buyer's request and without further consideration, CL at
its own expense will execute and transfer such documents and will take such
other action as Buyer may reasonably request in order to more effectively
consummate the transactions contemplated hereby.
6.04 Parties and Interests
All the terms and provisions of this Agreement shall be binding upon, shall
inure to the benefit of and shall be enforceable by the respective heirs,
beneficiaries, representatives, successors and permitted assigns of the parties
hereto.
11
<PAGE>
6.05 Employment Agreements
At the Closing Buyer will enter into employment agreements in the form set forth
in Exhibit 6.05 with Jeremy Case, Frank Westall and Chip Hilts.
6.06 Prior Agreements; Amendments
This Agreement supersedes all prior agreements and understandings between the
parties with respect to the subject matter hereof. This Agreement may be amended
only by a written instrument duly executed by the parties hereto or their
respective successors or assigns.
6.07 Representation
Each of the representations and warranties contained herein shall be true and
accurate as of the date of this Agreement and as of the Closing Date.
6.08 Counsel
Buyer and CL confirm that they have each been represented by counsel of their
choice in the negotiation of this Agreement and the transactions contemplated
hereby.
6.09 Headings
The section and paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretations of
this Agreement.
6.10 Governing Law and Judicial Proceedings
This Agreement shall be governed by and construed and enforced in accordance
with the laws of the state of California without regard to its conflict of laws
rules. Any judicial proceedings brought by Buyer against Seller with respect to
this Agreement must be brought in a court of competent jurisdiction in the
County of Los Angeles, State of California.
6.11 Dispute Resolution
The Parties agree to submit any and all disputes between them arising under or
in relation to this Agreement to mediation with a mediator approved by both
parties. If the Parties resolve their disputes through mediation, the Parties
shall share the costs of mediation evenly but pay their own attorneys' fees and
other
12
<PAGE>
expenses related to mediation. If mediation fails to resolve all disputes within
thirty (30) days after submission to the mediator, then either Party may file a
law suit or request arbitration. The Parties agree that a good faith attempt at
mediation is a precondition to filing a law suit. The prevailing Party in any
law suit or arbitration relating to the transactions contemplated by this
contract shall be entitled to costs and expenses including reasonable attorneys
fees and attorneys fees and expenses incurred in connection with mediation that
failed to resolve the dispute(s).
6.12 Notices
All notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered or mailed
(registered or certified mail, postage prepaid, return receipt requested) as
follows:
If to Buyer:
eUniverse, Inc.
264 South La Cienega Blvd., Suite 305
Beverly Hills, California 90211
Attn: President
Telephone: (310) 546 - 5437
Facsimile: (310) 546 - 2807
With a copy to:
David L. Kagel, Esq.
1801 Century Park East, 25th Floor
Los Angeles, California 90067-2327
Telephone: (310) 553 - 9009
Facsimile: (310) 553 - 9693
If to Seller:
Frank Westall
3863 Calle Loma Vista
Newberry Park, CA 91320
Telephone: (805) 375-0196
Fax: (805) 375-1126
With a copy to:
C. Timothy Smoot, Esq.
Suite 174
13
<PAGE>
23505 Crenshaw Blvd.
Torrance, CA 90505-5221
Telephone: (310) 530-3366
Fax: (310) 530-2211
6.13 Counterparts
This Agreement may be executed simultaneously in several Counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
6.14 No Third Party Beneficiaries
This Agreement is for the benefit of Buyer and Seller only and is not intended
to nor shall it operate to create any third party beneficiary or other rights in
any other person or entity.
6.15 Assignment
Neither party may assign its rights under this Agreement or delegate its duties
or obligations hereunder absent the prior written consent of the other party.
6.16 Brokers
If either party has retained, or is claimed to have retained, a broker or finder
in connection with this transaction, the party which so retained, or is claimed
to have retained, the broker or finder shall indemnify and hold the other party
harmless from any and all claims, fees and/or compensation sought by such actual
or alleged broker or finder.
6.17 Investment Intent; No Distribution
CL and each of the Seller is acquiring the Buyer Shares to be issued pursuant to
this Agreement for his, her or its own account, for investment and not as a
nominee and not with a present view to the redistribution thereof. Seller is
aware that there are legal and practical limits on Seller's ability to dispose
of the Buyer Shares and therefore that Seller must bear the economic risk of
holding the Buyer's Shares for an indefinite period of time and has adequate
means of providing for his, her or its current needs and possible personal
contingencies and has adequate other means for providing for Seller's financial
needs. By making the representations in this Section 6.16 Seller does not agree
to hold the Buyer's Shares for any minimum or other specific term and reserves
the right to dispose of the Buyer Shares at any time in accordance with or
pursuant to a registration statement under the Act or an exemption from
registration under the Act.
14
<PAGE>
6.18 No General Solicitation
The Buyer Shares were not offered to Seller and Seller is not aware of any form
of general solicitation or general advertising, including without limitation (a)
any advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, and
(b) any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising.
6.19 Restricted Securities
Seller understands that the Buyer Shares to be issued at the Closing are
"restricted securities" under Federal Securities Laws in as much as they are
being acquired from Buyer in a transaction not involving any public offering and
that under such laws and applicable regulations such securities may not be
transferred or resold without registration under the Act or pursuant to an
exemption from such registration. In this connection Seller and each of them
represents that Seller is familiar with or has been addressed by counsel
concerning Rule 144 under the Act, as presently in effect and understands the
resale limitations imposed thereby and by the Act.
6.20 Disposition
Without in any way limiting the representations set forth above, for one (1)
years from the Closing Date, except for transfers to holders of options to
purchase CL Shares as reflected in Schedule A, Seller further agrees not to make
any disposition of all or any portion of the Buyer's Shares unless and until (a)
there is then in effect a registration statement under the Act covering such
proposed disposition and such disposition is made in accordance with such
registration statement; or (b) (i) Seller shall have notified Buyer of the
proposed disposition and shall have furnished Buyer with a detailed statement of
the circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by Buyer Company Seller shall have furnished Buyer with an opinion of
counsel, reasonably satisfactory to Buyer that such disposition is being made in
accordance with the rules and regulations under the Act.
6.21 Exempt Transaction
Seller understands that Buyer Shares are being issued and sold in reliance on
specific exemptions from the registration requirements of the Act and state
securities laws and the representations, warranties and covenants set forth
herein are being relied upon by Buyer in determining that applicability of such
exemptions and the suitability of Seller to acquire such Shares.
15
<PAGE>
6.22 Legend
It is understood that any and all certificates representing Buyer Shares shall
bear substantially the following legend:
"The securities represented hereby have not been registered under the Securities
Act of 1933, as amended, or applicable state securities laws or the securities
laws of any other jurisdiction. They may not be sold or transferred in the
absence of an effective registration statement under those securities laws or
pursuant to an exemption therefrom."
IN WITNESS WHEREOF this Agreement has been duly executed by the parties hereto
on the date first above written.
MOTORCYCLE CENTERS OF AMERICA, INC.
By:__________________________________
Brad Greenspan, President
CASE'S LADDER, INC.
By:__________________________________
FRANK WESTALL, CEO, for SELLER
_____________________________________
FRANK WESTALL, CEO and Chairman
_____________________________________
CHIP HILTS, COO and CFO
16
<PAGE>
They may not be sold or transferred in the absence of an effective registration
statement under those securities laws or pursuant to an exemption therefrom."
IN WITNESS WHEREOF this Agreement has been duly executed by the parties hereto
on the date first above written.
MOTORCYCLE CENTERS OF AMERICA, INC.
By: /s/ Brad Greenspan
-----------------------------------
Brad Greenspan, President
CASE'S LADDER, INC.
By: /s/ Frank Westall
-----------------------------------
FRANK WESTALL, CEO, for SELLER
/s/ Frank Westall
- ---------------------------------------
FRANK WESTALL, CEO and Chairman
/s/ Chip Hilts 4/21/99
- ---------------------------------------
CHIP HILTS, COO and CFO
16
<PAGE>
SCHEDULE A
CASE'S LADDER INC.
Name of Shareholder No. of Shares of No. of Shares of Motorcycle
("Seller") Case's Ladder, Inc. Centers of America, Inc.
- ---------- ------------------- ------------------------
17
<PAGE>
MANAGEMENT AGREEMENT
This agreement dated April 19, 1999, is made by and between Entertainment
Universe, referred to as the "Company", and Edward L. Hilts
1. Services. The Company hereby employs Edward Hilts to perform the following
services in accordance with the terms and conditions set forth in this
agreement: Mr Hilts will consult with the officers and employees of the Company
concerning matters relating to the management and organization of the Company,
their financial policies, the terms and conditions of employment, and generally
any matter arising out of the business affairs of the Company.
2. Terms of Agreement. This agreement will begin upon the Company's acquisition
of Cases Ladder, Inc., and will run for a period of no less than 12 months from
the acquisition. Either party may cancel this agreement on sixty (60) days
notice to the other party in writing, by certified mail or personal delivery.
Upon termination of employment by the Company for any reason, Edward Hilts shall
be paid 1 years pay, including options and bonus, by the Company.
3. Place Where Services Will Be Rendered and Responsibilities. Mr. Hilts shall
perform most services in accordance with this contract in his own offices and/or
home. In addition, Mr. Hilts will perform services on the telephone and at such
other places as designated by the Company to perform these services in
accordance with this agreement. The responsibilities will be as follows but will
not be limited to: (a) Management of the Cases Ladder Internet site and all
activities associated with it; (b) Involvement in the growth and management of
all activities related to On-line entertainment and community; (c) Activities
related to software sales and Company acquisitions.
4. Payment to Edward Hilts. Mr. Hilts will be paid at the rate of $9166.67 per
month on a biweekly basis for work performed in accordance with this agreement.
All taxes and appropriate deductions will be administrated by the Company.
5. Additional Consideration to Edward Hilts. Mr. Hilts will be entitled to a
bonus no less than once per year, payable every six months from the date of the
acquisition of Cases Ladder. The bonus for Edward Hilts shall be based on
performance criteria set by the compensation committee.
6. Expenses incurred by Edward Hilts. Mr. Hilts will receive reimbursement for
all Company-mandated travel, mileage, entertainment and other reasonable
out-of-pocket expenses. Mr. Hilts will submit a statement setting forth the
expenses, and the Company will pay the amounts due within ten (10) days of
receipt.
7. Stock Options to Edward Hilts. Mr. Hilts will be granted stock options at the
quantity of 60K shares at a price of $10 per share option. These options will
vest quarterly equally over a 36 month period under the terms and conditions of
eUniverse's Stock Option Plan. The first option for 5,000 shares shall be
granted no later than 45 days after the purchase of such acquisition. The
exercise price of the options will be at $10 per share and in accordance with
the stock option plan.
8. Additional Benefits. The Company will offer Mr. Hilts, the opportunity to
participate in its medical, dental, life insurance, and other benefit programs
such as a car allowance and monthly expenses at a minimum equal to his current
medical/insurance/dental plan, but at terms no less favorable than those offered
to its officer of the Company.
9. Loans and deferred pay to the Company. Upon completion of the sale of Case's
Ladder to Entertainment Universe all loans as well as deferred pay that Cases
Ladder owes to Mr. Hilts shall be paid. The amount is not to exceed $10,000.00.
This obligation shall remain in force despite any termination of this agreement,
with or without cause. In addition, the Company shall provide Mr. Hilts with a 3
year $28,000
<PAGE>
Page 2
Management Agreement
loan in the form of a Note Payable. Such Note shall carry no interest for 12
months, and after 12 months interest shall be charged at 7%. The 3 year note
shall be secured by an Mr. Hilt's stock in the Company. In addition, 50% of any
money received from bonuses and 50% of any profits Mr. Hilts receives from
either exercise of his options and sale of the stock received or from the
Company repurchasing such options, shall go towards repayment of the Note. A
check for the full amount of deferred pay as well as the loan shall be made to
Mr. Hilts no later than two weeks after the signing of the employment agreement.
10. Confidential Information. Mr. Hilts agrees that any information received by
the him during any furtherance of the employee's obligations in accordance with
this contract, which concerns the personnel, financial or other affairs of the
Company will be treated by the employee in full confidence and will not be
revealed to any other persons, firms or organizations except as necessary and
appropriate for Mr. Hilts to perform his duties under this Agreement or in
response to legal process.
11. Registration Rights. The Company agrees to register all option shares issued
to Edward Hilts so that they are tradable in the public market upon issuance.
12. Governing Law - This Agreement shall be construed and its performance
enforced in accordance with the laws of the State of California, excluding its
choice of law provisions.
13. Modifications - Any and all modifications, amendments or additions to this
Agreement shall be in writing. Similarly, any and all waivers of any terms of
this Agreement shall be in writing. Any and all oral modifications, amendments,
additions, and/or waivers shall be unenforceable.
14. Dispute Resolution - The Parties agree to submit any disputes arising under
or in relation to this Agreement to mediation with a mediator approved by the
Parties. If the Parties resolve their disputes through mediation, they shall
share the costs of mediation evenly but pay their own attorneys' fees and other
expenses related to mediation. If mediation fails to resolve all disputes within
thirty (30) days after submission to the mediator, then either Party may file a
law suit or request arbitration. The Parties agree that mediation is a
pre-condition to filing a law suit. The prevailing Party in any law suit or
arbitration relating to the transactions contemplated by this Agreement shall be
entitled to costs and expenses including reasonable attorneys fees and the
attorneys fees and expenses incurred in connection with mediation that failed to
resolve the dispute.
15. Severability - If a court of competent jurisdiction or arbitrator finds that
one or more provisions of this Agreement is or are illegal or unenforceable, the
remaining provisions of this Agreement shall remain in full force and effect as
if such provision or provisions never existed.
16. Waiver - No Party's right to require performance of another Party's
obligations under this Agreement shall be affected by any previous delay in
enforcing such right, express waiver of prior similar right to require
performance, or course of dealing.
17. Integration Clause. This Agreement constitutes the entire understanding
between the Parties and supersedes all prior proposals and agreements, oral or
written, and all prior or contemporaneous communications between the Parties
relating to the subject of this Agreement. This Agreement may only be amended or
modified by a writing signed by the Party against whom such amendment or
modification is sought to be enforced.
18. Notices. Notices under this Agreement shall be sufficient only if sent (a)
by overnight courier, or (b) by facsimile or other electronic means and by U. S.
Mail, or (c) personally delivered to the other Party. Notices shall be addressed
as follows:
To the Company: To Consultant
<PAGE>
Page 3
Management Agreement
Edward Hilts
4404 Beaconsfield Ct.
Westlake Village, CA 91361
Telephone: Telephone: (818)706-2214
Fax: Fax: (818) 735-4937
Any Party may change the above information by giving written notice as set forth
above.
19. Counterparts. This Agreement may executed in one or more counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one and the same Agreement.
IN WITNESS WHEREOF, the Parties execute this Agreement as of the last date
written below.
Date: April 21, 1999 ENTERTAINMENT UNIVERSE, INC.
By:
--------------------------------------
------------------------------------------
Print Name and Title
Date: April 21, 1999 /s/ Edward Hilts
------------------------------------------
Edward Hilts
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Data
- -----------------------------------------------------------------------------------------------------------------------------
Nominee Name Phone SSN CL Shrs eUniverse Shrs
- -----------------------------------------------------------------------------------------------------------------------------
Edward Hilts David Gelhoff 818-706-2214 (blank) 5,000 331
------------------------------------------------------------------------------------------------
Diana Bingham 818-706-2214 (blank) 5,000 331
------------------------------------------------------------------------------------------------
Edward Hilts 818-706-2214 ###-##-#### 627,500 41,497
------------------------------------------------------------------------------------------------
Mark Hilts 818-706-2214 (blank) 7,500 496
------------------------------------------------------------------------------------------------
Randall Hayes 818-706-2214 (blank) 100,000 6,613
------------------------------------------------------------------------------------------------
Robert Egan 818-706-2214 (blank) 6,250 413
- -----------------------------------------------------------------------------------------------------------------------------
Edward Hilts Total 751,250 49,681
- -----------------------------------------------------------------------------------------------------------------------------
Frank Westall Datiana Westall 805-375-1330 ###-##-#### 250,000 16,533
------------------------------------------------------------------------------------------------
Frank Westall 805-375-1330 ###-##-#### 3,437,500 227,322
------------------------------------------------------------------------------------------------
Frankie Jean Westall 805-375-1330 ###-##-#### 125,000 8,266
------------------------------------------------------------------------------------------------
Gabriel Westall 805-375-1330 na 125,000 8,266
------------------------------------------------------------------------------------------------
Leilani Westall 805-375-1330 ###-##-#### 125,000 8,266
------------------------------------------------------------------------------------------------
Noelani Westall 805-375-1330 ###-##-#### 125,000 8,266
- -----------------------------------------------------------------------------------------------------------------------------
Frank Westall Total 4,187,500 276,919
- -----------------------------------------------------------------------------------------------------------------------------
Gordon Landies Abigail Landies 415-298-8786 ###-##-#### 50,000 3,307
------------------------------------------------------------------------------------------------
Barbara Landies 415-298-8786 ###-##-#### 300,000 19,839
------------------------------------------------------------------------------------------------
Gordon Landies 415-298-8786 (blank) 1,250,000 82,664
------------------------------------------------------------------------------------------------
Graham Landies 415-298-8786 ###-##-#### 50,000 3,307
------------------------------------------------------------------------------------------------
Hannah Landies 415-298-8786 ###-##-#### 50,000 3,307
------------------------------------------------------------------------------------------------
Ian Landies 415-298-8786 (blank) 71,250 4,712
------------------------------------------------------------------------------------------------
Meghan Landies 415-298-8786 ###-##-#### 50,000 3,307
------------------------------------------------------------------------------------------------
Richard Bruner 415-298-8786 ###-##-#### 31,250 2,067
- -----------------------------------------------------------------------------------------------------------------------------
Gordon Landies Total 1,852,500 122,510
- -----------------------------------------------------------------------------------------------------------------------------
Jarom Severson Calvin Shueh 408-396-0572 (blank) 24,375 1,612
------------------------------------------------------------------------------------------------
Jarom Severson 408-396-0572 ###-##-#### 36,563 2,418
- -----------------------------------------------------------------------------------------------------------------------------
Jarom Severson Total 60,938 4,030
- -----------------------------------------------------------------------------------------------------------------------------
Jeremy Rusnak Jason Oldenski 360-757-6479 (blank) 18,750 1,240
------------------------------------------------------------------------------------------------
Jeremy Rusnak 360-757-6479 ###-##-#### 2,093,750 138,462
------------------------------------------------------------------------------------------------
Joe Rusnak 360-757-6479 (blank) 12,500 827
------------------------------------------------------------------------------------------------
John Rusnak 360-757-6479 (blank) 62,500 4,133
------------------------------------------------------------------------------------------------
Kim Rusnak 360-757-6479 (blank) 31,250 2,067
------------------------------------------------------------------------------------------------
Sharon Rusnak 360-757-6479 (blank) 62,500 4,133
- -----------------------------------------------------------------------------------------------------------------------------
Jeremy Rusnak Total 2,281,250 150,862
- -----------------------------------------------------------------------------------------------------------------------------
(blank) Allen Bonaguro 714-539-9209 ###-##-#### 65,000 4,299
------------------------------------------------------------------------------------------------
Ann Aynes 360-855-0792 ###-##-#### 205,000 13,557
------------------------------------------------------------------------------------------------
C. Timothy Smoot 310-530-3366 (blank) 20,313 1,343
------------------------------------------------------------------------------------------------
Colm Gallagher 310-318-9469 ###-##-#### 33,750 2,232
------------------------------------------------------------------------------------------------
David Perez 805-376-3013 ###-##-#### 20,313 1,343
------------------------------------------------------------------------------------------------
Greg Strelzoff 310-796-4944 (blank) 79,688 5,270
------------------------------------------------------------------------------------------------
Joe Abrams 415-258-9117 ###-##-#### 645,996 42,720
------------------------------------------------------------------------------------------------
Jon Phillips 714-207-7170 ###-##-#### 31,250 2,067
------------------------------------------------------------------------------------------------
Kenneth Jamieson 415-298-8786 (blank) 71,250 4,712
------------------------------------------------------------------------------------------------
Randall Darling 415-298-8786 (blank) 71,250 4,712
------------------------------------------------------------------------------------------------
Ron Holt 805-644-2960 ###-##-#### 20,313 1,343
------------------------------------------------------------------------------------------------
William Macaitis 630-910-0365 ###-##-#### 187,500 12,400
- -----------------------------------------------------------------------------------------------------------------------------
(blank) Total 1,451,623 95,998
- -----------------------------------------------------------------------------------------------------------------------------
Grand Total 10,585,061 700,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of 01 October, 1998, by and between
CD UNIVERSE, INC., a Connecticut corporation with principal offices located at
101 North Plains Industrial Road, Wallingford, CT 06492 ("CD" or "Employer"),
and CHARLES BEILMAN, an individual residing in the State of Connecticut and
having a mailing and principal office address of 101 North Plains Industrial
Road, Wallingford, CT 06492 ("Employee").
WHEREAS, Employer desires to employ Employee as set forth herein with
respect to the operations of Employer and/or its affiliates, and such other
operations of Employer as Employer may, in its sole discretion, see fit,
("Beilman Employment"); and
WHEREAS, Employee desires to become employed by Employer in such Beilman
Employment;
WHEREAS, the parties hereto desire to express the terms and conditions of
such employment;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged and confessed, the parties hereto agree as follows:
Section 1 Employment. Employer hereby employs Employee in the Beilman
Employment, and Employee hereby accepts the employment upon the terms and
conditions of this Agreement.
Section 2 Term. The term of this Agreement shall commence as of the first day of
the month in which CD shall be acquired by a company where shares are traded in
the public market or in which CD's shares shall be publicly traded and shall
continue until at least three years thereafter unless earlier terminated prior
thereto in accordance with the provisions hereinafter stated. This Agreement may
be extended by mutual written agreement at the end of the period herein set
forth on the same or modified terms.
Section 3 Duties and Responsibilities. Employee shall serve as the Chief
Operating Officer and Chief Technical Officer of CD in such Beilman Employment
and shall render and perform services in such capacity to Employer under the
direction of Brad Greenspan. Employee will report to Brad Greenspan, and shall,
to the best of his ability and experience, competently, loyally, diligently and
conscientiously perform all of the duties and obligations expressly or
implicitly required under this Agreement. Employee further agrees that he will
not in the course of conducting business in the interest of Employer engage in,
or knowingly permit others to carry on or induce others to engage in any
<PAGE>
practice or commit acts in violation of any federal, state or local law or
ordinance.
Section 4 Compensation and Benefits.
4.1 Employer shall pay Employee $135,000 per year, payable no less often
than monthly, in arrears, as gross pay for all services rendered hereunder.
Employee shall be entitled to four weeks of paid vacation time in each year of
employment hereunder. Employee shall be entitled to health insurance selected
and paid for by Employer.
4.2 Employee shall be an employee of Employer for all purposes. Employer
shall withhold amounts from Employee's compensation in accordance with the
requirements of applicable law for federal and state income tax, FICA and other
employment or payroll tax.
Section 5 Expenses. Employee will be reimbursed for travel and other expenses
related to the performance of his duties under this Agreement in accordance with
Employer's policies.
Section 6 Paid Leave Time. Employee shall be entitled to a reasonable number of
days paid time off for personal matters and sick time.
Section 7 Non-Competition.
7.1 As part of the consideration Employee has received and will receive
pursuant to both this Agreement and the Purchase Agreement to which this
document is attached, Employee agrees that for a period of three calendar years,
he will not engage in any business or activity, or directly assist others in
such endeavors, which competes directly with any business in which CD
participates at the time of the execution of this document, or thereafter so
long as Employee remains an Employee or a Director on the Board of Directors of
CD or any company into which CD has been merged.
Section 8 Termination of Employment.
8.1 Termination Without Cause. This Agreement may be terminated by either
party without cause by providing the other party with ten (10) days' advance
notice of such intention to terminate. If such termination occurs, any
obligations of Employer hereunder shall cease on the effective date of
termination.
8.2 Termination for Cause. This Agreement may be terminated by Employer for
cause immediately upon notice to Employee. No
<PAGE>
severance benefits are due to Employee in the event he is terminated for cause.
Employer shall have cause for termination in the event of:
<PAGE>
8.2.1 A default by Employee in the performance of any material provision of
this Agreement, and such default continues for a period of thirty (30) days
after written notice to Employee from Employer stating the specific default,
unless such default is cured to the satisfaction of Employer within such thirty
(30) day period, in which case the notice of termination shall not be effective,
and this Agreement shall not be terminated.
8.2.2 Employee's death or legal incapacity.
8.2.3 The conviction of Employee of any criminal offense involving
dishonesty or breach of trust or any felony or any crime involving moral
turpitude.
8.2.4 The arrest or indictment of Employee for any crime which, whether
convicted thereof or not, causes Employer embarrassment, negative press coverage
or harm to its reputation.
8.2.5 The disability of Employee during his employment under this Agreement
through any illness, injury, accident or condition of either a physical or
psychological nature and, as a result in the opinion of a physician mutually
agreeable to the parties is expected to be unable to perform substantially all
of his duties and responsibilities hereunder for ninety (90) calendar days
during the year following the physician's examination of Employee.
Section 9 Non-Disclosure of Confidential Information.
9.1 Employee acknowledges that during the term of employment with Employer,
he will have access to and become acquainted with Confidential Information of
Employer. Confidential Information means all information related to the present
or planned business of CD or any of CD's current or future affiliates that has
not been released publicly by authorized representatives of CD or such
affiliate(s), and shall include but not be limited to, trade secrets and know-
how, inventions, marketing and sales programs, employee, customer, patient and
supplier information, information from patient medical records, financial data,
pricing information, regulatory approval and reimbursement strategies, data,
operations and clinical manuals.
9.2 Employee agrees not to use or disclose, directly or indirectly, any
Confidential Information of CD or any such affiliates at any time and in any
manner, except as required in the course of his employment with CD or such
affiliate(s) or with the express written authority of CD.
9.3 Employee understands that his non-disclosure obligations are continuing
and survive the termination of
<PAGE>
Employee's employment with CD.
<PAGE>
9.4 All documents and equipment relating to the business of CD or its
affiliates, whether prepared by Employee or otherwise coming into Employee's
possession, are the exclusive property of CD, and must not be removed from the
premises of CD except as required in the course of employment. Any such
documents and equipment must be returned to CD when Employee leaves the
employment of CD and its affiliates.
Section 10 Entire Agreement and Amendments. This Agreement shall constitute the
entire agreement between the parties and supersedes all existing agreements
between them, whether oral or written, with respect to the subject matter hereof
(other than the Purchase Agreement). Any waiver, alteration, or modification of
any of the provisions of this Agreement, or cancellation or replacement of any
part of this Agreement shall be in writing and signed by the party to be charged
therewith.
Section 11 Notices. All notices hereunder shall be in writing and shall be
deemed to be given when sent by certified mail to either party at the address of
such party set forth above or at such other address as shall have been
designated by written notice by such party to the other party.
Section 12 Severability. If any provision of this Agreement is declared invalid
or illegal for any reason whatsoever, then notwithstanding such invalidity or
illegality, the remaining terms and provisions of this Agreement shall remain in
full force and effect in the same manner as if the invalid or illegal provision
had not been contained herein.
Section 13 Governing Law. This Agreement shall be construed in accordance with,
and the rights of the parties shall be governed by, the laws of the State of
California applicable to contracts made and to be performed within the State of
California. It shall be deemed executed in Los Angeles, California, and any
action between the parties hereto based in whole or in part on this Agreement
shall be brought in the Los Angeles County Superior Court.
Section 14 Assignment. No party may assign this Agreement without written
consent of the other, except that Employer may assign this Agreement to a
successor or affiliated corporation or other organization.
Section 15 Counterparts. This Agreement may be executed in more than one
counterpart, and each executed counterpart shall be considered as the original.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by the
undersigned duly authorized person as of the day and year first stated above.
_____________________________
Dated:____________________
Brad Greenspan, on behalf of
CD Universe, Inc., a
Connecticut corporation
_____________________________
Dated:____________________
Charles Beilman, an Individual
<PAGE>
3.10(d)
Permitted or allowed any of its assets, tangible or intangible, to be
mortgaged, pledged or subjected to any liens or encumbrances;
3.10(e)
Written down the value of any inventory or written off as uncollectible
any notes or accounts receivable or any portion thereof except for write
offs of such items in the ordinary course of business;
3.10(f)
Canceled any other debts or claims or waived any rights of substantial
value or sold or transferred any of its assets or properties, tangible or
intangible, other than in the ordinary course of business and consistent
with past practice;
3.10(g)
Disposed of or permitted to lapse any material patent, trademark or
copyright or any application for any material patent, trademark or
copyright;
3.10(h)
Disposed of or disclosed to any person any trade secret, formula, process
or other know-how except pursuant to inquiries to purchase CL or its
assets for which Confidentiality Agreements were obtained by Seller, all
of which agreements are annexed hereto as Exhibit 3.10(h);
3.10(i)
Granted any general uniform increase in the compensation of employees
(including any increase pursuant to any bonus, pension, profit-sharing or
plan or commitment) or any substantial increase in any compensation
payable or to become payable to any officer or employee, and no such
increase (whether general or otherwise) is required pursuant to any
existing employment agreements or otherwise;
3.10(j)
Made any capital expenditures or commitments in excess of $20,000 for
additions to its property, plant or equipment;
3.10(k)
8
<PAGE>
Declared, paid or set aside for payment to its stockholders, any dividend
or other distribution in respect of its capital stock or redeemed or
purchased or otherwise acquired any of its capital stock or any options
relating thereto or agreed to take any such action; or
3.10(1)
Made any material change in any method of accounting or accounting
practice.
3.11 Litigation
Except to the extent set forth in Exhibit 3.11 hereto there are no actions,
proceedings or investigations pending or, after reasonable inquiry and to the
knowledge of Seller, threatened against CL and Management does not know or have
any reason to know of any basis for any such action, proceeding or
investigation.
3.12 Disclosure
Management has disclosed to Buyer all facts material to the assets, prospects
and business of CL known to Management. No representation or warranty by
Management contained in this Agreement and no statement contained in any
exhibit, list, certificate or writing furnished to Buyer pursuant to the
provisions hereof or in connection with the transactions contemplated hereby
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein or therein not
misleading or necessary in order to provide a prospective purchaser of the
business of CL with accurate and complete information which any reasonable
purchaser of CL would desire as to CL and its affairs.
3.13 Exhibits
Each of the Exhibits to this Agreement is incorporated into this Agreement and
made a part hereof, and is true, accurate and complete.
3.14 Material Events or Conditions
After reasonable inquiry, to the best knowledge of Management, there is no event
or condition of any kind or character pertaining to the business, assets or
prospects of CL that may materially or adversely affect such business, assets or
prospects.
4. REPRESENTATIONS AND WARRANTIES BY BUYER
9
<PAGE>
Buyer hereby represents, warrants and covenants to Seller as follows:
4.01 Organization, Etc.
Buyer is a corporation duly organized, validly existing and in good standing
under the laws of the state of Nevada.
4.02 Authority
The execution and delivery of this Agreement by Buyer and the consummation by
Buyer of the transactions contemplated hereby have been duly authorized by the
board of directors of Buyer. The officers of Buyer acting on behalf of Buyer
with respect to these transactions and executing this Agreement on behalf of
Buyer have been duly authorized by all necessary and appropriate corporate
action to take such actions and to execute this Agreement.
4.03 No Violation
Neither the execution nor the delivery of this Agreement, nor the consummation
of the transactions contemplated hereby will constitute any violation or default
under any term or provision of the articles of incorporation or bylaws of Buyer
or of any material contract, commitment, indenture or other agreement or
restriction of any kind or character to which Buyer is a party or by which Buyer
is bound.
4.04 Investment Experience
Buyer has significant knowledge and experience in financial and business matters
enabling it to evaluate the significant risks associated with its acquisition of
the CL Shares.
5. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
5.01 Survival of Representations
All representations, warranties and agreements made by any party in this
Agreement or pursuant hereto shall survive the execution and delivery hereof for
a period of one year.
5.02 Existing Lease
Exhibit 5.02 contains a true and complete copy of the Lease Agreement dated
January 4, 1999 (the "Lease") on Seller's business premises located at 11372
Trask Avenue, Garden Grove, CA 92643 (the "Premises").
10
<PAGE>
As further consideration for the purchase hereunder, Buyer agrees to assume and
fulfill CL's obligations to pay all rent under the Lease after the Closing Date
for so long as CL may continue to occupy the Premises, and to indemnify and hold
the Seller harmless from any claims by, or demands from, the Landlord under the
Lease related to, or arising from any failure to make such payments. Buyer will
indemnify Seller from any liabilities and expenses resulting from its and/or
CL's occupancy of the Premises and termination of the Lease following the
Closing Date.
6. MISCELLANEOUS
6.01 Expenses
All fees and expenses incurred by CL in connection with the transactions
contemplated by this Agreement shall be borne by CL and all fees and expenses
incurred by Buyer in connection with the transactions contemplated by this
Agreement shall be borne by Buyer.
6.02 Insurance
Seller hereby assigns to Buyer the benefits under and proceeds of each and all
existing policies of insurance coverage relating to products or services
provided by CL of which policies Seller or CL is a beneficiary. Copies of all
such policies shall be delivered to Buyer at the Closing. Seller further agrees
to cause CL to be named the sole insured under such policies and to deliver
evidence thereof satisfactory to Buyer within 30 days of the Closing Date. Such
benefits and proceeds shall be utilized in satisfaction of claims, liabilities,
costs and expenses of CL, if any, related to occurrences prior to the Closing
Date. Following the payment of such benefits and proceeds, the indemnification
provisions of Section 5.02 of this Agreement shall apply.
6.03 Further Assurances
From time to time, at Buyer's request and without further consideration, CL at
its own expense will execute and transfer such documents and will take such
other action as Buyer may reasonably request in order to more effectively
consummate the transactions contemplated hereby.
6.04 Parties and Interests
All the terms and provisions of this Agreement shall be binding upon, shall
inure to the benefit of and shall be enforceable by the respective heirs,
beneficiaries, representatives, successors and permitted assigns of the parties
hereto.
11
<PAGE>
6.05 Employment Agreements
At the Closing Buyer will enter into employment agreements in the form set forth
in Exhibit 6.05 with Jeremy Case, Frank Westall and Chip Hilts.
6.06 Prior Agreements; Amendments
This Agreement supersedes all prior agreements and understandings between the
parties with respect to the subject matter hereof. This Agreement may be amended
only by a written instrument duly executed by the parties hereto or their
respective successors or assigns.
6.07 Representation
Each of the representations and warranties contained herein shall be true and
accurate as of the date of this Agreement and as of the Closing Date.
6.08 Counsel
Buyer and CL confirm that they have each been represented by counsel of their
choice in the negotiation of this Agreement and the transactions contemplated
hereby.
6.09 Headings
The section and paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretations of
this Agreement.
6.10 Governing Law and Judicial Proceedings
This Agreement shall be governed by and construed and enforced in accordance
with the laws of the state of California without regard to its conflict of laws
rules. Any judicial proceedings brought by Buyer against Seller with respect to
this Agreement must be brought in a court of competent jurisdiction in the
County of Los Angeles, State of California.
6.11 Dispute Resolution
The Parties agree to submit any and all disputes between them arising under or
in relation to this Agreement to mediation with a mediator approved by both
parties. If the Parties resolve their disputes through mediation, the Parties
shall share the costs of mediation evenly but pay their own attorneys' fees and
other
12
<PAGE>
expenses related to mediation. If mediation fails to resolve all disputes within
thirty (30) days after submission to the mediator, then either Party may file a
law suit or request arbitration. The Parties agree that a good faith attempt at
mediation is a precondition to filing a law suit. The prevailing Party in any
law suit or arbitration relating to the transactions contemplated by this
contract shall be entitled to costs and expenses including reasonable attorneys
fees and attorneys fees and expenses incurred in connection with mediation that
failed to resolve the dispute(s).
6.12 Notices
All notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered or mailed
(registered or certified mail, postage prepaid, return receipt requested) as
follows:
If to Buyer:
eUniverse, Inc.
264 South La Cienega Blvd., Suite 305
Beverly Hills, California 90211
Attn: President
Telephone: (310) 546 - 5437
Facsimile: (310) 546 - 2807
With a copy to:
David L. Kagel, Esq.
1801 Century Park East, 25th Floor
Los Angeles, California 90067-2327
Telephone: (310) 553 - 9009
Facsimile: (310) 553 - 9693
If to Seller:
Frank Westall
3863 Calle Loma Vista
Newberry Park, CA 91320
Telephone: (805) 375-0196
Fax: (805) 375-1126
With a copy to:
C. Timothy Smoot, Esq.
Suite 174
13
<PAGE>
23505 Crenshaw Blvd.
Torrance, CA 90505-5221
Telephone: (310) 530-3366
Fax: (310) 530-2211
6.13 Counterparts
This Agreement may be executed simultaneously in several Counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
6.14 No Third Party Beneficiaries
This Agreement is for the benefit of Buyer and Seller only and is not intended
to nor shall it operate to create any third party beneficiary or other rights in
any other person or entity.
6.15 Assignment
Neither party may assign its rights under this Agreement or delegate its duties
or obligations hereunder absent the prior written consent of the other party.
6.16 Brokers
If either party has retained, or is claimed to have retained, a broker or finder
in connection with this transaction, the party which so retained, or is claimed
to have retained, the broker or finder shall indemnify and hold the other party
harmless from any and all claims, fees and/or compensation sought by such actual
or alleged broker or finder.
6.17 Investment Intent; No Distribution
CL and each of the Seller is acquiring the Buyer Shares to be issued pursuant to
this Agreement for his, her or its own account, for investment and not as a
nominee and not with a present view to the redistribution thereof. Seller is
aware that there are legal and practical limits on Seller's ability to dispose
of the Buyer Shares and therefore that Seller must bear the economic risk of
holding the Buyer's Shares for an indefinite period of time and has adequate
means of providing for his, her or its current needs and possible personal
contingencies and has adequate other means for providing for Seller's financial
needs. By making the representations in this Section 6.16 Seller does not agree
to hold the Buyer's Shares for any minimum or other specific term and reserves
the right to dispose of the Buyer Shares at any time in accordance with or
pursuant to a registration statement under the Act or an exemption from
registration under the Act.
14
<PAGE>
6.18 No General Solicitation
The Buyer Shares were not offered to Seller and Seller is not aware of any form
of general solicitation or general advertising, including without limitation (a)
any advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, and
(b) any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising.
6.19 Restricted Securities
Seller understands that the Buyer Shares to be issued at the Closing are
"restricted securities" under Federal Securities Laws in as much as they are
being acquired from Buyer in a transaction not involving any public offering and
that under such laws and applicable regulations such securities may not be
transferred or resold without registration under the Act or pursuant to an
exemption from such registration. In this connection Seller and each of them
represents that Seller is familiar with or has been addressed by counsel
concerning Rule 144 under the Act, as presently in effect and understands the
resale limitations imposed thereby and by the Act.
6.20 Disposition
Without in any way limiting the representations set forth above, for one (1)
years from the Closing Date, except for transfers to holders of options to
purchase CL Shares as reflected in Schedule A, Seller further agrees not to make
any disposition of all or any portion of the Buyer's Shares unless and until (a)
there is then in effect a registration statement under the Act covering such
proposed disposition and such disposition is made in accordance with such
registration statement; or (b) (i) Seller shall have notified Buyer of the
proposed disposition and shall have furnished Buyer with a detailed statement of
the circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by Buyer Company Seller shall have furnished Buyer with an opinion of
counsel, reasonably satisfactory to Buyer that such disposition is being made in
accordance with the rules and regulations under the Act.
6.21 Exempt Transaction
Seller understands that Buyer Shares are being issued and sold in reliance on
specific exemptions from the registration requirements of the Act and state
securities laws and the representations, warranties and covenants set forth
herein are being relied upon by Buyer in determining that applicability of such
exemptions and the suitability of Seller to acquire such Shares.
15
<PAGE>
6.22 Legend
It is understood that any and all certificates representing Buyer Shares shall
bear substantially the following legend:
"The securities represented hereby have not been registered under the Securities
Act of 1933, as amended, or applicable state securities laws or the securities
laws of any other jurisdiction. They may not be sold or transferred in the
absence of an effective registration statement under those securities laws or
pursuant to an exemption therefrom."
IN WITNESS WHEREOF this Agreement has been duly executed by the parties hereto
on the date first above written.
MOTORCYCLE CENTERS OF AMERICA, INC.
By:__________________________________
Brad Greenspan, President
CASE'S LADDER, INC.
By:__________________________________
FRANK WESTALL, CEO, for SELLER
_____________________________________
FRANK WESTALL, CEO and Chairman
_____________________________________
CHIP HILTS, COO and CFO
16
<PAGE>
They may not be sold or transferred in the absence of an effective registration
statement under those securities laws or pursuant to an exemption therefrom."
IN WITNESS WHEREOF this Agreement has been duly executed by the parties hereto
on the date first above written.
MOTORCYCLE CENTERS OF AMERICA, INC.
By: /s/ Brad Greenspan
-----------------------------------
Brad Greenspan, President
CASE'S LADDER, INC.
By: /s/ Frank Westall
-----------------------------------
FRANK WESTALL, CEO, for SELLER
/s/ Frank Westall
- ---------------------------------------
FRANK WESTALL, CEO and Chairman
/s/ Chip Hilts 4/21/99
- ---------------------------------------
CHIP HILTS, COO and CFO
16
<PAGE>
SCHEDULE A
CASE'S LADDER INC.
Name of Shareholder No. of Shares of No. of Shares of Motorcycle
("Seller") Case's Ladder, Inc. Centers of America, Inc.
- ---------- ------------------- ------------------------
17
<PAGE>
MANAGEMENT AGREEMENT
This agreement dated April 19, 1999, is made by and between Entertainment
Universe, referred to as the "Company", and Edward L. Hilts
1. Services. The Company hereby employs Edward Hilts to perform the following
services in accordance with the terms and conditions set forth in this
agreement: Mr Hilts will consult with the officers and employees of the Company
concerning matters relating to the management and organization of the Company,
their financial policies, the terms and conditions of employment, and generally
any matter arising out of the business affairs of the Company.
2. Terms of Agreement. This agreement will begin upon the Company's acquisition
of Cases Ladder, Inc., and will run for a period of no less than 12 months from
the acquisition. Either party may cancel this agreement on sixty (60) days
notice to the other party in writing, by certified mail or personal delivery.
Upon termination of employment by the Company for any reason, Edward Hilts shall
be paid 1 years pay, including options and bonus, by the Company.
3. Place Where Services Will Be Rendered and Responsibilities. Mr. Hilts shall
perform most services in accordance with this contract in his own offices and/or
home. In addition, Mr. Hilts will perform services on the telephone and at such
other places as designated by the Company to perform these services in
accordance with this agreement. The responsibilities will be as follows but will
not be limited to: (a) Management of the Cases Ladder Internet site and all
activities associated with it; (b) Involvement in the growth and management of
all activities related to On-line entertainment and community; (c) Activities
related to software sales and Company acquisitions.
4. Payment to Edward Hilts. Mr. Hilts will be paid at the rate of $9166.67 per
month on a biweekly basis for work performed in accordance with this agreement.
All taxes and appropriate deductions will be administrated by the Company.
5. Additional Consideration to Edward Hilts. Mr. Hilts will be entitled to a
bonus no less than once per year, payable every six months from the date of the
acquisition of Cases Ladder. The bonus for Edward Hilts shall be based on
performance criteria set by the compensation committee.
6. Expenses incurred by Edward Hilts. Mr. Hilts will receive reimbursement for
all Company-mandated travel, mileage, entertainment and other reasonable
out-of-pocket expenses. Mr. Hilts will submit a statement setting forth the
expenses, and the Company will pay the amounts due within ten (10) days of
receipt.
7. Stock Options to Edward Hilts. Mr. Hilts will be granted stock options at the
quantity of 60K shares at a price of $10 per share option. These options will
vest quarterly equally over a 36 month period under the terms and conditions of
eUniverse's Stock Option Plan. The first option for 5,000 shares shall be
granted no later than 45 days after the purchase of such acquisition. The
exercise price of the options will be at $10 per share and in accordance with
the stock option plan.
8. Additional Benefits. The Company will offer Mr. Hilts, the opportunity to
participate in its medical, dental, life insurance, and other benefit programs
such as a car allowance and monthly expenses at a minimum equal to his current
medical/insurance/dental plan, but at terms no less favorable than those offered
to its officer of the Company.
9. Loans and deferred pay to the Company. Upon completion of the sale of Case's
Ladder to Entertainment Universe all loans as well as deferred pay that Cases
Ladder owes to Mr. Hilts shall be paid. The amount is not to exceed $10,000.00.
This obligation shall remain in force despite any termination of this agreement,
with or without cause. In addition, the Company shall provide Mr. Hilts with a 3
year $28,000
<PAGE>
Page 2
Management Agreement
loan in the form of a Note Payable. Such Note shall carry no interest for 12
months, and after 12 months interest shall be charged at 7%. The 3 year note
shall be secured by an Mr. Hilt's stock in the Company. In addition, 50% of any
money received from bonuses and 50% of any profits Mr. Hilts receives from
either exercise of his options and sale of the stock received or from the
Company repurchasing such options, shall go towards repayment of the Note. A
check for the full amount of deferred pay as well as the loan shall be made to
Mr. Hilts no later than two weeks after the signing of the employment agreement.
10. Confidential Information. Mr. Hilts agrees that any information received by
the him during any furtherance of the employee's obligations in accordance with
this contract, which concerns the personnel, financial or other affairs of the
Company will be treated by the employee in full confidence and will not be
revealed to any other persons, firms or organizations except as necessary and
appropriate for Mr. Hilts to perform his duties under this Agreement or in
response to legal process.
11. Registration Rights. The Company agrees to register all option shares issued
to Edward Hilts so that they are tradable in the public market upon issuance.
12. Governing Law - This Agreement shall be construed and its performance
enforced in accordance with the laws of the State of California, excluding its
choice of law provisions.
13. Modifications - Any and all modifications, amendments or additions to this
Agreement shall be in writing. Similarly, any and all waivers of any terms of
this Agreement shall be in writing. Any and all oral modifications, amendments,
additions, and/or waivers shall be unenforceable.
14. Dispute Resolution - The Parties agree to submit any disputes arising under
or in relation to this Agreement to mediation with a mediator approved by the
Parties. If the Parties resolve their disputes through mediation, they shall
share the costs of mediation evenly but pay their own attorneys' fees and other
expenses related to mediation. If mediation fails to resolve all disputes within
thirty (30) days after submission to the mediator, then either Party may file a
law suit or request arbitration. The Parties agree that mediation is a
pre-condition to filing a law suit. The prevailing Party in any law suit or
arbitration relating to the transactions contemplated by this Agreement shall be
entitled to costs and expenses including reasonable attorneys fees and the
attorneys fees and expenses incurred in connection with mediation that failed to
resolve the dispute.
15. Severability - If a court of competent jurisdiction or arbitrator finds that
one or more provisions of this Agreement is or are illegal or unenforceable, the
remaining provisions of this Agreement shall remain in full force and effect as
if such provision or provisions never existed.
16. Waiver - No Party's right to require performance of another Party's
obligations under this Agreement shall be affected by any previous delay in
enforcing such right, express waiver of prior similar right to require
performance, or course of dealing.
17. Integration Clause. This Agreement constitutes the entire understanding
between the Parties and supersedes all prior proposals and agreements, oral or
written, and all prior or contemporaneous communications between the Parties
relating to the subject of this Agreement. This Agreement may only be amended or
modified by a writing signed by the Party against whom such amendment or
modification is sought to be enforced.
18. Notices. Notices under this Agreement shall be sufficient only if sent (a)
by overnight courier, or (b) by facsimile or other electronic means and by U. S.
Mail, or (c) personally delivered to the other Party. Notices shall be addressed
as follows:
To the Company: To Consultant
<PAGE>
Page 3
Management Agreement
Edward Hilts
4404 Beaconsfield Ct.
Westlake Village, CA 91361
Telephone: Telephone: (818)706-2214
Fax: Fax: (818) 735-4937
Any Party may change the above information by giving written notice as set forth
above.
19. Counterparts. This Agreement may executed in one or more counterparts, each
of which shall be deemed to be an original, but all of which together shall
constitute one and the same Agreement.
IN WITNESS WHEREOF, the Parties execute this Agreement as of the last date
written below.
Date: April 21, 1999 ENTERTAINMENT UNIVERSE, INC.
By:
--------------------------------------
------------------------------------------
Print Name and Title
Date: April 21, 1999 /s/ Edward Hilts
------------------------------------------
Edward Hilts
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Data
- -----------------------------------------------------------------------------------------------------------------------------
Nominee Name Phone SSN CL Shrs eUniverse Shrs
- -----------------------------------------------------------------------------------------------------------------------------
Edward Hilts David Gelhoff 818-706-2214 (blank) 5,000 331
------------------------------------------------------------------------------------------------
Diana Bingham 818-706-2214 (blank) 5,000 331
------------------------------------------------------------------------------------------------
Edward Hilts 818-706-2214 ###-##-#### 627,500 41,497
------------------------------------------------------------------------------------------------
Mark Hilts 818-706-2214 (blank) 7,500 496
------------------------------------------------------------------------------------------------
Randall Hayes 818-706-2214 (blank) 100,000 6,613
------------------------------------------------------------------------------------------------
Robert Egan 818-706-2214 (blank) 6,250 413
- -----------------------------------------------------------------------------------------------------------------------------
Edward Hilts Total 751,250 49,681
- -----------------------------------------------------------------------------------------------------------------------------
Frank Westall Datiana Westall 805-375-1330 ###-##-#### 250,000 16,533
------------------------------------------------------------------------------------------------
Frank Westall 805-375-1330 ###-##-#### 3,437,500 227,322
------------------------------------------------------------------------------------------------
Frankie Jean Westall 805-375-1330 ###-##-#### 125,000 8,266
------------------------------------------------------------------------------------------------
Gabriel Westall 805-375-1330 na 125,000 8,266
------------------------------------------------------------------------------------------------
Leilani Westall 805-375-1330 ###-##-#### 125,000 8,266
------------------------------------------------------------------------------------------------
Noelani Westall 805-375-1330 ###-##-#### 125,000 8,266
- -----------------------------------------------------------------------------------------------------------------------------
Frank Westall Total 4,187,500 276,919
- -----------------------------------------------------------------------------------------------------------------------------
Gordon Landies Abigail Landies 415-298-8786 ###-##-#### 50,000 3,307
------------------------------------------------------------------------------------------------
Barbara Landies 415-298-8786 ###-##-#### 300,000 19,839
------------------------------------------------------------------------------------------------
Gordon Landies 415-298-8786 (blank) 1,250,000 82,664
------------------------------------------------------------------------------------------------
Graham Landies 415-298-8786 ###-##-#### 50,000 3,307
------------------------------------------------------------------------------------------------
Hannah Landies 415-298-8786 ###-##-#### 50,000 3,307
------------------------------------------------------------------------------------------------
Ian Landies 415-298-8786 (blank) 71,250 4,712
------------------------------------------------------------------------------------------------
Meghan Landies 415-298-8786 ###-##-#### 50,000 3,307
------------------------------------------------------------------------------------------------
Richard Bruner 415-298-8786 ###-##-#### 31,250 2,067
- -----------------------------------------------------------------------------------------------------------------------------
Gordon Landies Total 1,852,500 122,510
- -----------------------------------------------------------------------------------------------------------------------------
Jarom Severson Calvin Shueh 408-396-0572 (blank) 24,375 1,612
------------------------------------------------------------------------------------------------
Jarom Severson 408-396-0572 ###-##-#### 36,563 2,418
- -----------------------------------------------------------------------------------------------------------------------------
Jarom Severson Total 60,938 4,030
- -----------------------------------------------------------------------------------------------------------------------------
Jeremy Rusnak Jason Oldenski 360-757-6479 (blank) 18,750 1,240
------------------------------------------------------------------------------------------------
Jeremy Rusnak 360-757-6479 ###-##-#### 2,093,750 138,462
------------------------------------------------------------------------------------------------
Joe Rusnak 360-757-6479 (blank) 12,500 827
------------------------------------------------------------------------------------------------
John Rusnak 360-757-6479 (blank) 62,500 4,133
------------------------------------------------------------------------------------------------
Kim Rusnak 360-757-6479 (blank) 31,250 2,067
------------------------------------------------------------------------------------------------
Sharon Rusnak 360-757-6479 (blank) 62,500 4,133
- -----------------------------------------------------------------------------------------------------------------------------
Jeremy Rusnak Total 2,281,250 150,862
- -----------------------------------------------------------------------------------------------------------------------------
(blank) Allen Bonaguro 714-539-9209 ###-##-#### 65,000 4,299
------------------------------------------------------------------------------------------------
Ann Aynes 360-855-0792 ###-##-#### 205,000 13,557
------------------------------------------------------------------------------------------------
C. Timothy Smoot 310-530-3366 (blank) 20,313 1,343
------------------------------------------------------------------------------------------------
Colm Gallagher 310-318-9469 ###-##-#### 33,750 2,232
------------------------------------------------------------------------------------------------
David Perez 805-376-3013 ###-##-#### 20,313 1,343
------------------------------------------------------------------------------------------------
Greg Strelzoff 310-796-4944 (blank) 79,688 5,270
------------------------------------------------------------------------------------------------
Joe Abrams 415-258-9117 ###-##-#### 645,996 42,720
------------------------------------------------------------------------------------------------
Jon Phillips 714-207-7170 ###-##-#### 31,250 2,067
------------------------------------------------------------------------------------------------
Kenneth Jamieson 415-298-8786 (blank) 71,250 4,712
------------------------------------------------------------------------------------------------
Randall Darling 415-298-8786 (blank) 71,250 4,712
------------------------------------------------------------------------------------------------
Ron Holt 805-644-2960 ###-##-#### 20,313 1,343
------------------------------------------------------------------------------------------------
William Macaitis 630-910-0365 ###-##-#### 187,500 12,400
- -----------------------------------------------------------------------------------------------------------------------------
(blank) Total 1,451,623 95,998
- -----------------------------------------------------------------------------------------------------------------------------
Grand Total 10,585,061 700,000
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.12
ENTERTAINMENT UNIVERSE
CONTRACT OF EMPLOYMENT
This memo confirms the terms and conditions of your employment with
Entertainment Universe. Please review each section and sign your name at the
bottom of each page - indicating your agreement with everything on the page -
and again at the end of the document. You are also required to indicate your
current address. NOTE: The company reserves the right to alter this contract
every year.
Role
In your position of Chief Financial Officer (CFO), you will be reporting to the
President and COO and serve as an integral member of the Entertainment Universe
Management Team. Your annual salary is $125,000 and will be reviewed every
twelve months. You will begin your job as CFO on Monday, April 5, 1999.
Stock Options
Your position entitles you to participate in an associate stock option plan (see
Attachment). Stock options will be issued by the Chairman and are discretionary.
Your first option issue will be 100,000 at a strike price of $3.00. These
options will exercise in equal portions by quarter over three years. Future
option issuing will be decided by the compensation committee and is also
discretionary.
Benefit package will include all benefits normally offered to an Entertainment
Universe salaried employee. These are summarized as follows:
o Medical insurance for you and your dependents. Anthem Blue Cross/Blue
Shield of CT offers a POS plan with specific provisions for optional
out-of-network services (see attached plan description). This plan
requires employee contribution and is effective 30 days after employment.
o FORTIS Dental Insurance for you and your dependents (see attached plan
description).
o Benefits are subject to change without notice as company plans evolve.
William R. Wagner
---------------------
Employee Name (Print)
/s/ William R. Wagner 3-25-99
--------------------- -------
Employee Signature Date
92 Compo Road North
-------------------------------------
Street Address Apt. # Floor
Westport CT 06880
-------------------------------------
City State Zip Code
Entertainment Universe - CONFIDENTIAL
<PAGE>
Termination
The Company may terminate your employment with or without cause during your
first year of employment and 3 months written notice thereafter. At the
Company's election, the Company may terminate you for cause with no notice
period or in lieu of notice. For this paragraph, "cause" is defined as
inadequate performance. You may terminate your employment with the Company upon
three months written notice. The Company may decide, at its discretion, to waive
the notice period required of you. In that case, no severance will be due to
you. Your notice to the Company must be either delivered in hand to an
authorized agent of the Company, or sent to the Company by certified mail.
Non-Competition/Non-Solicitation
In consideration of your employment, the benefits which you are receiving
hereunder, and in consideration of the notice/severance provision contained
herein, you agree that you will not accept employment or act as a consultant
with any person, company, or entity which competes with the Company directly or
indirectly, for a period of 12 months after date of departure. Furthermore, you
agree that, in consideration of the same items discussed herein, you will not
solicit any other employee who is or who was employed by the Company at any time
during the 12-month period preceding your departure date to leave the employ of
the company for purposes of employment, consulting, or entering into a joint
venture agreement, with you or with any other person, company, or entity. You
expressly agree that monetary damages could not make the Company whole in the
event that you violate any aspect of this provision and that injunctive relief
should be issued by a Court of competent jurisdiction in the event that you do
so. The parties further agree that, should any Court conclude that any aspect of
this provision is unreasonable in any respect, the provision as a whole would
not fail but would rather be limited to such extent as the Court deems
reasonable.
Moonlighting
As defined is having more than one job. This is not permitted.
Non-Disclosure and Confidentiality
You shall not, at any time during the term of this Agreement following your
termination of employment, publish, reveal, divulge or make known to any person,
firm, corporation or any other business organization, any proprietary or
confidential information, including but not limited to customer's lists, trade
secrets, processes, business practices, technology, know-how, research, and
programs. Also, you shall not use for yourself or others, or divulge to others,
any proprietary or confidential information, knowledge of data of the Company
obtained by you as a result of your employment, unless authorized by an
executive officer of the Company in writing. As a guide, in general but without
limitation, any unpublished information is proprietary and confidential,
including any information set for the in pending patent content, software or
technology applications for the Company.
William R. Wagner
---------------------
Employee Name (Print)
/s/ William R. Wagner 3-25-99
--------------------- -------
Employee Signature Date
92 Compo Road North
-------------------------------------
Street Address Apt. # Floor
Westport CT 06880
-------------------------------------
City State Zip Code
Entertainment Universe - CONFIDENTIAL
<PAGE>
OWNERSHIP OF TRADE SECRETS
You agree that any trade secret, invention, improvement, patent applications,
copyrightable material, program, system, or novel technique or the like
conceived, devised, developed, or otherwise obtained by you or other Company
employees during the term of this Agreement shall be and become the sole
property of the Company.
OWNERSHIP OF RECORDS AND DOCUMENTS
You agree all written materials, records, documents, and other materials either
prepared by you or which came into your possession during the term of the
Agreement concerning any services, products or processes used, developed,
investigated or considered by the Company, otherwise concerning the business
affairs of the Company, shall be the sole and exclusive property of the Company,
and upon termination of employment, or upon request of the Company during
employment, you shall promptly deliver all such materials to the Company.
The above terms and conditions have been established to reflect the importance
of your position within the Company.
This offer will expire on Thursday, March 25, 1999 at 1:30pm and is subject to a
reference check (i.e. education, employment history, and your submitted
references).
Please countersign the attached copy of this letter, signifying your acceptance
of the terms and conditions of the contract, and return it to Kim Shaw via the
enclosed Fed-Ex AFTER faxing the signed or unsigned sheets to Kim @ (203)
294-0391. Please call her at (203) 294-1648 ext. 509 prior to faxing the sheets.
Accepted and Agreed By,
William R. Wagner
---------------------
Employee Name (Print)
/s/ William R. Wagner 3-25-99
--------------------- -------
Employee Signature Date
92 Compo Road North
-------------------------------------
Street Address Apt. # Floor
Westport CT 06880
-------------------------------------
City State Zip Code
Entertainment Universe - CONFIDENTIAL
<PAGE>
ENTERTAINMENT UNIVERSE
CONTRACT OF EMPLOYMENT
"ADDENDUM"
Vacation
In your role, you will be entitled to four weeks vacation.
William R. Wagner
---------------------
Employee Name (Print)
/s/ William R. Wagner 3-31-99
--------------------- -------
Employee Signature Date
92 Compo Road North
-------------------------------------
Street Address Apt. # Floor
Westport CT 06880
-------------------------------------
City State Zip Code
Entertainment Universe - CONFIDENTIAL
<PAGE>
8.2 GOOD STANDING.
Purchaser is a corporation duly organized and existing in good standing under
the laws of the State of Nevada.
8.3 DUE AUTHORIZATION; NO CONFLICT.
Except as otherwise provided herein, no consent, waiver or approval of any party
or governmental authority is required in connection with Purchaser's execution,
delivery and performance of this Agreement. This Agreement constitutes a legal,
valid and binding obligation of the Purchaser enforceable in accordance with its
terms.
9.0 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The covenants, representations and warranties of the parties made herein or in
any other certificate, instrument or document delivered at the Closing shall
survive the Closing, notwithstanding any investigation at any time made by or on
behalf of the other party.
10.0 INDEMNIFICATION.
10.1 OBLIGATION OF THE SELLER, STEVE MARTIN AND KORRI KOLESA TO INDEMNIFY.
The Seller, Steve Martin and Korri Kolesa, jointly and severally, shall
indemnify, defend and hold harmless the Purchaser and its affiliated entities
from and against any and all losses, judgments, claims, awards, damages,
settlements, costs and expenses, including, without limitation, attorneys fees,
sustained or incurred by the Purchaser as a result or arising out of any the
following: (i) the breach by Seller, Steve Martin or Korri Kolesa of any
representation, warranty or covenant contained herein or in any document
executed and delivered in connection with the transactions contemplated herein;
(ii) the business of Seller prior to the Closing; (iii) any act, omission, debt,
obligation or liability of the Seller, its agents, contractors, employees,
officers, directors or any claim by present or former employees of Seller's
business, whether or not such employees become employees of the Purchaser
pursuant to the transaction contemplated hereby, of any nature whatsoever
arising in any way out of their employment relationship with Seller, provided
any such claim arises solely from events relating to employment with the Seller
prior to the Closing; or (iv) Any debt, liability, tax, obligation, trade
payable, non reimbursed customer warranty claims, contract or commitment of
Seller relating to the Assets, the Seller's business and/or the consummation of
the purchase and sale under the terms of this Agreement.
10.2 OBLIGATION OF THE PURCHASER TO INDEMNIFY.
The Purchaser shall indemnify, defend and hold harmless Seller from and against
any and all losses, judgments, claims, awards, damages, settlements, costs and
expenses, including, without limitation, attorneys
Page 6 of 10
<PAGE>
Headings in this agreement are for convenience only and shall not be used to
interpret or construe its provisions.
19.0 GOVERNING LAW
This agreement shall be governed by and construed in accordance with the laws of
the State of Connecticut.
20.0 COUNTERPARTS
This agreement may be executed in one or more counterparts, each of which shall
be deemed an original but all of which together shall constitute one and the
same instrument.
21.0 DEFAULT
Upon either party's default or breach hereunder, either party may before or
after the Date of Closing enforce any provision this Agreement or any document
or instrument executed and delivered in connection herewith according to law
and/or equity in any court of competent jurisdiction within the State of
Connecticut, including specific performance of either party's obligations,
indemnities, covenants, warranties and/or representations hereunder or therein
and may seek injunctive relief. The prevailing party shall be entitled to
recover any and all damages, costs, expense and reasonable attorney's fees due
or sustained as a result of any such default or breach or incurred in the
successful enforcement of any provision of this Agreement or any document
executed and delivered in connection herewith or in the pursuit or collection of
any remedy provided hereunder or in law.
22.0 SEVERABILITY
It is the desire and intent of the parties hereto that the provisions of this
Agreement be enforced to the fullest extent permissible under the laws and
public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, if any particular provision of this Agreement shall be adjudicated
by a court of competent jurisdiction to be invalid, prohibited or unenforceable
for any reason, such provision, as to such jurisdiction, shall be ineffective,
without invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly drawn so
as not to be invalid, prohibited or enforceable in such jurisdiction, it shall,
as to such jurisdiction, be so narrowly drawn, without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
In witness thereof the parties have caused this agreement to be executed as of
the day and year first above written.
Page 9 of 10
<PAGE>
For SELLER:
/s/ Steve E. Martin Date 5-17-99
- --------------------- -------
Name: Steve E. Martin
Title: CEO, GWIC
For PURCHASER:
/s/ [ILLEGIBLE] Date 5-17-99
- --------------------- -------
Name:
Title: COO
STEVE MARTIN:
/s/ Steve E. Martin Date 5-17-99
- --------------------- -------
KORRI KOLESA:
/s/ Korri M. Kolesa Date 5-17-99
- --------------------- -------
Page 10 of 10
<PAGE>
Exhibit 10.13
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of April
---------
14, 1999, by and between eUniverse, Inc., formerly known as Motorcycle Centers
of America, Inc., a corporation organized under the laws of the State of Nevada,
(the "Company") and Leland N. Silvas of Norwalk, Connecticut (the "Executive").
-------
RECITAL:
The Company desires to employ the Executive, and the Executive desires to
accept such employment, on the terms and subject to the conditions hereinafter
set fort h.
AGREEMENT:
In consideration of the premises and mutual covenants herein contained, the
parties hereby agree as follows:
1. Term of Employment.
Subject to the terms and conditions of this Agreement, the Company agrees
to employ the Executive and the Executive hereby accepts employment with the
Company pursuant to this Agreement for the period commencing on April 14, 1999
(the "Commencement Date"), and ending on April 30, 2000. The period from the
-----------------
Commencement Date through April 30, 2000 is hereinafter referred to as the
"Initial Term". The Initial Term shall be automatically extended for successive
------------
periods of one year ("Extension Terms") unless one of the parties provides
---------------
written notice to the other party, at least three (3) months prior to the last
day of the Initial Term or any Extension Term, as the case may be, of its
election not to so extend the then-scheduled expiration of the Employment
Period. The Initial Term, together with all extensions thereof (if any) is
referred to in this Agreement as the "Employment Period."
--------------------
2. Position and Duties of Executive.
The Company hereby employs the Executive as President and Chief Executive
Officer. The Executive shall report directly to the Chairman of the Board and
shall be responsible for the day-to-day operations of the Company as a publicly
traded company. The Executive shall render to the Company such services as are
typically associated with the position of Chief Executive Officer, and any other
services that may be reasonably required of him pursuant to the directions of
the Chairman of the Board and/or the Board of Directors. The Chief Financial
Officer and other officers, employees and advisors of the Company shall report
to the Executive.
3. Place of Performance.
The place of employment of the Executive shall be at Wallingford,
Connecticut, the Company's principal place of business. However, at any time
deemed necessary or advisable by the Company, the Executive shall temporarily
work at such other place or places as may be determined by the Company.
4. Compensation.
(a) Base Salary. During the period from the first year of the Initial Term,
-----------
the Company shall to pay to the Executive, as base compensation for the
services to be rendered by the Executive
1
<PAGE>
pursuant to this Agreement on an annualized basis (the "Base Salary"), of
-----------
$200,000.00. The Base Salary shall be payable in periodic installments in
accordance with the Company's regular payroll practices.
(b) Review and Adjustment of Salary. On an annual basis, the Company shall
-------------------------------
review the Executive's performance and other relevant factors relating to
salary, and at the time of such review, the Base Salary may be increased as
determined in the reasonable discretion of the Company.
(c) Bonuses. In addition to the Base Salary, the Executive shall be
-------
eligible to receive bonuses of up to 50% of the Base Salary if certain
performance milestones are achieved as determined by the Compensation Committee
of the Board.
(d) Total Compensation. Notwithstanding anything to the contrary contained
--------------------
herein, the Executive's Total Compensation (as hereinafter defined) during each
year of his employment by the Company shall not be less than the Total
Compensation of any other officer of the Company other than the Chairman. As
used herein, the term "Total Compensation" is defined as salary, bonus, stock
------------------
grants, and the value of stock options, employee fringe benefits and other
forms of remuneration. Total Compensation shall be determined in accordance with
United States generally accepted accounting principles consistently applied.
5. Stock Grants and Options.
(a) Stock Previously Granted. The parties acknowledge that the Company
--------------------------
has granted to the Executive 200,000 shares of the Company's common stock $0.001
par value ("Shares") as partial consideration for entering into this Agreement
-----------
and in consideration of consulting services performed on behalf of the company.
(b) Stock Options. The Company hereby grants the Executive options (the
---------------
"Stock Options") to purchase 825,000 Shares at an exercise price of $3.00 per
-------------
share. 91,667 of the Stock Options are immediately vested and fully exercisable,
and 733,333 of the Stock Options shall vest and become exercisable ("Vest") over
----
the period from the date of this Agreement through January 22, 2002 as follows:
66,667 of said Stock Options shall Vest on the 22nd day of each January, April,
July and October, commencing on July 22, 1999 and continuing until the first to
occur of (i) all 733,333 of said Stock Options have Vested, or (ii) the
Executive is no longer employed by the Company; provided however, this
subsection 5(b) is subject to certain provisions with respect to vesting of
Stock Options which are set forth in Section 9 hereof. The number of Shares
exercisable pursuant to the Stock Options shall be adjusted for any stock-splits
or stock dividends by the Company after the date hereof.
(c) Accelerated Vesting of Stock Options Upon a Change of Control. In the
---------------------------------------------------------------
event of a "Change of Control" of the Company during the Employment Period, all
of the remaining Stock Options granted in Section 5(b) above, shall immediately
Vest as of the date of the Change of Control. "Change of Control" shall occur:
(i) upon the acquisition by any person, including a group (as
defined in Section 13(d) of the Securities Exchange Act of 1934, as amended),
other than the Company or any of its Subsidiaries or any employee benefit plan
maintained by the Company or any of its Subsidiaries, of beneficial ownership of
50% or more of the outstanding stock of the Company entitled to vote;
(ii) upon the approval by the shareholders of the Company of a
definitive agreement for the merger, consolidation, liquidation,
recapitalization or sale of substantially all of the assets of the Company; or
2
<PAGE>
(iii) Upon a sale or other transfer of all or substantially all of
the assets of the Company in one or a series of transactions.
6. Reimbursement of Expenses.
The Company shall reimburse the Executive for normal and reasonable
business expenses incurred by him in the course of his employment, including the
reasonable costs for transportation and accommodations when the Executive is
required to travel away from the location in which he is employed. Such
reimbursement shall be subject to the Company's standard procedures with respect
to reimbursement, including such matters as pre-approval requirements, lodging
and meal allowances, and reimbursement rates for automobile travel.
7. Benefits.
The Company represents and agrees that it shall provide a 401(k) Plan in
which the Executive shall be eligible to participate. The Company shall provide
the Executive with health insurance coverage which pays in full for all medical
and dental services for the Executive and his family. The Company shall also
reimburse the Executive for car expenses on a monthly basis. The Executive
shall also be entitled to participate in all other benefit plans that the
Company provides to the other officers.
8. Vacation.
The Executive shall be entitled to four weeks of vacation per year.
9. Termination of Employment.
(a) Termination by the Company for Cause. Notwithstanding anything to the
------------------------------------
contrary contained herein, the Company may terminate the employment of the
Executive for Cause (as defined below) upon written notice to the Executive. As
used herein, the term for "Cause" shall be defined as (i) the Executive shall
-----
have committed a material breach of any of the provisions set forth herein and
failed to cure such breach within 15 days after being given written notice of
same by the Company; provided however, in the case of a breach which cannot
reasonably be cured within 15 days, Cause shall be deemed not to exist if the
Executive commences to cure the breach and is diligently continuing to cure same
within 15 days after being given written notice of same by the Company; or (ii)
the Executive shall have committed any material act of fraud, gross negligence
or gross misconduct in connection with the performance of his duties or
obligations hereunder, or shall have been convicted of any felony under the laws
of the United States or any of its subdivisions (or pleaded guilty or nolo
contendre to any such crime) or any other crime that relates to the Executive's
services to, or employment by, the Company.
(b) Termination Due To Disability. Notwithstanding anything to the contrary
-----------------------------
contained herein, but subject to the terms and provisions of applicable law, the
Company shall have the right to terminate this Agreement if the Executive
becomes Disabled (as hereinafter defined) during the Employment Period, provided
however, if the Company does so, all Stock Options that would have otherwise
vested during the remainder of the Employment Period, shall immediately Vest and
become fully exercisable.. As used herein, "Disabled" shall mean that the
--------
Executive has a physical or mental condition which prevents him from performing
the essential functions required of him pursuant to this Agreement, which
condition has continued for a period of 90 consecutive business days or existed
for a total of at least 120 business days in any twelve month period as
determined in good faith by the Board of Directors of the Company.
3
<PAGE>
(c) Termination Due To Death. Notwithstanding anything to the contrary
------------------------
contained herein, this Agreement shall terminate if the Executive dies during
the Employment Period, provided however, in such event, all Stock Options that
would have otherwise vested during the remainder of the Employment Period, shall
immediately Vest and become fully exercisable..
(d) Termination for Good Reason. The Executive may terminate this Agreement
---------------------------
for Good Reason (as hereinafter defined) upon giving 45 days written notice to
the Company. Any such notice of termination for Good Reason shall specify the
acts or omissions of the Company in sufficient detail so as to enable the
Company to determine the provision of this Section relied upon by the Executive
in terminating this Agreement. In the event of a Termination for Good Reason,
the Company shall pay to the Executive all Base Salary and bonus as provided for
in this Agreement through the remainder of the Initial Term or the current
Extension Term, as the case may be. For purposes of this Agreement, "Good
----
Reason" shall mean:
- ------
(i) the assignment to the Executive of any duties inconsistent with
the Executive's position (including titles and reporting requirements),
authority, duties or responsibilities as contemplated by Section 2 of this
Agreement, or any other such position, authority, duties or responsibilities and
such assignment shall continue for a ten (10) day cure period, if curable,
following the Company's receipt of written notice of such inappropriate
assignment, which notice shall specify in detail the nature of the Company's
breach, and which shall not be in lieu of the notice of termination referenced
above;
(ii) any failure by the Company to comply with any of the provisions
of this Agreement pertaining to compensation of the Executive, and such failure
shall continue for a ten (10) day cure period, if curable, following the
Company's receipt of written notice of such failure, which notice shall specify
in detail the nature of the Company's failure, and which shall not be in lieu of
the notice of termination referenced above; or
(iii) any purported termination by the Company of the Executive's
employment except as expressly permitted by this Agreement (i.e., a termination
by the Company other than for "Cause").
---------
(e) Payments Through Last Day of Employment. In the event of a termination
-----------------------------------------
of the Executive's employment during the Employment Period for any reason other
than as provided in 9(d) above, the Company shall pay the Executive the Base
Salary pro rated through the Last Day of Employment, and any reimbursable
expenses which he incurred through the Last Day of Employment. If this Agreement
is terminated due to the Executive's disability or death, the Company shall pay
to him or his estate, as the case may be, any bonus to which he would have
otherwise been entitled, which shall be pro rated from the beginning of the then
current calendar year, through the Last Day of Employment (it being understood
and agreed that any such bonus payable to the Executive shall be paid to the
Executive or his estate, as the case may be, if and when any corresponding bonus
is paid to the other officers of the Company).
(f) Survival of Obligations. Except as otherwise set forth herein, all
-------------------------
rights, duties and obligations of the Company and the Executive shall terminate
as of the Last Day Employment except that the Executive's duties and obligations
under the Sections hereof pertaining to confidentiality, ownership of
intellectual property, covenant to deliver business materials, and any
provisions hereof specifying obligations of the parties after termination shall
survive the termination of the Executive's employment and shall remain in full
force and effect.
4
<PAGE>
(g) Accelerated Vesting of Stock Options. In the event the Executive's
------------------------------------
employment is terminated because (i) the Company did not agree to extend this
Agreement for any Extension Term, (ii) the Company terminates the Executive
during the Initial Term or any Extension Term other than for Cause, or (iii) the
Executive terminates his employment for Good Reason, then the Accelerated
Vesting Portion (as hereinafter defined) of the Stock Options shall immediately
Vest as of the date of termination of the Executive's employment. For purposes
of this Agreement, the "Accelerated Vesting Portion" shall mean the aggregate
-----------------------------
number of Stock Options which (if the Executive's employment with the. Company
had continued), would have Vested pursuant to Section 5(b) hereof during (x) the
remainder of the then-current term of this Agreement (i.e.: the Initial Term or
Extension Term, as the case may be), and (y) the one-year period following the
end of the then-current term of this Agreement.
10. Confidentiality.
---------------
The Executive acknowledges that in connection with his employment by the
Company, he will have access to trade secrets of the Company and other
information and materials which the Company desires to keep confidential,
including customer lists, supplier lists, financial statements, business records
and data, marketing and business plans, and information and materials relating
to the Company's services, products, methods of operation, key personnel,
proprietary software and other proprietary intellectual property (collectively,
the "Confidential Information"); provided however, that Confidential Information
------------------------
does not include information which (i) is or becomes publicly known through the
lawful action of any party other than the Executive; (ii) has been made
available by the Company, directly or indirectly, to a nonaffiliated third party
without obligation of confidentiality; or (iii) the Executive is obligated to
produce as a result of a court order or pursuant to governmental action or
proceeding. The Executive covenants and agrees that, both during and after the
Employment Period, he will keep secret all Confidential Information and will not
disclose, reveal, divulge or otherwise make known any Confidential Information
to any person (other than the Company or its employees or agents in the course
of performing his duties hereunder) or use any Confidential Information for his
own account or for the benefit of any other individual or entity, except with
the prior written consent of the Company.
11. Ownership of Intellectual Property.
The Executive agrees that all inventions, copyrightable material,
software, formulas, trademarks, trade secrets and the like which are developed
or conceived by the Executive in the course of his employment by the Company
(collectively, the "Intellectual Property"), shall be disclosed promptly to the
---------------------
Company and the Company shall own all right, title and interest in and to the
Intellectual Property. All of the Intellectual Property shall be considered
works made-for-hire pursuant to the United States Copyright Act of 1976, as
amended from time to time. In order to ensure that the Company shall own all
right, title and interest in and to the Intellectual Property in the event that
any of the Intellectual Property is not deemed a work made-for-hire and in any
other event, the Executive hereby assigns all such Intellectual Property to the
Company, and the Executive agrees to affix to the Intellectual Property
appropriate legends and copyright notices indicating the Company's ownership of
all Intellectual Property and all underlying documentation to the extent
reasonably appropriate, and will execute such instruments of transfer,
assignment, conveyance or confirmation as the Company considers necessary to
transfer, confirm, vest, perfect, maintain or defend the Company's right, title
and interest in and to the Intellectual Property.
5
<PAGE>
12. Successors and Assigns.
This Agreement is binding upon, and shall inure to the benefit of, the
Company and its successors and assigns. With respect to the Executive, this is
an agreement for the performance of personal services. Absent the prior written
consent of the Company, and subject to the terms of the Executive's Will and the
laws of descent and distribution, the Executive shall have no right to assign
any of his duties or obligations pursuant to this Agreement, and likewise, he
shall have no right to assign, transfer, convey, encumber or otherwise dispose
of any of his rights pursuant to this Agreement.
13. Entire Agreement.
This Agreement contains all of the representations, covenants and
agreements between the parties hereto with respect to the subject matter hereof,
and constitute the entire agreement of the parties with respect to said subject
matter. This Agreement supersedes any and all other prior or contemporaneous
agreements, whether oral or in writing, between the parties with respect to the
subject matter thereof.
14. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Connecticut without giving effect to the conflicts of law
principles thereof.
15. Amendment and Waiver.
This Agreement may not be amended or modified except by an instrument in
writing signed by the parties hereto.
No delay by either party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any right, power or privilege hereunder. Any failure by either party hereto
to require strict performance by the other party or any waiver by any party
hereto of any term, covenant or agreement herein shall not be construed as a
waiver of any other breach of the same or any other term, covenant or agreement
herein.
16. Severability.
If any term or provision of this Agreement is held or deemed to be invalid
or unenforceable, in whole or in part, by a court of competent jurisdiction,
this Agreement shall not thereby be rendered invalid or unenforceable as a
whole. In such event, this Agreement shall continue in full force and effect-
and shall be interpreted and enforced as if such invalid or unenforceable term
or provision had not been a part hereof.
17. Indemnification of Executive.
----------------------------
The Company agrees to indemnify and hold the Executive harmless from and
against any loss, cost or expense, including reasonable attorneys' fees,
incurred by the Employee at any time in connection with any claim, demand, suit,
action or proceeding, whether pending or threatened, arising out of, or related
to any act or omission of the Executive for the Company, including, but not
limited to any act or omission, within the scope of his employment by the
Company, or in connection with his capacity as an officer or director of the
Company. Notwithstanding the foregoing, the indemnification
6
<PAGE>
obligation of the Company set forth in the preceding sentence shall not apply
with respect to any claim, demand, suit, action or proceeding which arises out
of any act or omission of the Executive which constitutes gross negligence or
willful misconduct by the Executive.
IN WITNESS WHEREOF, this Agreement was executed by the undersigned as of
the date first above written.
eUniverse, Inc.
By:____________________
Brad Greenspan
Its Chairman
____________________
Leland N. Silvas
7
<PAGE>
EXHIBIT 10.14
ENTERTAINMENT UNIVERSE, INC.
264 South LaCienega, Suite 305
Beverly Hills, CA 90211
April 6, 1999
E. P. Opportunity Fund, L.L.C.
77 West Wacker Drive
Suite 4600
Chicago, Illinois 60601
Ladies and Gentlemen:
This letter confirms, and reduces to writing, our agreements that,
commencing on the date hereof and until such time that EP Opportunity Fund,
L.L.C. ("EP") no longer owns any shares of Series A 6% Convertible Preferred
Stock ("Preferred Stock") of Entertainment Universe, Inc. (the "Company") (such
period hereinafter being referred to as the "Preferred Stock Period"), EP shall
have the right to have one person of its choosing serve as a director of the
Company. Accordingly, to effectuate the forgoing, the following shall be
applicable during the Preferred Stock Period:
1. EP shall be entitled to nominate one person to the board of
directors of the Company;
2. Brad Greenspan agrees to vote all shares of stock of the Company
owned by him for the election of the person nominated by EP to the board
of directors of the Company;
3. To the extent required, the by-laws and Articles (or Certificate)
of Incorporation of the Company will be amended to increase the number of
directors on the Board so that the person nominated by EP can serve; and
4. Any director nominated by EP shall finish his or her term
regardless whether the Preferred Stock Period ends during such person's
term as a director.
In addition, for a period of two (2) years, commencing on the date of EP's
purchase of the Preferred Stock, in any public offering of securities made by
the Company during such period, EP shall have the right to purchase One Million
Dollars ($1,000,000) of such securities; provided, however, it is agreed and
understood that EP may, in its sole discretion, elect to purchase less than such
amount. Any election by EP to purchase less than the entire
<PAGE>
E. P. Opportunity Fund, L.L.C.
April 6, 1999
Page 2
One Million Dollars ($1,000,000) of such securities that it has the right to
purchase shall not be, or be deemed to be, a waiver of its right to purchase One
Million Dollars ($1,000,000) of securities in any subsequent offering by the
Company.
The Company understands that this agreement was a material inducement to
EP to purchase shares of the Company's Preferred Stock and, without it, EP would
not have made such purchase.
The Company shall assign this Letter Agreement to Motorcycle Centers of
America, Inc. ("MC"), or such other company that it engages in a stock for stock
exchange, on or prior to the date that EP purchases shares of Preferred Stock of
the Company. From and after the date of assignment, reference herein to
"Company" shall mean and refer to MC or such other company with which the
Company engages in a stock for stock exchange.
Very Truly yours,
ENTERTAINMENT UNIVERSE, INC.
By: /s/ Brad Greenspan
------------------------
Its: Chairman
-----------------------
I hereby agree to the foregoing provisions of this Letter Agreement.
/s/ Brad Greenspan
----------------------------
Brad D. Greenspan
Date: April 6, 1999
The undersigned hereby assigns this Letter Agreement to Motorcycle Centers of
America, Inc., effective on the 16 day of April, 1999 and agrees to all of its
provisions.
ENTERTAINMENT UNIVERSE, INC.
By: /s/ Brad Greenspan
------------------------
Its: Chairman
-----------------------
<PAGE>
E. P. Opportunity Fund, L.L.C.
April 6, 1999
Page 3
The undersigned hereby accepts the assignment of this Letter Agreement from
Entertainment Universe, Inc. on the 16 day of April, 1999
MOTORCYCLE CENTERS OF AMERICA, INC.
By: /s/ Brad Greenspan
------------------------
Its: Chairman
-----------------------
Date: April 16, 1999
<PAGE>
ENTERTAINMENT UNIVERSE
CONTRACT OF EMPLOYMENT
"ADDENDUM"
Vacation
In your role, you will be entitled to four weeks vacation.
William R. Wagner
---------------------
Employee Name (Print)
/s/ William R. Wagner 3-31-99
--------------------- -------
Employee Signature Date
92 Compo Road North
-------------------------------------
Street Address Apt. # Floor
Westport CT 06880
-------------------------------------
City State Zip Code
Entertainment Universe - CONFIDENTIAL
<PAGE>
EXHIBIT 10.15
MODIFICATION AND RESTATEMENT OF LEASE
THIS AGREEMENT made as of this 1 day of February 1999, 1999, by and
between VINCENZO VERNA TRUSTEE d/b/a HARVEST ASSOCIATES with a mailing address
at P.O. Box 176, Wallingford, Connecticut, hereinafter called "Landlord", and CD
UNIVERSE, INC., of 101 North Plains Industrial Road, Building 5 Harvest Park,
Wallingford, Connecticut, hereinafter called "Tenant".
W I T N E S S E T H :
WHEREAS, Landlord and Tenant had entered into a Lease for the use or
occupancy of premises containing 12,500 sq feet in Building Five Harvest Park,
101 North Plains Industrial Road, Wallingford, Connecticut; and
WHEREAS, Tenant is desirous of occupying additional space in said Building
5 (for a total of 19,500 sq. ft.);
WHEREAS, Landlord is desirous of leasing said additional space in said
Building 5 provided Landlord is compensated for the cost of fitting up said
space; and
WHEREAS, the parties are desirous of amending and reforming the
aforementioned lease between Landlord and Tenant to reflect the additional space
and how the cost of fitting up shall be paid.
NOW THEREFORE, in consideration of One ($1.00) Dollar and other valuable
consideration, and the mutual benefits to the parties hereto, the undersigned
hereby covenant and agree as follows:
ARTICLE I
Premises
1.1 Landlord, in consideration of the rents, covenants and agreements
hereinafter reserved and contained on the part of the Tenant to be paid and
performed, hereby demises and lets to the Tenant those certain premises more
particularly described as 19,500 square feet in Building Five of HARVEST PARK
located at 101 North Plains Industrial Road, Wallingford, hereinafter referred
to as "premises" or "demised premises".
1.2 Tenant shall have parking privileges for its employees, associates and
customers in common with other tenants.
ARTICLE II
Term
Section 2.1 The commencement date of this lease shall be February 1, 1999.
The term of this lease shall be for a term of three (3) years and one (1)
month commencing on February 1, 1999 and terminating on March 1, 2002.
Section 2.2 Tenant shall have an option to extend the term of this lease
for two extension periods ("Extension Period") commencing upon the day after the
expiration date of the original term. The first extension period shall be for
two (2) years and the second extension period shall be for three (3) lease
years. Tenant shall be deemed to have exercised its option to extend the period
of this Lease unless Tenant gives notice of its intent not to extend the lease
to the Landlord. Said notice must be given on or before the date which is six
(6) months prior to the
<PAGE>
commencement of the extension period.
Such extension period shall be upon the same terms and conditions as are
in effect hereunder immediately preceding the commencement of such extension
period except for rental payments as otherwise provided in this lease.
ARTICLE III
Base Rent and Additional Rent
Section 3.1 Tenant agrees to pay to Landlord, at such place or places as
Landlord may, by notice to Tenant from time to time direct, rent at the
following rates and times:
A. The base rent for the first three years and one and one-half months of
the demised term shall be $6.00 per square foot per annum or $117,000 per year
or $9,750 per month;
In addition to the foregoing, Tenant agrees to pay $40,000.00 towards the
cost of fitting up the additional space. Landlord shall bill Tenant for said
fitup expenses in 2 phases. Phase One shall be in the amount of $20,000 and
shall be due and payable on February 1, 1999. Phase Two shall be in the amount
of $20,000 and shall be due and payable on February 15, 1999. All bills shall be
paid no later than ten (10) days after billing date.
In the event that Tenant does not exercise its right to extend this lease
for the first Option Period, Tenant agrees to pay the Landlord an additional
$20,000.00 by December 31, 2001.
B. First Option Period - Rent shall be $6.00 per square foot or $117,000
per year or $9,750 per month;
C. Second Option Period - Rent shall be negotiated by the parties at the
time Tenant exercises its right to renew this lease.
Section 3.2 The said rent is to be payable in advance on the first day of
each calendar month. If rent is not received by the tenth (10th) day of the
calendar month, a monthly charge of one and one half (1.5%) percent of the
monthly payment will be assessed commencing with the first day of the calendar
month.
Section 3.3 Tenant shall pay to the Landlord a security deposit in the
amount of NO ($0.00) DOLLARS.
ARTICLE IV
Repairs and Alterations
Section 4.1 Landlord shall maintain and make all necessary repairs and
replacements to the foundation, floor, exterior walls, marquees, structural
columns and structural beams, roof, driveways and parking areas of the building
and the premises. Landlord shall maintain all landscaping. Tenant shall make all
necessary repairs to the heating, air conditioning, electrical, plumbing and
drainage systems (collectively "Systems"). Landlord shall pay for the
replacement in whole or in part of any of the systems necessitated by normal
wear and tear except that if any repair or replacement is the result of the
Tenant's negligence, misuse or conditions caused by any manufacturing process or
related activity performed by Tenant, same shall be paid for by the Tenant.
Section 4.2 Tenant may make any interior, nonstructural installations,
alterations, additions, or improvements to or within the demised premises. No
changes or alterations may be made without the consent of the Landlord, which
consent not to be unreasonably withheld. Said Tenant improvements shall be made
in a first class manner. All such Tenant improvements made to or within the
demised premises (except, movable trade fixtures and all equipment of any kind
and nature used in tenant's operations, installed in the premises prior to or
during the term of this lease
<PAGE>
at the cost of Tenant or any other person claiming under Tenant), upon
expiration or other termination of the term of this lease shall be surrendered
with the premises as a part thereof without disturbance, molestation or injury.
Said movable trade fixtures shall not be deemed part of the premises and may be
removed by Tenant at any time or times during the term of this lease, provided
that upon any such removal, Tenant shall restore the premises to their condition
prior to such installation.
Section 4.3 Tenant will procure all necessary permits before making any
repairs, removals or Tenant improvements. Landlord will cooperate with Tenant in
obtaining such permits. All repairs, removals and Tenant improvements done by
Tenant or anyone claiming under Tenant, shall be done in good and workmanlike
manner and shall be done in conformity with all laws, ordinances and regulations
of all public authorities and all insurance inspection or rating bureaus having
jurisdiction; and the structure of the premises will not be endangered or
impaired and Tenant will repair any and all damage caused by or resulting from
any such repairs, removals or Tenant improvements, including, but without
limitation, the filling of holes. Tenant agrees to pay, promptly when due, all
charges for labor and materials in connection with any work done by Tenant upon
the premises so that the premises shall at all times be free of liens. Tenant
agrees to save Landlord harmless from and indemnify Landlord against any and all
claims for injury, loss or damage to persons or property caused by or resulting
from the doing of any such work, and Tenant shall carry all necessary builder's
risk, liability and worker's compensation insurance required to be carried
during the course of any construction hereunder.
Section 4.4 No sign shall be placed on the exterior of the demised
premises without the express consent of the Landlord, and further, such sign
shall conform to all applicable rules and regulations issued by the Town of
Wallingford. It is agreed by the parties that an exterior sign on all of the
premises owned by the Landlord shall be substantially similar in shape, size,
color and content.
ARTICLE V
Tenant's Covenants
Tenant covenants and agrees as follows:
Section 5.1 To pay when due the said base rent, additional rent, and any
and all other charges required to be paid by Tenant hereunder at the times and
in the manner provided in this lease.
Section 5.2 To use the premises for office space.
No business activity shall be conducted outside of the building.
Section 5.3 To procure any licenses and permits required for any use made
of the premises by Tenant; and upon the expiration or termination of this lease,
to remove its good and effects and those of all persons claiming under it and to
yield up peaceably to Landlord the premises in good order, repair, and condition
in all respects, damage by fire, taking, casualty, structural and other defects
required to be repaired by Landlord and reasonable wear and tear excepted.
Section 5.4 The Tenant shall promptly comply with all laws, ordinance, and
lawful orders and regulations affecting the premises (other than condemnation)
and the cleanliness, safety, occupation, and use of the same, and shall also
promptly comply with and execute all rules, orders and regulations of the Board
of Fire Underwriters, Rating Bureaus, and Fire Insurance Companies,
organizations and associations for the prevention of fires, at the Tenant's own
cost and expense. Landlord warrants that the premises shall conform to all the
foregoing laws, ordinances, orders and
<PAGE>
regulations upon the delivery of possession. The Tenant shall not permit or
commit any waste.
Section 5.5 That it will not use, or permit to be used, the premises for
any illegal or unlawful purpose.
Section 5.6 To pay for the cost of all heat, water and electricity,
utilities, materials and services which may be furnished to it or used by it in
or about the premises.
Section 5.7 To maintain, repair, replace and generally keep in first class
working order and condition all of the nonstructural components of the premises,
except those items which are the responsibility of the Landlord at its own cost
and expense.
Section 5.8 The Tenant agrees not to use the exterior of the premises for
storage of materials, unless authorized by Landlord in a designated area.
Section 5.9 Tenant shall not accumulate or store any materials deemed
hazardous, injurious or a pollutant by the Department of Environmental
Protection. All said hazardous waste shall be disposed of in such a manner that
it conforms with federal and state law. Tenant agrees to hold Landlord harmless
for any claim arising from a violation of this Section or a violation of any
applicable federal, state or local regulation related to hazardous materials.
ARTICLE VI
Landlord's Covenants
Section 6.1 Landlord covenants and agrees as follows: That Tenant, upon
payment of the rent above reserved, and upon the due performance of the
covenants and agreements herein contained, shall and may at all times peaceably
and quietly have, hold and enjoy the premises for the term of this lease without
any manner of hindrance or molestation from Landlord or anyone claiming under
Landlord.
Section 6.2 To perform all obligations of Landlord in regard to all
construction, maintenance and repair of the premises at the time and in the
manner provided in this lease; and to perform all other obligations required to
be performed by Landlord as elsewhere provided in this lease, provided however,
the named Landlord shall be responsible as above set forth only for the period
of time it owned the premises, provided that any successor Landlord specifically
assumes all obligations of the Landlord hereunder.
ARTICLE VII
Indemnity and Public Liability
The Tenant from and after the commencement date will hold the Landlord
harmless against any and all claims, suits, damages or causes of action for
damages and against any orders of decrees or judgments which will be entered
herein, brought from damages or alleged damages resulting from any injury to
persons and/or property or loss of life sustained in and about the premises
resulting from the Tenant's negligence or that of its agents, servants and
business invitees; and the Tenant shall, during the term hereof, maintain
general liability policies insuring the Tenant, and shall present to the
Landlord, prior to taking occupancy, a liability policy on the premises, naming
the landlord as an additional assured. Such policies shall be issued by
insurance companies authorized and licensed to issue such policies in the State
of Connecticut and shall provide for notice to Landlord prior to cancellation.
Such liability policy or policies shall initially afford protection to limits of
not less than $1,000,000.00 in respect to bodily injury and to the limit of
$500,000.00 property damage, which limits shall be reviewed from time to time,
but not more than annually, and adjusted to the
<PAGE>
standard amounts normally carried by similar operations. Upon failure, at any
time, on the part of the Tenant to pay the premiums for the insurance required
herein, the Landlord shall be at liberty, from time to time, as often as such
failure shall occur, to pay the premiums therefore, and any and all sums so paid
shall be and become and are hereby declared to be rent under this lease due and
payable on the next rent day.
Tenant agrees that it will, at its own cost and expense, keep its own
fixtures, merchandise and equipment adequately insured during the term hereof
against loss or damage.
ARTICLE VIII
Eminent Domain, Fire or Other Casualty
Section 8.1 In the event that the whole of the premises shall be taken
under the power of eminent domain then this lease will terminate.
Section 8.2 In the event that the premises or any substantial part thereof
shall be destroyed or damaged by fire or unavoidable casualty so as to render
the premises wholly untenable or unfit for occupancy, or should the demised
premises be so badly injured that same cannot be repaired within ninety days
from the happening of such injury, then in such case, the term created shall, at
the option of the Landlord, cease and become null and void from the date of said
damage or destruction, and the Tenant shall immediately surrender said premises
and all of the Tenant's interest therein to the Landlord, and shall pay rent
only to the time of surrender, in which event the Landlord may re-enter and
re-possess the premises thus discharged from this lease and remove all parties
therefrom. Should the demised premises by rendered untenable and unfit for
occupancy, but yet repairable within ninety days from the happening of said
injury, the Landlord may enter and repair the same with reasonable speed, and
the rent shall not accrue after said injury or while repairs are being made, but
shall recommence immediately after said repairs shall be completed. But if the
premises shall be so slightly injured as not to be rendered untenable and unfit
for occupancy, then the Landlord agrees to repair same with reasonable
promptness and in that case the rent accrued and accruing shall not cease. The
Tenant shall immediately notify Landlord in case of fire or other damage to the
premises.
ARTICLE IX
Assignment
The Tenant may transfer, sell, assign, sublet or otherwise convey its
interest in the premises with the written consent of Landlord, which consent
will not be unreasonably withheld, provided nothing herein shall operate to
relieve Tenant from any liability hereunder in the event of said transfer, sale,
assignment or subletting.
ARTICLE X
End of Term/Holding Over
Section 10.1 At the expiration of this lease, the Tenant shall surrender
the premises in good order, repair and condition in all respects, reasonable
wear and tear, damage by fire, taking, casualty, structural and other defects
required to be repaired by Landlord excepted, and shall deliver all keys to
Landlord. Before surrendering said premises, Tenant shall remove all its
personal property including all trade fixtures and equipment, and shall repair
any damage caused thereby. Tenant's obligations to perform this provision shall
survive the end of this lease. If Tenant fails to remove its property upon the
expiration of this lease, the
<PAGE>
said property shall be deemed abandoned and shall become the property of the
Landlord. Landlord may at said time remove said abandoned property and charge
Tenant for said removal.
Section 10.2 Any holding over after the expiration of the term of this
lease shall be construed to be a tenancy at will and shall otherwise be on the
terms herein specified.
ARTICLE XI
Default
Section 11.1 A. If Tenant shall default in the payment of rent herein or
any item of rent herein mentioned or any part thereof, and such default shall
continue for more than ten (10) days after the day that such payment is past
due; or
B. If Tenant shall default in the observance of any of the other terms,
covenants and conditions of this lease and such default shall continue for more
than thirty (30) days after notice given to Tenant by Landlord specifying such
default; provided, however, that the Landlord shall waive such thirty day
requirement so long as the Tenant is making a diligent effort to remedy same and
such default is not of the kind or nature which can be reasonably remedied in
such thirty (30) days period; or
C. If Tenant shall make any assignment for the benefit of creditors or
file a voluntary petition in bankruptcy or be by any court adjudicated a
bankrupt or take the benefit of any insolvency act or be dissolved pursuant
thereof, voluntarily or involuntarily, or if a receiver or trustee of Tenant
and/or its property shall be appointed in any proceedings other than bankruptcy
proceedings and such appointment, petition for an arrangement or reorganization,
if made in proceedings instituted by Tenant shall not be vacated within thirty
(30) days after it has been made, or if made in proceedings instituted by Tenant
shall not be vacated within one hundred twenty (120) days after it has been made
(provided further that during said respective period of thirty and one hundred
twenty days, all the covenants of this lease to be performed by Tenant,
including payment of rent, shall continue to be performed): then, upon the
happening of any one or more of the defaults or events above mentioned in this
Section 11.1 the Landlord may, at its option, on ten (10) days notice in
writing, terminate this lease, and this lease and the term hereof shall
automatically cease and determine at the expiration of said ten day period, and
it shall be lawful for the Landlord at his option to enter the premises or any
part thereof, and to have, hold and repossess said premises and to remove all
persons therefrom by summary proceedings or by other action or proceedings, or
by force or otherwise, any notice required by the laws of the State of
Connecticut being hereby waived.
D. The failure of Tenant to observe any term, covenant, or condition of
the lease other than the payment of rent shall not be deemed a default within
the meaning of this Section 11.1 so long as Tenant, after receiving any notice
as specified herein, proceeds to cure the default as soon as reasonably possible
and continues to take all steps necessary to complete the curing of such default
within a period of time which, under all prevailing circumstances, shall be
reasonable.
Section 12.1 In the event any action is brought under the provisions
of this Article, the Landlord shall be entitled to reasonable attorneys' fees
and costs provided he shall prevail.
ARTICLE XII
Miscellaneous Provisions
Section 11.2 Tenant agrees at the request of Landlord to
<PAGE>
subordinate this lease to any mortgage placed upon the premises by Landlord,
provided that the mortgagee thereof will agree to recognize all the rights of
the Tenant under this lease in the event of acquisition of title by such
mortgagee through foreclosure proceedings or otherwise, specifically including
the right of Tenant to purchase the premises in accordance with the terms
hereof, and Tenant will agree to recognize the holder of such mortgage as
Landlord in such event, which agreement shall be expressly binding upon the
successors and assigns of Tenant and of the mortgagee and upon anyone purchasing
said premises at any foreclosure sale. Tenant and Landlord agree to execute and
deliver appropriate instruments necessary to effect the provision of this
Section.
Section 12.2 Failure of either party to complain of any act or omission on
the part of the other party, no matter how long the same may continue, shall not
be deemed to be a waiver by said party of any of its rights hereunder. No waiver
by either party at any time, expressed or implied, of any breach or any
provision of this lease shall be deemed a waiver of a breach of any other
provisions of this lease or a consent to any subsequent breach of the same or
any other provision. If any action by either party shall require the consent or
approval of such action, such consent or approval on any one occasion shall not
be deemed a consent to or approval of said action on any subsequent occasion or
a consent to or approval of any other action on the same or any subsequent
occasion. Any and all rights and remedies which either party may have under this
lease or by operation of law, either at law or in equity, upon any breach, shall
be distinct, separate, and cumulative and shall not be deemed inconsistent with
each other; and no one of them, whether exercised by said party or not, shall be
deemed to be in exclusion of any other; and any two or more or all of such
rights and remedies may be exercised at the same time.
Section 12.3 All notices required to be sent to the Landlord shall be
mailed at its address noted above, or hand delivered, or to such other addresses
or entity as Landlord shall notify Tenant. All notice required to be sent to the
Tenant shall be mailed at its address noted above, or to such other address or
entity as Tenant shall notify Landlord.
Section 12.4 If any term or provision of this lease or application hereof
to any person or circumstances shall, to any extent, be invalid or
unenforceable, the remainder of this lease, or the application of such term or
provision to the persons or circumstances other than those as to which it is
held invalid, or unenforceable, shall not be affected thereby, and each term and
provision of this lease shall be valid and be enforced to the fullest extent
permitted by law.
Section l2.5 The captions in this lease are for convenience only and are
not a part of this lease and do not in any way limit or amplify the terms and
provisions of this lease.
Section 12.6 Notwithstanding any of the terms and provisions herein
contained to the contrary, Landlord and Tenant shall each have the duty and
obligation to mitigate, in every reasonable manner, any and all damages that may
or shall be caused or suffered by virtue of defaults under or violation of any
of the terms and provisions of this lease agreement committed by the other.
Section 12.7 All the covenants, agreements, terms, conditions, provisions
and undertakings in this lease contained, shall extend to and be binding upon
the heirs, executors, administrators, successors and assigns of the parties
hereto.
Section 12.8 This instrument contains the entire and only agreement
between the parties, and no oral statements or representations or prior written
matter not contained in this instrument shall have any force and effect. This
lease shall not be modified in any way except by a writing executed by both
parties.
<PAGE>
Section 12.9 This lease shall be governed exclusively by the provisions
hereof and by the laws of the State of Connecticut, as the same may, from time
to time, exist.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
the day and year first above written.
Signed, Sealed and Delivered
in the presence of:
/s/ Vincenzo Verna
- ------------------------------ -----------------------------
VINCENZO VERNA, TRUSTEE
d/b/a HARVEST ASSOCIATES
- ------------------------------
CD UNIVERSE, INC.
BY: /s/ [ILLEGIBLE]
- ------------------------------ -----------------------------
Its President duly authorized
- ------------------------------
<PAGE>
JONATHON P. REUBEN, CPA
An Accountancy Corporation
- --------------------------------------------------------------------------------
23440 Hawthorne Blvd. Suite 270 Torrance CA 90505
(310) 378-3609 . FAX (310) 378-3709
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
eUNIVERSE, INC.
101 North Plains Industrial Road
Wallingford, Connecticut 06492
The undersigned consents to the use of its opinion dated April 9, 1999, relating
to the financial statements of Cases Ladder, Inc. and to the reference to the
firm under "Experts," all as included in the Registration Statement on Form 10.
Date: June 11, 1999 s/s Jonathon P.Reuben CPA
-------------------------
Jonathon P. Reuben, C.P.A.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of eUniverse, Inc. on Form
10 of our report dated June 3, 1999 (relating to the financial statements of
Motorcycle Centers of America, Inc. presented separately herein), appearing in
Item 15, which is part of this Registration Statement.
We also consent to references to us under the headings "Selected Financial Data"
and "Experts" in such Registration Statement.
Cordovano and Harvey, P.C.
Denver, Colorado
June 11, 1999
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in this Registration Statement of eUniverse, Inc.
on Form 10 of our report dated May 14, 1999 relating to the financial statements
of CD Universe, Inc., and to the reference to our Firm under caption "Experts"
in such Registration Statement.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
June 11, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 887 101568
<SECURITIES> 8000 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 3500 3500
<DEPRECIATION> 2667 2792
<TOTAL-ASSETS> 9720 102276
<CURRENT-LIABILITIES> 54934 73300
<BONDS> 0 0
0 0
0 0
<COMMON> 70 2148
<OTHER-SE> (45284) 26828
<TOTAL-LIABILITY-AND-EQUITY> 9720 102276
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 45603 80473
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (102893) 4130
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (102893) 4130
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 00
<NET-INCOME> (102893) 4130
<EPS-BASIC> (1.47) .06
<EPS-DILUTED> (1.47) .06
</TABLE>
