SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/x/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
/ / Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 31, 1999.
Commission File Number
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0-26351
DIGS, INC.
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(Name of Small Business Issuer in its charter)
DELAWARE 95-4603237
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization). Identification No.)
17327 VENTURA BOULEVARD, SUITE 200, ENCINO, CALIFORNIA 91316
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (818) 995-3650
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: None
Check whether Issuer: (1) has filed all reports required to be filed by section
13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12
months and (2) has been subject to such filing requirements for the past 90
days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form or any amendment to this Form
10-KSB. / /
Issuer's Revenues for its most recent fiscal year: $564,022.
As of February 29, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Issuer, 5,043,131 shares, was $44,283,733. The market
value of Common Stock of the Issuer, par value $.001 per share, was computed by
reference to the average of the closing bid and asked prices of one share on
such date which was $8.781.
The number of shares outstanding of the Issuer's Common Stock, par value $.001
per share, as of February 29, 2000, was 6,658,631 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference: The information required by Part III
of Form 10-KSB is incorporated by reference to the Issuer's definitive proxy
statement relating to the 2000 Annual Meeting of Shareholders which will be
filed with the Securities and Exchange Commission on or before April 29, 2000.
<PAGE>2
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
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DIGS, Inc. is a developer and producer of comprehensive multimedia Internet
and CD-ROM communication software and other forms of digital media to businesses
who want to proactively provide information to their clients, investors,
employees, the media, and the public at large. In this report, you will see our
company referred to as "DIGS," or simply as "we." These terms are used
interchangeably, and unless otherwise noted, they include subsidiaries.
We have achieved a substantial reputation with several of our products that
are recognized as innovative and technologically advanced. Our products include
investor relations CD-ROMs, marketing CD-ROMs, employee orientation CD-ROMs,
environment, health and safety CD-ROMs, employee recruitment CD-ROMs and
training CD-ROMs. We also provide Web Site design, CD-ROM data base programming
and graphic design services. We intend to introduce to the market a highly
sophisticated multiple video Internet player system in late 2000. DIGS consists
of three active subsidiaries: Digital Corporate Profiles, Inc., DXF Design, Inc.
and Digs Web Video Inc. Each subsidiary is wholly owned by DIGS.
Products.
The primary product of Digital Corporate Profiles (DCP) is an Investor
Relations CD-ROM (IRCD). Each IRCD program tells a corporate story by
integrating the traditional printed annual report information with the latest
CD-ROM and Internet interactive video, audio, and animation technologies.
Complete financial information including financial statements, schedules and
notes, combined with annual comparison graphs of revenues, sales, profits,
earnings per share, etc., are all set forth in a colorful and creative manner.
Each presentation includes video and audio that not only contains music and
sound effects, but includes conversations with company executives, such as its
President, Chief Financial Officer or Chief Scientist. These video and audio
clips explain the clients business, financial success, new products and/or
inventions. This approach makes the "corporate story" come alive, and instead of
reading a dry annual report, shareholders and other interested parties view an
interesting, colorful and entertaining CD that brings them up to date on the
company's progress.
To create our IRCD product, we first accumulate and/or create a collection
of our client's videos, pictures, text, financial information or other data.
Then using our proprietary application software, we produce an interactive
digital Master CD-ROM of the client's story. In the case of the IRCD products,
the basic package includes filming three corporate executive interviews, a
10-page corporate profile section, a financial bottom line section (which
includes charts and graphs illustrating the financial aspects of the company), a
products and services sections and a research library. Also included is a link
function that takes the viewer to a specific Internet website for
up-to-the-minute information. This feature is available as long as the user has
Internet capabilities and the Internet connection is established at the same
time the IRCD is being viewed. This link function prevents the CD-ROM from
becoming out-dated. Once the "Master" CD-ROM is produced, we contract with
outside replication houses and printers to produce the final product for
distribution to shareholders, the investing community or other interested
parties.
In addition to providing corporate information in a highly attractive,
entertaining and interactive form, DCP offers a variety of custom designed
packaging to further project a company's image. The CD-ROM/packaging combo can
offer substantial savings to companies over traditional written annual reports
<PAGE>3
and investor relation materials in both production and mailing costs. While
traditional annual reports are still required by law, condensed IRCD versions
can be inserted into the jacket, thereby slashing printing costs and expensive
postage. This approach to disseminating corporate information provides a
substantial economic incentive to our clients. Large companies often spend
anywhere from $6 to $12 to print each annual report and investor relations
package. In addition, they incur postage costs upwards of $3 per shareholder.
Our IRCD approach reduces the report costs to approximately $4 each, and postage
costs plunge to an average of less than a $1 each. With volume orders and
economies of scale, we believe it may be possible to substantially reduce unit
report prices to the $1 to $2 range. Moreover, the IRCD is user-friendly, can be
linked to a company's website and unlike traditional paper reports, does not
require new paper, packaging and postage for every update. Once a shareholder
has received an IRCD, additional CD's may not be required because new
information or updated statistics can be obtained through the website link
feature. The result is an easily updated entertaining and interactive report
that reduces a company's printing, handling and mailing costs.
Another DCP product is the Environmental Health and Safety CD-ROM (EHSCD).
The EHSCD provides an interactive format for corporate clients to report their
environmental, health and safety accomplishments to shareholders, governments
and interested environmental groups. The EHSCD uses text, graphics, video and
audio in a dynamic manner to describe and explain a clients environmental,
health, safety and natural resource preservation efforts to their employees,
investors, environmental groups, media, the public and governmental agencies.
DCP has produced an EHSCD for Atlantic Richfield Corporation ("ARCO") who is
using it primarily to provide environmental health and safety information to its
employees.
Using a format similar to its IRCD and EHSCD products, DCP has also
developed an Employee Orientation CD-ROM (EOCD) for internal uses by
corporations. This product serves as an orientation and recruiting piece that is
designed to familiarize new employees with their company by providing a
comprehensive look at the company's people, products, services and policies. The
first two clients using the EOCD product are The CheeseCake Factory, Inc. and
The Limited.
In August 1999, DIGS formed DXF Design to provide Web Site design, Web Site
and CD-ROM graphic art design, traditional print design services and artistic
support for our CD-ROM projects and the soon to be released iVideoNow!TM.
During the fall of 1999, DXF not only redesigned all of our web sites, but
provided design services for outside companies as well. One of the first
projects taken on by DXF, was the design of www.ehsreports.com. The Website
helps Internet users search an international corporate database by company
and/or industry, for environmental, health and safety reports available in
print, online and interactive CD-ROM formats. DXF also developed an interactive
Internet investor relations data base program to be used by a prominent Los
Angeles Public Relations firm on their web site. As a support partner to DCP,
DXF designed and produced the new Limited EOCD packaging in November 1999.
DXF also offers its graphic services in traditional advertising, annual
reports, corporate identity graphics, entertainment, and marketing design.
Clients using DXF design services during the latter half of 1999, included
Paramount, Universal Studios, USA Studios, Hearst-Argyle Television and Merv
Griffin Productions.
1999 also saw DIGS begin the initial research and development of a new and
innovative Internet Video technology. This effort led to the formation in
October 1999 of DIGS Web Video, Inc. (DWV) and the trade marking of a new
<PAGE>4
business to business (B2B) product, iVideoNow!TM. In November 1999, we began
beta testing the product on the Web Site www.ivideonow.com with existing
clients, Victoria Secret, ARCO, and The CheeseCake Factory. In December we added
two new testing partners, Prosperity Pictures and Paramount TV.
iVideoNow!TM is a real time Internet video screening application. Scheduled
for full launch in late 2000, iVideoNow!TM is currently in beta testing.
iVideoNow!TM is designed to provide an Internet video presentation platform that
allows companies in the film, TV, music, travel, and retail industries to use
their existing video and TV presentations to promote their image and products.
The iVideoNow!TM key features are its instant video library screening format
(currently 36 videos), an interactive and user friendly interface, a
multi-screen quality viewing function and our Internet video delivery system
(iVNDS(TM)). Currently, iVideoNow!TM supports both Apple's QuickTime(TM) and
Microsoft's MediaPlayer(TM) on the Internet Explorer(TM) and Netscape(TM) web
browsers. Support for Real Networks' Real Video will be added by the in the year
2000, thus making iVideoNow!TM functional with all major web browsers and
streaming video technologies. Coupled with iVNDS(TM), the iVideoNow!TM system is
designed to automatically detect the video technology installed on a user's
computer at the time of log on and uses that system seamlessly, thus limiting
the need to download any additional software.
The iVNDSTM is based on our proprietary Internet server infrastructure,
which has the ability to provide the best video quality possible at the fastest
possible speeds. Presently, video presentations over the Internet are in their
infancy and require high speed Internet connections to deliver good quality.
However, DWV can provide 4-star, near broadcast quality at the 56K-modem level,
the connection speed used by most households. DWV also provides video
digitization, compression and server storage. We intend to lease the
iVideoNow!TM player as a package with the iVNDSTM or offer it as a stand-alone
product to be used on a client's own server. DWV plans to offer two upgrades to
the system. First, an e-commerce function is planned for integration in late
2000. Second, by year-end the video library function of the player should be
expanded from the present 36 to 200 videos.
We believe our principal business strengths include our demonstrated
ability to supply unique CD-ROM and Internet communication products to
companies, our reputation for experience, competence, integrity and our
knowledge of how to successfully serve the market. Amplifying our strengths is
the reality that any potential new competitor would face the formidable task of
having to substantially duplicate our technology to successfully challenge us.
Overview of the Industry.
Our "Industry" really is three industries, CD-ROM production, Website
Design and Streaming Video, all three in one way or another key off the Internet
Industry. The number of Internet users around the world is constantly growing.
The Computer Industry Almanac has projected that by year-end 2002, 490 million
people around the world will have Internet access. The United States has an over
whelming lead in Internet users with more than 110 million users at the end of
1999. According to the December 1999 Harris Interactive Survey, a total of 69
percent of all adults use a computer at home, work, or some other location. This
is up from 50 percent in late 1995. The same study reported that 81 percent of
all computer users use the Internet compared to 27 percent three years ago.
The Internet Video industry is in its infancy. PC Data Online reported that
as of the end of October 1999, 41 percent of households with Internet access
used media players. It is estimated that less than 10 percent of households with
Internet access use media players for video playback. Internet video, whether it
be streaming or download-and-watch video, requires large bandwidth connections
(high speed Internet access) to perform acceptably. Most businesses and schools
<PAGE>5
have T-1 lines or higher bandwidth connections in use but as of November 1999,
only 5.9 percent (Nielson/ NetRatings) of home users were accessing the Internet
via high-speed connections. High-speed connections are defined as ISDN, T-1
telephone lines satellite, cable modem service and various types of digital
subscriber lines.
As of November 1999, only 4,266,023 unique audience used high-speed
bandwidth, but the number of high-speed users is projected by Computer Economics
to grow to 27 million by 2002.
The Market.
The market for our products and services is extremely widespread. Any
mid-size or larger business can use our products. Key products such as the IRCD
and graphic design services compete directly with the print media. Competition
in the financial and corporate printing industry is intense and well
established, as most corporations currently use printed matter as the means to
communicate with their investors and market makers. We believe that the
significant cost advantages and the more interesting, entertaining content as
compared to printed materials gives our products a substantial competitive
advantage to be successful in this marketplace.
The iVideoNow!TM player has an obvious appeal to movie studios and TV
distribution companies and has applications for video retailers that may wish to
provide previews of popular new videos. There are also multiple applications in
the travel industry and retail trade. In the travel industry, hotels can video
preview their rooms and facilities to potential clients. Cruise lines can
display ship amenities, on board entertainment and destinations. Travel agents
can provide visual and audio information on resorts, golf packages, European
tours, etc. Travel industry websites are the second most popular sites on the
Internet. In the retail industry, retailers can put on video fashion shows for
home computer users. Likewise, the music industry can display music videos to
help drive record sales. There are undoubtedly many other companies with
products and/or services where videos can be designed to tease the public
interest. While viewing these video presentations on the Internet, a quick click
can open a company's e-commerce site. The e-commerce link will allow users to
reserve a hotel room, book a cruise, rent or purchase a video, buy a music CD,
or get the latest in fashion apparel.
Yet another application for iVideoNow!TM has emerged as a result of recent
discussions with a company that wants to place employee-training videos on their
Intranet. The use of the iVideoNow!TM player in this capacity could replace a
company's use of videocassettes and VCR's. The benefit is with videocassettes an
employee has to look at the entire videotape to see what they need to learn,
while only certain sections may be germane to them. With iVideoNow!TM, the
employee easily can skip to the exact chapter or chapters of the presentation to
find and review the pertinent information they require.
The market we operate in is characterized by rapidly changing technologies,
frequent new product and service introductions, and evolving industry standards.
The future success of DIGS will depend, in large part, on how we adapt to
rapidly changing technologies. We plan to adapt to new technology by continually
improving the performance features and the reliability of our services. In
addition, we have an active commitment to research and development and believe
we will benefit greatly as new bandwidth technology develops.
We believe we are now in a position to aggressively market our products and
services to a wider expansion of industries. We operate in the
business-to-business (B2B) marketplace, and focus our sales efforts on mid to
large companies that are seeking a unique, efficient and inexpensive means of
<PAGE>6
disseminating corporate business and financial information. We market our
products and services through personal contacts with existing and potential
customers and investment relations firms, through a specially trained in-house
sales force and through direct marketing techniques. In addition to soliciting
business from existing and prospective customers, each sales person also acts as
the account service representative, ensuring that the Company's production staff
promptly responds to customer instructions and meets customer needs.
DIGS is not dependent on long-term clientele and does not enter into long
term service or product contracts with its clients. We do have the opportunity
to provide multiple products and services to each client and actively solicit
such business. The growth and expansion of our business is built on constant
recruitment of new accounts and the maintenance of relationships with current
clients.
Marketing of our products is through contacts made by its President and
marketing staff. Presentations are made to each prospective client demonstrating
the product capabilities and how each product can be customized to fit a clients
needs. The company promotes its products and establishes potential client
contacts through various techniques including news releases, mailers, industry
networking, public relation firms and simply word of mouth.
Competition.
Currently, there is limited direct competition in the production of
CD-ROM's for the investment and corporate communications community. Although
competitors can enter the field of CD-ROM production at any time, we believe our
early entrance into this market and our proprietary instant-start software
technology will allow us to continue to be a dominant provider of this business
service. We face substantial competition in the area of financial Website design
and maintenance. However, few, if any competitors combine the corporate
customer's Website with a physical CD-ROM in the hands of its audience, nor do
they provide for continuous outgoing updates.
Key design services offered by DXF compete with the print media. The
competition in the financial and corporate printing industry is intense and well
established, as most corporations currently use printed matter as the means to
communicate with their investors and market makers.
At the present time video on the Internet is in its infancy, and
competitive offerings are limited to single unit players. Real Player's Real
Video, Apple's QuickTime and Microsoft's Media Player make up the majority share
of this market. These players could be considered competition to the
iVideoNow!TM system but since iVideoNow!TM supports all these players, a more
accurate description might be a system friendly application program. Further,
iVideoNow!TM is the only player offering a multiple of videos, a "library" of up
to 36 videos. It is also the only product on the market providing the end user
control of what they view and its quality. The Company's state-of-the-art
technology puts it in a position to establish itself strongly in this emerging
market, and even a small market share could be worth hundreds of millions of
dollars in the next few years.
DIGS believes that the significant cost advantages and more interesting,
entertaining content as compared to printed materials and other traditional
communication mediums gives our products a substantial competitive advantage to
be successful in this marketplace.
Subsequent Event.
In February 2000, through the May Davis group we raised $2.5 million in
additional capital through a private placement of convertible preferred stock.
This new funding will be used for the continuing development of iVideoNow!,
<PAGE>7
working capital, marketing purposes, pay short term loans and, principally, the
addition of new sales and technical support personnel. It is anticipated that
this interim financing will provide all the capital needed for our operations in
2000.
The Company sold 2,500 shares of Series A Convertible Preferred Stock (the
"Preferred Stock") and Warrants to purchase 100,000 shares of our Common Stock
at $10.0375 per share for $2,500,000 to Calp II, L.P., an offshore venture
capital limited partnership in Hamilton, Bermuda. The Preferred Stock is
convertible at 75% of the lowest closing bid price of our Common stock during
any three trading days during the twenty consecutive trading days ending on the
date of the purchaser's determination to convert, or $9.125, whichever is lower.
We have also agreed to register the underlying Common Stock issuable upon
conversion of the Preferred Stock and exercise of the Warrants. In connection
with this private placement, we paid May Davis $200,000 and issued a Warrant to
purchase 200,000 shares of our Common Stock at $10.0375 per share as a placement
agent fee. We also paid $50,000 to Thomson Kernaghan & Company, Ltd. as a
finders fee.
Employees.
As of December 31, 1999, the Company has ten full time employees.
ITEM 2. DESCRIPTION OF PROPERTY
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DIGS is leasing from a third party 6,153 square feet of office space at
17327 Ventura Boulevard, Suite 200, Encino, California, 91316. The lease calls
for monthly rent of $8,307 and terminates July 31, 2003. The lease can be
renewed for an additional three or five years at our discretion. DIGS has no
plans to change its corporate office location or purchase any real property at
this time.
ITEM 3. LEGAL PROCEEDINGS
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None.
ITEM 4. SUBMISSION OF MATTER TO VOTE OF SECURITY HOLDERS
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The Company did not hold a security holders meeting in the fourth quarter
of its fiscal year ended December 31, 1999. A security holders' meeting is
scheduled to be held in June, 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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(a) The Company's Common Stock has been trading on the over-the-counter
through the NASD's electronic OTC Bulletin Board service. The following table
shows for the calendar periods indicated the high and low closing bid quotation
for the Company's Common Stock. The quotations were obtained using an Internet
retrieval service. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not necessarily represent actual
transactions.
1999 High Bid Low Bid
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First Quarter $7.00 $3.00
Second Quarter $8.50 $8.50
Third Quarter $7.75 $7.75
Fourth Quarter $8.25 $8.00
1998 High Bid Low Bid
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First Quarter $0.09 $0.03
Second Quarter $1.50 $0.04*
Third Quarter $2.62 $0.25
Fourth Quarter $6.87 $4.87**
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* Reflects a 1 for 50 reverse stock split.
** Reflects a 1 for 20 reverse stock split.
<PAGE>8
(b) As of February 29 2000, there were approximately 305 record holders of
the Company's Common Stock. In addition, there were approximately 870
shareholders in street name whose shares are held in the name of other nominees.
(c) There have been no dividends declared or paid by the Company on its
Common Stock during the past three years.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- -----------------------------------------------------------------
The information included in this discussion contains forward looking
statements that are based on current expectations and beliefs and involve
numerous risks and uncertainties that could cause actual results to differ
materially. Readers are cautioned not to place undue reliance on these forward
looking statements, which speak only as of the date hereof.
Corporate History.
On November 9, 1998, as a result of a reorganization agreement, DIGS issued
5,194,968 shares of its common stock in exchange for all the outstanding common
stock of Digital Corporate Profiles, Inc. (DCP). The stock exchange resulted in
DCP becoming a wholly owned subsidiary of the Company based on a conversion
ratio of three shares of DIGS, Inc. common stock for each share of DCP's common
stock. The reorganization was accounted for as a recapitalization of each entity
at their book values.
Prior to the reorganization, DIGS was an inactive shell called Advanced
Laser Products. The shell corporation did not generate any revenue but did incur
minor administrative expenses. Administration expenses were $300 and $4,730 for
the years ended December 31, 1998 and 1997 respectively. On the reorganization
date there were 53,663 outstanding shares owned by former shareholders. All
share and per share amounts have been adjusted to reflect an April 20, 1998 one
for ten reverse stock split and an October 16, 1998 one for twenty reverse stock
split. DIGS is currently comprised of the following three active entities:
Digital Corporate Profiles, Inc. (DCP) provides complete multimedia and
internet communication solutions to its clients allowing them to proactively
tell their story to the world. DCP produces several CD-ROM products including an
Investor Relation CD (IRCD), an Environmental Health and Safety CD (EHSCD) and
an Employee Orientation CD (EOCD). Each CD provides the client with a dynamic
medium that allows them to communicate effectively with their investors,
employees, the media and the public.
During 1999, DIGS formed a wholly owned subsidiary, DXF Design, Inc.
("DXF"), a digital and graphic design studio. DXF offers a complete range of
Internet, CD-ROM and promotional print design services. DXF specializes in
designing brochures, corporate identity graphics, corporate and entertainment
promotional kits, as well as key art for theatrical and home video
advertisements. DXF will not only provide artistic support to DCP but is an
additional revenue center. DXF is actively marketing its digital and graphic
design capabilities to the music, film and television industries.
Digs Web Video, Inc. (DWV), another wholly owned subsidiary, was formed in
1999 to develop and market a real time Internet video screening application
<PAGE>9
called iVideoNow!TM. The iVideoNow!TM player currently allows a user to
instantly view up to 36 separate videos. DWV plans to expand the viewing
capacity of the player to 200 videos. The interface of the iVideoNow!TM player
can be designed to a client's specification to maximize the video players use as
a marketing and promotional tool. DWV also plans to develop an e-commerce
function that will allow the iVideoNow!TM player to act as both a marketing tool
and sales point for the client.
Operating Results for the Years Ended December 31, 1999 and 1998.
Revenue increased over 200% to $564,022 for 1999 from $171,694 in 1998. The
increase is primarily due to increased sales of DCP's CD-ROM products and
revenue generated from graphic design services provided by DXF.
Gross profit also increased by over 200% to $283,953 in 1999 from $74,714
in 1998. As a percentage of revenue, gross profit percentages were approximately
50.4% in 1999, up from 43.5% in 1998. The increased gross profit amount and
percentage is primarily due to labor efficiencies associated with production of
CD-ROM products.
Operating expenses increased to $801,799 in 1999 from $535,231 in 1998. An
increase in marketing costs accounts for approximately 36% of the increase. The
Company's marketing costs increased to $109,005 in 1999 from $14,400 in 1998.
Increased marketing efforts resulted in an increase in sales volume and revenue.
Increases in professional services, rent, officer salaries and shareholder
expenses also contributed to the overall increase in operating costs in 1999 as
compared to 1998.
Other income and (expenses) were $52,733 in 1999 as compared to ($113,761)
in 1998. This increase is the result of the selling of the Stocknet-USA domain
name and website for a gain of $38,722 and a decrease in financing expenses.
Other income and (expenses) included rental income, interest income, interest
expense and realized losses on sale of investments.
Federal income tax provisions for the years ended December 31, 1999 and
1998 have not been recorded due to operating losses and the inability to benefit
from deferred tax assets. However, the minimum state income tax expense for DIGS
and its subsidiaries in the amounts of $6,364 and $800 were incurred in 1999 and
1998 respectively. As of December 31, 1999, DIGS has net operating loss
carryforwards of $1,253,761 that may be used to offset future federal taxable
income. These net operating loss carryforwards will begin to expire in 2011 if
not used.
Liquidity and Capital Resources.
DIGS has funded its operations and met its capital requirements through
private sales of equity securities, short-term loans and cash generated from
sales. Negative cash flows from operating activities are a result of our net
operating losses. Net cash used for operations was $523,047 in 1999 and $383,158
in 1998. Net cash flow used for investing activities was $156,220 in 1999 and
$88,042 in 1998. Cash used in 1999 for investing activities is primarily related
to the development of the iVideoNow!TM player technology.
DIGS anticipates making capital expenditures of approximately $200,000
during the year ending December 31, 2000. The majority of the capital
expenditures will be to remodel the corporate offices and purchase additional
hardware and software. Remodeling of the corporate offices began in February
2000 to accommodate a staff of programmers, designers and marketers. In
addition, DIGS anticipates it will require approximately $450,000, $80,000 and
$100,000 for salaries, outside services and marketing expenses respectively. On
March 8, 2000, DIGS secured financing of $2,500,000 through a private sale of
equity securities. The cash from this financing will be used to pay off
short-term debt, pay for capital expenditures and pay operating expenses. This
additional capital along with cash generated through revenues should be
<PAGE>10
sufficient to fund operations, capital expenditures and other obligations
through December 31, 2001. Digs anticipates that it will continue to report
operating losses for at least 1 or 2 years as the Company continues to refine
its projects and build its marketing, production and management teams.
Additional capital may be raised through public financing, private financing or
some other arrangement. If additional capital were raised through the issuance
of equity securities, the percentage of ownership held by current shareholders
would be reduced. Furthermore, such equity may have rights, preferences or
privileges senior to the current common stock.
Year 2000 Issue.
DIGS did not experience any disruptions to operations or any other problems
resulting from the Y2K issue. The Y2K issue generally refers to the problems
some computer systems may have in determining the correct year for the century.
DIGS does not foresee any future problems resulting from the Y2K issue.
New Accounting Pronouncements.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131) was adopted in
1999 with the formation of DXF Design, Inc. SFAS No. 131 establishes standards
for the reporting of operating results regarding different segments of a
company. Segment operating results reported by DIGS for its subsidiaries Digital
Corporate Profiles (DCP) and DXF Design (DXF) in 1999 are summarized as follows:
<TABLE>
<S> <C> <C> <C>
DCP DXF Consolidated
----------------- ---------------- --------------------
Net operating revenues $413,743 $150,279 $564,022
Operating income (589,211) 23,365 (565,846)
Operating assets 449,591 100,090 549,681
Capital expenditures 0 0 0
Depreciation/amortization 47,080 1,306 48,386
</TABLE>
Adoption of SFAS No. 131 did not have a material effect on financial
statement presentations and disclosures for prior years.
DIGS has elected to follow Accounting Principles Board Opinion (APBO) No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation. In electing to follow APBO No. 25,
we are obligated to provide the expanded disclosures required under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." APBO No. 25 requires no recognition of compensation expense for
stock-based compensation agreements provided the exercise price is equal to the
market value on the date of grant. APBO No. 25 does require the recognition of
compensation expense for variable award plans based on the current market value
over the vesting periods. In contrast, SFAS No. 123 requires the recognition of
compensation expense for grants of stock options and other equity instruments
over the vesting period of such grants, based on the estimated fair market
values of such grants on the grant-date. In 1999, DIGS granted 230,000 shares of
qualified stock options and 65,000 shares of nonqualified stock options at an
average exercise price of $5.17 per share. DIGS has not recognized any
compensation expense related to these grants in 1999 because the options were
not granted at a price below the fair market value on the date of grant. For
additional information, please see Note 13 of the 1999 audited financial
statements.
In 1999, DIGS adopted Accountants' Statement of Position 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities." This statement requires costs
related to start-up activities and organizational costs be expensed when
incurred. The cumulative effect of this change was $2,625 (net of $0 tax effect)
<PAGE>11
or $0.00 per common share for the years prior to 1999. The adoption of SOP 98-5
had no material effect on 1999 income.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
The financial statement and supplementary data listed in the accompanying
Index to Financial Statements are attached as part of this report.
<TABLE>
<S> <C>
List of Financial Statements.
The following financial statements of Digs, Inc. and Subsidiaries are included in Item 7:
Consolidated Balance Sheets F 3
Consolidated Statements of Operations F 4
Consolidated Statements of Stockholders' Equity F 5
Consolidated Statements of Cash Flows F 6
Notes to Consolidated Financial Statements F 8
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
- ---------------------------------------------------------------------------
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -----------------------------------------------------------
Incorporated by reference from the Company's definitive proxy statement to
be filed pursuant to Regulation 14(A) under the Securities Exchange Act of 1934,
as amended, which involves election of directors, and which will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the Company's fiscal year ended December 31, 1999.
ITEM 10. EXECUTIVE COMPENSATION.
- --------------------------------
Incorporated by reference from the Company's definitive proxy statement to
be filed pursuant to Regulation 14(A) under the Securities Exchange Act of 1934,
as amended, which involves election of directors, and which will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the Company's fiscal year ended December 31, 1999.
<PAGE>12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------
Incorporated by reference from the Company's definitive proxy statement to
be filed pursuant to Regulation 14(A) under the Securities Exchange Act of 1934,
as amended, which involves election of directors, and which will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the Company's fiscal year ended December 31, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
Incorporated by reference from the Company's definitive proxy statement to
be filed pursuant to Regulation 14(A) under the Securities Exchange Act of 1934,
as amended, which involves election of directors, and which will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the Company's fiscal year ended December 31, 1999.
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K.
- ------------------------------------------
(a) Exhibits
Item Description
2. Plan and Agreement of Reorganization between the
Registrant and Digital Corporate Profiles, Inc. dated
October 3, 1998 - incorporated by reference from
Exhibit 2 to Registrant's Form 10-SB12G filed June
14, 1999.
3. (i) Articles of Incorporation and Amendments thereto -
incorporated by reference from Exhibit 3.(i) to
Registrant's form 10-SB12G filed June 14, 1999.
(ii) By-Laws of Registrant - incorporated by reference
from Exhibit 3.(ii) to Registrant's Form 10-SB12G
filed June 14, 1999.
4. Certificate of Designations, Preferences and Rights
of Series A Convertible Preferred Stock of Digs, Inc.,
dated March 14, 2000
10. (i) Registrant's 1999 Stock Incentive Plan - incorporated
by reference from Exhibit (10.(i) to Registrant's
Form 10-SB12G filed June 14, 1999.
(ii) Employment Agreement between Registrant's
wholly-owned subsidiary and Peter Dunn incorporated
by reference from Exhibit 10.(ii) to Registrant's
Form 10-SB12G filed June 14, 1999.
(iii) Placement Agreement Agreement by and between Digs, Inc.
and May Davis Group, Inc., dated March 14, 2000.
(iv) Securities Purchase Agreement by and between Digs, Inc.
and Calp II L.P., dated March 14, 2000.
(v) Warrant to Purchase Common Stock by and between Digs, Inc.
and May Davis Group, Inc., dated March 14, 2000.
(vi) Warrant to Purchase Common Shares by and between Digs,
Inc. and Calp II, L.P., dated March 14, 2000.
(b) Reports on Form 8-K.
None.
<PAGE>13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIGS, INC.
By: /s/ PETER B. DUNN
-------------------
Peter B. Dunn
President
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
reporthas been signed below by the following persons on behalf of registrant
and in the capacities indicated on the 29th day of March 2000.
Signatures Title
/s/ PETER DUNN President and Director
- --------------
Peter Dunn
/s/ ALLEN DUNN Vice President and Director
- --------------
Allen Dunn
/s/ DAVID FLEMING Treasurer and Director
- -----------------
David Fleming
/s/ KARL EHLERT Chief Financial Officer and
- ---------------- Controller
Karl Ehlert
<PAGE>F-1
DIGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<TABLE>
<S> <C>
INDEX TO FINANCIAL STATEMENTS
Pages
------------------
Independent Auditors' Report F-2
Consolidated Balance Sheet as of December 31, 1999 F-3
Consolidated Statements of Operations
For the Years Ended December 31, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-19
Additional Information:
Independent Auditors' Report on Additional Information F-20
Schedule of Cost of Goods Sold and Operating Expenses F-21
For the Years Ended December 31, 1999 and 1998
</TABLE>
<PAGE>F-2
INDEPENDENT AUDITORS' REPORT
February 24, 2000
To the Board of Directors and Shareholders of
DIGS, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of DIGS, Inc. (a
Delaware corporation) and Subsidiaries as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DIGS, Inc.
and subsidiaries as of December 31, 1999, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1999, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, in 1999 the Company changed
its method of accounting for organizational and start-up costs.
CALDWELL, BECKER, DERVIN, PETRICK & CO., L. L. P.
Woodland Hills, California 91364
<PAGE>F-3
DIGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash (Note 2) $ 106,095
Marketable equity securities (Notes 2 and 3) 116,875
Accounts receivable - trade (Note 2 and 8) 67,695
Loan receivable - officer (Note 15) 30,558
-----------------
Total Current Assets 321,223
-----------------
PROPERTY AND EQUIPTMENT,
net of accumulated depreciation (Notes 2 and 5) 110,811
PROGRAM DEVELOPMENT COSTS,
net of accumulated amortization (Notes 2 and 6) 127,955
LONG-TERM ASSETS
Deposit 160
Deferred tax assets (Note 4) --
-----------------
Total Assets $ 560,149
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 72,164
Income taxes payable 4,564
Interest payable (Note 16) 2,346
Short-term note payable (Note 16) 300,000
Sublease deposits 2,400
Deferred rent credit (Note 7) 11,667
-----------------
Total Current Liabilities 393,141
-----------------
CONCENTRATION AND COMMITMENT (Note 7 and 8)
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share; 20,000,000 shares
authorized, 0 shares issued and outstanding --
Common stock, par value $.001 per share; 80,000,000 shares
authorized, 6,658,631 shares issued and outstanding 6,659
Additional paid-in capital 1,482,594
Accumulated other comprehensive income (loss) (2,747)
Retained (deficit) (1,319,498)
-----------------
Total Stockholders' Equity 167,008
-----------------
Total Liabilities and Stockholders' Equity $ 560,149
=================
</TABLE>
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
<PAGE>F-4
DIGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C>
1999 1998
----------------- ----------------
REVENUE
CD-ROM design and development revenue $ 414,145 $ 166,564
Graphic design revenue 149,877 --
Stocknet-USA directories -- 5,130
----------------- ----------------
Total Revenue 564,022 171,694
----------------- ----------------
COST OF SALES (Page 21) 280,069 96,980
----------------- ----------------
Gross Profit 283,953 74,714
OPERATING EXPENSES (Page 21) 801,799 535,231
----------------- ----------------
(Loss) from Operations (517,846) (460,517)
OTHER INCOME (EXPENSE)
Rental income (Note 7) 22,300 23,000
Financing expense (Note 10) -- (134,930)
Interest income 863 --
Miscellaneous income 1,351 --
Gain on sale of asset (Note 18) 38,722 --
Realized loss on sale of securities (7,850) --
Interest expense (2,653) (1,831)
----------------- ----------------
Total Other Income 52,733 (113,761)
----------------- ----------------
(Loss) Before Income Taxes and Cumulative Effect of Accounting
Change (465,113) (574,278)
PROVISION FOR INCOME TAX (Note 4) (5,364) (800)
----------------- ----------------
Net (Loss) Before Cumulative Effect of Accounting Change (470,477) (575,078)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Organizational costs, net of income tax benefit of $0 (2,625) --
----------------- ----------------
Net (Loss) (473,102) (575,078)
OTHER COMPREHENSIVE INCOME, net of tax:
Unrealized holding (loss) arising during period, net of tax benefit
of $0 and $0 (Notes 2 and 3) (2,747) (7,850)
Add reclassification adjustment for (loss) included in net income 7,850 --
----------------- ----------------
Comprehensive Income (Loss) $ (467,999) $ (582,928)
================= ================
(Loss) per common share (Note 2 and 12) $ (.07) $ (.14)
================= ================
</TABLE>
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
<PAGE>F-5
DIGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other
Preferred Stock Common Stock Additional Comprehensive Retained
-------------------------------------------- Paid-In Income/ Earnings
Shares Amount Shares Amount Capital (Loss) (Deficit) Total
------- -------- ----------- ----------- ------------ ------------- ------------- -----------
Balance at
Dec. 31, 1997 -- -- 3,435,000 $ 3,435 $ 297,153 $ -- $ (271,318) $ 29,270
Stock sales
Mar. 20, 1998
(Note 10) -- -- 1,759,968 1,760 144,905 -- -- 146,665
Reorganization
with DIGS, Inc.
Nov. 9, 1998
(Note 9) -- -- 53,663 54 (54) -- -- --
Stock sales
Nov. 10, 1998
(Note 11) -- -- 1,400,000 1,400 992,600 -- -- 994,000
Net (loss) for the
year ended
Dec. 31, 1998 -- -- -- -- -- -- (575,078) (575,078)
Unrealized holding
(loss)
Dec. 31, 1998
(Notes 2 and 3) -- -- -- -- -- (7,850) -- (7,850)
------- -------- ----------- ----------- ------------ ------------- ------------- -----------
Balance at
Dec. 31, 1998 -- -- 6,648,631 6,649 1,434,604 (7,850) (846,396) 587,007
Shares issued for
services
Nov. 17, 1999
(Note 17) -- -- 10,000 10 47,990 -- -- 48,000
Net (loss) for the
year ended
Dec. 31, 1999 -- -- -- -- -- -- (473,102) (473,102)
Net unrealized
holding (loss) and
reclassification
Dec. 31, 1999
(Notes 2 and 3) -- -- -- -- -- 5,103 -- 5,103
------- -------- ----------- ----------- ------------ ------------- ------------- -----------
Balance at
Dec. 31, 1999 -- $ -- 6,658,631 $ 6,659 $1,482,594 $ (2,747) $(1,319,498) $ 167,008
------- -------- ----------- ----------- ------------ ------------- ------------- -----------
</TABLE>
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
<PAGE>F-6
DIGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C>
1999 1998
--------------------- -------------------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Net (loss) $ (473,102) $ (575,078)
Adjustments to reconcile net (loss) to net cash provided (used)
by operating activities:
Cumulative effect of accounting change-organizational costs 2,625 --
Operating expenses paid by issuance of stock 48,000 134,930
Equity securities received for payment of services (75,000) --
Amortization and depreciation 48,386 31,607
(Increase) in accounts receivable (64,512) (3,183)
(Increase) in deposit (160) --
(Decrease) increase in current liabilities and accrued expenses 35,278 (6,101)
Increase in income taxes payable 4,564 --
Increase in interest payable 2,346 --
(Decrease) increase in deposits (600) 3,000
Increase (decrease) in deferred rent credit (20,000) 31,667
Gain on sale of asset (38,722) --
Realized loss on sale of marketable equity securities 7,850 --
------------------- -------------------
Net Cash Flows (Used) by Operating Activities (523,047) (383,158)
------------------- -------------------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Acquisition of property and equipment (48,550) (79,042)
(Increase) in program development cost (108,820) --
Proceeds from sale of marketable equity securities 1,150 --
Acquisition of marketable equity securities -- (9,000)
------------------- -------------------
Net Cash Flows (Used) by Investing Activities (156,220) (88,042)
------------------- -------------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Issuance of common stock (Notes 10 and 11) -- 1,005,735
Proceeds from short-term loan 325,000 600,000
Principal payment on short-term loan (25,000) (600,000)
(Increase) in loan receivable - officer (30,558) --
(Decrease) in note payable to stockholders -- (47,321)
------------------- -------------------
Net Cash Flows Provided by Financing Activities 269,442 958,414
------------------- -------------------
NET INCREASE (DECREASE) IN CASH (409,825) 487,213
CASH AT THE BEGINNING OF THE YEAR 515,920 28,707
------------------- -------------------
CASH AT THE END OF THE YEAR $ 106,095 $ 515,920
=================== ===================
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
<PAGE>F-7
DIGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
--------------------- -------------------
ADDITIONAL DISCLOSURES:
Cash paid during the year for:
Interest $ 307 $ 1,831
=================== ===================
Income Taxes $ 800 $ 800
=================== ===================
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Common stock issued in exchange for subsidiary's common stock
$ -- $ 312,322
=================== ===================
Disposal of asset in exchange for equity securities (Note 18) $ 44,622 $ --
=================== ===================
Equity securities received for payment of services (Note 18) $ 75,000 $ --
=================== ===================
</TABLE>
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
<PAGE>F-8
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - DESCRIPTION OF BUSINESS
DIGS, Inc. (the Company), formerly known as Advanced Laser Products, Inc., a
Delaware corporation, was incorporated on June 27, 1986, as Skin Research
Laboratories, Ltd. On September 25, 1990, the Company changed its name to
Medipak Corporation. On February l, 1995, the Company changed its name to
Advanced Laser Products, Inc. In the late 1980's, the Company was attempting to
enter the medical receivables financing business. On November 9, 1998, the
Company acquired Digital Corporate Profiles, Inc. (DCP). In connection with the
agreement of reorganization, the "Reorganization," the Company issued 5,l94,968
shares of its common stock at $.001 par value per share, in exchange for all of
the outstanding common stock of DCP, in which DCP became a wholly owned
subsidiary of the Company based on a conversion ratio of 3 shares of the
Company's common stock for each share of DCP's stock. Prior to the
reorganization, the Company was considered a shell organization and was
inactive. The merger qualified for a tax-free reorganization and has been
accounted for as a recapitalization of Digital Corporate Profiles, Inc. and the
acquisition of DIGS at their book value. As a result of the recapitalization,
the Company's consolidated financial statements presented are those of Digital
Corporate Profiles, Inc. (DCP) whose owners maintained control after the
reorganization. Please see Note 9 for additional information. In 1999, the
Company formed two wholly owned subsidiaries, DXF Design, Inc. (DXF) and DIGS
Web Video, Inc. (DWV).
DCP provides complete multimedia and Internet communications solutions for
public companies to proactively tell their story to the worldwide investment
community. DCP produces CD-ROM (IRCD) packages for its corporate and investor
relations clients. DCP also offers an environmental health and safety CD-ROM
(EHSCD) to dynamically tell the environmental, health and safety story to
investors, environmental groups, media and the public. In addition, the Company
also produces an employee orientation CD-ROM (EOCD) for the customers' internal
use. It is designed to familiarize new employees with their new environment by
providing a comprehensive look at all aspects of the customers' companies,
including: staff, products, services, policies, and financial outlook. In 1999,
DCP ceased to provide Stocknet-USA directory services and sold Stocknet-USA
Website and domain name to non-related parties (see Note 18 for additional
information).
DXF is a fully functional digital and graphic design studio providing a complete
range of Internet, CD-ROM and promotional print design services. DXF specializes
in designing brochures, corporate identity graphics, corporate and entertainment
promotional kits, as well as providing key art for theatrical and home video
advertisement.
DWV is developing and marketing a real time Internet Video screening application
known as iVideoNow!. The iVideoNow! player has the capability of allowing the
user to instantly view up to 36 separate videos. This multi-screening technology
is currently being marketed to companies in the film, television, music, travel,
and retail industries. This multi-screening technology of iVideoNow! can be
designed to a client's specification and will provide companies new ways to use
Internet video as a promotional tool. DWV is also developing an e-commerce
technology that will work with the iVideoNow! player, allowing the viewer to
order products directly from the promotional videos.
<PAGE>F-9
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of DIGS, Inc. and its
wholly owned subsidiaries, Digital Corporate Profiles, Inc. (DCP), a California
corporation, Advanced Laser Products, Inc., a Nevada corporation (inactive), DXF
Design, Inc., a California corporation, and DIGS Web Video, Inc., a California
corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Segment information
The company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No
131) in 1999. Prior to 1999, the Company only operated in one business segment.
This statement establishes for the reporting of information about a company's
operating segments. Operating segments are defined as components of an
enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision maker(s) in deciding how to
allocate resources and in assessing performance. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position of prior reports. (See Note 14 for additional information)
Reclassifications
Certain prior year balances have been reclassified to conform with the current
year presentation.
Cash and Cash Equivalents
The Company and its subsidiaries consider cash on hand and cash in banks as cash
and cash equivalents.
Accounts Receivable
Uncollectible accounts receivable are written off as bad debt expense at the end
of the year. For the year ended December 31, 1999 and 1998, there was no bad
debt expense. The current accounts receivable is considered collectible by
management.
Marketable Securities
Marketable securities consist of common stock. Marketable securities are stated
at market value as determined by the most recently traded price of each security
at the balance sheet date, with the unrealized gains and losses, net of tax,
reported as a separate component of stockholders' equity. All marketable
securities are defined as available-for-sale securities under provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." For purpose of determining
realized gains and losses, the cost of securities sold was based on first-in,
first-out method.
<PAGE>F-10
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, establishes a standard for reporting and displaying
comprehensive income and its components within the financial statements.
Comprehensive income includes charges and credits to equity that are not the
result of transactions with shareholders. Comprehensive income is composed of
two subsets - net income and other comprehensive income. Included in other
comprehensive income for the Company are unrealized losses and adjustment for
realized losses of available-for-sale securities as of December 31, 1999 and
1998.
Revenue Recognition
Design and development of CD-ROM revenues are billed in equal one-third
installments as the contract progresses. All payments are nonrefundable and
revenue is recognized when earned. Revenue is deemed to be earned when there is
no future performance obligation. Future performance obligation ceases when the
product is approved by the client and shipped. The average length of a contract
is approximately two months. As of December 31, 1999 and 1998, the Company did
not have any open contracts.
Graphic design revenue is billed when the project is completed. As of December
31, 1999, the Company did not have any open contracts.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement (SFAS) No.
128, "Earning Per Share." SFAS No. 128 established standards for computing and
presenting earnings per share ("EPS") and requires the presentation of both
basic and diluted EPS. Unlike primary EPS, basic EPS excludes any dilutive
effects of options, warrants, and convertible securities and is computed on the
basis of the weighted average number of common shares outstanding during the
year. The diluted EPS calculation is very similar to the previous fully diluted
EPS calculation method. The Company has adopted SFAS 128 since 1998. The Company
has a simple capital structure and there were no changes under the SFAS 128
methodology to the previously reported EPS amounts for any of the fiscal years.
Fully diluted per share data is not presented, as the effects would be
antidilutive. (See Note 12)
Property and Equipment
Depreciation of equipment and amortization of leasehold improvements is
calculated by the straight-line and accelerated methods based on the following
estimated useful lives:
Years
---------
Computer 5
Furniture and fixtures 7
Computer software 5
Leasehold improvements 10
In 1999, the Company changed its accounting policy for organization and start-up
costs. Please see accounting change.
<PAGE>F-11
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets
In 1998, the Company adopted SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." In accordance
with SFAS 121, long-lived assets held and used by the Company are reviewed for
impairment when events or changes in circumstances indicate that the carrying
amount of an asset might not be fully recoverable. For purposes of evaluating
the recoverability of long-lived assets, the estimated future cash flows
associated with the asset would be compared to the asset's carrying amount to
determine if a write-down to market value or discounted cash flow value is
required. The adoption of SFAS 121 had no impact on the Company's financial
position or on its results of operations.
Program Development Costs
In March 1998, the Company adopted Statement of Position 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use." Capitalized
program development costs consist of consulting and programming costs. The
Company capitalizes internally developed software costs based on a
project-by-project analysis of each project's significance to the Company and
its estimated useful life. All capitalized software costs are amortized on a
straight-line method over a period of five years.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion (APBO) No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation and to provide the disclosures
required under Statement of Financial Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation."
APBO No. 25 requires no recognition of compensation expense for most of the
stock-based compensation agreements provided by the Company where the exercise
price is equal to the market value at the date of grant. However, APBO No. 25
requires recognition of compensation expense for variable award plans over the
vesting periods of such plans, based upon the then-current market values of the
underlying stock. In contrast, SFAS No. 123 requires recognition of compensation
expense for grants of stock, stock options, and other equity instruments over
the vesting periods of such grants, based on the estimated grant-date fair
values of those grants (see Note 13 for additional information).
Income Taxes
This Company has adopted SFAS No. 109, "Accounting for Income Taxes", which
requires a liability approach to financial accounting and reporting for income
taxes. The difference between the financial statement and tax basis of assets
and liabilities is determined annually. Deferred income tax assets and
liabilities are computed for those differences that have future tax consequences
using the currently enacted tax laws and rates that apply to the periods in
which they are expected to affect taxable income. Valuation allowances are
established, if necessary, to reduce deferred tax asset accounts to the amounts
that will more likely than not be realized. Income tax expense is the current
tax payable or refundable for the period, plus or minus the net change in the
deferred tax asset and liability accounts.
<PAGE>F-12
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use 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.
Year 2000 Compliance
In general, management believes its computerized systems used to report
financial information are year 2000 compliant. Management does not foresee any
material year 2000 problems with the Company's vendors, service providers, or
other third parties which affect the Company's financial information. As of the
date of this report, the Company has not experienced any year 2000 problems.
Accounting Change
In 1999, the Company adopted Accountants' Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities." This statement requires that
costs of start-up activities and organizational costs be expensed as incurred.
The cumulative effect of this accounting change on years prior to 1999 was in
the amount of $2,625 (net of $0 tax effect) or $0.00 per common share that was
reflected in the first quarter of 1999. This new accounting requirement did not
have a significant effect on 1999 income before the cumulative effect of the
accounting change.
NOTE 3 - MARKETABLE EQUITY SECURITIES
Cost and fair value of marketable equity securities at December 31, 1999 are as
follows:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross
Unrealized Unrealized
Cost Gains Losses Fair Value
--------------- --------------- --------------- ---------------
December 31, 1999
Available for sale
Equity securities $ 119,622 $ -- $ (2,747) $ 116,875
=============== =============== =============== ===============
</TABLE>
Net unrealized losses from available for sale securities during the year ended
December 31, 1999 and 1998 amounted to $2,747 and $7,850, respectively,
resulting in net changes of $2,747 and $7,850, respectively, to Other
Comprehensive Income. For the year ended December 31, 1999, the Company received
proceeds of $1,510 as the result of sales of securities available for sale. The
Company also recorded gross realized losses included in earnings of $7,850, and
recorded losses reclassified out of accumulated other comprehensive income as
the result of sales of securities available for sale. The tax benefit for each
component of comprehensive income, including reclassification adjustments is $0
for the year ended December 31, 1999 and 1998. For purpose of determining
realized gains and losses, the cost of securities sold was based on first-in,
first-out method.
<PAGE>F-13
NOTE 4 - INCOME TAXES
The Company has available at December 31, 1999, net operating loss carryforwards
totaling $1,253,761 that may be offset against future taxable. If not used, the
net operating loss carryforwards will expire as follows:
Operating Losses
Year 2011 $ 81,269
Year 2012 190,049
Year 2018 470,148
Year 2019 512,295
------------------
$ 1,253,761
==================
The net deferred tax assets, resulting from the net operating loss, included in
the accompanying balance sheet include the following amounts of deferred tax
assets and liabilities at December 31, 1999:
Deferred Tax Asset - Current $ --
Deferred Tax Asset - Non-Current 427,916
------------------
427,916
Valuation allowance (427,916)
------------------
$ --
==================
For the year ended December 31, 1999 and 1998, valuation allowance increased by
$203,679 and $156,530, respectively. Due to the uncertainty of the realization
of the net operating loss carryforwards, the Company has established a valuation
allowance against the carryforward benefits in the amount of $427,916.
The components of the provision for income taxes for continuing operations are
as follows:
1999 1998
------------------- ------------------
Current
State $ 5,364 $ 800
=================== ==================
NOTE 5 - PROPERTY AND EQUIPMENT
Computer $ 89,510
Furniture and fixtures 9,923
Computer software 21,180
Leasehold improvements 44,365
------------------
164,978
Less accumulated amortization and depreciation (54,167)
------------------
$ 110,811
==================
Amortization and depreciation expenses for the years ended December 31, 1999 and
1998 were $25,666 and $18,356, respectively. In 1999 and 1998, the Company
allocated amortization expense to cost of sales in the amount of $4,057 and
$3,639, respectively.
<PAGE>F-14
NOTE 5 - PROPERTY AND EQUIPMENT (CONTINUED)
In 1999, the Company adopted Accountants' Statement of Position (SOP) 98-5,
"Reporting on the costs of Start up Activities." This statement requires that
costs of start-up activities and organizational costs be expensed as incurred.
See Accounting Change in Note 2 for additional information.
NOTE 6 - PROGRAM DEVELOPMENT COSTS
Program development costs $ 160,931
Less accumulated amortization (32,976)
------------------
$ 127,955
==================
Amortization expense for the years ended December 31, 1999 and 1998 was $22,720
and $13,251, respectively. In 1999 and 1998, the Company allocated amortization
expense to cost of sales in an amount of $22,720 and $13,251, respectively. For
the year ended December 31, 1999, the Company capitalized additional $108,820 of
program development costs.
NOTE 7 - COMMITMENTS
In August 1998, the Company entered in a two-year operating lease on its current
premises, expiring July 31, 2000, with a monthly lease payment of $7,691. The
lease agreement contains certain terms and conditions, which include, but are
not limited to, payment of property taxes, insurance, rent increases, repairs
and maintenance. There is currently an option to renew the lease for an
additional three and five years. On February 23, 2000, the Company renewed its
lease agreement for an additional three years, with a monthly lease payment of
$8,307. The new lease will expire on July 31, 2003.
The following is a schedule of future minimum rental payments required under the
above operating lease as of December 31, 1999:
Year Ending
December 31, Amount
------------------------ ------------------
2000 $ 95,370
2001 99,679
2002 99,679
2003 58,146
------------------
$ 352,874
==================
The above rental expenses will be offset by $7,000 in sublease rental income
through July 31, 2000.
For the years ended December 31, 1999 and 1998, rental expenses, net of deferred
rent credit, were $70,277 and $44,445, respectively. Rental income under the
subleases amounted to $22,300 and $23,000 for the years ended December 31, 1999
and 1998, respectively.
In 1998, the lessor compensated DCP in an amount of $40,000 for moving to its
current facility. As of December 31, 1998, the above amount has been classified
as deferred rental credit and amortized on a straight-line method over the term
of the lease. In 1999 and 1998, the amortized credit of $20,000 and $8,333 was
offset against rental expense, respectively.
<PAGE>F-15
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 7 - COMMITMENTS (CONTINUED)
In 1999 the Company entered in a 36-month operating lease agreement with a
monthly payment of $822. For the year ended December 31, 1999, total lease
payment amounted to $5,015. Future obligation under the operating lease totals
$9,864, $9,864, and $4,932 for 2000, 2001, and 2002, respectively.
On March 1, 1998, DCP entered into a two-year employment contract with an
officer that provides for an annual salary of $96,000 as well as annual
vacation, sick pay, bonus, and miscellaneous reimbursement of out-of-pocket
costs. On February 28, 2000, the Company renewed the above employment contract
an additional three years that provides an annual salary of $120,000 as well as
annual vacation, sick pay, bonus, and miscellaneous reimbursement of
out-of-pocket costs. The contract expires on February 28, 2003. For the years
ended December 31, 2000, 2001, 2002, and 2003, minimum obligation under this
contract is $116,000, $120,000, $120,000, and $20,000, respectively. Total
compensation to all officers for the year ended December 31, 1999 was
approximately $242,000 including auto and miscellaneous expense reimbursements.
During 1999, the total of approximately $20,000 was recorded as auto expense and
other operating expenses. In addition, the Company allocated $65,250 of
officers' salary to cost of goods sold during 1999.
NOTE 8 - CONCENTRATON
For the years ended December 31, 1999 and 1998, sales to five and three
customers accounted for approximately 60% and 96% of total revenue,
respectively. The total revenue received from these customers in 1999 and 1998
was as follows:
<TABLE>
<S> <C> <C> <C> <C>
For the Years Ended December 31,
-------------------------------------------------
1999 1998
---------------------- -----------------------
Customer A $ -- --% $ 29,045 16.9%
Customer B 1,500 0.3 27,541 16.0
Customer C -- -- 107,500 62.6
Customer D 60,118 10.6 -- --
Customer E 84,500 15.0 -- --
Customer F 130,680 23.2 -- --
Customer G 59,183 10.5 -- --
------------- -------- -------------- --------
$ 335,981 59.6% $ 164,086 95.5%
============= ======== ============== ========
</TABLE>
As of December 31, 1999, receivables from three customers account for 91% of
total accounts receivable.
The Company relies solely on the performance of DXF's officer, Mr. Fleming, to
generate revenue for its graphic design subsidiary, DXF Design, Inc. (DXF).
NOTE 9 - AGREEMENT OF REORGANIZATION
Effective November 9, 1998, in connection with the agreement of reorganization,
the Company issued 5,l94,968 shares of its common stock at $.001 par value per
share, in exchange for all of the outstanding common stock of Digital Corporate
Profiles, Inc. (DCP), in which DCP became a wholly owned subsidiary of the
Company, based on a conversion ratio of 3 shares of the Company's common stock
for each share of DCP's stock. The merger qualified for a tax-free
reorganization and has been accounted for as a recapitalization of Digital
Corporate Profiles, Inc. and the acquisition of DIGS at their book values.
<PAGE>F-16
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 9 - AGREEMENT OF REORGANIZATION (CONTINUED)
Prior to the reorganization, the Company was considered a shell organization and
was inactive with no revenues and a minimal administrative expense of $300 and
$4,730 for the year ended December 31, 1998 and 1997, respectively. As a result
of the recapitalization, the Company's consolidated financial statements
presented are those of Digital Corporate Profiles, Inc. (DCP) whose owners
maintained control after the reorganization.
At the date of reorganization, there were 53,663 shares that were owned by the
former DIGS, Inc. shareholders. All share and per share amounts have been
adjusted to reflect the 1 for 10 reverse stock split effective April 20, 1998,
and the 1 for 20 reverse stock split effective October 16, 1998.
NOTE 10 - SALE OF DCP'S STOCK
On March 20, 1998, pursuant to a short-term loan agreement of $600,000, DCP's
Board of Directors authorized the issuance of 586,656 shares of its common
stock, an equivalent of 1,759,968 shares of the Company, no par, to various
unrelated individuals at the price of $.02 per share. All shares were issued on
September 15, 1998. The net proceeds were $11,735. These shares were outstanding
at the time of the reorganization with the Company (see Note 9). In addition,
the Company recorded a non-cash financing expense of $134,930 in conjunction
with the short-term loan agreement and the issuance of the above shares. The
financing expense is the difference between the estimated fair market value of
DCP's stock on March 20, 1998, which is $0.25 per share, and the net proceeds
received. Factors used in determining the fair market value of DCP's stock
included the price of previously sold stock and the financial condition of the
Company on March 20, 1998.
NOTE 11 - SALE OF DIGS' STOCK
On November 10, 1998, the Company issued 1,400,000 shares of common stock
through a 504 offering, which is available to non-reporting and non-investment
companies for offerings of not more than $1,000,000 of securities in the
12-month period under section 3(b) of the (1933) Securities Act. The net
proceeds of the offering were $994,000. The Company used $600,000 of the net
proceeds to repay outstanding short-term debts.
NOTE 12 - EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic (loss) per share:
<TABLE>
<S> <C> <C>
1999 1998
------------------- ------------------
Basic EPS:
(Loss) from continue operation $ (.07) $ (.14)
Cumulative effect of accounting change (.00) (.00)
------------------- ------------------
Net (Loss) Per Common Share $ (.07) $ (.14)
=================== ==================
Weight average shares outstanding 6,649,864 4,220,188
=================== ==================
</TABLE>
Fully diluted per share data is not presented, as the effects would be
antidilutive.
<PAGE>F-17
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 13 - STOCK OPTION PLANS
The Company's 1999 stock option plans provide incentive stock options and
nonqualified stock options to purchase common stock. These may be granted to
directors, officers, key employees, consultants, and subsidiaries with an
exercise price of up to 110% of market price at the date of grant. Generally,
options are exercisable in equal installments over three years from the date of
grant, and expire five to ten years from the date of grant. As of December 31,
1999, the maximum of 750,000 shares was approved to be issued under the plan, of
which 455,000 shares were available for future grants.
For the year ended December 31, 1999, the Company granted 230,000 shares of
qualified stock options and 65,000 shares of nonqualified stock options to
various individuals at the average exercise price of $5.17 per share.
In electing to follow Accounting Principles Board Opinion (APBO) No. 25,
"Accounting for Stock Issued to Employees," the Company recognizes no
compensation expense related to employee stock options for the year December 31,
1999, as no options are granted at a price below the market price on the day of
grant.
Presented below is a summary of stock option plan activity for the year shown:
<TABLE>
<S> <C> <C>
Weight-
Average
Stock Options Exercise Price
------------------- ------------------
Outstanding at December 31, 1998 -- --
Granted 295,000 5.17
Exercised -- --
Forfeited -- --
Expired -- --
------------------- ------------------
Outstanding at December 31, 1999 295,000 5.17
=================== ==================
Shares exercisable at December 31, 1999 -- --
=================== ==================
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 range from $5.00
to $5.50. The following table summarizes information for options outstanding and
exercisable at December 31, 1999:
<TABLE>
<S> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
------------------------------------------- ---------------------------
Weighted
Weight- Average Weight-
Stock Average Remaining Stock Average
Exercise Options Exercise Contractual Options Exercise
Prices Outstanding Price Life Exercisable Price
-------------------- ------------- ------------- ------------- ------------- -------------
$5.00 195,000 $5.00 2.0 -- --
$5.50 100,000 $5.50 2.0 -- --
------------- -------------
295,000 --
</TABLE>
In electing to continue to follow APBO No. 25 for expense recognition purposes,
the Company is obliged to provide the expanded disclosures required under SFAS
No. 123 for stock-based compensation granted in 1999. This includes materially
different information from reported results, such as pro forma net income and
earnings per share, had compensation expense that relating to the year ended
December 31, 1999 grants measured under the fair value recognition provisions of
SFAS No. 123.
<PAGE>F-18
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 13 - STOCK OPTION PLANS (CONTINUED)
The weight-average fair values at date of grant for options granted during the
year ended December 31, 1999 were $5.00, respectively and were estimated using
the Black-Scholes option valuation model with the following weight-average
assumptions:
1999
-------------
Expected life in years 5
Interest Rate 5.0%
Volatility 33.0%
Dividend Yield 0%
NOTE 14 - SEGMENT INFORMATION
Information concerning operations in different lines of business at December 31,
1999 and for the year then ended is presented below. Prior to 1999, the Company
only operated in one business segment, public relation CD-ROM. In 1999, the
company operated in the public relation CD-ROM products and graphic design
within the United States. Intercompany transactions between segments are not
material.
<TABLE>
<S> <C> <C> <C>
CD-ROM
Design and Graphic
1999 Development Design Consolidated
- ------------------------------------------------------ --------------- -------------- ---------------
Net Operating Revenues $ 413,743 $ 150,279 $ 564,022
Operating Income (589,211) 23,365 (565,846)
Identifiable Operating Assets 449,591 100,090 549,681
Capital Expenditures -- -- --
Depreciation and Amortization $ 47,080 $ 1,306 $ 48,386
</TABLE>
Identifiable operating assets include cash, available-for-sale securities, trade
accounts receivable, and fixed assets.
NOTE 15 - RELATED PARTY TRANSACTIONS
For the year ended December 31, 1999 and 1998, the Company paid its Secretary,
David Fleming, approximately $10,500 and $9,000 as an independent contractor in
connection with the production of its products. All payments were made prior to
Mr. Fleming taking the position of a full-time officer of DXF Design, Inc.
In 1999, the President provided the Company an unsecured non-interest bearing
short-term loan of $25,000. The Company repaid this loan within one month.
For the year ended December 31, 1998, DCP repaid the president of the Company
the short-term note in an amount of $47,321. This amount was on DCP's books
since December 31, 1997.
For the year ended December 31, 1999, loan receivable from DXF's officer, Mr.
Fleming, totaled $30,558, including $558 of accrued interest. The loan bears
interest at 5% per annum and is due on July 30, 2000.
<PAGE>F-19
DIGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<TABLE>
<S> <C>
NOTE 16 - SHORT-TERM NOTE
As of December 31, 1999, the Company has the following short-term notes:
A short-term note bears interest at 5% per annum,
with an effective interest rate of 5.116%. The
note is due on January 1, 2000. $ 100,000
Revolving short-term note bears interest at 5% per annum, with an
effective interest rate of 5.116%.
The note is due on January 1, 2000. 200,000
--------------------
300,000
Interest accrued for the above notes 2,346
--------------------
$ 302,346
====================
</TABLE>
For the year ended December 31, 1999, interest expense accrued for the above
notes totaled $2,346. The maximum funds available under the second note
agreement are $350,000. The Company, under the note agreements, is required to
provide 100,000 and 350,000 shares of its common stock as collateral for the
above notes, respectively. If the note is not repaid in full within 30 days from
the due date, the note is deemed to be in default, which shall give the note
holder the right to foreclose on the collateral with no further action or
notice. The notes have been extended and is due April 1, 2000. As of February
24, 2000, the Company borrowed an additional $150,000.
NOTE 17 - SHARES ISSUED FOR SERVICES
On November 17, 1999, the Company issued 10,000 restricted shares of common
stock for services rendered relating to the listing of the Company's stock on
Frankfurt Stock Exchange. The Company recorded a shareholder expense in an
amount of $48,000, which represents 50% of the fair market value of the
Company's share at $9.60 per share. The 50% value is deemed reasonable
considering the inability of the shareholder to dispose of the restricted stock.
NOTE 18 - SALE OF ASSETS
On September 1999, the Company received from Monia Investment, Inc. (MII) 10,000
shares of Global Electronics Manufacturing, Inc. (ECSW) common stock with a
market value of $122,500. In exchange, the Company gave MII, Stocknet-USA's
domain name and Website, as well as redesigning the Website to MII
specifications and providing MII with a lifetime of non-exclusive and
non-transfereable use of the Company proprietary system. The net book value of
Stocknet-USA's domain name and Website was $5,900. The Company recorded an after
tax gain of $38,722 for the exchange of Stocknet-USA's domain name and Website,
net of agent fee of $2,878. The Company also recorded the redesigning fees and
the non-exclusive use of the Company proprietary system as revenue in an amount
of $75,000 for the year ended December 31, 1999.
NOTE 19 - SUBSEQUENT EVENTS
In February 2000, the Company entered into securities purchase agreements to
issue and sell up to 2,500 shares of the Company's Series "A" convertible
preferred stock, par value $.01 per share and warrants to purchase 40 shares of
common stock for each share of preferred stock at a price of $1,000 per share
for an aggregate offering price of $2,500,000. In connection with the
agreements, the Company will issue and sell 200,000 warrants to purchase 200,000
shares of the Company's common stock, $.001 par value.
<PAGE>F-20
Independent Auditors' Report on Additional Information
To the Board of Directors and Stockholders of
DIGS, Inc. and Subsidiaries
Our report on our audit of the basic financial statements of DIGS, Inc. and
Subsidiaries for December 31, 1999 and 1998 appears on Page F-2. That audit was
conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedules of cost of goods sold and operating
expenses on Page F-21 are presented for the purposes of additional analysis and
are not a required part of the basic financial statements. Such information,
except for that portion marked "unaudited', on which we express no opinion, has
been subjected to the auditing procedures applied in the audit of the basic
financial statements, and, in our opinion, the information is fairly stated in
all material respects in relation to the basic financial statements taken as a
whole.
CALDWELL, BECKER, DERVIN, PETRICK & CO., L.L.P.
Woodland Hills, California 91364
<PAGE>F-21
DIGS, INC. AND SUBSIDIARIES
SCHEDULE OF COST OF GOODS SOLD AND OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C>
UNAUDITED
1999 1998
------------------ ----------------
COST OF GOODS SOLD
IRCD production costs $ 87,381 $ 72,972
Labor costs 124,380 --
Others 68,308 24,008
------------------ ----------------
Total Cost of Sales $ 280,069 $ 96,980
================== ================
OPERATING EXPENSES
Auto expense $ 28,001 $ 18,282
Commissions 5,931 17,974
Marketing 109,005 14,400
Outside services 22,867 43,817
Printing 1,611 19,824
Professional services 66,022 33,126
Rent (Note 7) 70,277 44,445
Salaries - officers 156,725 121,989
Salaries - other 107,247 113,257
Shareholder expenses (Note 17) 69,972 2,860
Taxes - payroll 24,941 20,565
Others 139,200 84,692
------------------ ----------------
Total Operating Expenses $ 801,799 $ 535,231
================== ================
</TABLE>
The Accompanying Notes are an Integral Part of the Consolidated Financial
Statements.
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK
OF DIGS, INC.
Digs, Inc. (the "Company"), a corporation organized and existing under
the General Corporation Law of the State of Delaware, does hereby certify that,
pursuant to authority conferred upon the Board of Directors of the Company by
the Certificate of Incorporation, as amended, of the Company, and pursuant to
Section 151 of the General Corporation Law of the State of Delaware, the Board
of Directors of the Company at a meeting duly held, adopted resolutions (i)
authorizing a series of the Company's previously authorized preferred stock, par
value $0.01 per share, and (ii) providing for the designations, preferences and
relative, participating, optional or other rights, and the qualifications,
limitations or restrictions thereof, of Two Thousand Five Hundred(2,500) shares
of Series A Convertible Preferred Stock of the Company, as follows:
RESOLVED, that the Company is authorized to issue 2,500 shares
of Series A Convertible Preferred Stock (the "Preferred Shares"), par
value $0.01 per share, which shall have the following powers,
designations, preferences and other special rights:
(1) Dividends. The holders of the Preferred Shares shall be entitled
to receive dividends ("Dividends") at a rate of 6.0% per annum, which shall be
cumulative, accrue daily from the Issuance Date (as defined below) and be
payable on the Conversion Date. Dividends shall be payable in shares of Common
Stock (as defined below) ("Dividend Shares") or, at the option of the Holder, in
cash. Dividends to be paid in shares of Common Stock shall be paid in a number
of fully paid and nonassessable shares (rounded to the nearest whole share in
accordance with Section 2(b)) of Common Stock equal to the quotient of (a) the
accrued and unpaid Dividends and (b) the Conversion Price (as defined below) on
the applicable Conversion Date.
(2) Conversion of Preferred Shares. Preferred Shares shall be
convertible into shares of the Company's common stock, par value $0.01 per share
(the "Common Stock"), on the terms and conditions set forth in this Section 2.
(a) Certain Defined Terms. For purposes of this Certificate of
Designations, the following terms shall have the following meanings:
(i) "Business Day" means any day other than Saturday, Sunday
or other day on which commercial banks in the city of New York are authorized or
required by law to remain closed.
<PAGE>
(ii) "Closing Bid Price" means, for any security as of any
date, the last closing bid price for such security on the Principal Market (as
defined below) as reported by Bloomberg Financial Markets ("Bloomberg"), or, if
the Principal Market is not the principal securities exchange or trading market
for such security, the last closing bid price of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by Bloomberg, or if the foregoing do not apply, the last closing bid
price of such security in the over-the-counter market on the electronic bulletin
board for such security as reported by Bloomberg, or, if no closing bid price is
reported for such security by Bloomberg, the last closing trade price of such
security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the average of the bid prices of any
market makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Bid Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the holders of Preferred Shares. If the Company and the
holders of Preferred Shares are unable to agree upon the fair market value of
the Common Stock, then such dispute shall be resolved pursuant to Section
2(d)(iii) except that such dispute shall be submitted to an independent
reputable investment bank selected by the Company and approved by the holders of
at least two-thirds of the Preferred Shares then outstanding (All such
determinations to be appropriately adjusted for any stock dividend, stock split
or other similar transaction during such period).
(iii) "Conversion Amount" means, the sum of (1) any accrued
and unpaid Dividends as provided Section 1 and (2) the Stated Value (as defined
below).
(iv) "Conversion Price" means, as of any Conversion Date (as
defined below) or other date of determination, the lower of the Fixed Conversion
Price and the Floating Conversion Price, each in effect as of such date and
subject to adjustment as provided herein.
(v) "Fixed Conversion Price" means, with respect to any
Preferred Share, as of any Conversion Date or other date of determination 125%
of the Closing Bid Price on the Issuance Date, subject to adjustment as provided
herein.
(vi) "Floating Conversion Price" means, as of any date of
determination, the arithmetic average of 75% of the lowest Closing Bid Price of
the Common Stock during any three (3) trading days during the twenty (20)
consecutive trading days ending on and including such date of determination. All
such determinations to be appropriately adjusted for any stock dividend, stock
split or other similar transaction during such period.
<PAGE>
(vii)"Issuance Date" means, with respect to each Preferred
Share, the date of issuance of the applicable Preferred Share.
(viii) "Maturity Date" means the date which is three (3)
years after the applicable Issuance Date.
(ix) "Person" means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.
(x) "Principal Market" means the National Association of
Securities Dealers Inc.'s OTC Bulletin Board (the "Bulletin Board") if the
Common Stock is not traded on the Bulletin Board, then the principal securities
exchange or trading market for the Common Stock.
(xi) "Registration Rights Agreement" means that certain
registration rights agreement between the Company and the initial holders of the
Preferred Shares relating to the filing of a registration statement covering the
resale of the shares of Common Stock issuable upon conversion of the Preferred
Shares.
(xii)"SEC" means the United States Securities and Exchange
Commission.
(xiii) "Securities Purchase Agreement" means that certain
securities purchase agreement between the Company and the initial holders of the
Preferred Shares.
(xiv) "Stated Value" means $1,000.
(xv) "Warrants" means warrants to acquire shares of Common
Stock issued pursuant to the Securities Purchase Agreement.
(b) Holder's Conversion Right; Mandatory Conversion. Subject to the
provisions of Section 5, at any time or times on or after the applicable
Issuance Date, any holder of Preferred Shares shall be entitled to convert any
whole or fractional number of Preferred Shares into fully paid and nonassessable
shares of Common Stock in accordance with Section 2(d), at the Conversion Rate
(as defined below). If any Preferred Shares remain outstanding on the Maturity
Date, then all such Preferred Shares shall be converted at the Conversion Rate
as of such date in accordance with Section 2(d). The Company shall not issue any
<PAGE>
fraction of a share of Common Stock upon any conversion. All shares of Common
Stock (including fractions thereof) issuable upon conversion of more than one
Preferred Share by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of a fraction of
a share of Common Stock. If, after the aforementioned aggregation, the issuance
would result in the issuance of a fraction of a share of Common Stock, the
Company shall round such fraction of a share of Common Stock up or down to the
nearest whole share.
(c) Conversion Rate. The number of shares of Common Stock issuable
upon conversion of each Preferred Share pursuant to Section 2(b) shall be
determined according to the following formula (the "Conversion Rate"):
Conversion Amount
-----------------
Conversion Price
(d) Mechanics of Conversion. The conversion of Preferred Shares shall
be conducted in the following manner:
(i) Holder's Delivery Requirements. To convert Preferred
Shares into shares of Common Stock on any date (the "Conversion Date"), the
holder thereof shall (A) transmit by facsimile (or otherwise deliver), for
receipt on or prior to 4:59 p.m., Pacific Time on such date, a copy of a fully
executed notice of conversion in the form attached hereto as Exhibit I (the
"Conversion Notice") to the Company and (B) if required by Section 2(d)(viii),
surrender to a common carrier for delivery to the Company as soon as practicable
following such date the original certificates representing the Preferred Shares
being converted (or an indemnification undertaking with respect to such shares
in the case of their loss, theft or destruction) (the "Preferred Stock
Certificates").
(ii) Company's Response. Upon receipt by the Company of a
copy of a Conversion Notice, the Company (I) shall immediately send, via
facsimile, a confirmation of receipt of such Conversion Notice to such holder
and the Company's designated transfer agent (the "Transfer Agent"), which
confirmation shall constitute an instruction to the Transfer Agent to process
such Conversion Notice in accordance with the terms herein and (II) on or before
the second Business Day following the date of receipt by the Company of the
facsimile or other copy of such Conversion Notice (the "Share Delivery Date"),
(A) issue and deliver to the address as specified in the Conversion Notice, a
certificate, registered in the name of the holder or its designee, for the
number of shares of Common Stock to which the holder shall be entitled, or (B)
provided the Transfer Agent is participating in The Depository Trust Company
("DTC") Fast Automated Securities Transfer Program, upon the request of the
holder, credit such aggregate number of shares of Common Stock to which the
holder shall be entitled to the holder's or its designee's balance account with
DTC through its Deposit Withdrawal Agent Commission system. If the number of
Preferred Shares represented by the Preferred Stock Certificate(s) submitted for
conversion is greater than the number of Preferred Shares being converted, then
the Company shall, as soon as practicable and in no event later than three
Business Days after receipt of the Preferred Stock Certificate(s) (the
"Preferred Stock Delivery Date") and at its own expense, issue and deliver to
the holder a new Preferred Stock Certificate representing the number of
Preferred Shares not converted.
<PAGE>
(iii) Dispute Resolution. In the case of a dispute as to the
determination of the arithmetic calculation of the Conversion Rate, the Company
shall instruct the Transfer Agent to issue to the holder the number of shares of
Common Stock that is not disputed and shall submit the disputed determinations
or arithmetic calculations to the holder via facsimile within one (1) Business
Day of receipt of such holder's Conversion Notice. If such holder and the
Company are unable to agree upon the determination of arithmetic calculation of
the Conversion Rate within three (3) Business Days of such disputed
determination or arithmetic calculation being submitted to the holder, then the
Company shall within two (2) Business Days submit via facsimile the disputed
arithmetic calculation of the Conversion Rate to the Company's independent,
outside accountant. The Company shall cause the accountant to perform the
determinations or calculations and notify the Company and the holder of the
results no later than three (3) Business Days from the time it receives the
disputed determinations or calculations. Such accountant's determination or
calculation shall be binding upon all parties absent error.
(iv) Record Holder. The person or persons entitled to receive the
shares of Common Stock issuable upon a conversion of Preferred Shares shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on the Conversion Date.
<PAGE>
(v) Company's Failure to Timely Convert.
(A) Cash Damages. If within three (3) Business Days after
the Company's receipt of the facsimile copy of a Conversion Notice the Company
shall fail to issue a certificate to a holder or credit such holder's balance
account with DTC for the number of shares of Common Stock to which such holder
is entitled upon such holder's conversion of Preferred Shares or to issue a new
Preferred Stock Certificate representing the number of Preferred Shares to which
such holder is entitled pursuant to Section 2(d)(ii), in addition to all other
available remedies which such holder may pursue hereunder and under the
Securities Purchase Agreement (including indemnification pursuant to Section 8
thereof), the Company shall pay additional damages to such holder for each date
after the Share Delivery Date such conversion is not timely effected and/or each
date after the Preferred Stock Delivery Date such Preferred Stock Certificate is
not delivered in an amount equal to 0.5% of the sum of (a) the product of (I)
the number of shares of Common Stock not issued to the holder on or prior to the
Share Delivery Date and to which such holder is entitled and (II) the Closing
Bid Price of the Common Stock on the Share Delivery Date, and (b) in the event
the Company has failed to deliver a Preferred Stock Certificate to the holder on
or prior to the Preferred Stock Delivery Date, the product of (y) the number of
shares of Common Stock issuable upon conversion of the Preferred Shares
represented by such Preferred Stock Certificate, as of the Preferred Stock
Delivery Date and (z) the Closing Bid Price of the Common Stock on the Preferred
Stock Delivery Date. If the Company fails to pay the additional damages set
forth in this Section 2(d)(v) within five Business Days of the date incurred,
then the holder entitled to such payments shall have the right at any time, so
long as the Company continues to fail to make such payments, to require the
Company, upon written notice, to immediately issue, in lieu of such cash
damages, the number of shares of Common Stock equal to the quotient of (X) the
aggregate amount of the damages payments described herein divided by (Y) the
Conversion Price in effect on such Conversion Date as specified by the holder in
the Conversion Notice. The foregoing notwithstanding, the damages set forth in
this Section 2(d)(v)(A) shall be stayed with respect to the number of shares of
Common Stock and, if applicable, the Preferred Stock Certificate for which there
is a good faith dispute being resolved pursuant to, and within the time periods
provided for in Section 2(d)(iii), pending the resolution of such dispute.
(B) Void Conversion Notice; Adjustment to Conversion Price.
If for any reason a holder has not received all of the shares of Common Stock
prior to the tenth (10th) Business Day after the Share Delivery Date with
respect to a conversion of Preferred Shares, then the holder, upon written
notice to the Company, with a copy to the Transfer Agent, may void its
Conversion Notice with respect to, and retain or have returned, as the case may
be, any Preferred Shares that have not been converted pursuant to such holder's
Conversion Notice; provided that the voiding of a holder's Conversion Notice
shall not effect the Company's obligations to make any payments which have
<PAGE>
accrued prior to the date of such notice pursuant to Section 2(d)(v)(A) or
otherwise. Thereafter, the Fixed Conversion Price of any Preferred Shares
returned or retained by the holder for failure to timely convert shall be
adjusted to the lowest Closing Bid Price during the period beginning on the
Conversion Date and ending on the date such holder voided the Conversion Notice.
(C) Redemption. If for any reason a holder has not received
all of the shares of Common Stock prior to the tenth (10th) Business Day after
the Share Delivery Date with respect to a conversion of Preferred Shares (a
"Conversion Failure"), then the holder, upon written notice to the Company, may
require that the Company redeem, in accordance with Section 3, all Preferred
Shares held by such holder, including the Preferred Shares previously submitted
for conversion and with respect to which the Company has not delivered shares of
Common Stock.
(vi) Pro Rata Conversion. In the event the Company receives a
Conversion Notice from more than one holder of Preferred Shares for the same
Conversion Date and the Company can convert some, but not all, of such Preferred
Shares, the Company shall convert from each holder of Preferred Shares electing
to have Preferred Shares converted at such time a pro rata amount of such
holder's Preferred Shares submitted for conversion based on the number of
Preferred Shares submitted for conversion on such date by such holder relative
to the number of Preferred Shares submitted for conversion on such date.
(vii) Mandatory Conversion or Redemption at Maturity. If any
Preferred Shares remain outstanding on the Maturity Date, then all such
Preferred Shares, at the Company's option, either (i) shall be converted at the
Maturity Date Conversion Price (as defined below) for such Preferred Shares as
of such date without the holders of such Preferred Shares being required to give
a Conversion Notice on the Maturity Date (a "Maturity Date Mandatory
Conversion"), or (ii) shall be redeemed as of such date for an amount in cash
per Preferred Share (the "Maturity Date Redemption Price") equal to the
Liquidation Preference (as defined in Section 9) (a "Maturity Date Mandatory
Redemption"). The Company shall be deemed to have elected a Maturity Date
Mandatory Redemption unless it delivers written notice to each holder of
Preferred Shares at least 20 Business Days prior to the Maturity Date of its
election to effect a Maturity Date Mandatory Conversion. If the Company elects a
Maturity Date Mandatory Redemption, then on the Maturity Date the Company shall
pay to each holder of Preferred Shares outstanding on the Maturity Date, by wire
transfer of immediately available funds, an amount per Preferred Share equal to
the Maturity Date Redemption Price. If the Company elects a Maturity Date
Mandatory Redemption and fails to redeem all of the Preferred Shares outstanding
on the Maturity Date by payment of the Maturity Date Redemption Price, then in
addition to any remedy such holder of Preferred Shares may have under this
Certificate of Designations, the Securities Purchase Agreement and the
<PAGE>
Registration Rights Agreement, (X) the applicable Maturity Date Redemption Price
payable in respect of such unredeemed Preferred Shares shall bear interest at
the rate of 2.0 % per month, prorated for partial months, until paid in full,
and (Y) any holder of Preferred Shares shall have the option to require the
Company to convert any or all of such holder's Preferred Shares that the Company
elected (or is deemed to have elected) to redeem under this Section 2(d)(vii)
and for which the Maturity Date Redemption Price (together with any interest
thereon) has not been paid into the number of shares of Common Stock such holder
would have received if such holder had given a Conversion Notice for such
Preferred Shares on the Maturity Date. On the Maturity Date, all holders of
Preferred Shares shall surrender all Preferred Stock Certificates, duly endorsed
for cancellation, to the Company or the Transfer Agent. If the Company has
elected a Maturity Date Mandatory Conversion or has failed to pay the Maturity
Date Redemption Price in a timely manner as described above, then the Maturity
Date shall be extended for any Preferred Shares for as long as (A) the
conversion of such Preferred Shares would violate the provisions of Section 5,
(B) a Triggering Event shall have occurred and be continuing, or (C) an event
shall have occurred and be continuing which with the passage of time and the
failure to cure would result in a Triggering Event. In addition to the extension
described in the foregoing sentence, the Maturity Date shall be extended by two
(2) days for each day during a Grace Period (as defined in Section 3(u) of the
Registration Rights Agreement). For purposes of this Section 2(d)(vii),
"Maturity Date Conversion Price" means 75% of the arithmetic average of the
lowest Closing Bid Prices on any three (3) trading days of the Common Stock
during the 20 consecutive trading days immediately preceding the Maturity Date.
(viii) Book-Entry. Notwithstanding anything to the contrary set
forth herein, upon conversion of Preferred Shares in accordance with the terms
hereof, the holder thereof shall not be required to physically surrender the
certificate representing the Preferred Shares to the Company unless the full
number of Preferred Shares represented by the certificate are being converted.
The holder and the Company shall maintain records showing the number of
Preferred Shares so converted and the dates of such conversions or shall use
such other method, reasonably satisfactory to the holder and the Company, so as
not to require physical surrender of the certificate representing the Preferred
Shares upon each such conversion. In the event of any dispute or discrepancy,
such records of the Company shall be controlling and determinative in the
absence of manifest error. Notwithstanding the foregoing, if Preferred Shares
represented by a certificate are converted as aforesaid, the holder may not
transfer the certificate representing the Preferred Shares unless the holder
first physically surrenders the certificate representing the Preferred Shares to
the Company, whereupon the Company will forthwith issue and deliver upon the
order of the holder a new certificate of like tenor, registered as the holder
may request, representing in the aggregate the remaining number of Preferred
Shares represented by such certificate. The holder and any assignee, by
<PAGE>
acceptance of a certificate, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion of any Preferred Shares, the
number of Preferred Shares represented by such certificate may be less than the
number of Preferred Shares stated of the face thereof. Each certificate for
Preferred Shares shall bear the following legend:
ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE
TERMS OF THE COMPANY'S CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS OF THE PREFERRED SHARES REPRESENTED BY
THIS CERTIFICATE, INCLUDING SECTION 2(d)(viii) THEREOF. THE
NUMBER OF PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE MAY
BE LESS THAN THE NUMBER OF PREFERRED SHARES STATED ON THE FACE
HEREOF PURSUANT TO SECTION 2(d)(viii) OF THE CERTIFICATE OF
DESIGNATIONS, PREFERENCES AND RIGHTS.
(e) Taxes. The Company shall pay any and all taxes that may be payable
with respect to the issuance and delivery of Common Stock upon the conversion of
Preferred Shares.
(f) Adjustments to Conversion Price. The Conversion Price will be
subject to adjustment from time to time as provided in this Section 2(f).
(i) Adjustment of Fixed Conversion Price upon Issuance of Common
Stock. If and whenever on or after the date of issuance of the Preferred Shares,
the Company issues or sells, or in accordance with this Section 2(f) is deemed
to have issued or sold, any shares of Common Stock (including the issuance or
sale of shares of Common Stock owned or held by or for the account of the
Company, but excluding (a) the Excluded Securities (as defined below) and (b)
shares of Common Stock deemed to have been issued by the Company in connection
with an Approved Stock Plan (as defined below) or upon conversion of the
Preferred Shares or exercise of the Warrants) for a consideration per share less
than a price (the "Applicable Price") equal to the Fixed Conversion Price in
effect immediately prior to such time, then immediately after such issue or
sale, the Fixed Conversion Price then in effect shall be reduced to an amount
equal to such consideration per share. For purposes of determining the adjusted
Fixed Conversion Price under this Section 2(f)(i), the following shall be
applicable:
<PAGE>
(A) Issuance of Options. If the Company in any manner grants
or sells any Options (as defined below) and the lowest price per share for which
one share of Common Stock is issuable upon the exercise of any such Option or
upon conversion or exchange of any Convertible Securities (as defined below)
issuable upon exercise of such Option is less than the Applicable Price, then
such share of Common Stock shall be deemed to be outstanding and to have been
issued and sold by the Company at the time of the granting or sale of such
Option for such price per share. For purposes of this Section 2(f)(i)(A), the
"lowest price per share for which one share of Common Stock is issuable upon the
exercise of any such Option or upon conversion or exchange of any Convertible
Securities issuable upon exercise of such Option" shall be equal to the sum of
the lowest amounts of consideration (if any) received or receivable by the
Company with respect to any one share of Common Stock upon granting or sale of
the Option, upon exercise of the Option and upon conversion or exchange of any
Convertible Security issuable upon exercise of such Option. No further
adjustment of the Fixed Conversion Price shall be made upon the actual issuance
of such Common Stock or of such Convertible Securities upon the exercise of such
Options or upon the actual issuance of such Common Stock upon conversion or
exchange of such Convertible Securities.
(B) Issuance of Convertible Securities. If the Company in
any manner issues or sells any Convertible Securities and the lowest price per
share for which one share of Common Stock is issuable upon such conversion or
exchange thereof is less than the Applicable Price, then such share of Common
Stock shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the issuance of sale of such Convertible Securities for
such price per share. For the purposes of this Section 2(f)(i)(B), the "lowest
price per share for which one share of Common Stock is issuable upon such
conversion or exchange" shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon the issuance or sale of the Convertible Security
and upon the conversion or exchange of such Convertible Security. No further
adjustment of the Fixed Conversion Price shall be made upon the actual issuance
of such Common Stock upon conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustment of the Fixed Conversion Price had
been or are to be made pursuant to other provisions of this Section 2(f)(i), no
further adjustment of the Fixed Conversion Price shall be made by reason of such
issue or sale.
(C) Change in Option Price or Rate of Conversion. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into
or exchangeable for Common Stock changes at any time, the Fixed Conversion Price
in effect at the time of such change shall be adjusted to the Fixed Conversion
<PAGE>
Price which would have been in effect at such time had such Options or
Convertible Securities provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold. For purposes of this Section 2(f)(i)(C), if
the terms of any Option or Convertible Security that was outstanding as of the
date of issuance of the Preferred Shares are changed in the manner described in
the immediately preceding sentence, then such Option or Convertible Security and
the Common Stock deemed issuable upon exercise, conversion or exchange thereof
shall be deemed to have been issued as of the date of such change. No adjustment
shall be made if such adjustment would result in an increase of the Fixed
Conversion Price then in effect.
(D) Calculation of Consideration Received. In case any
Option is issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
will be deemed to have been issued for a consideration of $0.01. If any Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor will be deemed
to be the net amount received by the Company therefor. If any Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of the consideration other than cash received by the
Company will be the fair value of such consideration, except where such
consideration consists of marketable securities, in which case the amount of
consideration received by the Company will be the market price of such
securities on the date of receipt. If any Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such Common Stock, Options or Convertible Securities, as the case may be. The
fair value of any consideration other than cash or securities will be determined
jointly by the Company and the holders of a majority of the Preferred Shares
then outstanding. If such parties are unable to reach agreement within 10 days
after the occurrence of an event requiring valuation (the "Valuation Event"),
the fair value of such consideration will be determined within five Business
Days after the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the holders of a
majority of the Preferred Shares then outstanding. The determination of such
appraiser shall be deemed binding upon all parties absent manifest error and the
fees and expenses of such appraiser shall be borne equally by the Company and
the holders of the Preferred Shares.
(E) Record Date. If the Company takes a record of the
holders of Common Stock for the purpose of entitling them (1) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (2) to subscribe for or purchase Common Stock, Options
<PAGE>
or Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(F) Certain Definitions. For purposes of this Section
2(f)(i), the following terms have the respective meanings set forth below:
(I) "Approved Stock Plan" shall mean any employee
benefit plan which has been approved by the Board of Directors of the Company,
pursuant to which the Company's securities may be issued to any employee,
officer, director or consultant for services provided to the Company.
(II) "Common Stock Deemed Outstanding" means, at any
given time, the number of shares of Common Stock actually outstanding at such
time, plus the number of shares of Common Stock deemed to be outstanding
pursuant to Sections 2(f)(i)(A) and 2(f)(i)(B) hereof regardless of whether the
Options or Convertible Securities are actually exercisable at such time, but
excluding any shares of Common Stock owned or held by or for the account of the
Company or issuable upon conversion of the Preferred Shares or exercise of the
Warrants.
(III) "Convertible Securities" means any stock or
securities (other than Options) directly or indirectly convertible into or
exchangeable for Common Stock.
(IV) "Options" means any rights, warrants or options to
subscribe for or purchase Common Stock or Convertible Securities.
(V) "Excluded Securities" means (A) provided such
security is issued at a price which is greater than or equal to the arithmetic
average of the Closing Bid Prices of the Common Stock for the ten (10)
consecutive trading days immediately preceding the date of issuance, any of the
following (i) any issuance by the Company of securities in connection with a
strategic partnership or a joint venture (the primary purpose of which is not to
raise equity capital) and (ii) any issuance by the Company of securities as
consideration for a merger or consolidation or the acquisition of a business,
product, license, or other assets of another person or entity and (B) any
warrants or options outstanding as of the Issuance Date which have not been
modified or amended since such Issuance Date and (C) options to purchase shares
of Common Stock, provided (I) such options are issued after the Issuance Date to
employees of the Company within 30 days of such employee starting their
employment with the Company, (II) an aggregate of no more than 1,000,000 options
<PAGE>
are issued in reliance on this exclusion and (III) the exercise price of such
options is not less than 75% of the market price of the Common Stock on the date
of issuance of such options.
(ii) Adjustment of the Fixed Conversion Price upon Subdivision or
Combination of Common Stock. If the Company at any time subdivides (by any stock
split, stock dividend, recapitalization or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of shares, the Fixed
Conversion Price in effect immediately prior to such subdivision will be
proportionately reduced. If the Company at any time combines (by combination,
reverse stock split or otherwise) one or more classes of its outstanding shares
of Common Stock into a smaller number of shares, the Fixed Conversion Price in
effect immediately prior to such combination will be proportionately increased.
(iii) Holder's Right of Alternative Floating Conversion Price
Following Issuance of Convertible Securities. If the Company in any manner
issues or sells any Options or Convertible Securities after the applicable
Issuance Date that are convertible into or exchangeable or exercisable for
Common Stock at a price which may vary with the market price of the Common
Stock, including by way of one or more resets to the conversion, exchange or
exercise price of such Convertible Security or Option (the formulation for such
variable price being herein referred to as, the "Variable Price"), the Company
shall provide written notice thereof via facsimile and overnight courier to each
holder of the Preferred Shares ("Variable Notice") on the date of issuance of
such Convertible Securities. From and after the date the Company issues any such
Convertible Securities with a Variable Price, a holder of Preferred Shares shall
have the right, but not the obligation, in its sole discretion to substitute the
Variable Price for the Floating Conversion Price upon conversion of any
Preferred Shares by designating in the Conversion Notice delivered upon
conversion of such Preferred Shares that solely for purposes of such conversion
the holder is relying on the Variable Price rather than the Floating Conversion
Price then in effect. A holder's election to rely on a Variable Price for a
particular conversion of Preferred Shares shall not obligate the holder to rely
on a Variable Price for any future conversions of Preferred Shares.
(iv) Notices.
(A) Immediately upon any adjustment of the Conversion Price,
the Company will give written notice thereof to each holder of Preferred Shares,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment.
(B) The Company will give written notice to each holder of
Preferred Shares at least ten (10) Business Days prior to the date on which the
Company closes its books or takes a record (I) with respect to any dividend or
<PAGE>
distribution upon the Common Stock, (II) with respect to any pro rata
subscription offer to holders of Common Stock or (III) for determining rights to
vote with respect to any Organic Change, dissolution or liquidation, provided
that such information shall be made known to the public prior to or in
conjunction with such notice being provided to such holder.
(C) The Company will also give written notice to each holder
of Preferred Shares at least ten (10) Business Days prior to the date on which
any Organic Change, dissolution or liquidation will take place, provided that
such information shall be made known to the public prior to or in conjunction
with such notice being provided to such holder.
(3) Redemption at Option of Holders.
(a) Redemption Option Upon Triggering Event. In addition to all other
rights of the holders of Preferred Shares contained herein, after a Triggering
Event (as defined below), each holder of Preferred Shares shall have the right,
at such holder's option, to require the Company to redeem all or a portion of
such holder's Preferred Shares at a price per Preferred Share equal to the
greater of (i) 133% of the Liquidation Preference and (ii) the product of (A)
the Conversion Rate in effect at such time as such holder delivers a Notice of
Redemption at Option of Buyer (as defined below) and (B) the Closing Bid Price
of the Common Stock on the date immediately preceding such Triggering Event on
which the Principal Market, or the market or exchange where the Common Stock is
then traded, is open for trading ("Redemption Price").
(b) "Triggering Event". A "Triggering Event" shall be deemed to have
occurred at such time as any of the following events:
(i) the failure of the applicable Registration Statement (as
defined in the Registration Rights Agreement) to be declared effective by the
SEC on or prior to the date that is 30 days after the applicable Effectiveness
Deadline (as defined in the Registration Rights Agreement) ;
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights Agreement,
the effectiveness of the Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is unavailable
to the holder of the Preferred Shares for sale of all of the Registrable
Securities (as defined in the Registration Rights Agreement) in accordance with
the terms of the Registration Rights Agreement, and such lapse or unavailability
continues for a period of five consecutive trading days or for more than an
aggregate of 10 trading days in any 365-day period, excluding days during an
Allowable Grace Period (as defined in the Registration Rights Agreement);
<PAGE>
(iii) the suspension from trading or failure of the Common
Stock to be listed on the Principal Market for a period of five consecutive
trading days or for more than an aggregate of 10 trading days in any 365-day
period;
(iv) the Company's notice or the Transfer Agent's notice, at
the Company's direction to any holder of Preferred Shares, including by way of
public announcement, at any time, of its intention not to comply with a request
for conversion of any Preferred Shares into shares of Common Stock that is
tendered in accordance with the provisions of this Certificate of Designations,
excluding, however, notices that relate solely to a dispute under resolution
pursuant to Section 2(d)(iii), provided that such dispute has not been publicly
disclosed;
(v) a Conversion Failure (as defined in Section 2(d)(v)(C));
or
(vi) the Company breaches any representation, warranty,
covenant or other term or condition of the Securities Purchase Agreement, the
Registration Rights Agreement, the Warrants this Certificate of Designations or
any other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated thereby and hereby, except to the
extent that such breach would not have a Material Adverse Effect (as defined in
Section 3(a) of the Securities Purchase Agreement) and except, in the case of a
breach of a covenant which is curable, only if such breach continues for a
period of at least 10 days.
(c) Mechanics of Redemption at Option of Buyer. Within one (1) Business Day
after the occurrence of a Triggering Event, the Company shall deliver written
notice thereof via facsimile and overnight courier ("Notice of Triggering
Event") to each holder of Preferred Shares. At any time after the earlier of a
holder's receipt of a Notice of Triggering Event and such holder becoming aware
of a Triggering Event, any holder of Preferred Shares then outstanding may
require the Company to redeem up to all of such holder's Preferred Shares by
delivering written notice thereof via facsimile and overnight courier ("Notice
of Redemption at Option of Buyer") to the Company, provided that such Notice of
Redemption at Option of Buyer upon Triggering Event may only be sent during the
period beginning on and including the date of the occurrence of the Triggering
Event and ending on and including the later of the date which is (a) 30 days
after the date on which such holder of the Preferred Shares receives a Notice of
Triggering Event from the Company with respect to such Triggering Event and (b)
the date on which such Triggering Event is cured and such holder receives
written notice from the Company confirming such Triggering Event has been cured,
which Notice of Redemption at Option of Buyer shall indicate (i) the number of
Preferred Shares that such holder is electing to redeem and (ii) the applicable
Redemption Price, as calculated pursuant to Section 3(a) above.
<PAGE>
(d) Payment of Redemption Price. Upon the Company's receipt of a
Notice(s) of Redemption at Option of Buyer from any holder of Preferred Shares,
the Company shall immediately notify each other holder of Preferred Shares by
facsimile of the Company's receipt of such notices. Each holder which has sent
such a notice shall, if required pursuant to Section 2(d)(viii), promptly submit
to the Transfer Agent such holder's Preferred Stock Certificates which such
holder has elected to have redeemed. The Company shall deliver the applicable
Redemption Price to such holder within five Business Days after the Company's
receipt of a Notice of Redemption at Option of Buyer; provided that a holder's
Preferred Stock Certificates shall have been so delivered to the Transfer Agent.
If the Company is unable to redeem all of the Preferred Shares submitted for
redemption, the Company shall (i) redeem a pro rata amount from each holder of
Preferred Shares based on the number of Preferred Shares submitted for
redemption by such holder relative to the total number of Preferred Shares
submitted for redemption by all holders of Preferred Shares and (ii) in addition
to any remedy such holder of Preferred Shares may have under this Certificate of
Designations and the Securities Purchase Agreement, pay to each holder interest
at the rate of 2.0% per month (prorated for partial months) in respect of each
unredeemed Preferred Share until paid in full.
(e) Void Redemption. In the event that the Company does not pay
the Redemption Price within the time period set forth in Section 3(d), at any
time thereafter and until the Company pays such unpaid applicable Redemption
Price in full, a holder of Preferred Shares shall have the option (the "Voidable
Redemption Option") to, in lieu of redemption, require the Company to promptly
return to such holder any or all of the Preferred Shares that were submitted for
redemption by such holder under this Section 3 and for which the applicable
Redemption Price (together with any interest thereon) has not been paid, by
sending written notice thereof to the Company via facsimile (the "Voidable
Redemption Notice"). Upon the Company's receipt of such Voidable Redemption
Notice, (i) the Notice of Redemption at Option of Buyer shall be null and void
with respect to those Preferred Shares subject to the Voidable Redemption
Notice, and (ii) the Company shall immediately return any Preferred Shares
subject to the Voidable Redemption Notice, and (iii) the Fixed Conversion Price
of such returned Preferred Shares shall be adjusted to the lesser of (A) the
Fixed Conversion Price as in effect on the date on which the Voidable Redemption
Notice is delivered to the Company and (B) the lowest Closing Bid Price during
the period beginning on the date on which the Notice of Redemption at Option of
Buyer is delivered to the Company and ending on the date on which the Voidable
Redemption Notice is delivered to the Company.
(f) Disputes; Miscellaneous. In the event of a dispute as to the
determination of the Closing Bid Price or the arithmetic calculation of the
Redemption Price, such dispute shall be resolved pursuant to Section 2(d)(iii)
above. A holder's delivery of a Voidable Redemption Notice and exercise of its
<PAGE>
rights following such notice shall not effect the Company's obligations to make
any payments which have accrued prior to the date of such notice.
(4) Other Rights of Holders.
(a) Reorganization, Reclassification, Consolidation, Merger or Sale.
Any recapitalization, reorganization, reclassification, consolidation, merger,
sale of all or substantially all of the Company's assets to another Person or
other transaction which is effected in such a way that holders of Common Stock
are entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is referred
to herein as "Organic Change." Prior to the consummation of any (i) sale of all
or substantially all of the Company's assets to an acquiring Person or (ii)
other Organic Change following which the Company is not a surviving entity, the
Company will secure from the Person purchasing such assets or the successor
resulting from such Organic Change (in each case, the "Acquiring Entity") a
written agreement (in form and substance satisfactory to the holders of a at
least two-thirds (2/3) of the Preferred Shares then outstanding) to deliver to
each holder of Preferred Shares in exchange for such shares, a security of the
Acquiring Entity evidenced by a written instrument substantially similar in form
and substance to the Preferred Shares, including, without limitation, having a
stated value and liquidation preference equal to the Stated Value and the
Liquidation Preference of the Preferred Shares held by such holder, and
satisfactory to the holders of a at least two-thirds (2/3) of the Preferred
Shares then outstanding. Prior to the consummation of any other Organic Change,
the Company shall make appropriate provision (in form and substance satisfactory
to the holders of at least two-thirds (2/3) of the Preferred Shares then
outstanding) to insure that each of the holders of the Preferred Shares will
thereafter have the right to acquire and receive in lieu of or in addition to
(as the case may be) the shares of Common Stock immediately theretofore
acquirable and receivable upon the conversion of such holder's Preferred Shares
such shares of stock, securities or assets that would have been issued or
payable in such Organic Change with respect to or in exchange for the number of
shares of Common Stock which would have been acquirable and receivable upon the
conversion of such holder's Preferred Shares as of the date of such Organic
Change (without taking into account any limitations or restrictions on the
convertibility of the Preferred Shares).
(b) Optional Redemption Upon Change of Control. In addition to the
rights of the holders of Preferred Shares under Section 4(a), upon a Change of
Control (as defined below) of the Company each holder of Preferred Shares shall
have the right, as such holder's option, to require the Company to redeem all or
a portion of such holder's Preferred Shares at a price per Preferred Share equal
to the greater of (A) 133% of the Liquidation Preference and (B) the Product of
(I) the Conversion Rate on the date the holder of Preferred Shares gives a
Notice of Redemption upon Change of Control and (II) the arithmetic average of
the Closing Bid Prices of the Common Stock during the five trading days
<PAGE>
immediately preceding such date ("Change of Control Redemption Price"). No
sooner than 15 days nor later than 10 days prior to the consummation of a Change
of Control, but not prior to the public announcement of such Change of Control,
the Company shall deliver written notice thereof via facsimile and overnight
courier (a "Notice of Change of Control") to each holder of Preferred Shares. At
any time during the period beginning after receipt of a Notice of Change of
Control (or, in the event a Notice of Change of Control is not delivered at
least 10 days prior to a Change of Control, at any time on or after the date
which is 10 days prior to a Change of Control) and ending on the date of such
Change of Control, any holder of the Preferred Shares then outstanding may
require the Company to redeem all or a portion of the holder's Preferred Shares
then outstanding by delivering written notice thereof via facsimile and
overnight courier (a "Notice of Redemption Upon Change of Control") to the
Company, which Notice of Redemption Upon Change of Control shall indicate (i)
the number of Preferred Shares that such holder is submitting for redemption,
and (ii) the applicable Change of Control Redemption Price, as calculated
pursuant to this Section 4(b). Upon the Company's receipt of a Notice(s) of
Redemption Upon Change of Control from any holder of Preferred Shares, the
Company shall promptly, but in no event later than one (1) Business Day
following such receipt, notify each holder of Preferred Shares by facsimile of
the Company's receipt of such Notice(s) of Redemption Upon Change of Control.
The Company shall deliver the applicable Change of Control Redemption Price
simultaneous with the consummation of the Change of Control; provided that, if
required by Section 2(d)(viii), a holder's Preferred Stock Certificates shall
have been so delivered to the Company. Payments provided for in this Section
4(b) shall have priority to payments to other stockholders in connection with a
Change of Control. For purposes of this Section 4(b), "Change of Control" means
(i) the consolidation, merger or other business combination of the Company with
or into another Person (other than (A) a consolidation, merger or other business
combination in which holders of the Company's voting power immediately prior to
the transaction continue after the transaction to hold, directly or indirectly,
the voting power of the surviving entity or entities necessary to elect a
majority of the members of the board of directors (or their equivalent if other
than a corporation) of such entity or entities, or (B) pursuant to a migratory
merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company), (ii) the sale or transfer of all or substantially
all of the Company's assets, or (iii) a purchase, tender or exchange offer made
to and accepted by the holders of more than the 50% of the outstanding shares of
Common Stock.
(c) Purchase Rights. If at any time the Company grants, issues or
sells any Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "Purchase Rights"), then the holders of Preferred Shares will
be entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such holder could have acquired if such holder
had held the number of shares of Common Stock acquirable upon complete
conversion of the Preferred Shares (without taking into account any limitations
or restrictions on the convertibility of the Preferred Shares) immediately
<PAGE>
before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of which the
record holders of Common Stock are to be determined for the grant, issue or sale
of such Purchase Rights.
(5) Limitations on Conversion.
(a) Limitation on Beneficial Ownership. The Company shall not effect
any conversion of Preferred Shares and no holder of Preferred Shares shall have
the right to convert Preferred Shares in excess of that number of Preferred
Shares which, upon giving effect to such conversion, would cause the aggregate
number of shares of Common Stock beneficially owned by the holder and its
affiliates to exceed 4.99% of the total outstanding shares of Common Stock
following such conversion. For purposes of the foregoing proviso, the aggregate
number of shares of Common Stock beneficially owned by the holder and its
affiliates shall include the number of shares of Common Stock issuable upon
conversion of the Preferred Shares with respect to which the determination of
such proviso is being made, but shall exclude the number of shares of Common
Stock which would be issuable upon (i) conversion of the remaining, nonconverted
Preferred Shares beneficially owned by the holder and its affiliates and (ii)
exercise or conversion of the unexercised or unconverted portion of any other
securities of the Company (including, without limitation, any warrants or
convertible preferred stock) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the holder
and its affiliates. Except as set forth in the preceding sentence, for purposes
of this Section 2(a), beneficial ownership shall be calculated in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended. For
purposes of this Section 2(a), in determining the number of outstanding shares
Common Stock a holder may rely on the number of outstanding shares of Common
Stock as reflected in (1) the Company's most recent Form 10-Q or Form 10-K, as
the case may be, (2) a more recent public announcement by the Company or (3) any
other notice by the Company or its transfer agent setting forth the number of
shares of Common Stock outstanding. Upon the written request of any holder, the
Company shall promptly, but in no event later than one (1) Business Day
following the receipt of such request, confirm in writing to any such holder the
number of shares Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
conversions of Preferred Shares and exercise of the Warrants by such holder and
its affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.
(b) Conversion Restrictions. The right of a holder of Preferred Shares
to convert Preferred Shares pursuant to Section 2(b) shall be limited as set
forth below. In the event that the Closing Bid Price on the Conversion Date is
less than or equal to 50% of the Closing Bid Price on the Issuance Date, no
holder of Preferred Shares, without the prior consent of the Company, shall be
<PAGE>
entitled to convert any Preferred Shares during the period beginning on the
first trading day after any Conversion Date and ending 10 trading days
thereafter.
(6) Company Redemptions.
(a) Redemption at the Company's Election. The Company shall have the
right, in its sole discretion, to require that some or all of the outstanding
Preferred Shares issued on such Issuance Date be redeemed ("Redemption at
Company's Election"), for consideration per Preferred Share equal to 120% of the
Liquidation Preference for such Preferred Share (the "Company's Election
Redemption Price"); provided that the Conditions to Redemption at the Company's
Election (as set forth below) are satisfied as of the Company's Election
Redemption Date (as defined below). The Company may exercise its right of
Redemption at Company's Election only by providing each holder of Preferred
Shares issued on such Issuance Date written notice ("Notice of Redemption at
Company's Election") at least 10 but not more than 30 days prior to the date of
consummation of such redemption ("Company's Election Redemption Date"). If the
Company elects to require redemption of some, but not all, of the Preferred
Shares issued on such Issuance Date then outstanding, the Company shall require
redemption of the pro rata amount from each holder of such Preferred Shares
based on the number of Preferred Shares purchased by such holder on such
Issuance Date relative to the total number of Preferred Shares purchased on such
Issuance Date (such amount with respect to each holder being referred to herein
as its "Pro Rata Redemption Amount"). The Company's Notice of Redemption at
Company's Election shall indicate (x) the aggregate number of Preferred Shares
the Company has elected to redeem from all holders of Preferred Shares, (y) the
date selected by the Company for the Company's Election Redemption Date, and (z)
each holder's Pro Rata Redemption Amount of the Preferred Shares selected for
redemption. If the Company has exercised its right of Redemption at Company's
Election and the conditions of this Section 6(a), including the Conditions to
Redemption at Company's Election, have been satisfied, then each holder's Pro
Rata Redemption Amount of the Preferred Shares selected for redemption which
remain outstanding on the Company's Election Redemption Date shall be redeemed
as of the Company's Election Redemption Date by payment by the Company to each
such holder of Preferred Shares of the Company's Election Redemption Price. If
required by Section 2(d)(viii), all such holders of the Preferred Shares being
redeemed shall thereupon and within two (2) Business Days after the Company's
Election Redemption Date, or such earlier date as the Company and each such
holder of Preferred Shares mutually agree, surrender all Preferred Shares being
redeemed on such date to the Company. If the Company fails to pay the full
Company's Election Redemption Price on the Company's Election Redemption Date
with respect to a Preferred Share selected for redemption, then the Redemption
at Company's Election shall be null and void with respect to such Preferred
Share and the Holder shall be entitled to all the rights of a holder of
outstanding Preferred Shares. "Conditions to Redemption at the Company's
Election" means the following conditions: (i) during the period beginning on the
<PAGE>
applicable Issuance Date and ending on and including the Company's Election
Redemption Date, the Company shall have delivered Conversion Shares upon
conversion of the Preferred Shares to the holders of the Preferred Shares on a
timely basis as set forth in Section 2(d)(ii); (ii) on each day during the
period beginning 30 days prior to the date of Notice of Redemption at Company's
Election and ending on and including the Company's Election Redemption Date, the
Common Stock is designated for quotation on the Bulletin Board, Nasdaq or listed
on AMEX or The New York Stock Exchange, Inc. and is not suspended from trading
(excluding suspensions of not more than one day resulting from business
announcements by the Company); (iv) during the period beginning on and including
the Issuance Date and ending on and including the Company's Election Redemption
Date, there shall not have occurred a Triggering Event or an event that with the
passage of time and without being cured would constitute a Triggering Event; (v)
during the period beginning on the applicable Issuance Date and ending on and
including the Company's Election Redemption Date, there shall not have occurred
the consummation of a Change of Control or the public announcement of a pending,
proposed or intended Change of Control; (vi) the Company otherwise shall have
been in compliance in all material respects with this Certificate of
Designations, the Securities Purchase Agreement, the Warrants and the
Registration Rights Agreement and shall not have breached in any material
respect any provision of this Certificate of Designations, the Securities
Purchase Agreement, the Warrants or the Registration Rights Agreement.
Notwithstanding the above, but subject to Section 5, any holder of Preferred
Shares may convert any Preferred Shares (including Preferred Shares selected for
redemption) into Common Stock pursuant to Section 2 on or prior to the date
immediately preceding the Company's Election Redemption Date. If the Company
fails to timely pay any Company's Election Redemption Price in accordance with
this Section 6(a), then the Company shall not be permitted to submit another
Notice of Redemption at Company's Election without the prior written consent of
the holders of at least two-thirds (b) of the Preferred Shares then outstanding.
(7) Reservation of Shares.
(a) Reservation. The Company shall, so long as any of the Preferred
Shares are outstanding, take all action necessary to reserve and keep available
out of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Preferred Shares, such number of shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all of the Preferred Shares then outstanding; provided that the number of
shares of Common Stock so reserved shall at no time be less than 200% of the
number of shares of Common Stock for which the Preferred Shares are at any time
convertible (without regard to any limitations on conversions) (the "Required
Reserve Amount"). The initial number of shares of Common Stock reserved for
conversions of the Preferred Shares and each increase in the number of shares so
reserved shall be allocated pro rata among the holders of the Preferred Shares
<PAGE>
based on the number of Preferred Shares held by each holder at the time of
issuance of the Preferred Shares or increase in the number of reserved shares,
as the case may be. In the event a holder shall sell or otherwise transfer any
of such holder's Preferred Shares, each transferee shall be allocated a pro rata
portion of the number of reserved shares of Common Stock reserved for such
transferor. Any shares of Common Stock reserved and allocated to any Person
which ceases to hold any Preferred Shares shall be allocated to the remaining
holders of Preferred Shares, pro rata based on the number of Preferred Shares
then held by such holders.
(b) Insufficient Authorized Shares. If at any time while any of the
Preferred Shares remain outstanding the Company does not have a sufficient
number of authorized and unreserved shares of Common Stock to satisfy its
obligation to reserve for issuance upon conversion of the Preferred Shares at
least a number of shares of Common Stock equal to the Required Reserve Amount
(an "Authorized Share Failure"), then the Company shall immediately take all
action necessary to increase the Company's authorized shares of Common Stock to
an amount sufficient to allow the Company to reserve the Required Reserve Amount
for the Preferred Shares then outstanding. Without limiting the generality of
the foregoing sentence, as soon as practicable after the date of the occurrence
of an Authorized Share Failure, but in no event later than 60 days after the
occurrence of such Authorized Share Failure, the Company shall hold a meeting of
its stockholders for the authorization of an increase in the number of
authorized shares of Common Stock. In connection with such meeting, the Company
shall provide each stockholder with a proxy statement and shall use its best
efforts to solicit its stockholders' approval of such increase in authorized
shares of Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal.
(8) Voting Rights. Holders of Preferred Shares shall have no voting rights,
except as required by law, including but not limited to the General Corporation
Law of the State of Delaware, and as expressly provided in this Certificate of
Designations.
(9) Liquidation, Dissolution, Winding-Up. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of the Preferred Shares shall be entitled to receive in cash out of the assets
of the Company, whether from capital or from earnings available for distribution
to its stockholders (the "Liquidation Funds"), before any amount shall be paid
to the holders of any of the capital stock of the Company of any class junior in
rank to the Preferred Shares in respect of the preferences as to the
distributions and payments on the liquidation, dissolution and winding up of the
Company, an amount per Preferred Share equal to the sum of (a) the Stated Value
and (b) any accrued and unpaid Dividends (such sum being referred to as the
"Liquidation Preference"); provided that, if the Liquidation Funds are
insufficient to pay the full amount due to the holders of Preferred Shares and
holders of shares of other classes or series of preferred stock of the Company
that are of equal rank with the Preferred Shares as to payments of Liquidation
<PAGE>
Funds (the "Pari Passu Shares"), then each holder of Preferred Shares and Pari
Passu Shares shall receive a percentage of the Liquidation Funds equal to the
full amount of Liquidation Funds payable to such holder as a liquidation
preference, in accordance with their respective Certificate of Designations,
Preferences and Rights, as a percentage of the full amount of Liquidation Funds
payable to all holders of Preferred Shares and Pari Passu Shares. In addition to
the receipt of the Liquidation Preference, in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of the Preferred Shares shall be entitled to receive Liquidation Funds
distributed to holders of Common Stock, after the Liquidation Preference has
been paid, to the same extent as if such holders of Preferred Shares had
converted the Preferred Shares into Common Stock (without regard to any
limitations on conversions herein or elsewhere) and had held such shares of
Common Stock on the record date for such distribution of the remaining
Liquidation Funds. The purchase or redemption by the Company of stock of any
class, in any manner permitted by law, shall not, for the purposes hereof, be
regarded as a liquidation, dissolution or winding up of the Company. Neither the
consolidation or merger of the Company with or into any other Person, nor the
sale or transfer by the Company of less than substantially all of its assets,
shall, for the purposes hereof, be deemed to be a liquidation, dissolution or
winding up of the Company. No holder of Preferred Shares shall be entitled to
receive any amounts with respect thereto upon any liquidation, dissolution or
winding up of the Company other than the amounts provided for herein; provided
that a holder of Preferred Shares shall be entitled to all amounts previously
accrued with respect to amounts owed hereunder.
(10) Preferred Rank. All shares of Common Stock shall be of junior rank to
all Preferred Shares in respect to the preferences as to distributions and
payments upon the liquidation, dissolution and winding up of the Company. The
rights of the shares of Common Stock shall be subject to the preferences and
relative rights of the Preferred Shares. Without the prior express written
consent of the holders of not less than two-thirds (2/3) of the then outstanding
Preferred Shares, the Company shall not hereafter authorize or issue additional
or other capital stock that is of senior or equal rank to the Preferred Shares
in respect of the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Company. Without the prior
express written consent of the holders of not less than two-thirds (2/3) of the
then outstanding Preferred Shares, the Company shall not hereafter authorize or
make any amendment to the Company's Certificate of Incorporation or bylaws, or
file any resolution of the board of directors of the Company with the Delaware
Secretary of State or enter into any agreement containing any provisions, which
would adversely affect or otherwise impair the rights or relative priority of
the holders of the Preferred Shares relative to the holders of the Common Stock
or the holders of any other class of capital stock. In the event of the merger
or consolidation of the Company with or into another corporation, the Preferred
Shares shall maintain their relative powers, designations and preferences
<PAGE>
provided for herein and no merger shall result inconsistent therewith.
(11) Participation. Subject to the rights of the holders, if any, of the
Pari Passu Shares, the holders of the Preferred Shares shall, as holders of
Preferred Stock, be entitled to such dividends paid and distributions made to
the holders of Common Stock to the same extent as if such holders of Preferred
Shares had converted the Preferred Shares into Common Stock (without regard to
any limitations on conversion herein or elsewhere) and had held such shares of
Common Stock on the record date for such dividends and distributions. Payments
under the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock.
(12) Restriction on Redemption and Cash Dividends. Until all of the
Preferred Shares have been converted or redeemed as provided herein, the Company
shall not, directly or indirectly, redeem, or declare or pay any cash dividend
or distribution on, its capital stock (other than the Preferred Shares) Common
Stock without the prior express written consent of the holders of not less than
two-thirds (2/3) of the then outstanding Preferred Shares.
(13) Vote to Change the Terms of Preferred Shares. The affirmative vote at
a meeting duly called for such purpose or the written consent without a meeting,
of the holders of not less than two-thirds (2/3) of the then outstanding
Preferred Shares, shall be required for (a) any change to this Certificate of
Designations or the Company's Certificate of Incorporation which would amend,
alter, change or repeal any of the powers, designations, preferences and rights
of the Preferred Shares and (b) the issuance of Preferred Shares other than
pursuant to the Securities Purchase Agreement.
(14) Lost or Stolen Certificates. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of any indemnification
undertaking by the holder to the Company in customary form and, in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall not
be obligated to re-issue preferred stock certificates if the holder
contemporaneously requests the Company to convert such Preferred Shares into
Common Stock.
(15) Remedies, Characterizations, Other Obligations, Breaches and
Injunctive Relief. The remedies provided in this Certificate of Designations
shall be cumulative and in addition to all other remedies available under this
Certificate of Designations, at law or in equity (including a decree of specific
<PAGE>
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designations. The Company covenants to each holder of Preferred Shares that
there shall be no characterization concerning this instrument other than as
expressly provided herein. Amounts set forth or provided for herein with respect
to payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the holder thereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holders of the
Preferred Shares and that the remedy at law for any such breach may be
inadequate. The Company therefore agrees that, in the event of any such breach
or threatened breach, the holders of the Preferred Shares shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required.
(16) Specific Shall Not Limit General; Construction. No specific provision
contained in this Certificate of Designations shall limit or modify any more
general provision contained herein. This Certificate of Designations shall be
deemed to be jointly drafted by the Company and all Buyers and shall not be
construed against any person as the drafter hereof.
(17) Failure or Indulgence Not Waiver. No failure or delay on the part of a
holder of Preferred Shares in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege.
(18) Notice. Whenever notice is required to be given under these Articles
of Amendment, unless otherwise provided herein, such notice shall be given in
accordance with Section 9(f) of the Securities Purchase Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of
Designations to be signed by its President, as of the 14th day of March, 2000.
DIGS, INC.
By: /s/ PETER B. DUNN
--------------
Name: Peter B. Dunn
Its: President
<PAGE>
EXHIBIT I
DIGS, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and Rights of
Digs, Inc. for its Series A Convertible Preferred Stock (the "Certificate of
Designations"). In accordance with and pursuant to the Certificate of
Designations, the undersigned hereby elects to convert the number of shares of
Series A Convertible Preferred Stock, par value $0.01 per share (the "Preferred
Shares"), of Digs, Inc., a Delaware corporation (the "Company"), indicated below
into shares of Common Stock, par value $0.01 per share (the "Common Stock"), of
the Company, as of the date specified below.
Date of Conversion:
Number of Preferred Shares to be converted:
Stock certificate no(s). of Preferred Shares to be converted:
Please confirm the following information:
Conversion Price:
Number of shares of Common Stock to be issued:
Is the alternative Floating Conversion Price being relied on pursuant
to Section 2(f)(iii) of the Certificate of Designations? (check one)
YES ____ No ____
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to:
Facsimile Number:
Authorization:
By:
Title:
Dated:
Account Number (if electronic book entry transfer):
Transaction Code Number (if electronic book entry transfer):
<PAGE>
ACKNOWLEDGMENT
The Company hereby acknowledges this Conversion Notice and hereby
directs [TRANSFER AGENT] to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated ___________ ___,
2000 from the Company and acknowledged and agreed to by [TRANSFER AGENT].
DIGS, INC.
By:
Name:
Title:
DIGS, INC.
PLACEMENT AGENT AGREEMENT
Dated as of: March 14, 2000
May Davis Group, Inc.
One World Trade Center - Suite 8735
New York, New York, 10038
Ladies and Gentlemen:
The undersigned, Digs, Inc. (the "Company"), hereby agrees with May Davis
Group, Inc. ("May Davis") as follows:
1. Offering.
A. The Company hereby engages May Davis to act as its exclusive
placement agent in connection with the issuance and sale by the Company (the
"Offering") of the Company's Convertible Series A Preferred Stock, $0.01 par
value per share (the "Preferred Stock"), at a price of $1,000 per share for an
aggregate offering price of $2,500,000. For every forty (40) shares of Preferred
Stock purchased in the Offering, an investor will receive a common stock
purchase warrant (collectively, the "Warrants" and individually, a "Warrant")
for the purchase of one (1) share of the Company's common stock, $0.001 par
value per share (the "Common Stock").
<PAGE>
The Preferred Stock will be convertible by the holder for a period of three (3)
years at any time after the Closing Date (as hereinafter defined) into shares of
Common Stock (the 'Conversion Shares") in accordance with the terms and
conditions set forth in the Company's Certificate of Designations, Preferences
and Rights governing the Preferred Stock to be filed by the Company with the
Secretary of State of Delaware on or before the Closing Date (the "Certificate
of Designations"). Each Warrant entitles the holder to purchase one share of
Common Stock (the "Warrant Shares") for an exercise price as set forth in the
Warrants.
The Preferred Stock and the Warrants are subject to the terms of the Certificate
of Designations, the Securities Purchase Agreement (the "Securities Purchase
Agreement") and the registration rights agreement (the "Registration Rights
Agreement") to be executed by the Company and all investors who purchase shares
of Preferred Stock and Warrants in the Offering and all disclosure materials of
the Company referred to in the Securities Purchase Agreement (collectively, the
"Offering Materials"). The Preferred Stock, the Conversion Shares, the Warrants
and the Warrant Shares are hereinafter sometimes collectively referred to as the
"Securities." The Securities will be offered without registration under the
Securities Act of 1933, as amended (the "Securities Act"). Purchasers of the
Securities will be granted certain registration rights with respect to the
Conversion Shares and the Warrant Shares as more fully set forth in the
Registration Rights Agreement, the Securities Purchase Agreement and in the
certificates representing the Preferred Stock and the Warrants.
B. The Offering of Preferred Stock will be made by May Davis on a
"best efforts, all or none" basis. The closing of the Offering (the "Closing")
will occur as soon as practicable after the date on which subscriptions have
been received and accepted by the Company for all 2,500 shares of Preferred
Stock being sold in the Offering (the "Closing Date"), and the Company shall
issue shares of Preferred Stock and Warrants at the Closing upon receipt of
investors' funds that have cleared the banking system in the normal course of
business. The Closing will take place at the offices of Silverman, Collura &
Chernis, P.C., counsel to May Davis, at 381 Park Avenue South, Suite 1601, New
York, New York 10016, or such other place as determined by the Company and May
Davis, at such time as shall be determined by May Davis.
C. The Offering shall commence on the date hereof and shall
terminate on March 31, 2000, unless extended by the Company and May Davis (such
date, as the same may be extended, is hereinafter referred to as the
"Termination Date"; the period commencing on the date hereof and ending on the
<PAGE>
Termination Date is sometimes referred to herein as the "Offering Period"). If
subscriptions for all shares of Preferred Stock being offered in the Offering
are not received by May Davis prior to the Termination Date, all funds received
by investors will be returned thereto without interest thereon or deduction
therefrom.
2. Information.
A. The Preferred Stock will be offered by May Davis on a "best
efforts, all or none" basis.
B. The Preferred Stock shall have the terms set forth in the
Certificate of Designations and the Preferred Stock and Warrants shall be
offered by the Company by means of the Securities Purchase Agreement and other
Offering Materials. Payment for the Preferred Stock shall be made by check or
wire transfer as more fully described in the Securities Purchase Agreement. The
minimum purchase by any purchaser shall be $50,000, or 50 shares of Preferred
Stock, except that subscriptions for lesser amounts of Preferred Stock may be
accepted at the discretion of the Company and May Davis. May Davis and the
Company agree that the Preferred Stock will be offered and sold only to
"accredited investors" within the meaning of Rule 501 of Regulation D
("Accredited Investors") promulgated by the Securities and Exchange Commission
(the "Commission") under the Securities Act and Rule 506 of Regulation D of the
Securities Act.
C. In the event that the Closing occurs, the funds received in respect
of the shares of Preferred Stock closed on will be forwarded to the Company,
against delivery of the appropriate amount of the securities offered, net of (i)
the placement agent commission equal to ten percent (10%) of the gross proceeds
from the sale of shares of Preferred Stock in the Offering, and (iii) legal fees
and expenses related thereto due to May Davis's counsel.
<PAGE>
D. In addition to the foregoing compensation, at the Closing the
Company shall issue to May Davis common stock purchase warrants to purchase
200,000 shares of Common Stock at an exercise price equal to 110% of the closing
bid price of the Common Stock on the Closing Date (the Placement Agent's
Warrants). The Placement Agent's Warrants shall be exercisable at any time by
the Placement Agent's for a period of sixty (60) months from the Closing Date
and shall contain such anti-dilution and other protective provisions as are
contained in the Warrants to be issued to investors in the Offering.
E. At the Closing, the Company shall cause to be paid by, at the
option of May Davis, certified or official bank check or wire transfer, to the
extent not previously paid by the Company to May Davis (i) the placement agent
commission equal to eight percent (8%) of the gross proceeds from the sale of
shares Preferred Stock in the Offering, (ii) mailing and related expenses of May
Davis and (iii) and legal fees and expenses related thereto due to May Davis's
counsel, not to exceed $20,000 plus out of pocket expenses. In addition to the
foregoing, the Company shall be responsible for the fees and expenses identified
in Sections 6, 7, and 9 hereof, which expenses shall not be deemed to be
commissions.
F. May Davis shall not be obligated to sell any shares of Preferred
Stock and shall only be obligated to offer the Preferred Stock on a "best
efforts" basis.
G. The Company and May Davis reserve the right to reject any
subscriber, in whole or in part, in their sole discretion. Notwithstanding
anything to the contrary contained in this Section 2(G), the Company's right to
reject a subscriber shall lapse three (3) days after receipt by the Company of
the fully completed and duly executed subscription documents from May Davis with
respect to such subscriber (unless it is determined subsequent to such period
that such subscriber does not meet the investor suitability requirements of this
Offering). Funds received from any subscriber whose subscription is rejected
will be returned to such subscriber, without deduction therefrom or interest
thereon, but no sooner than such funds have cleared the banking system in the
normal course of business.
3. Representations, Warranties and Covenants of May Davis.
A. May Davis represents, warrants and covenants as follows:
(i) May Davis has the necessary power to enter into this
Agreement, the Placement Agent's Warrant, the Placement Agent's Registration
Agreement and to consummate the transactions contemplated hereby and thereby.
<PAGE>
(ii) The execution and delivery by May Davis of this Agreement,
the Placement Agent's Warrant, the Placement Agent's Registration Rights
Agreement and the consummation of the transactions contemplated herein and
therein will not result in any violation of, or be in conflict with, or
constitute a default under, any agreement or instrument to which May Davis is a
party or by which May Davis or its properties are bound, or any judgment,
decree, order or, to May Davis's knowledge, any statute, rule or regulation
applicable to May Davis. This Agreement, the Placement Agent's Warrant, and the
Placement Agent's Registration Rights Agreement when executed and delivered by
May Davis, will constitute the legal, valid and binding obligations of May
Davis, enforceable in accordance with their respective terms, except to the
extent that (a) the enforceability hereof or thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws from time to
time in effect and affecting the rights of creditors generally, (b) the
enforceability hereof or thereof is subject to general principles of equity, or
(c) the indemnification provisions hereof or thereof may be held to be violative
of public policy.
(iii) May Davis will deliver to each purchaser, prior to any
submission by such person of a written offer relating to the purchase of the
Preferred Stock, the Securities Purchase Agreement, the Registration Rights
Agreement, the Warrant and a copy of the Certificate of Designations.
(iv) Upon receipt of an executed Securities Purchase Agreement, a
Registration Rights Agreement and the payments representing subscriptions for
shares of Preferred Stock, May Davis will promptly forward copies of the
Securities Purchase Agreement and Registration Rights Agreement to the Company
or its counsel and shall forward all consideration received for such shares of
Preferred Stock to be held in escrow.
(v) May Davis will not deliver any Offering Materials to any
person it does not reasonably believe to be an Accredited Investor.
(vi) May Davis will not intentionally take any action that it
reasonably believes would cause the Offering to violate the provisions of the
Securities Act, the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), the respective rules and regulations promulgated thereunder
(the "Rules and Regulations") or applicable "Blue Sky" laws of any state or
jurisdiction.
<PAGE>
(vii) May Davis shall use all reasonable efforts to determine (a)
whether any prospective purchaser is an Accredited Investor and (b) that any
information furnished by a prospective investor is true and accurate. May Davis
shall have no obligation to insure that (a) any check, note, draft or other
means of payment for the Preferred Stock will be honored, paid or enforceable
against the subscriber in accordance with its terms, or (b) subject to the
performance of May Davis's obligations and the accuracy of May Davis's
representations and warranties hereunder, (i) the Offering is exempt from the
registration requirements of the Securities Act or any applicable state "Blue
Sky" law or (ii) any prospective purchaser is an Accredited Investor.
(viii) May Davis is a member of the National Association of
Securities Dealers, Inc., and is a broker-dealer registered as such under the
Exchange Act and under the securities laws of the states in which the Preferred
Stock will be offered or sold by May Davis, unless an exemption for such state
registration is available to May Davis. May Davis is in compliance with all
material rules and regulations applicable to May Davis generally and applicable
to May Davis's participation in the Offering.
(ix) Placement Agent agrees that Placement Agent shall not engage
in any transaction constituting a "short sale" (as defined in Rule 3b-3 of the
1934 Act) of Common Stock for a period of 12 months from the date of this
Agreement.
4. Representations and Warranties of the Company.
A. The Company represents and warrants as follows:
(i) The execution, delivery and performance of each of this Agreement,
the Securities Purchase Agreements, the Registration Rights Agreements, the
Warrant, the Placement Agent's Warrant, the Placement Agent's Registration
Rights Agreement and the Certificate of Designations has been or will be duly
and validly authorized by the Company and is, or with respect to the Securities
Purchase Agreements, the Registration Rights Agreements, the Warrant, the
Placement Agent's Warrant, the Placement Agent's Registration Rights Agreement
and the Certificate of Designations will be, a valid and binding agreement of
the Company, enforceable in accordance with their respective terms, except to
the extent that (a) the enforceability hereof or thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws from time to
time in effect and affecting the rights of creditors generally, (b) the
enforceability hereof or thereof is subject to general principles of equity or
(c) the indemnification provisions hereof or thereof may be held to be violative
of public policy. The Securities have been duly authorized and, when issued and
<PAGE>
paid for in accordance with the (x) this Agreement, the Warrant, the Certificate
of Designations, the Securities Purchase Agreements, the Placement Agent's
Warrant the certificates/instruments representing each of such Securities, (y)
will be valid and binding obligations of the Company, enforceable in accordance
with their respective terms, except to the extent that (a) the enforceability
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws from time to time in effect and affecting the rights of creditors
generally, and (b) the enforceability thereof is subject to general principles
of equity. All corporate action required to be taken for the authorization,
issuance and sale of the Securities has been duly and validly taken by the
Company.
(ii) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Offering Materials. The Company is not a
party to or bound by any instrument, agreement or other arrangement providing
for it to issue any capital stock, rights, warrants, options or other
securities, except for this Agreement and the agreements described herein and as
described in the Offering Materials. All issued and outstanding securities of
the Company, have been duly authorized and validly issued and are fully paid and
non-assessable; the holders thereof have no rights of rescission or preemptive
rights with respect thereto and are not subject to personal liability solely by
reason of being securityholders; and none of such securities was issued in
violation of the preemptive rights of any holders of any security of the
Company. The Company has 80,000,000 shares of authorized Common Stock, 6,648,631
of which will be issued and outstanding as of the date hereof. The Company has
20,000,000 authorized shares of Preferred Stock, of which 2,500 shares of
Redeemable Convertible Series A Preferred Stock will be outstanding after the
Offering.
(iii) The Securities have been duly authorized and when issued and
paid for in accordance with the (x) this Agreement, the Certificate of
Designations, the Securities Purchase Agreements, the Warrants, the Placement
Agent's Warrant, the certificates/instruments representing each of such
Securities, (y) will be validly issued, fully-paid and non-assessable; the
holders thereof will not be subject to personal liability solely by reason of
being such holders; such securities are not and will not be subject to the
preemptive rights of any holder of any security of the Company.
(iv) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property
necessary to conduct its business (including, without limitation any real or
personal property stated in the Offering Materials to be owned or leased by the
Company), free and clear of all liens, encumbrances, claims, security interests
<PAGE>
and defects of any material nature whatsoever, other than those set forth in the
Offering Materials and liens for taxes not yet due and payable.
(v) There is no litigation or governmental proceeding pending or, to
the best of the Company's knowledge, threatened against, or involving the
properties or business of the Company, except as set forth in the Offering
Materials.
(vi) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware. Except as
set forth in the Offering Materials, the Company does not own or control,
directly or indirectly, an interest in any other corporation, partnership,
trust, joint venture or other business entity. The Company is duly qualified or
licensed and in good standing as a foreign corporation in each jurisdiction in
which the character of its operations requires such qualification or licensing
and where failure to so qualify would have a material adverse effect on the
Company. The Company has all requisite corporate power and authority, and all
material and necessary authorizations, approvals, orders, licenses, certificates
and permits of and from all governmental regulatory officials and bodies
(domestic and foreign) to conduct its businesses (and proposed business) as
described in the Offering Materials, and the Company is doing business in strict
compliance with all such authorizations, approvals, orders, licenses,
certificates and permits and all foreign, federal, state and local laws, rules
and regulations concerning the business in which it is engaged. Any disclosures
in the Offering Materials concerning the effects of foreign, federal, state and
local regulation on the Company's businesses as currently conducted and as
contemplated are correct in all material respects and do not omit to state a
material fact. The Company has all corporate power and authority to enter into
this Agreement, the Securities Purchase Agreements, the Registration Rights
Agreements, the Placement Agent's Warrant, the Placement Agent's Registration
Rights Agreement and the Certificate of Designations and to carry out the
provisions and conditions hereof and thereof, and all consents, authorizations,
approvals and orders required in connection herewith and therewith have been
obtained or will have been obtained prior to the Termination Date. No consent,
authorization or order of, and no filing with, any court, government agency or
other body is required by the Company for the issuance of the Securities or
execution and delivery of the Securities Purchase Agreements and the Placement
Agent's Warrant, the Placement Agent's Registration Rights Agreement except for
applicable federal and state securities laws. The Company, since its inception,
has not incurred any liability arising under or as a result of the application
of any of the provisions of the Securities Act, the Exchange Act or the Rules
and Regulations.
<PAGE>
(vii) There has been no material adverse change in the condition or
prospects of the Company, financial or otherwise, from the latest dates as of
which such condition or prospects, respectively, are set forth in the Offering
Materials, and the outstanding debt, the property and the business of the
Company conform in all material respects to the descriptions thereof contained
in the Offering Materials.
(viii) Except as set forth in the Offering Materials, the Company is
not in breach of, or in default under, any term or provision of any material
indenture, mortgage, deed of trust, lease, note, loan or credit agreement or any
other material agreement or instrument evidencing an obligation for borrowed
money, or any other material agreement or instrument to which it is a party or
by which it or any of its properties may be bound or affected. The Company is
not in violation of any provision of its charter or Bylaws or in violation of
any franchise, license, permit, judgment, decree or order, or in violation of
any statute, rule or regulation. Neither the execution and delivery of this
Agreement, the Securities Purchase Agreements, the Registration Rights
Agreements, the Placement Agent's Warrant, or the Placement Agent's Registration
Rights Agreement, or the Certificate of Designations, nor the issuance and sale
or delivery of the Securities, nor the consummation of any of the transactions
contemplated herein or in the Securities Purchase Agreements, Placement Agent's
Warrant, or the Placement Agent's Registration Rights Agreement, nor the
compliance by the Company with the terms and provisions hereof or thereof, has
conflicted with or will conflict with, or has resulted in or will result in a
breach of, any of the terms and provisions of, or has constituted or will
constitute a default under, or has resulted in or will result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or pursuant to the terms of any indenture, mortgage, deed of trust,
note, loan or credit agreement or any other agreement or instrument evidencing
an obligation for borrowed money, or any other agreement or instrument to which
the Company may be bound or to which any of the property or assets of the
Company is subject except (a) where such default, lien, charge or encumbrance
would not have a material adverse effect on the Company and (b) as described in
the Offering Materials; nor will such action result in any violation of the
provisions of the charter or the Bylaws of the Company or, assuming the due
performance by May Davis of its obligations hereunder, any statute or any order,
rule or regulation applicable to the Company of any court or of any foreign,
federal, state or other regulatory authority or other government body having
jurisdiction over the Company.
(ix) Subsequent to the dates as of which information is given in the
Offering Materials, and except as may otherwise be indicated or contemplated
herein or therein, the Company has not (a) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money, or (b)
entered into any transaction other than in the ordinary course of business, or
<PAGE>
(c) declared or paid any dividend or made any other distribution on or in
respect of its capital stock. Except as described in the Offering Materials, the
Company has no outstanding obligations to any officer or director of the
Company.
(x) There are no claims for services in the nature of a finder' or
origination fee with respect to the sale of the Preferred Stock or any other
arrangements, agreements or understandings that may affect May Davis's
compensation, as determined by the National Association of Securities Dealers,
Inc.
(xi) The Company owns or possesses, free and clear of all liens or
encumbrances and rights thereto or therein by third parties, the requisite
licenses or other rights to use all trademarks, service marks, copyrights,
service names, trade names, patents, patent applications and licenses necessary
to conduct its business (including, without limitation, any such licenses or
rights described in the Offering Materials as being owned or possessed by the
Company) and, except as set forth in the Offering Materials, there is no claim
or action by any person pertaining to, or proceeding, pending or threatened,
which challenges the exclusive rights of the Company with respect to any
trademarks, service marks, copyrights, service names, trade names, patents,
patent applications and licenses used in the conduct of the Company's businesses
(including, without limitation, any such licenses or rights described in the
Offering Materials as being owned or possessed by the Company) except any claim
or action that would not have a material adverse effect on the Company; the
Company's current products, services or processes do not infringe or will not
infringe on the patents currently held by any third party.
(xii) Except as described in the Offering Materials, the Company is
not under any obligation to pay royalties or fees of any kind whatsoever to any
third party with respect to any trademarks, service marks, copyrights, service
names, trade names, patents, patent applications, licenses or technology it has
developed, uses, employs or intends to use or employ, other than to their
respective licensors.
(xiii) Subject to the performance by May Davis of its obligations
hereunder, the Offering Materials and the offer and sale of the Securities
comply, and will continue to comply, up to the Termination Date in all material
respects with the requirements of Rule 506 of Regulation D promulgated by the
Commission pursuant to the Securities Act and any other applicable federal and
state laws, rules, regulations and executive orders. Neither the Offering
Materials nor any amendment or supplement thereto nor any documents prepared by
the Company in connection with the Offering will 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. All statements of material facts in the
<PAGE>
Offering Materials are true and correct as of the date of the Offering Materials
and will be true and correct on the date of the Closing.
(xiv) All taxes which are due and payable from the Company have been
paid in full and the Company does not have any tax deficiency or claim
outstanding assessed or proposed against it.
(xv) The financial information of the Company included in the Offering
Materials fairly presents the financial position of the Company in accordance
with generally accepted accounting principles consistently applied. There has
been no adverse change or development involving a material prospective change in
the condition, financial or otherwise, or in the earnings, prospects,
stockholders' equity, value, operations, properties, business or results of
operations of the Company on a consolidated basis, whether or not arising in the
ordinary course of business, since the date of the most recent financial
information included in the Offering Materials; and the outstanding debt, the
property, both tangible and intangible, and the businesses of the Company
conform in all material respects to the descriptions thereof contained in the
Offering Materials.
(xvi) None of the Company nor any of its officers, directors,
employees or agents, nor any other person acting on behalf of the Company, has,
directly or indirectly, given or agreed to give any money, gift or similar
benefit (other than legal price concessions to customers in the ordinary course
of business) to any customer, supplier, employee or agent of a customer or
supplier, or official or employee of any governmental agency or instrumentality
of any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who is or may be in a position to
help or hinder the business of the Company (or assist it in connection with any
actual or proposed transaction) which (A) might subject the Company to any
damage or penalty in any civil, criminal or governmental litigation or
proceeding, or (B) if not given in the past, might have had a materially adverse
effect on the assets, business or operations of the Company as reflected in any
of the financial statements contained in the Offering Materials, or (C) if not
continued in the future, might adversely affect the assets, business, operations
or prospects of the Company in the future.
5. Certain Covenants and Agreements of the Company.
The Company covenants and agrees at its expense and without any
expense to May Davis as follows:
A. To advise May Davis of any material adverse change in the Company's
financial condition, prospects or business or of any development materially
affecting the Company or rendering untrue or misleading any material statement
<PAGE>
in the Offering Materials occurring at any time prior to the Closing as soon as
the Company is either informed or becomes aware thereof.
B. To use its best efforts to cause the Securities to be qualified or
registered for sale, or to obtain exemptions from such qualification or
registration requirements, on terms consistent with those stated in the Offering
Materials under the securities laws of such jurisdictions as May Davis shall
reasonably request, provided that such states and jurisdictions do not require
the Company to qualify as a foreign corporation. Qualification, registration and
exemption charges and fees shall be at the sole cost and expense of the Company.
C. Upon written request, to provide and continue to provide to each
holder of Securities participating in the Offering, so long as such holder shall
remain a security holder of the Company, for a period ending on the earlier of
(i) the registration of the Conversion Shares and Warrant Shares under the
Securities Act and (ii) three (3) years from the Termination Date, copies of all
quarterly financial statements and audited annual financial statements prepared
by or on behalf of the Company, other reports prepared by or on behalf of the
Company for public disclosure and all documents delivered to the Company's
stockholders.
D. To deliver, for a period ending on the earlier of (i) the
registration of the Conversion Shares and Warrant Shares under the Securities
Act and (ii) three (3) years following the Termination Date, to May Davis, upon
May Davis's request, in the manner provided in Section 10(B) of this Agreement:
(i) within forty five (45) days after the end of each of the first three
quarters of each fiscal year of the Company, commencing with the first quarter
ending after the Termination Date, a statement of its income for each such
quarterly period, and its balance sheet and a statement of changes in
stockholders' equity as of the end of such quarterly period, all in reasonable
detail, certified by its principal financial or accounting officer; (ii) within
ninety (90) days after the close of each fiscal year, its balance sheet as of
the close of such fiscal year, together with a statement of income, a statement
of changes in stockholders' equity and a statement of cash flow for such fiscal
year, such balance sheet, statement of income, statement of changes in
stockholders' equity and statement of cash flow to be in reasonable detail and
accompanied by a copy of the certificate or report thereon of independent
auditors if audited financial statements are prepared; and (iii) a copy of all
documents, reports and information furnished to its stockholders at the time
that such documents, reports and information are furnished to its stockholders.
E. To apply the proceeds of the Offering substantially in accordance
with the Offering Materials.
<PAGE>
F. To provide May Davis with as many copies of the Offering Materials
as May Davis may reasonably request.
G. To comply with the terms of the Securities Purchase Agreements, the
Registration Rights Agreements, the Placement Agent's Warrants, the Placement
Agent's Registration Rights Agreement, the Certificate of Designations and the
Warrants.
H. To keep available out of its authorized Common Stock solely for the
purpose of issuance upon the conversion of the Preferred Stock, the exercise of
the Warrants and the Placement Agent's Warrant, such number of shares of Common
Stock as shall then be issuable upon the exercise or conversion thereof.
I. To issue to May Davis, or May Davis's designee, at the Closing, the
Placement Agent Warrant to purchase 200,000 shares of Common Stock. Each
Placement Agent Warrant shall entitle the holder thereof to purchase one share
of Common Stock at an exercise price equal to 110% of the closing bid price of
the Common Stock on the Closing Date (subject to adjustment under certain
circumstances) at any time commencing from issuance until sixty (60) months
thereafter. The Placement Agent's Warrants shall not be redeemable by the
Company. The terms of the Placement Agent's Warrants shall be more fully set
forth in the certificate(s) representing the Placement Agent's Warrants.
J. To ensure that any transactions between or among the Company, or any
of its officers, directors and affiliates be on terms and conditions that are no
less favorable to the Company, than the terms and conditions that would be
available in an "arm's length" transaction with an independent third party.
6. Indemnification.
A. The Company hereby agrees that it will indemnify and hold May Davis
and each officer, director, shareholder, employee or representative of May
Davis, and each person controlling, controlled by or under common control with
May Davis within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act or the Rules and Regulations, harmless from and against any
and all loss, claim, damage, liability, cost or expense whatsoever (including,
but not limited to, any and all reasonable legal fees and other expenses and
disbursements incurred in connection with investigating, preparing to defend or
defending any action, suit or proceeding, including any inquiry or
investigation, commenced or threatened, or any claim whatsoever or in appearing
or preparing for appearance as a witness in any action, suit or proceeding,
including any inquiry, investigation or pretrial proceeding such as a
deposition) to which May Davis or such indemnified person of May Davis may
<PAGE>
become subject under the Securities Act, the Exchange Act, the Rules and
Regulations, or any other federal or state law or regulation, common law or
otherwise, arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in (A) Section 4 of this
Agreement, (B) the Offering Materials (except those written statements relating
to May Davis given by an indemnified person for inclusion therein), (C) any
application or other document or written communication executed by the Company
or based upon written information furnished by the Company filed in any
jurisdiction in order to qualify the Preferred Stock under the securities laws
thereof, or any state securities commission or agency; (ii) the omission or
alleged omission from documents described in clauses (A), (B) or (C) above of a
material fact required to be stated therein or necessary to make the statements
therein not misleading; or (iii) the breach of any representation, warranty,
covenant or agreement made by the Company in this Agreement. The Company further
agrees that upon demand by an indemnified person, at any time or from time to
time, it will promptly reimburse such indemnified person for any loss, claim,
damage, liability, cost or expense actually and reasonably paid by the
indemnified person as to which the Company has indemnified such person pursuant
hereto. Notwithstanding the foregoing provisions of this Paragraph 6(A), any
such payment or reimbursement by the Company of fees, expenses or disbursements
incurred by an indemnified person in any proceeding in which a final judgment by
a court of competent jurisdiction (after all appeals or the expiration of time
to appeal) is entered against May Davis or such indemnified person as a direct
result of May Davis or such person's gross negligence or willful misfeasance
will be promptly repaid to the Company.
B. May Davis hereby agrees that it will indemnify and hold the Company
and each officer, director, shareholder, employee or representative of the
Company, and each person controlling, controlled by or under common control with
the Company within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act or the Rules and Regulations, harmless from and against any
and all loss, claim, damage, liability, cost or expense whatsoever (including,
but not limited to, any and all reasonable legal fees and other expenses and
disbursements incurred in connection with investigating, preparing to defend or
defending any action, suit or proceeding, including any inquiry or
investigation, commenced or threatened, or any claim whatsoever or in appearing
or preparing for appearance as a witness in any action, suit or proceeding,
including any inquiry, investigation or pretrial proceeding such as a
deposition) to which the Company or such indemnified person of the Company may
become subject under the Securities Act, the Exchange Act, the Rules and
Regulations, or any other federal or state law or regulation, common law or
otherwise, arising out of or based upon (i) the conduct of May Davis or its
officers, employees or representatives in its acting as Placement Agent for the
Offering or (ii) the breach of any representation, warranty, covenant or
<PAGE>
agreement made by May Davis in this Agreement.
C. Promptly after receipt by an indemnified party of notice of
commencement of any action covered by Section 6(A) or 6(B), the party to be
indemnified shall, within five (5) business days, notify the indemnifying party
of the commencement thereof; the omission by one indemnified party to so notify
the indemnifying party shall not relieve the indemnifying party of its
obligation to indemnify any other indemnified party that has given such notice
and shall not relieve the indemnifying party of any liability outside of this
indemnification if not materially prejudiced thereby. In the event that any
action is brought against the indemnified party, the indemnifying party will be
entitled to participate therein and, to the extent it may desire, to assume and
control the defense thereof with counsel chosen by it which is reasonably
acceptable to the indemnified party. After notice from the indemnifying party to
such indemnified party of its election to so assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under such
Section 6(A) or 6(B) for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof, but the
indemnified party may, at its own expense, participate in such defense by
counsel chosen by it, without, however, impairing the indemnifying party's
control of the defense. Subject to the proviso of this sentence and
notwithstanding any other statement to the contrary contained herein, the
indemnified party or parties shall have the right to choose its or their own
counsel and control the defense of any action, all at the expense of the
indemnifying party if, (i) the employment of such counsel shall have been
authorized in writing by the indemnifying party in connection with the defense
of such action at the expense of the indemnifying party, or (ii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying party; provided, however, that the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstance, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys at any time for all such indemnified parties. No
settlement of any action or proceeding against an indemnified party shall be
made without the consent of the indemnifying party.
<PAGE>
D. In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Section 6(A) or 6(B)
is due in accordance with its terms but is for any reason held by a court to be
unavailable on grounds of policy or otherwise, the Company and May Davis shall
contribute to the aggregate losses, claims, damages and liabilities (including
legal or other expenses reasonably incurred in connection with the investigation
or defense of same) which the other may incur in such proportion so that May
Davis shall be responsible for such percent of the aggregate of such losses,
claims, damages and liabilities as shall equal the percentage of the gross
proceeds paid to May Davis and the Company shall be responsible for the balance;
provided, however, that no person guilty of fraudulent misrepresentation within
the meaning of Section 11(f) of the Securities Act shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 6(D), any person controlling,
controlled by or under common control with May Davis, or any partner, director,
officer, employee, representative or any agent of any thereof, shall have the
same rights to contribution as May Davis and each person controlling, controlled
by or under common control with the Company within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act and each officer of the
Company and each director of the Company shall have the same rights to
contribution as the Company. Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect of which a claim for contribution may be made
against the other party under this Section 6(D), notify such party from whom
contribution may be sought, but the omission to so notify such party shall not
relieve the party from whom contribution may be sought from any obligation they
may have hereunder or otherwise if the party from whom contribution may be
sought is not materially prejudiced thereby. The indemnity and contribution
agreements contained in this Section 6 shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of any
indemnified person or any termination of this Agreement.
7. Payment of Expenses.
Whether or not the Offering is successfully completed, the Company hereby agrees
to bear all of the expenses in connection with the Offering, including, but not
limited to the following: filing fees, printing and duplicating costs,
advertisements, postage and mailing expenses with respect to the transmission of
Offering Materials, registrar and transfer agent fees, escrow agent fees and
expenses, fees of the Company's counsel and accountants, issue and transfer
taxes, if any, and counsel fees and expenses (such counsel fees not to exceed
$20,000 plus out of pocket expenses).
<PAGE>
8. Conditions of the Closing
The Closing shall be held at the offices of May Davis or its counsel.
The obligations of May Davis hereunder shall be subject to the continuing
accuracy of the representations and warranties of the Company herein as of the
date hereof and as of the Closing with respect to the Company as if it had been
made on and as of the Closing; the accuracy on and as of the Closing of the
statements of the officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing of its
covenants and obligations hereunder and to the following further conditions:
A. At the Closing, May Davis shall receive the opinion of William B.
Barnett, Esq., counsel to the Company, dated as of the date of the Closing,
which opinion shall be in form and substance reasonably satisfactory to counsel
for May Davis.
B. At or prior to the Closing, counsel for May Davis shall have been
furnished such documents, certificates and opinions as they may reasonably
require for the purpose of enabling them to review or pass upon the matters
referred to in this Agreement and the Offering Materials, or in order to
evidence the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained.
C. At and prior to the Closing, (i) there shall have been no material
adverse change nor development involving a prospective change in the condition
or prospects or the business activities, financial or otherwise, of the Company
from the latest dates as of which such condition is set forth in the Offering
Materials; (ii) there shall have been no transaction, not in the ordinary course
of business, entered into by the Company which has not been disclosed in the
Offering Materials or to May Davis in writing; (iii) except as set forth in the
Offering Materials, the Company shall not be in default under any provision of
any instrument relating to any outstanding indebtedness for which a waiver or
extension has not been otherwise received; (iv) except as set forth in the
Offering Materials, the Company shall not have issued any securities (other than
those set forth in the Offering Materials) or declared or paid any dividend or
made any distribution of its capital stock of any class and there shall not have
been any change in the indebtedness (long or short term) or liabilities or
obligations of the Company (contingent or otherwise); (v) no material amount of
the assets of the Company shall have been pledged or mortgaged, except as
indicated in the Offering Materials; and (v) no action, suit or proceeding, at
law or in equity, against the Company or affecting any of its properties or
businesses shall be pending or threatened before or by any court or federal or
state commission, board or other administrative agency, domestic or foreign,
wherein an unfavorable decision, ruling or finding could materially adversely
affect the businesses, prospects or financial condition or income of the
Company, except as set forth in the Offering Materials.
<PAGE>
D. At the Closing, May Davis shall have received a certificate of the
Company signed by its chief executive officer and chief financial officer, dated
as of the date of the Closing, to the effect that the conditions set forth in
subparagraph (C) above have been satisfied and that, as of the Closing Date, the
representations and warranties of the Company set forth herein are true and
correct.
E. At the Closing, the Company shall have duly executed and delivered
to May Davis, or its designees, the Placement Agent's Warrants, in the names and
denominations specified by May Davis.
9. Termination.
This Agreement shall terminate if the Closing specified in Section 1(B)
does not take place on or before seven (7) business days following the
Termination Date or as soon thereafter as the funds received from subscriptions
have cleared the banking system in the normal course of business. Either May
Davis or the Company may terminate the Offering in its sole discretion prior to
the Closing. In the event that the Company determines to terminate the Offering
from and after the date hereof through the end of the Offering Period for any
reason other than May Davis's breach of the terms of this Agreement, and May
Davis is willing to proceed, then the Company shall immediately pay to May Davis
the amount of its out-of-pocket expenses. Upon such termination, the Securities
Purchase Agreements, Registration Rights Agreements and payments for the
Preferred Stock not previously delivered to the purchasers thereof, without
interest thereon or deduction therefrom, shall be returned to the respective
subscribers, May Davis shall have no further obligation to the Company, and the
Company shall have no obligation to May Davis. If May Davis does not or fails to
complete the Offering and the reasons therefor are reasonably related to a
material adverse change in the business or financial results, prospects or
condition of the Company, factors beyond May Davis control and through no fault
of its own or a material adverse change in market conditions then, in any such
case, the Company agrees to promptly pay May Davis its actual out-of-pocket
expenses, including the fees and disbursements of May Davis's legal counsel.
10. Miscellaneous.
A. This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all which shall be deemed to be
one and the same instrument.
<PAGE>
B. Any notice required or permitted to be given hereunder shall be
given in writing and shall be deemed effective when deposited in the United
States mail, postage prepaid, or when received if personally delivered or faxed,
addressed as follows:
To May Davis:
May Davis Group, Inc.
One World Trade Center - Suite 8735
New York, New York 10048
Attention:
with a copy to:
Silverman, Collura & Chernis, P.C.
Martin C. Licht, Esq.
381 Park Avenue South B Suite 1601
New York, New York 10016
Fax: (212) 779-8858
To the Company:
Digs, Inc.
17327 Ventura Blvd., Suite 200
Encino CA 91316
Attention: Peter Dunn
or to such other address of which written notice is given to the others.
C. This Agreement shall be governed by and construed in all respects
under the laws of the State of New York, without reference to its conflict of
laws rules or principles. Any suit, action, proceeding or litigation arising out
of or relating to this Agreement shall be brought and prosecuted in such federal
or state court or courts located within the State of New York as provided by
law. The parties hereby irrevocably and unconditionally consent to the
jurisdiction of each such court or courts located within the State of New York
and to service of process by registered or certified mail, return receipt
requested, or by any other manner provided by applicable law, and hereby
irrevocably and unconditionally waive any right to claim that any suit, action,
proceeding or litigation so commenced has been commenced in an inconvenient
forum.
<PAGE>
D. This Agreement and the other agreements referenced herein contain
the entire understanding between the parties hereto and may not be modified or
amended except by a writing duly signed by the party against whom enforcement of
the modification or amendment is sought.
E. If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
DIGS, INC.
By: /s/ PETER B. DUNN
--------------
Name: Peter B. Dunn
Title: President
MAY DAVIS GROUP, INC.
By: ________________________
Name:
Title:
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of March 14,
2000, by and among Digs, Inc. a Delaware corporation, with headquarters located
at 17327 Ventura Blvd., Suite 200, Encino CA 91316 (the "Company"), and the
investors listed on the Schedule of Buyers attached hereto (individually, a
"Buyer" and collectively, the "Buyers").
WHEREAS:
A. The Company and the Buyers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D ("Regulation D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 Act") and/or Rule 4(2) thereof;
B. The Company has authorized the following new series of its preferred
stock, par value $0.01 per share: the Company's Series A Convertible Preferred
Stock (the "Preferred Stock"), which shall be convertible into shares of the
Company's common stock, par value $0.01 per share (the "Common Stock") (as
converted, the "Conversion Shares"), in accordance with the terms of the
Company's Certificate of Designations, Preferences and Rights of the Preferred
Stock, substantially in the form attached hereto as Exhibit A (the "Certificate
of Designations");
C. The Buyers wish to purchase, upon the terms and conditions stated in
this "agreement, initially an aggregate of up to 2,500 shares of the Preferred
Stock (the "Preferred Shares") in the respective amounts set forth opposite
each Buyer's name on the Schedule of Buyers and warrants substantially in the
form attached hereto as Exhibit B (the "Warrants" ) to acquire 40 shares of
Common Stock (the "Warrant Shares") for each share of Preferred Stock purchased
by the Buyer.
D. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as Exhibit C (the "Registration Rights
Agreement") pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
NOW THEREFORE, the Company and the Buyers hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED SHARES.
a. Purchase of Preferred Shares. Subject to the satisfaction (or waiver) of
the conditions set forth in Sections 6(a) and 7(a) below, the Company shall
issue and sell to each Buyer and each Buyer severally agrees to purchase from
the Company the respective number of Preferred Shares set forth opposite such
<PAGE>
Buyer's name on the Schedule of Buyers, along with the related Warrants (the
"Closing"). The purchase price (the "Purchase Price") of each Preferred Share
and the related Warrants shall be an aggregate of $1,000. "Business Days" means
any day other than Saturday, Sunday or other day on which commercial banks in
the City of New York are authorized or required by law to remain closed.
b. The Closing Date. The date and time of the Closing (the "Closing Date")
shall be 10:00 a.m. Central Time, within three (3) Business Days following the
date hereof, subject to the satisfaction (or waiver) of the conditions to the
Closing set forth in Sections 6(a) and 7(a) (or such later date as is mutually
agreed to by the Company and the Buyers). The Closing shall occur on the Closing
Date at the offices of Silverman, Collura, & Chernis, P.C., 381 Park Avenue
South, New York, New York 10016.
c. Form of Payment. On the Closing Date, (i) each Buyer shall pay the
Purchase Price to the Company for the Preferred Shares, along with the related
Warrants to be issued and sold to such Buyer at such Closing, by wire transfer
of immediately available funds in accordance with the Company's written wire
instructions, less any amount withheld for expenses pursuant to Section 4(i),
and (ii) the Company shall deliver to each Buyer, stock certificates (in the
denominations as such Buyer shall request) (the "Preferred Stock Certificates")
representing such number of the Preferred Shares which such Buyer is then
purchasing hereunder along with the related Warrants, duly executed on behalf of
the Company and registered in the name of such Buyer or its designee.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants with respect to only itself that:
a. Investment Purpose. Such Buyer (i) is acquiring the Preferred Shares and
(ii) upon conversion of the Preferred Shares, will acquire the Conversion Shares
issuable upon conversion thereof (the Preferred Shares and the Conversion Shares
collectively are referred to herein as the "Securities"), for its own account
for investment only and not with a view towards, or for resale in connection
with, the public sale or distribution thereof, except pursuant to sales
registered or exempted under the 1933 Act; provided, however, that by making the
representations herein, such Buyer does not agree to hold any of 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 under the 1933 Act.
b. Accredited Investor Status. Such Buyer is an accredited investor" as
that term is defined in Rule 501(a)(3) of Regulation D.
c. Reliance on Exemptions. Such Buyer understands that the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of the United States federal and state securities laws
<PAGE>
and that the Company is relying in part upon the truth and accuracy of, and such
Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.
d. Information. Such Buyer and its advisors, if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Securities which
have been requested by such Buyer. Such Buyer and its advisors, if any, have
been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by such Buyer or
its advisors, if any, or its representatives shall modify, amend or affect such
Buyer's right to rely on the Company's representations and warranties contained
in Sections 3 and 9(m) below. Such Buyer understands that its investment in the
Securities involves a high degree of risk. Such Buyer has sought such
accounting, legal and tax advice as it has considered necessary to make an
informed investment decision with respect to its acquisition of the Securities.
e. No Governmental Review. Such Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
f. Transfer or Resale. Such Buyer understands that except as provided in
the Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that such
Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) such Buyer
provides the Company with reasonable assurance that such Securities can be sold,
assigned or transferred pursuant to Rule 144 promulgated under the 1933 Act, as
amended, (or a successor rule thereto) ("Rule 144"); (ii) any sale of the
Securities made in reliance on Rule 144 may be made only in accordance with the
terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the
Securities under circumstances in which the seller (or the person through whom
the sale is made) may be deemed to be an underwriter (as that term is defined in
the 1933 Act) may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (iii) neither the
Company nor any other person is under any obligation to register the Securities
under the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder. Notwithstanding the foregoing, the
Securities may be pledged in connection with a bona fide margin account or other
loan secured by the securities.
<PAGE>
g. Legends. Such Buyer understands that the certificates or other
instruments representing the Preferred Shares and the Warrants and, until such
time as the sale of the Conversion Shares and the Warrant Shares have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the stock certificates representing the Conversion Shares and the
Warrant Shares, except as set forth below, shall bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B) AN
OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION
IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR
(II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. NOTWITHSTANDING
THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA
FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY THE SECURITIES.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by federal or state securities laws, that
(i) such Securities are registered for resale under the 1933 Act, (ii) in
connection with a sale transaction, such holder provides the Company with an
opinion of counsel, in a generally acceptable form, to the effect that a public
sale, assignment or transfer of the Securities may be made without registration
under the 1933 Act, or (iii) such holder provides the Company with reasonable
assurances that the Securities can be sold pursuant to Rule 144 without any
restriction as to the number of securities acquired as of a particular date that
can then be immediately sold.
h. Authorization; Enforcement; Validity. This Agreement and the
Registration Rights Agreement have been duly and validly authorized, executed
and delivered on behalf of such Buyer and are valid and binding agreements of
such Buyer enforceable against such Buyer in accordance with their terms,
<PAGE>
subject as to enforceability to general principles of equity and to applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation and other
similar laws relating to, or affecting generally, the enforcement of applicable
creditors' rights and remedies.
i. Residency. Such Buyer is a resident of that country specified in its
address on the Schedule of Buyers.
1. Compensation. Such Buyer acknowledges that May Davis Group, Inc. will
receive compensation in connection with the offering of the Preferred Shares and
the Warrants in an amount equal to 10% of the gross proceeds from the sale of
the Preferred Shares together with a warrant to purchase 200,000 shares of
Common Stock.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers that:
a. Organization and Qualification. The Company and its "Subsidiaries"
(which for purposes of this Agreement means any entity in which the Company,
directly or indirectly, owns capital stock or holds an equity or similar
interest) are corporations duly organized and validly existing in good standing
under the laws of the jurisdiction in which they are incorporated, and have the
requisite corporate power and authorization to own their properties and to carry
on their business as now being conducted. Each of the Company and its
Subsidiaries is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which its ownership of property or the
nature of the business conducted by it makes such qualification necessary,
except to the extent that the failure to be so qualified or be in good standing
would not have a Material Adverse Effect. As used in this Agreement, "Material
Adverse Effect" means any material adverse effect on the business, properties,
assets, operations, results of operations, financial condition or prospects of
the Company and its Subsidiaries, if any, taken as a whole, or on the
transactions contemplated hereby or by the agreements and instruments to be
entered into in connection herewith, or on the authority or ability of the
Company to perform its obligations under the Transaction Documents (as defined
below). The Company has no Subsidiaries except as set forth on Schedule 3(a).
<PAGE>
b. Authorization; Enforcement; Validity. (i) The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement, the Registration Rights Agreement, the Irrevocable Transfer
Agent Instructions (as defined in Section 5), the Warrants and each of the other
agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the "Transaction
Documents"), and to issue the Securities in accordance with the terms hereof and
thereof, (ii) the execution and delivery of the Transaction Documents and the
execution and filing of the Certificate of Designations by the Company and the
consummation by it of the transactions contemplated hereby and thereby,
including without limitation the issuance of the Preferred Shares and the
reservation for issuance and the issuance of the Conversion Shares and the
Warrant Shares issuable upon conversion or exercise thereof have been duly
authorized and unanimously approved by the Company's Board of Directors and no
further consent or authorization is required by the Company, its Board of
Directors or its stockholders, (iii) this Agreement and the Registration Rights
Agreement have been duly executed and delivered by the Company, (iv) the
Transaction Documents, upon execution and delivery thereof, will constitute the
valid and binding obligations of the Company enforceable against the Company in
accordance with their terms, except as such enforceability may be limited by
general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors' rights and remedies, and (v)
prior to the Closing Date, the Certificate of Designations has been filed with
the Secretary of State of the State of Delaware and will be in full force and
effect, enforceable against the Company in accordance with its terms and shall
not have been amended unless in compliance with its terms.
c. Capitalization. As of the date hereof, the authorized capital stock of
the Company consists of (i) 80,000,000 shares of Common Stock, of which as of
the date hereof, 6,648,631 shares are issued and outstanding, 750,000 shares are
reserved for issuance pursuant to the Company's stock option and purchase plans
and -0- shares are issuable and reserved for issuance pursuant to securities
(other than the Preferred Shares and the Warrants) exercisable or exchangeable
for, or convertible into, shares of Common Stock and (ii) 20,000,000 shares of
Preferred Stock, of which as of the date hereof, no shares are issued and
outstanding. All of such outstanding shares have been, or upon issuance will
<PAGE>
be, validly issued and are fully paid and nonassessable. Except as disclosed in
Schedule 3(c), (A) no shares of the Company's capital stock are subject to
preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company; (B) there are no outstanding debt
securities issued by the Company; (C) there are no outstanding options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into, any shares of
capital stock of the Company or any of its Subsidiaries, or contracts,
commitments, understandings 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 or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company or any of its Subsidiaries; (D) there are no agreements or arrangements
under which the Company or any of its Subsidiaries is obligated to register the
sale of any of their securities under the 1933 Act (except the Registration
Rights Agreement); (E) there are no outstanding securities or instruments of the
Company or any of its Subsidiaries which contain any redemption or similar
provisions, and there are no contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to redeem a security of the Company or any of its Subsidiaries; (F) there
are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Securities as described in this
Agreement; and (G) the Company does not have any stock appreciation rights or
"phantom stock" plans or agreements or any similar plan or agreement. The
Company has furnished to the Buyer true and correct copies of the Company's
Certificate of Incorporation, as amended and as in effect on the date hereof
(the "Certificate of Incorporation"), and the Company's Bylaws, as amended and
as in effect on the date hereof (the "Bylaws"), and the terms of all securities
convertible into or exercisable for Common Stock and the material rights of the
holders thereof in respect thereto.
d. Issuance of Securities. The Preferred Shares are duly authorized and,
upon issuance in accordance with the terms hereof, shall be (i) validly issued,
fully paid and non-assessable, (ii) free from all taxes, liens and charges with
respect to the issue thereof and (iii) entitled to the rights and preferences
set forth in the Certificate of Designations. 80,000,000 shares of Common Stock
(subject to adjustment pursuant to the Company's covenant set forth in Section
<PAGE>
4(f) below) have been duly authorized and reserved for issuance upon conversion
of the Preferred Shares and upon exercise of the Warrants. Upon conversion or
exercise in accordance with the Certificate of Designations or the Warrants, as
the case may be, the Conversion Shares and the Warrant Shares will be validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issue thereof, with the holders being entitled to all rights
accorded to a holder of Common Stock. The issuance by the Company of the
Securities is exempt from registration under the 1933 Act, assuming that the
representations and warranties of each of the Buyers contained in Section 2 are
true and correct as to factual matters.
e. No Conflicts. Except as disclosed in Schedule 3(e), the execution,
delivery and performance of the Transaction Documents by the Company, the
performance by the Company of its obligations under the Certificate of
Designations and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the reservation
for issuance and issuance of the Conversion Shares and the Warrant Shares) will
not (i) result in a violation of the Certificate of Incorporation, any
Certificate of Designations, Preferences and Rights of any outstanding series of
preferred stock of the Company or the Bylaws; (ii) conflict with, or constitute
a default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, indenture or instrument
to which the Company or any of its Subsidiaries is a party; (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations and the rules and regulations
of the Principal Market (as defined below)) applicable to the Company or any of
its Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries is bound or affected. Except as disclosed in Schedule 3(e), neither
the Company nor its Subsidiaries is in violation of any term of its Certificate
of Incorporation, any Certificate of Designations, Preferences and Rights of any
outstanding series of preferred stock of the Company or Bylaws or their
organizational charter or bylaws, respectively. Except as disclosed in Schedule
3(e), neither the Company or any of its Subsidiaries is in violation of any term
of or in default under any contract, agreement, mortgage, indebtedness,
indenture, instrument, judgment, decree or order or any statute, rule or
regulation applicable to the Company or its Subsidiaries, except where such
violation would not result, either individually or in the aggregate, in a
Material Adverse Effect. The business of the Company and its Subsidiaries is not
being conducted, and shall not be conducted, in violation of any law, ordinance
or regulation of any governmental entity. Except as specifically contemplated by
<PAGE>
this Agreement and as required under the 1933 Act, the Company is not required
to obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency or any regulatory or
self-regulatory agency in order for it to execute, deliver or perform any of its
obligations under or contemplated by the Transaction Documents or to perform its
obligations under the Certificate of Designations, in each case in accordance
with the terms hereof or thereof. Except as disclosed in Schedule 3(e), all
consents, authorizations, orders, filings and registrations which the Company is
required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the date hereof. The Company and its Subsidiaries are
unaware of any facts or circumstances which might give rise to any of the
foregoing. The Company is not in violation of the listing requirements of the
Principal Market (as defined below), and has no actual knowledge of any facts
which would reasonably lead to delisting or suspension of the Common Stock by
the Principal Market in the foreseeable future.
f. SEC Documents; Financial Statements. The Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "1934 Act") (all of the foregoing filed prior to the date
hereof and all exhibits included therein and financial statements and schedules
thereto and documents incorporated by reference therein being hereinafter
referred to as the ASEC Documents". The Company has delivered to the Buyers or
their respective representatives true and complete copies of the SEC Documents.
As of their respective dates, the SEC Documents complied in all material
respects with the requirements of the 1934 Act and the rules and regulations of
the SEC promulgated thereunder applicable to the SEC Documents, and none of the
SEC Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
<PAGE>
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). No other
information provided by or on behalf of the Company to the Buyers which is not
included in the SEC Documents, contains any untrue statement of a material fact
or omits to state any material fact necessary in order to make the statements
therein, in the light of the circumstance under which they are or were made, not
misleading. Neither the Company nor any of its Subsidiaries or any of their
officers, directors, employees or agents have provided the Buyers with any
material, nonpublic information.
g. Absence of Certain Changes. Except as disclosed in Schedule 3(g), since
January 1, 1999 there has been no material adverse change and no material
adverse development in the business, properties, assets, operations, results of
operations, financial conditions or prospects of the Company or its
Subsidiaries. The Company has not taken any steps, and does not currently expect
to take any steps, to seek protection pursuant to any bankruptcy law nor does
the Company or any of its Subsidiaries have any knowledge or reason to believe
that its creditors intend to initiate involuntary bankruptcy proceedings or any
actual knowledge of any fact which would reasonably lead a creditor to do so.
Except as disclosed in Schedule 3(g), since January 1, 1999 the Company has not
declared or paid any dividends, sold any assets in excess of $25,000 outside of
the ordinary course of business or had capital expenditures in excess of
$25,000.
h. Absence of Litigation. There is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the Company
or any of its Subsidiaries, threatened against or affecting the Company, the
Common Stock or any of the Subsidiaries or any of the Company's or the
Subsidiaries' officers or directors in their capacities as such, except as
expressly set forth in Schedule 3(h). Except as set forth in Schedule 3(h), to
the knowledge of the Company none of the directors or officers of the Company
have been involved in securities related litigation during the past five years.
i. Acknowledgment Regarding Buyer's Purchase of Preferred Shares. The
Company acknowledges and agrees that each of the Buyers is acting solely in the
capacity of an arm's length purchaser with respect to the Transaction Documents
and the Certificate of Designation and the transactions contemplated hereby and
thereby. The Company further acknowledges that each Buyer is not acting as a
<PAGE>
financial advisor or fiduciary of the Company (or in any similar capacity) with
respect to the Transaction Documents and the Certificate of Designation and the
transactions contemplated hereby and thereby and any advice given by any of the
Buyers or any of their respective representatives or agents in connection with
the Transaction Documents and the Certificate of Designation and the
transactions contemplated hereby and thereby is merely incidental to such
Buyer's purchase of the Securities. The Company further represents to each Buyer
that the Company's decision to enter into the Transaction Documents has been
based solely on the independent evaluation by the Company and its
representatives.
j. No Undisclosed Events, Liabilities, Developments or Circumstances.
Except for the issuance of the Preferred Stock contemplated by this Agreement,
no event, liability, development or circumstance has occurred or exists, or is
contemplated to occur, with respect to the Company or its Subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly disclosed.
k. No General Solicitation. Neither the Company, nor any of its affiliates,
nor any person acting on its or their behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D under
the 1933 Act) in connection with the offer or sale of the Securities.
l. 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 security or solicited any offers to buy any security,
under circumstances that would require registration of any of the Securities
under the 1933 Act or cause this offering of the Securities to be integrated
with prior offerings by the Company for purposes of the 1933 Act or any
applicable stockholder approval provisions, including, without limitation, under
the rules and regulations of any exchange or automated quotation system on which
any of the securities of the Company are listed or designated, nor will the
Company or any of its Subsidiaries take any action or steps that would require
registration of any of the Securities under the 1933 Act or cause the offering
of the Securities to be integrated with other offerings.
m. Dilutive Effect. The Company understands and acknowledges that the
number of Conversion Shares issuable upon conversion of the Preferred Shares and
<PAGE>
the Warrant Shares issuable upon the exercise of the Warrants will increase in
certain circumstances. The Company further acknowledges that its obligation to
issue Conversion Shares upon conversion of the Preferred Shares in accordance
with this Agreement and the Certificate of Designations and its obligation to
issue the Warrant Shares upon exercise of the Warrants in accordance with this
Agreement and the Warrants, is, in each case, absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.
n. Employee Relations. Neither the Company nor any of its Subsidiaries is
involved in any union labor dispute nor, to the knowledge of the Company or any
of its Subsidiaries, is any such dispute threatened. None of the Company's or
its Subsidiaries' employees is a member of a union which relates to such
employee's relationship with the Company, neither the Company nor any of its
Subsidiaries is a party to a collective bargaining agreement, and the Company
and its Subsidiaries believe that their relations with their employees are good.
No executive officer (as defined in Rule 501(f) of the 1933 Act) has notified
the Company that such officer intends to leave the Company or otherwise
terminate such officer's employment with the Company. No executive officer, 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 such executive officer does not
subject the Company or any of its Subsidiaries to any liability with respect to
any of the foregoing matters.
o. Intellectual Property Rights. The Company and its Subsidiaries own or
possess adequate rights or licenses to use all trademarks, trade names, service
marks, service mark registrations, service names, patents, patent rights,
copyrights, inventions, licenses, approvals, governmental authorizations, trade
secrets and other intellectual property rights necessary to conduct their
respective businesses as now conducted. Except as set forth on Schedule 3(o),
none of the Company's trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions,
licenses, approvals, governmental authorizations, trade secrets or other
intellectual property rights have expired or terminated, or are expected to
expire or terminate within two years from the date of this Agreement. The
Company and its Subsidiaries do not have any knowledge of any infringement by
the Company or its Subsidiaries of trademarks, trade names, service marks,
service mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, trade secrets or other intellectual property rights of
others, or of any development of similar or identical trade secrets or technical
information by others and, except as set forth on Schedule 3(o), there is no
claim, action or proceeding being made or brought against, or to the Company's
knowledge, being threatened against, the Company or its Subsidiaries regarding
its trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, trade secrets,
<PAGE>
or infringement of other intellectual property rights; and the Company and its
Subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing. The Company and its Subsidiaries have taken reasonable
security measures to protect the secrecy, confidentiality and value of all of
their intellectual properties.
p. Environmental Laws. Except in such instances as could not, either
individually or in the aggregate, have a Material Adverse Effect, the Company
and its Subsidiaries (i) are in compliance with any and all applicable foreign,
federal, state and local laws and regulations relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"("Environmental Laws"
q. Title. The Company and its Subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
Subsidiaries, in each case free and clear of all liens, encumbrances and defects
except such as are described in Schedule 3(q) or such as do not materially
affect 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 of its Subsidiaries.
Any real property and facilities held under lease by the Company and any of its
Subsidiaries are held by them 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 facilities by the Company and its
Subsidiaries.
r. Insurance. The Company and each of its Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its Subsidiaries are
engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
Subsidiary 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 as may be necessary to continue its
<PAGE>
business at a cost that would not have a Material Adverse Effect, taken as a
whole.
s. Regulatory Permits. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such Subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit.
t. Internal Accounting Controls. The Company and each of its Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with management's general
or specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
u. No Materially Adverse Contracts, Etc. Neither the Company nor any of its
Subsidiaries is subject to any charter, corporate or other legal restriction, or
any judgment, decree, order, rule or regulation which in the judgment of the
Company's officers has or is expected in the future to have a Material Adverse
Effect. Neither the Company nor any of its Subsidiaries is a party to any
contract or agreement which in the judgment of the Company's officers has or is
expected to have a Material Adverse Effect.
v. Tax Status. The Company and each of its Subsidiaries (i) has made or
filed all federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject (unless and
only to the extent that the Company and each of its Subsidiaries has set aside
on its books provisions reasonably adequate for the payment of all unpaid and
unreported taxes), (ii) has paid all taxes and other governmental assessments
and charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and for which the Company has made appropriate reserves for on its books, and
(iii) has set aside on its books provisions reasonably adequate for the payment
of all taxes for periods subsequent to the periods to which such returns,
reports or declarations (referred to in clause (i) above) apply. There are no
<PAGE>
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim.
w. Transactions With Affiliates. Except as set forth on Schedule 3(w) and
in the SEC Documents filed at least ten days prior to the date hereof, none of
the officers, directors, or employees of the Company is presently a party to any
transaction with the Company or any of its Subsidiaries (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for rental of real or personal property to or from, or otherwise requiring
payments to or from any such officer, director or employee or, to the knowledge
of the Company, any corporation, partnership, trust or other entity in which any
such officer, director, or employee has a substantial interest or is an officer,
director, trustee or partner.
x. Application of Takeover Protections. The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation or the laws of
the state of its incorporation which is or could become applicable to the Buyers
as a result of the transactions contemplated by this Agreement, including,
without limitation, the Company's issuance of the Securities and the Buyers'
ownership of the Securities.
y. Rights Agreement. The Company has not adopted a shareholder rights plan
or similar arrangement relating to accumulations of beneficial ownership of
Common Stock or a change in control of the Company.
z. Foreign Corrupt Practices. Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any of its Subsidiaries 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 unlawful bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.
<PAGE>
aa. No Other Agreements. The Company has not, directly or indirectly, made
any agreements with any Buyers relating to the terms or conditions of the
transactions contemplated by the Transaction Documents except as set forth in
the Transaction Documents.
4. COVENANTS.
a. Best Efforts. Each party shall use its best efforts to timely satisfy
each of the conditions to be satisfied by it as provided in Sections 6 and 7 of
this Agreement.
b. Form D and Blue Sky. The Company agrees to file a Form D with respect to
the Securities as required under Regulation D and to provide a copy thereof to
each Buyer promptly after such filing. The Company shall, on or before the
Closing Dates, take such action as the Company shall reasonably determine is
necessary in order to obtain an exemption for or to qualify the Securities for
sale to the Buyer at the Closing pursuant to this Agreement under applicable
securities or "Blue Sky" laws of the states of the United States, and shall
provide evidence of any such action so taken to the Buyers on or prior to the
Closing Date. The Company shall make all filings and reports relating to the
offer and sale of the Securities required under applicable securities or "Blue
Sky" laws of the states of the United States following the Closing Date.
c. Reporting Status. Until the later of (i) the date which is one year
after the date as of which the Investors (as that term is defined in the
Registration Rights Agreement) may sell all of the Conversion Shares and the
Warrant Shares without restriction pursuant to Rule 144(k) promulgated under the
1933 Act (or successor thereto) and (ii) the date which is three (3) years from
the Closing Date (the "Reporting Period"), the Company shall file all reports
required to be filed with the SEC pursuant to the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would
otherwise permit such termination.
d. Use of Proceeds. The Company will use the proceeds from the sale of the
Preferred Shares for substantially the same purposes and in substantially the
same amounts as indicated in Schedule 4(d).
e. Financial Information. The Company agrees to send the following to each
Buyer during the Reporting Period: (i) within two (2) days after the filing
thereof with the SEC (unless available on the EDGAR System, in which case within
seven (7) days after the filing thereof with the SEC), a copy of its Annual
Reports on Form 10-K, its Quarterly Reports on Form 10-Q, any Current Reports on
<PAGE>
Form 8-K and any registration statements (other than on Form S-8) or amendments
filed pursuant to the 1933 Act, provided that if any such report is not filed
with the SEC through EDGAR then the Company shall deliver a copy of such report
to each Buyer by facsimile on the same day it is filed with the SEC; (ii) on the
same day as the release thereof, facsimile copies of all press releases issued
by the Company or any of its Subsidiaries; and (iii) copies of any notices and
other information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.
f. Reservation of Shares. The Company shall take all action necessary to at
all times have authorized, and reserved for the purpose of issuance, no less
than 200% of the number of shares of Common Stock needed to provide for the
issuance of the shares of Common Stock upon conversion of all outstanding
Preferred Shares (without regard to any limitations on conversions).
g. Additional Financing; Right of First Refusal. Subject to the exceptions
described below, the Company and its Controlled Subsidiaries (as defined below)
agrees that during the period beginning on the date hereof and ending twelve
(12) months following the Closing, neither the Company nor its Controlled
Subsidiaries will negotiate or contract with any party for any equity financing
(including any debt financing with an equity component) or issue any equity
securities of the Company or any Controlled Subsidiary or securities convertible
or exchangeable into or for equity securities of the Company or any Controlled
Subsidiary (including debt securities with an equity component) in any form (a
"Future Offering"). unless it shall have first delivered to each Buyer or a
designee appointed by such Buyer written notice (the "Future Offering Notice")
describing the proposed Future Offering, including the buyer and terms and
conditions thereof, and providing each Buyer an option to purchase up to its
Aggregate Percentage (as defined below) of the securities to be issued in such
Future Offering (the limitations referred to in this and the preceding sentence
are collectively referred to as the "Capital Raising Limitations"). For purposes
of this Section 4(g), "Aggregate Percentage" shall mean the percentage obtained
by dividing (i) the aggregate number of Preferred Shares initially issued to
such Buyer by (ii) the aggregate number of Preferred Shares initially issued to
all the Buyers. A Buyer can exercise its option to participate in a Future
Offering by delivering written notice to the Company within ten (10) Busi ness
Days after receipt of a Future Offering Notice, which notice shall state the
<PAGE>
quantity of securities being offered in the Future Offering that such Buyer will
purchase, up to its Aggregate Percentage, and that number of securities it is
willing to purchase in excess of its Aggregate Percentage. In the event that one
or more Buyers fail to elect to purchase up to each such Buyer's Aggregate
Percentage, then each Buyer which has indicated that it is willing to purchase a
number of securities in such Future Offering in excess of its Aggregate
Percentage shall be entitled to purchase its pro rata portion (determined in the
same manner as described in the preceding sentence) of the securities in the
Future Offering which one or more of the Buyers have not elected to purchase. In
the event the Buyers fail to elect to fully participate in the Future Offering
within the periods described in this Section 4(g), the Company shall have 45
days thereafter to sell the securities in the Future Offering that the Buyers
did not elect to purchase, upon terms and conditions, no more favorable to the
purchasers thereof than specified in the Future Offering Notice. In the event
the Company has not sold such securities of the Future Offering within such 45
day period, the Company shall not thereafter issue or sell such securities
without first offering such securities to the Buyers in the manner provided in
this Section 4(g). The Capital Raising Limitations shall not apply to (i) a loan
from a commercial bank which does not have any equity feature, (ii) any
transaction involving the Company's issuances of securities (A) as consideration
in a merger or consolidation, (B) in connection with any strategic partnership
or joint venture (the primary purpose of which is not to raise equity capital),
or (C) as consideration for the acquisition of a business, product, license or
other assets by the Company, (iii) the issuance of Common Stock in an
underwritten public offering, (iv) the issuance of securities upon exercise or
conversion of the Company's options, warrants or other convertible securities
outstanding as of the date hereof and (v) the grant of additional options or
warrants, or the issuance of additional securities, under any Company stock
option plan, restricted stock plan or stock purchase plan for the benefit of the
Company's employees, consultants or directors. The Buyers shall not be required
to participate or exercise their right of first refusal with respect to a
particular Future Offering in order to exercise their right of first refusal
with respect to later Future Offerings. "Controlled Subsidiaries" means any
entity in which the Company, directly or indirectly, owns at least 50% of the
capital stock, equity or similar interest of such entity.
h. Listing. The Company shall promptly secure the listing of all of the
Registrable Securities (as defined in the Registration Rights Agreement) upon
each national securities exchange and automated quotation system, if any, upon
which shares of Common Stock are then listed (subject to official notice of
issuance) and shall maintain, so long as any other shares of Common Stock shall
be so listed, such listing of all Registrable Securities from time to time
issuable under the terms of the Transaction Documents and the Certificate of
Designations. The Company shall maintain the Common Stock's authorization for
<PAGE>
quotation on National Association of Securities Dealers Inc.'s OTC Bulletin
Board on Nasdaq or NYSE or AMEX. Neither the Company nor any of its Subsidiaries
shall take any action which would be reasonably expected to result in the
delisting or suspension of the Common Stock from the Principal Market. The
Company shall pay all fees and expenses in connection with satisfying its
obligations under this Section 4(h).
i. Expenses. The Company shall pay the legal fees in the amount of $20,000
and out of pocket expenses to Silverman Collura & Chernis, P.C. which amount
shall be disbursed from the net proceeds from the sale of the Preferred Shares
on the Closing Date.
j. Filing of Form 8-K. On or before the third (3rd) Business Day following
the Closing Date, the Company shall file a Form 8-K with the SEC describing the
terms of the transactions contemplated by the Transaction Documents and
including as exhibits to such 8-K this Agreement, the Certificate of
Designation, the Registration Rights Agreement, in the form required by the 1934
Act.
k. Transactions With Affiliates. So long as (i) any Preferred Shares or
Warrants are outstanding or (ii) any Buyer owns Conversion Shares or Warrant
Shares with a market value equal to or greater than $100,000, the Company shall
not, and shall cause each of its Controlled Subsidiaries not to, enter into,
amend, modify or supplement any agreement, transaction, commitment or
arrangement with any of its or any Controlled Subsidiary's officers, directors,
persons who were officers or directors at any time during the previous two
years, stockholders who beneficially own 5% or more of the Common Stock, or
affiliates of the Company or its Controlled Subsidiaries or with any individual
related by blood, marriage or adoption to any such individual or with any entity
in which any such entity or individual owns a 5% or more beneficial interest
(each a "Related Party"), except for (a) customary employment arrangements and
benefit programs on reasonable terms, (b) any agreement, transaction, commitment
or arrangement on an arms-length basis on terms no less favorable than terms
which would have been obtainable from a person other than such Related Party, or
(c) any agreement, transaction, commitment or arrangement which is approved by a
majority of the disinterested directors of the Company. For purposes hereof, any
director who is also an officer of the Company or any Controlled Subsidiary
shall not be a disinterested director with respect to any such agreement,
transaction, commitment or arrangement. "Affiliate" for purposes hereof means,
with respect to any person or entity, another person or entity that, directly or
indirectly, (i) has a 5% or more equity interest in that person or entity, (ii)
has 5% or more common ownership with that person or entity, (iii) controls that
<PAGE>
person or entity, or (iv) shares common control with that person or entity.
"Control" or "controls" for purposes hereof means that a person or entity has
the power, direct or indirect, to conduct or govern the policies of another
person or entity.
l. Capital and Surplus; Special Reserves. The Company agrees that the
capital of the Company (as such term is used in Section 154 of the General
Corporation Law of Delaware) in respect of the Preferred Shares shall be equal
to the aggregate par value of such Preferred Shares and that it shall not
increase the capital of the Company with respect to any shares of the Company's
capital stock at anytime on or after the date of this Agreement. The Company
also agrees that it shall not create any special reserves under Section 171 of
the General Corporation Law of Delaware without the prior written consent of
each holder of Preferred Shares. As long as any Preferred Shares remain
outstanding, the Company shall not account for as surplus or transfer to or
otherwise allocate to the Company's surplus account for purposes of the Delaware
General Corporation Law any of the capital represented by the Preferred Shares,
including, without limitation, for the purpose of reducing any of its capital
stock as contemplated by Section 244 of the Delaware General Corporation Law.
The amount to be represented in the capital account for the Preferred Stock at
all times for each outstanding Preferred Share shall be an amount equal to the
product of (i) the Liquidation Preference (as defined in the Certificate of
Designations) and (ii) the 133%.
m. Corporate Existence. So long as a Buyer beneficially owns any Preferred
Shares or Warrants, the Company shall maintain its corporate existence and shall
not sell all or substantially all of the Company's assets, except in the event
of a merger or consolidation or sale of all or substantially all of the
Company's assets, where the surviving or successor entity in such transaction
(i) assumes the Company's obligations hereunder and under the agreements and
instruments entered into in connection herewith and (ii) is a publicly traded
corporation whose common stock is quoted on or listed for trading on Nasdaq,
AMEX or NYSE.
n. Restriction on Short Sales. Each Buyer agrees that the Buyer shall not
engage in any transaction constituting a "short sale" (as defined in Rule 3b-3
of the 1934 Act) of the Common Stock (collectively, "Short Sales").
Notwithstanding the foregoing, the restriction on Short Sales set forth in the
first sentence of this Section 4(n) shall not apply (a) on and after any date on
which the Common Stock is not listed or quoted on the Bulletin Board, Nasdaq
SmallCap or National Market or The New York Stock Exchange, Inc. or has been
<PAGE>
suspended from trading on any such exchange (excluding suspensions of not more
than one day resulting from business announcements by the Company), or any such
delisting or suspension is threatened or pending; (b) on or after any date on
which there shall have occurred an event constituting a Change of Control or a
Triggering Event or an event that with the passage of time and without being
cured would constitute a Triggering Event; (c) on or after any date on which
there shall have been an announcement of a pending, proposed or intended Change
of Control; (d) on or after any date on which the Company issues or sells or is
deemed to have issued or sold any Convertible Securities or Options (both as
defined in the Certificate of Designations) that are convertible into or
exercisable or exchangeable for shares of Common Stock at a conversion or
exercise price which varies or may vary with the market price of the Common
Stock, including by way of one or more reset(s) to a fixed price; or (e) with
respect to a short sale so long as the Buyer delivers a Conversion Notice (as
defined in the Certificate of Designations) within two Business Days of such
Short Sale entitling such Buyer to receive a number of shares of Common Stock at
least equal to the number of shares of Common Stock sold in such Short Sale.
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions to its transfer agent, and
any subsequent transfer agent, to issue certificates, registered in the name of
each Buyer or its respective nominee(s), for the Conversion Shares and Warrant
Shares in such amounts as specified from time to time by each Buyer to the
Company upon conversion of the Preferred Shares or exercise of the Warrants (the
"Irrevocable Transfer Agent Instructions"). Prior to registration of the
Conversion Shares under the 1933 Act, all such certificates shall bear the
restrictive legend specified in Section 2(g). The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 5 and stop transfer instructions to give effect to Section 2(f)
(in the case of the Conversion Shares and the Warrant Shares, prior to
registration of the Conversion Shares and the Warrant Shares under the 1933 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.
If a Buyer provides the Company with an opinion of counsel, in a generally
acceptable form, to the effect that a public sale, assignment or transfer of the
Securities may be made without registration under the 1933 Act or the Buyer
provides the Company with reasonable assurances that the Securities can be sold
<PAGE>
pursuant to Rule 144 without any restriction as to the number of securities
acquired as of a particular date that can then be immediately sold, the Company
shall permit the transfer, and, in the case of the Conversion Shares and the
Warrant Shares, promptly instruct its transfer agent to issue one or more
certificates in such name and in such denominations as specified by such Buyer
and without any restrictive legend. The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the Buyers by
vitiating 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 will be inadequate and agrees, in the event of
a breach or threatened breach by the Company of the provisions of this Section
5, that the Buyers shall be entitled, in addition to all other available
remedies, to an order and/or 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.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
a. Closing Date. The obligation of the Company to issue and sell the
Preferred Shares and the Warrants to each Buyer is subject to the satisfaction,
at or before the Closing Date, of each of the following conditions, provided
that these conditions are for the Company's sole benefit and may be waived by
the Company at any time in its sole discretion by providing each Buyer with
prior written notice thereof:
(i) Such Buyer shall have executed each of the Transaction Documents to
which it is a party and delivered the same to the Company.
(ii) The Certificate of Designations shall have been filed with the
Secretary of State of the State of Delaware.
(iii) Such Buyer shall have delivered to the Company the Purchase Price for
the Preferred Shares (net of the amounts withheld pursuant to Section 4(i))being
purchased by such Buyer at the Closing by wire transfer of immediately available
funds pursuant to the wire instructions provided by the Company.
(iv) The representations and warranties of such Buyer shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date), and such Buyer shall have performed, satisfied and complied in all
<PAGE>
material respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by such Buyer
at or prior to the Closing Date.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
a. Closing Date. The obligation of each Buyer hereunder to purchase
the Preferred Shares and the Warrants from the Company at the Closing is subject
to the satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer's sole benefit and
may be waived by such Buyer at any time in its sole discretion by providing the
Company with prior written notice thereof:
(i) The Company shall have executed each of the Transaction Documents and
delivered the same to such Buyer.
(ii) The Certificate of Designations, shall have been filed with the
Secretary of State of the State of Delaware, and a copy thereof certified by
such Secretary of State shall have been delivered to such Buyer.
(iii) The Common Stock (x) shall be designated for quotation or listed on
the Principal Market and (y) shall not have been suspended by the SEC or the
Principal Market from trading on the Principal Market nor shall suspension by
the SEC or the Principal Market have been threatened either (A) in writing by
the SEC or the Principal Market or (B) by falling below the minimum listing
maintenance requirements of the Principal Market; and the Conversion Shares
issuable and Warrant Shares shall be listed upon the Principal Market.
(iv) The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date) and the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the Company
at or prior to the Closing Date.
<PAGE>
(v) Such Buyer shall have received the opinion dated as of the Closing
Date, in form, scope and substance reasonably satisfactory to such Buyer and in
substantially the form of Exhibit D attached hereto.
(vi) The Company shall have executed and delivered to such Buyer the
Preferred Stock Certificates and the Warrants (in such denominations as such
Buyer shall request) for the Preferred Shares and Warrants being purchased by
such Buyer at the Closing.
(vii) The Board of Directors of the Company shall have adopted resolutions
consistent with Section 3(b)(ii) above and in a form reasonably acceptable to
such Buyer (the "Resolutions").
(viii) As of the Closing Date, the Company shall have reserved out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Preferred Shares and the exercise of the Warrants, at least
_______________ shares of Common Stock.
(ix) The Irrevocable Transfer Agent Instructions, in the form of Exhibit E
attached hereto, shall have been delivered to and acknowledged in writing by the
Company's transfer agent.
(x) The Company shall have delivered to such Buyer a certificate evidencing
the incorporation and good standing of the Company and each Subsidiary in such
entity's state of incorporation or organization issued by the Secretary of State
of such state of incorporation or organization as of a date within ten days of
the Closing Date.
(xi) The Company shall have delivered to such Buyer a certified copy of the
Certificate of Incorporation as certified by the Secretary of State of the State
of Delaware as of a date within ten days of the Closing Date.
(xii) The Company shall have delivered to such Buyer a secretary's
certificate, dated as the Closing Date, as to (A) the Resolutions, (B) the
Certificate of Incorporation and (C) the Bylaws, each as in effect at the
Initial Closing.
<PAGE>
(xiii) The Company shall have made all filings under all applicable federal
and state securities laws necessary to consummate the issuance of the Securities
pursuant to this Agreement in compliance with such laws.
(xiv) Each Buyer shall have delivered the Purchase Price for the Preferred
Shares and the Warrants purchased by such Buyer at the Closing pursuant to this
Agreement.
(xv) The Company shall have delivered to such Buyer such other documents
relating to the transactions contemplated by this Agreement as such Buyer or its
counsel may reasonably request.
8. INDEMNIFICATION. In consideration of each Buyer's execution and delivery of
the Transaction Documents and acquiring the Securities thereunder and in
addition to all of the Company's other obligations under the Transaction
Documents and the Certificate of Designations, the Company shall defend,
protect, indemnify and hold harmless each Buyer and each other holder of the
Securities and all of their stockholders, officers, directors, employees and
direct or indirect investors and any of the foregoing persons' agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the
"Indemnitees") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby,
(c) any cause of action, suit or claim brought or made against such Indemnitee
and arising out of or resulting from the execution, delivery, performance or
enfo rcement of the Transaction Documents or any other certificate, instrument
or document contemplated hereby or thereby, (d) any transaction financed or to
be financed in whole or in part, directly or indirectly, with the proceeds of
the issuance of the Securities or (e) the status of such Buyer or holder of the
Securities as an investor in the Company. To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company
<PAGE>
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities which is permissible under applicable law. Except as
otherwise set forth herein, the mechanics and procedures with respect to the
rights and obligations under this Section 8 shall be the same as those set forth
in Sections 6(a) and (d) of the Registration Rights Agreement, including,
without limitation, those procedures with respect to the settlement of claims
and the Company's rights to assume the defense of claims.
<PAGE>
9. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law; Jurisdiction; Jury Trial. The corporate laws of the State
of Delaware shall govern all issues concerning the relative rights of the
Company and its stockholders. All other questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
the internal laws of the State of New York, without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York. Each party hereby irrevocably
submits to the non-exclusive jurisdiction of the state and federal courts
sitting in the City of New York, borough of Manhattan, for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such suit, action
or proceeding is brought in an inconvenient forum or that the venue of such
suit, action or proceeding is improper. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION
OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
<PAGE>
b. Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party; provided that a facsimile signature shall be
considered due execution and shall be binding upon the signatory thereto with
the same force and effect as if the signature were an original, not a facsimile
signature.
c. Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement supersedes all other prior
oral or written agreements between the Buyers, the Company, their affiliates and
persons acting on their behalf with respect to the matters discussed herein, and
this Agreement and the instruments referenced herein contain the entire
understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the
Company nor any Buyer makes any representation, warranty, covenant or
undertaking with respect to such matters. No provision of this Agreement may be
amended other than by an instrument in writing signed by the Company and the
holders of at least two-thirds (b) of the Preferred Shares, and no provision
hereof may be waived other than by an instrument in writing signed by the party
against whom enforcement is sought. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Preferred Shares
then outstanding. No consideration shall be offered or paid to any person to
amend or consent to a waiver or modification of any provision of any of the
Transaction Documents or the Certificate of Designations unless the same
consideration also is offered to all of the parties to the Transaction Documents
or holders of Preferred Shares, as the case may be.
f. Notices. Any notices, consents, waivers or other communications required
or permitted to be given under the terms of this Agreement must be in writing
and will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one Business Day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
<PAGE>
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
Digs, Inc.
17327 Ventura Blvd., Suite 200
Encino, CA 91316
With a copy to:
Silverman, Collura & Chernis, P.C.
381 Park Avenue South, Suite 1601
New York, New York 10016
Telephone: (212) 779-8600
Facsimile: (212) 779-8858
Attention: Martin C. Licht
If to the Transfer Agent:
[To be supplied ]
If to a Buyer, to it at the address and facsimile number set forth on the
Schedule of Buyers, with copies to such Buyer's representatives as set forth on
the Schedule of Buyers, or at such other address and/or facsimile number and/or
to the attention of such other person as the recipient party has specified by
written notice given to each other party five days prior to the effectiveness of
such change. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a nationally recognized overnight delivery
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
g. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Preferred Shares. The Company shall not assign
<PAGE>
this Agreement or any rights or obligations hereunder without the prior written
consent of the holders of at least two-thirds (b) of the Preferred Shares then
outstanding, including by merger or consolidation, except pursuant to a Change
of Control (as defined in the Certificate of Designations) with respect to which
the Company is in compliance with Section 4 of the Certificate of Designations.
A Buyer may assign some or all of its rights hereunder without the consent of
the Company, provided, however, that any such assignment shall not release such
Buyer from its obligations hereunder unless such obligations are assumed by such
assignee and the Company has consented to such assignment and assumption, which
consent shall not be unreasonably withheld. Notwithstanding anything to the
contrary contained in the Transaction Documents, the Buyers shall be entitled to
pledge the Securities in connection with a bona fide margin account or other
loan secured by Securities.
h. No Third Party Beneficiaries. This Agreement is intended for the benefit
of the parties hereto and their respective permitted successors and assigns, and
is not for the benefit of, nor may any provision hereof be enforced by, any
other person.
i. Survival. Unless this Agreement is terminated under Section 9(l), the
representations and warranties of the Company and the Buyers contained in
Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9,
and the indemnification provisions set forth in Section 8, shall survive the
Closings. Each Buyer shall be responsible only for its own representations,
warranties, agreements and covenants hereunder.
j. Publicity. The Company and each Buyer shall have the right to approve
before issuance any press releases or any other public statements with respect
to the transactions contemplated hereby; provided, however, that the Company
shall be entitled, without the prior approval of any Buyer, to make any press
release or other public disclosure with respect to such transactions as is
required by applicable law, regulation, or rule of the NASD or Principal Market
(although each Buyer shall be consulted by the Company in connection with any
such press release or other public disclosure prior to its release and shall be
provided with a copy thereof).
k. Further Assurances. Each party shall do and perform, or cause to be done
and performed, all such further acts and things, and shall execute and deliver
all such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
<PAGE>
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
l. Termination. In the event that the Closing shall not have occurred with
respect to a Buyer on or before five (5) Business Days from the date hereof due
to the Company's or such Buyer's failure to satisfy the conditions set forth in
Sections 6(a) and 7(a) above (and the nonbreaching party's failure to waive such
unsatisfied condition(s)), the nonbreaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date without liability of any party to any other party;
provided, however, that if this Agreement is terminated pursuant to this Section
9(l), the Company shall remain obligated to reimburse any nonbreaching Buyers
for the expenses described in Section 4(i) above.
m. Placement Agent. The Company acknowledges that it has engaged May Davis
Group, Inc. as placement agent in connection with the sale of the Preferred
Shares, which placement agent may have formally or informally engaged other
agents on its behalf. The Company shall be responsible for the payment of any
placement agent's fees and consultant's fees in an aggregate amount equal to 10%
of the gross proceeds from the sale of the Preferred Shares together with a
warrant to purchase 200,000 shares of Common Stock. The Company shall pay, and
hold each Buyer harmless against, any liability, loss or expense (including,
without limitation, attorneys' fees and out of pocket expenses) arising in
connection with any such claim.
n. No Strict Construction. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.
o. Remedies. Each Buyer and each holder of the Securities shall have all
rights and remedies set forth in the Transaction Documents and the Certificate
of Designations and all rights and remedies which such holders have been granted
at any time under any other agreement or contract and all of the rights which
such holders have under any law. Any person having any rights under any
provision of this Agreement shall be entitled to enforce such rights
specifically (without posting a bond or other security), to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law.
<PAGE>
p. Payment Set Aside. To the extent that the Company makes a payment or
payments to the Buyers hereunder or pursuant to the Registration Rights
Agreement the Certificate of Designations or Warrants or the Buyers enforce or
exercise their rights hereunder or thereunder, and such payment or payments or
the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or otherwise
restored to the Company, a trustee, receiver or any other Person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
<PAGE>
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
COMPANY: BUYERS:
DIGS, INC.
By: /s/ PETER B. DUNN By:
---------------------
Name: Peter B. Dunn Name:
Title: President Title:
<PAGE>
SCHEDULES
Schedule 3(a) Subsidiaries
Schedule 3(c) Capitalization
Schedule 3(e) Conflicts
Schedule 3(g) Material Changes
Schedule 3(o) Intellectual Property
Schedule 3(q) Liens
Schedule 3(w) Certain Transactions
Schedule 4(d) Use of Proceeds
EXHIBITS
Exhibit A - Form of Certificate of Designations, Preferences and Rights of the
Series A Convertible Preferred Stock
Exhibit B - Form of Warrant
Exhibit C - Form of Registration Rights Agreement
Exhibit D - Form of Company Counsel Opinion
Exhibit E - Form of Irrevocable Transfer Agent Instructions
FORM OF WARRANT
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN A FORM REASONABLY
SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THIS WARRANT MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT.
DIGS, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No.: 102 Number of Shares: 200,000
Date of Issuance: March 14, 2000
Digs, Inc., a Delaware corporation (the "Company"), hereby certifies that, for
Ten United States Dollars ($10.00) and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, May Davis Group,
Inc., the registered holder hereof or its permitted assigns, is entitled,
subject to the terms set forth below, to purchase from the Company upon
surrender of this Warrant, at any time or times on or after the date hereof, but
not after 4:59 P.M. Pacific Time on the Expiration Date (as defined herein) two
hundred thousand (200,000) fully paid nonassessable shares of Common Stock (as
defined herein) of the Company (the "Warrant Shares") at the purchase price per
share provided in Section 1(b) below; provided, however, that in no event shall
the holder be entitled to exercise this Warrant for a number of Warrant Shares
in excess of that number of Warrant Shares which, upon giving effect to such
exercise, would cause the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates to exceed 4.99% of the
outstanding shares of the Common Stock following such exercise. For purposes of
the foregoing proviso, the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates shall include the number of
shares of Common Stock issuable upon exercise of this Warrant with respect to
which the determination of such proviso is being made, but shall exclude shares
of Common Stock which would be issuable upon (i) exercise of the remaining,
unexercised Warrants beneficially owned by the holder and its affiliates and
(ii) exercise or conversion of the unexercised or unconverted portion of any
other securities of the Company beneficially owned by the holder and its
affiliates (including, without limitation, any convertible notes or preferred
stock) subject to a limitation on conversion or exercise analogous to the
limitation contained herein. Except as set forth in the preceding sentence, for
<PAGE>
purposes of this paragraph, beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended. For purposes of this Warrant, in determining the number of outstanding
shares of Common Stock a holder may rely on the number of outstanding shares of
Common Stock as reflected in (1) the Company's most recent Form 10-Q or Form
10-K, as the case may be, (2) a more recent public announcement by the Company
or (3) any other notice by the Company or its transfer agent setting forth the
number of shares of Common Stock outstanding. Upon the written request of any
holder, the Company shall promptly, but in no event later than one (1) Business
Day following the receipt of such notice, confirm in writing to any such holder
the number of shares of Common Stock then outstanding. In any case, the number
of outstanding shares of Common Stock shall be determined after giving effect to
the exercise of Warrants (as defined below) by such holder and its affiliates
since the date as of which such number of outstanding shares of Common Stock was
reported.
Section 1.
(a) Placement Agent Agreement. This Warrant is one of the Common Stock
Purchase Warrants (the "Warrants") issued pursuant to the Placement Agent
Agreement dated as of February 29, 2000, among the Company and the Buyers
referred to therein (the "Placement Agent Agreement").
(b) Definitions. The following words and terms as used in this Warrant
shall have the following meanings:
(i) "Approved Stock Plan" shall mean any employee benefit plan which
has been approved by the Board of Directors of the Company, pursuant to
which the Company's securities may be issued to any employee, officer or
director for services provided to the Company.
(ii) "Business Day" means any day other than Saturday, Sunday or other
day on which commercial banks in the City of New York are authorized or
required by law to remain closed.
(iii) "Closing Bid Price" means the closing bid price of Common Stock
as quoted on the Principal Market (as reported by Bloomberg Financial
Markets ("Bloomberg") through its "Volume at Price" function).
(iv) "Common Stock" means (i) the Company's common stock, par value
$0.001 per share, and (ii) any capital stock into which such Common Stock
shall have been changed or any capital stock resulting from a
reclassification of such Common Stock.
(v) "Convertible Securities" means any stock or securities (other than
Options) directly or indirectly convertible into or exchangeable for Common
Stock.
<PAGE>
(vi) "Excluded Securities" means, provided such security is issued at
a price which is greater than or equal to the arithmetic average of the
Closing Bid Prices of the Common Stock for the ten (10) consecutive trading
days immediately preceding the date of issuance, any of the following: (a)
any issuance by the Company of securities in connection with a strategic
partnership or a joint venture (the primary purpose of which is not to
raise equity capital), (b) any issuance by the Company of securities as
consideration for a merger or consolidation or the acquisition of a
business, product, license, or other assets of another person or entity and
(c) options to purchase shares of Common Stock, provided (I) such options
are issued after the date of this Warrant to employees of the Company
within 30 days of such employee starting his employment with the Company,
(II) an aggregate of no more than 1,000,000 options are issued in reliance
on this exclusion and (III) the exercise price of such options is not less
than the Closing Bid Price of the Common Stock on the date of issuance of
such option.
(vii) "Expiration Date" means the date three (3) years from the
Issuance Date of this Warrant or, if such date falls on a Saturday, Sunday
or other day on which banks are required or authorized to be closed in the
City of New York or the State of New York or on which trading does not take
place on the principal exchange or automated quotation system on which the
Common Stock is traded (a "Holiday"), the next date that is not a Holiday.
(viii) "Issuance Date" means, with respect to each Warrant, the date
of closing pursuant to the Securities Purchase Agreement on which the
applicable Warrant is issued.
(ix) "Market Price" means, with respect to any security for any date
of determination, that price which shall be computed as the arithmetic
average of the Weighted Average Price for such security on each of the five
(5) consecutive trading days immediately preceding such date of
determination (all such determinations to be appropriately adjusted for any
stock dividend, stock split or similar transaction during the pricing
period).
(x) "Options" means any rights, warrants or options to subscribe for
or purchase Common Stock or Convertible Securities.
(xi) "Other Securities" means (i) those options and warrants of the
Company issued prior to, and outstanding on, the date of issuance of this
Warrant, (ii) the shares of Common Stock issuable on exercise of such
options and warrants, provided such options and warrants are not amended
after the issuance date of this Warrant, (iii) the Preferred Shares and
(iv) the shares of Common Stock issuabale upon conversion of the Preferred
Shares or exercise of the Warrants.
(xii) "Person" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
<PAGE>
(xiii) "Preferred Shares" means the shares of the Company's Series A
Redeemable Convertible Preferred Stock, $0.01 par value per share, issued
pursuant to the Securities Purchase Agreement.
(xiv) "Principal Market" means the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg or, if
no bid or sale information is reported for such security by Bloomberg, then
the average of the bid prices of each of the market makers for such
security as reported in the "pink sheets" by the National Quotation Bureau,
Inc.
(xv) "Registration Rights Agreement" means the Registration Rights
Agreement dated as of February 29, 2000 by and among the Company and the
Holder referred to therein with respect to the registration rights
pertaining to the Common Stock issuable upon exercise of this Warrant.
(xvi) "Securities Act" means the Securities Act of 1933, as amended.
(xvii) "Warrant" means this Warrant and all Warrants issued in
exchange, transfer or replacement thereof.
(xiii) "Warrant Exercise Price" shall be equal to, with respect to any
Warrant Shares, 110%of the Closing Bid Price of the Common Stock on the
Issuance Date, subject to adjustment as hereinafter provided.
(xix) "Warrant Shares" means the shares of Common Stock issuable at
any time upon exercise of this Warrant.
(xx) "Weighted Average Price" means, for any security as of any date,
the dollar volume-weighted average price for such security on the Principal
Market (as reported by Bloomberg). If the Weighted Average Price cannot be
calculated for such security on such date on any of the foregoing bases,
the Weighted Average Price of such security on such date shall be the fair
market value as mutually determined by the Company and the holders of the
Preferred Shares. If the Company and the holders of the Warrants are unable
to agree upon the fair market value of the Common Stock, then such dispute
shall be resolved pursuant to Section 2(a) below with the term "Weighted
Average Price" being substituted for the term "Market Price." All such
determinations to be appropriately adjusted for any stock dividend, stock
split or other similar transaction during such period.
<PAGE>
(c) Other Definitional Provisions.
(i) Except as otherwise specified herein, all references herein (A) to
the Company shall be deemed to include the Company's successors and (B) to
any applicable law defined or referred to herein shall be deemed references
to such applicable law as the same may have been or may be amended or
supplemented from time to time.
(ii) When used in this Warrant, the words "herein," "hereof," and
"hereunder," and words of similar import, shall refer to this Warrant as a
whole and not to any provision of this Warrant, and the words "Section,"
"Schedule," and "Exhibit" shall refer to Sections of, and Schedules and
Exhibits to, this Warrant unless otherwise specified.
(iii) Whenever the context so requires, the neuter gender includes the
masculine or feminine, and the singular number includes the plural, and
vice versa.
Section 2. Exercise of Warrant.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the holder hereof then registered on the books of the Company, in
whole or in part, at any time on any Business Day on or after the opening of
business on the date hereof and prior to 4:59 P.M. Pacific Time on the
Expiration Date by (i) delivery of a written notice, in the form of the
subscription notice attached as Exhibit A hereto (the "Exercise Notice"), of
such holder's election to exercise this Warrant, which notice shall specify the
number of Warrant Shares to be purchased, (ii) (A) payment to the Company of an
amount equal to the applicable Warrant Exercise Price multiplied by the number
of Warrant Shares as to which this Warrant is being exercised (plus any
applicable issue or transfer taxes) (the "Aggregate Exercise Price") in cash or
wire transfer of immediately available funds or (B) by notifying the Company
that this Warrant is being exercised pursuant to a Cashless Exercise (as defined
in Section 2(f)) and (iii) the surrender to a common carrier for overnight
delivery to the Company as soon as practicable following such date, this Warrant
(or an indemnification undertaking with respect to this Warrant in the case of
its loss, theft or destruction). In the event of any exercise of the rights
represented by this Warrant in compliance with this Section 2(a), the Company
shall on the second Business Day following the date of receipt of the Exercise
Notice, the Aggregate Exercise Price (or notice of a Cashless Exercise) and this
Warrant (or an indemnification undertaking with respect to this Warrant in the
case of its loss, theft or destruction) (the "Exercise Delivery Documents"),
credit such aggregate number of shares of Common Stock to which the holder shall
be entitled to the holder's or its designee's balance account with The
Depository Trust Company; provided, however, if the holder who submitted the
Exercise Notice requested physical delivery of any or all of the Warrant Shares,
then the Company shall, on or before the second Business Day following receipt
of the Exercise Delivery Documents issue and surrender to a common carrier for
overnight delivery to the address specified in the Exercise Notice, a
certificate, registered in the name of the holder, for the number of shares of
Common Stock to which the holder shall be entitled pursuant to such request.
<PAGE>
Upon delivery of the Exercise Notice and Aggregate Exercise Price referred to in
clause (ii)(A) above or notification to the Company of a Cashless Exercise
referred to in Section 2(e), the holder of this Warrant shall be deemed for all
corporate purposes to have become the holder of record of the Warrant Shares
with respect to which this Warrant has been exercised, irrespective of the date
of delivery of this Warrant as required by clause (iii) above or the
certificates evidencing such Warrant Shares. In the case of a dispute as to the
determination of the Warrant Exercise Price or the Market Price or the
arithmetic calculation of the Warrant Shares, the Company shall promptly issue
to the holder the number of Warrant Shares that is not disputed and shall submit
the disputed determinations or arithmetic calculations to the holder via
facsimile within one (1) Business Day of receipt of the holder's subscription
notice. If the holder and the Company are unable to agree upon the determination
of the Warrant Exercise Price or arithmetic calculation of the Warrant Shares
within one day of such disputed determination or arithmetic calculation being
submitted to the holder, then the Company shall immediately submit via facsimile
(i) the disputed determination of the Warrant Exercise Price or the Market Price
to an independent, reputable investment banking firm or (ii) the disputed
arithmetic calculation of the Warrant Shares to its independent, outside
accountant The Company shall cause the investment banking firm or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the holder of the results no later than forty-eight
(48) hours from the time it receives the disputed determinations or
calculations. Such investment banking firm's or accountant's determination or
calculation, as the case may be, shall be deemed conclusive absent manifest
error.
(b) Unless the rights represented by this Warrant shall have expired or
shall have been fully exercised, the Company shall, as soon as practicable and
in no event later than five (5) Business Days after any exercise and at its own
expense, issue a new Warrant identical in all respects to this Warrant exercised
except it shall represent rights to purchase the number of Warrant Shares
purchasable immediately prior to such exercise under this Warrant exercised,
less the number of Warrant Shares with respect to which such Warrant is
exercised.
(c) No fractional Warrant Shares are to be issued upon the exercise of this
Warrant, but rather the number of Warrant Shares issued upon exercise of this
Warrant shall be rounded up or down to the nearest whole number.
(d) If the Company shall fail for any reason or for no reason to issue to
the holder within three (3) Business Days of receipt of the Exercise Delivery
Documents, a certificate for the number of Warrant Shares to which the holder is
entitled or to credit the holder's balance account with The Depository Trust
Company for such number of Warrant which the holder is entitled upon the
holder's exercise of this Warrant, the Company shall, in addition to any other
remedies under this Warrant or the Placement Agent Agreement or otherwise
available to such holder, including any indemnification under the Placement
Agent Agreement, pay as additional damages in cash to such holder on each day
the issuance of such certificate for Warrant Shares is not timely effected an
amount equal to 0.5% of the product of (A) the sum of the number of Warrant
Shares not issued to the holder on a timely basis and to which the holder is
<PAGE>
entitled, and (B) the average of the Weighted Average Price of the Common Stock
for the three consecutive trading days immediately preceding the last possible
date which the Company could have issued such Common Stock to the holder without
violating this Section 2.
(e) If within five (5) Business Days after the Company's receipt of the
Exercise Delivery Documents, the Company fails to deliver a new Warrant to the
holder for the number of Warrant Shares of Common Stock to which such holder is
entitled pursuant to Section 2(b) hereof, then, in addition to any other
available remedies under this Warrant or the Placement Agent Agreement,
including indemnification pursuant thereto, or otherwise available to such
holder, the Company shall pay as additional damages in cash to such holder on
each day after such fifth (5th) Business Day that such delivery of such new
Warrant is not timely effected in an amount equal to 0.5% of the product of (A)
the number of Warrant Shares represented by the portion of this Warrant which is
not being exercised and (B) the average of the Weighted Average Prices of the
Common Stock for the three consecutive trading days immediately preceding the
last possible date which the Company could have issued such Warrant to the
holder without violating this Section 2.
(f) The holder of this Warrant may, at its election exercised in its sole
discretion, exercise this Warrant in whole or in part and, in lieu of making the
cash payment otherwise contemplated to be made to the Company upon such exercise
in payment of the Aggregate Exercise Price, elect instead to receive upon such
exercise the "Net Number" of shares of Common Stock determined according to the
following formula (a "Cashless Exercise"):
Net Number = (A x B) - (A x C)
-----------------
B
For purposes of the foregoing formula:
A= the total number of shares with respect to which this Warrant is then
being exercised.
B= the Closing Sale Price (as reported in Bloomberg) of the Common Stock
on the date immediately preceding the date of the subscription notice.
C= the Warrant Exercise Price then in effect for the applicable Warrant
Shares at the time of such exercise.
<PAGE>
Section 3. Covenants as to Common Stock. The Company hereby covenants and agrees
as follows:
(a) This Warrant is, and any Warrants issued in substitution for or
replacement of this Warrant will upon issuance be, duly authorized and validly
issued.
(b) All Warrant Shares which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable and free from all taxes, liens and charges with respect to the
issue thereof.
(c) During the period within which the rights represented by this Warrant
may be exercised, the Company will at all times have authorized and reserved at
least 100% of the number of shares of Common Stock needed to provide for the
exercise of the rights then represented by this Warrant and the par value of
said shares will at all times be less than or equal to the applicable Warrant
Exercise Price.
(d) The Company shall promptly file a registration statement with the
Securities and Exchange Commission to secure the listing of the Warrant Shares
on the Principal Market in accordance with the terms and conditions regarding
the registration rights of holders of Warrants set forth in the Registration
Rights Agreement and shall maintain, so long as any other shares of Common Stock
shall be so listed, such listing of all Warrant Shares from time to time
issuable upon the exercise of this Warrant; and the Company shall so list on
each national securities exchange or automated quotation system, as the case may
be, and shall maintain such listing of, any other shares of capital stock of the
Company issuable upon the exercise of this Warrant if and so long as any shares
of the same class shall be listed on such national securities exchange or
automated quotation system.
(e) The Company will not, by amendment of its Certificate of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Warrant Exercise Price then in effect,
and (ii) will take all such actions as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and nonassessable
shares of Common Stock upon the exercise of this Warrant.
(f) This Warrant will be binding upon any entity succeeding to the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets.
<PAGE>
Section 4. Taxes. The Company shall pay any and all taxes which may be
payable with respect to the issuance and delivery of Warrant Shares upon
exercise of this Warrant.
Section 5. Warrant Holder Not Deemed a Stockholder. Except as otherwise
specifically provided herein, no holder, as such, of this Warrant shall be
entitled to vote or receive dividends or be deemed the holder of shares of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities
on such holder to purchase any securities (upon exercise of this Warrant or
otherwise) or as a stockholder of the Company, whether such liabilities are
asserted by the Company or by creditors of the Company. Notwithstanding this
Section 5, the Company will provide the holder of this Warrant with copies of
the same notices and other information given to the stockholders of the Company
generally, contemporaneously with the giving thereof to the stockholders.
Section 6. Representations of Holder. The holder of this Warrant, by the
acceptance hereof, represents that it is acquiring this Warrant and the Warrant
Shares for its own account for investment only and not with a view towards, or
for resale in connection with, the public sale or distribution of this Warrant
or the Warrant Shares, except pursuant to sales registered or exempted under the
Securities Act; provided, however, that by making the representations herein,
the holder does not agree to hold this Warrant or any of the Warrant Shares for
any minimum or other specific term and reserves the right to dispose of this
Warrant and the Warrant Shares at any time in accordance with or pursuant to a
registration statement or an exemption under the Securities Act. The holder of
this Warrant further represents, by acceptance hereof, that, as of this date,
such holder is an "accredited investor" as such term is defined in Rule
501(a)(1) of Regulation D promulgated by the Securities and Exchange Commission
under the Securities Act (an "Accredited Investor"). Upon exercise of this
Warrant, other than pursuant to a Cashless Exercise, the holder shall, if
requested by the Company, confirm in writing, in a form satisfactory to the
Company, that the Warrant Shares so purchased are being acquired solely for the
holder's own account and not as a nominee for any other party, for investment,
and not with a view toward distribution or resale and that such holder is an
Accredited Investor. If such holder cannot make such representations because
they would be factually incorrect, it shall be a condition to such holder's
exercise of this Warrant, other than pursuant to a Cashless Exercise, that the
Company receive such other representations as the Company considers reasonably
necessary to assure the Company that the issuance of its securities upon
exercise of this Warrant shall not violate any United States or state securities
laws.
<PAGE>
Section 7. Ownership and Transfer.
(a) The Company shall maintain at its principal executive offices (or such
other office or agency of the Company as it may designate by notice to the
holder hereof), a register for this Warrant, in which the Company shall record
the name and address of the person in whose name this Warrant has been issued,
as well as the name and address of each transferee. The Company may treat the
person in whose name any Warrant is registered on the register as the owner and
holder thereof for all purposes, notwithstanding any notice to the contrary, but
in all events recognizing any transfers made in accordance with the terms of
this Warrant.
(b) This Warrant and the rights granted hereunder shall not be assignable
by the holder hereof without the written consent of the Company.
(c) The Company is obligated to register the Warrant Shares for resale
under the Securities Act pursuant to the Registration Rights Agreement and the
initial holder of this Warrant (and certain assignees thereof) is entitled to
the registration rights in respect of the Warrant Shares as set forth in the
Registration Rights Agreement.
Section 8. Adjustment of Warrant Exercise Price and Number of Shares. The
Warrant Exercise Price and the number of shares of Common Stock issuable upon
exercise of this Warrant shall be adjusted from time to time as follows:
(a) Adjustment of Warrant Exercise Price and Number of Shares upon Issuance
of Common Stock. If and whenever on or after the Issuance Date of this Warrant,
the Company issues or sells, or is deemed to have issued or sold, any shares of
Common Stock (other than (i) Excluded Securities and (ii) shares of Common Stock
which are issued or deemed to have been issued by the Company in connection with
an Approved Stock Plan or upon exercise or conversion of the Other Securities)
for a consideration per share less than a price (the "Applicable Price") equal
to the Warrant Exercise Price in effect immediately prior to such issuance or
sale, then immediately after such issue or sale the Warrant Exercise Price then
in effect shall be reduced to an amount equal to such consideration per share.
Upon each such adjustment of the Warrant Exercise Price hereunder, the number of
Warrant Shares issuable upon exercise of this Warrant shall be adjusted to the
number of shares determined by multiplying the Warrant Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Shares issuable
upon exercise of this Warrant immediately prior to such adjustment and dividing
the product thereof by the Warrant Exercise Price resulting from such djustment.
(b) Effect on Warrant Exercise Price of Certain Events. For purposes of
determining the adjusted Warrant Exercise Price under Section 8(a) above, the
following shall be applicable:
(i) Issuance of Options. If the Company in any manner grants any
Options and the lowest price per share for which one share of Common Stock
is issuable upon the exercise of any such Option or upon conversion or
exchange of any Convertible Securities issuable upon exercise of any such
<PAGE>
Option is less than the Applicable Price, then such share of Common Stock
shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the granting or sale of such Option for such price
per share. For purposes of this Section 8(b)(i), the Alowest price per
share for which one share of Common Stock is issuable upon exercise of such
Options or upon conversion or exchange of such "Convertible Securities"
shall be equal to the sum of the lowest amounts of consideration (if any)
received or receivable by the Company with respect to any one share of
Common Stock upon the granting or sale of the Option, upon exercise of the
Option or upon conversion or exchange of any Convertible Security issuable
upon exercise of such Option. No further adjustment of the Warrant Exercise
Price shall be made upon the actual issuance of such Common Stock or of
such Convertible Securities upon the exercise of such Options or upon the
actual issuance of such Common Stock upon conversion or exchange of such
Convertible Securities.
(ii) Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities and the lowest price per share
for which one share of Common Stock is issuable upon the conversion or
exchange thereof is less than the Applicable Price, then such share of
Common Stock shall be deemed to be outstanding and to have been issued and
sold by the Company at the time of the issuance or sale of such Convertible
Securities for such price per share. For the purposes of this Section
8(b)(ii), the Alowest price per share for which one share of Common Stock
is issuable upon such conversion or exchange" shall be equal to the sum of
the lowest amounts of consideration (if any) received or receivable by the
Company with respect to one share of Common Stock upon the issuance or sale
of the Convertible Security and upon conversion or exchange of such
Convertible Security. No further adjustment of the Warrant Exercise Price
shall be made upon the actual issuance of such Common Stock upon conversion
or exchange of such Convertible Securities, and if any such issue or sale
of such Convertible Securities is made upon exercise of any Options for
which adjustment of the Warrant Exercise Price had been or are to be made
pursuant to other provisions of this Section 8(b), no further adjustment of
the Warrant Exercise Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Rate of Conversion. If the purchase
price provided for in any Options, the additional consideration, if any,
payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock changes at any time, the Warrant
Exercise Price in effect at the time of such change shall be adjusted to
the Warrant Exercise Price which would have been in effect at such time had
such Options or Convertible Securities provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may
be, at the time initially granted, issued or sold and the number of Warrant
Shares issuable upon exercise of this Warrant shall be correspondingly
readjusted. For purposes of this Section 8(b)(iii), if the terms of any
Option or Convertible Security that was outstanding as of the Issuance Date
of this Warrant are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall
be deemed to have been issued as of the date of such change. No adjustment
pursuant to this Section 8(b) shall be made if such adjustment would result
<PAGE>
in an increase of the Warrant Exercise Price then in effect.
(c) Effect on Warrant Exercise Price of Certain Events. For purposes of
determining the adjusted Warrant Exercise Price under Sections 8(a) and 8(b),
the following shall be applicable:
(i) Calculation of Consideration Received. If any Common Stock,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed
to be the net amount received by the Company therefor. If any Common Stock,
Options or Convertible Securities are issued or sold for a consideration
other than cash, the amount of such consideration received by the Company
will be the fair value of such consideration, except where such
consideration consists of marketable securities, in which case the amount
of consideration received by the Company will be the Market Price of such
securities on the date of receipt of such securities. If any Common Stock,
Options or Convertible Securities are issued to the owners of the
non-surviving entity in connection with any merger in which the Company is
the surviving entity, the amount of consideration therefor will be deemed
to be the fair value of such portion of the net assets and business of the
non-surviving entity as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. The fair value of any
consideration other than cash or securities will be determined jointly by
the Company and the holders of Warrants representing at least two-thirds
(b) of the Warrant Shares issuable upon exercise of the Warrants then
outstanding. If such parties are unable to reach agreement within ten (10)
days after the occurrence of an event requiring valuation (the "Valuation
Event"), the fair value of such consideration will be determined within
five (5) Business Days after the tenth (10th) day following the Valuation
Event by an independent, reputable appraiser jointly selected by the
Company and the holders of Warrants representing at least two-thirds (b) of
the Warrant Shares issuable upon exercise of the Warrants then outstanding.
The determination of such appraiser shall be final and binding upon all
parties and the fees and expenses of such appraiser shall be borne jointly
by the Company and the holders of Warrants.
(ii) Integrated Transactions. In case any Option is issued in
connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the
Options will be deemed to have been issued for a consideration of $.01.
(iii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time does not include shares owned or held by or
for the account of the Company, and the disposition of any shares so owned
or held will be considered an issue or sale of Common Stock.
(iv) Record Date. If the Company takes a record of the holders of
Common Stock for the purpose of entitling them (1) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible
Securities or (2) to subscribe for or purchase Common Stock, Options or
<PAGE>
Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
(d) Adjustment of Warrant Exercise Price upon Subdivision or Combination of
Common Stock. If the Company at any time after the date of issuance of this
Warrant subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, any Warrant Exercise Price in effect immediately prior
to such subdivision will be proportionately reduced and the number of shares of
Common Stock obtainable upon exercise of this Warrant will be proportionately
increased. If the Company at any time after the date of issuance of this Warrant
combines (by combination, reverse stock split or otherwise) one or more classes
of its outstanding shares of Common Stock into a smaller number of shares, any
Warrant Exercise Price in effect immediately prior to such combination will be
proportionately increased and the number of Warrant Shares issuable upon
exercise of this Warrant will be proportionately decreased. Any adjustment under
this Section 8(d) shall become effective at the close of business on the date
the subdivision or combination becomes effective.
(e) Distribution of Assets. If the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets)
to holders of Common Stock, by way of return of capital or otherwise (including,
without limitation, any distribution of cash, stock or other securities,
property or options by way of a dividend, spin off, reclassification, corporate
rearrangement or other similar transaction) (a "Distribution"), at any time
after the issuance of this Warrant, then, in each such case:
(i) any Warrant Exercise Price in effect immediately prior to the
close of business on the record date fixed for the determination of holders
of Common Stock entitled to receive the Distribution shall be reduced,
effective as of the close of business on such record date, to a price
determined by multiplying such Warrant Exercise Price by a fraction of
which (A) the numerator shall be the Closing Sale Price of the Common Stock
on the trading day immediately preceding such record date minus the value
of the Distribution (as determined in good faith by the Company's Board of
Directors) applicable to one share of Common Stock, and (B) the denominator
shall be the Closing Sale Price of the Common Stock on the trading day
immediately preceding such record date; and
(ii) either (A) the number of Warrant Shares obtainable upon exercise
of this Warrant shall be increased to a number of shares equal to the
number of shares of Common Stock obtainable immediately prior to the close
of business on the record date fixed for the determination of holders of
Common Stock entitled to receive the Distribution multiplied by the
reciprocal of the fraction set forth in the immediately preceding clause
(i), or (B) in the event that the Distribution is of common stock of a
company whose common stock is traded on a national securities exchange or a
national automated quotation system, then the holder of this Warrant shall
<PAGE>
receive an additional warrant to purchase Common Stock, the terms of which
shall be identical to those of this Warrant, except that such warrant shall
be exercisable into the amount of the assets that would have been payable
to the holder of this Warrant pursuant to the Distribution had the holder
exercised this Warrant immediately prior to such record date and with an
exercise price equal to the amount by which the exercise price of this
Warrant was decreased with respect to the Distribution pursuant to the
terms of the immediately preceding clause (i).
(f) Certain Events. If any event occurs of the type contemplated by the
provisions of this Section 8 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
Board of Directors will make an appropriate adjustment in the Warrant Exercise
Price and the number of shares of Common Stock obtainable upon exercise of this
Warrant so as to protect the rights of the holders of the Warrants; provided
that no such adjustment pursuant to this Section 8(f) will increase the Warrant
Exercise Price or decrease the number of shares of Common Stock obtainable as
otherwise determined pursuant to this Section 8.
(g) Notices.
(i) Immediately upon any adjustment of the Warrant Exercise Price, the
Company will give written notice thereof to the holder of this Warrant,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment.
(ii) The Company will give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which the Company
closes its books or takes a record (A) with respect to any dividend or
distribution upon the Common Stock, (B) with respect to any pro rata
subscription offer to holders of Common Stock or (C) for determining rights
to vote with respect to any Organic Change (as defined below), dissolution
or liquidation, provided that such information shall be made known to the
public prior to or in conjunction with such notice being provided to such
holder.
(iii) The Company will also give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which any Organic
Change, dissolution or liquidation will take place, provided that such
information shall be made known to the public prior to or in conjunction
with such notice being provided to such holder.
Section 9. Purchase Rights; Reorganization, Reclassification, Consolidation,
Merger or Sale.
(a) In addition to any adjustments pursuant to Section 8 above, if at any
time the Company grants, issues or sells any Options, Convertible Securities or
rights to purchase stock, warrants, securities or other property pro rata to the
record holders of any class of Common Stock (the "Purchase Rights"), then the
holder of this Warrant will be entitled to acquire, upon the terms applicable to
such Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock acquirable
<PAGE>
upon complete exercise of this Warrant immediately before the date on which a
record is taken for the grant, issuance or sale of such Purchase Rights, or, if
no such record is taken, the date as of which the record holders of Common Stock
are to be determined for the grant, issue or sale of such Purchase Rights.
(b) Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Company's assets to another
Person or other transaction in each case which is effected in such a way that
holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as an "Organic Change." Prior to
the consummation of any (i) sale of all or substantially all of the Company's
assets to an acquiring Person or (ii) other Organic Change following which the
Company is not a surviving entity, the Company will secure from the Person
purchasing such assets or the successor resulting from such Organic Change (in
each case, the "Acquiring Entity") a written agreement (in form and substance
satisfactory to the holders of Warrants representing at least two-thirds (b) of
the Warrant Shares issuable upon exercise of the Warrants then outstanding) to
deliver to each holder of Warrants in exchange for such Warrants, a security of
the Acquiring Entity evidenced by a written instrument substantially similar in
form and substance to this Warrant and satisfactory to the holders of the
Warrants (including an adjusted warrant exercise price equal to the value for
the Common Stock reflected by the terms of such consolidation, merger or sale,
and exercisable for a corresponding number of shares of Common Stock acquirable
and receivable upon exercise of the Warrants (without regard to any limitations
or exercise), if the value so reflected is less than any Warrant Exercise Price
in effect immediately prior to such consolidation, merger or sale). Prior to the
consummation of any other Organic Change, the Company shall make appropriate
provision (in form and substance satisfactory to the holders of Warrants
representing a majority of the Warrant Shares issuable upon exercise of the
Warrants then outstanding) to insure that each of the holders of the Warrants
will thereafter have the right to acquire and receive in lieu of or in addition
to (as the case may be) the Warrant Shares immediately theretofore issuable and
receivable upon the exercise of such holder's Warrants (without regard to any
limitations on exercise), such shares of stock, securities or assets that would
have been issued or payable in such Organic Change with respect to or in
exchange for the number of Warrant Shares which would have been issuable and
receivable upon the exercise of such holder's Warrant as of the date of such
Organic Change (without taking into account any limitations or restrictions on
the exercisability of this Warrant).
Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant
is lost, stolen, mutilated or destroyed, the Company shall promptly, on receipt
of an indemnification undertaking (or, in the case of a mutilated Warrant, the
Warrant), issue a new Warrant of like denomination and tenor as this Warrant so
lost, stolen, mutilated or destroyed.
Section 11. Notice. Any notices, consents, waivers or other communications
<PAGE>
required or permitted to be given under the terms of this Warrant must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit with
a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Holder:
May Davis Group, Inc.
1 World Trade Center, Suite 8735
New York, NY 10048
Telephone: (212) 775-7400
Facsimile: (212) 775-8166
Attention:
If to the Company:
Digs, Inc.
17327 Ventura Blvd.
Encino, CA 91316
Telephone: (818) 995-3650
Facsimile: (818) 789-3985
Attention: President
With a copy to:
Silverman, Collura & Chernis, P.C.
381 Park Avenue South, Suite 1601
New York, New York 10016
Telephone: (212) 779-8600
Facsimile: (212) 779-8858
Attention: Martin C. Licht, Esq.
Each party shall provide five days' prior written notice to the other party
of any change in address or facsimile number. Written confirmation of receipt
(A) given by the recipient of such notice, consent, waiver or other
communication, (B) mechanically or electronically generated by the sender's
facsimile machine containing the time, date, recipient facsimile number and an
image of the first page of such transmission or (C) provided by a nationally
recognized overnight delivery service shall be rebuttable evidence of personal
service, receipt by facsimile or receipt from a nationally recognized overnight
delivery service in accordance with clause (i), (ii) or (iii) above,
respectively.
Section 12. Date. The date of this Warrant is March __, 2000. This Warrant,
in all events, shall be wholly void and of no effect after the close of business
on the Expiration Date, except that notwithstanding any other provisions hereof,
the provisions of Section 7(c) shall continue in full force and effect after
<PAGE>
such date as to any Warrant Shares or other securities issued upon the exercise
of this Warrant.
Section 13. Amendment and Waiver. Except as otherwise provided herein, the
provisions of the Warrants may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed by
it, only if the Company has obtained the written consent of the holders of
Warrants representing at least two-thirds (b) of the Warrant Shares issuable
upon exercise of the Warrants then outstanding; provided that no such action may
increase the Warrant Exercise Price or decrease the number of shares or class of
stock obtainable upon exercise of any Warrant without the written consent of the
holder of such Warrant.
Section 14. Descriptive Headings; Governing Law. The descriptive headings
of the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The corporate
laws of the State of Delaware shall govern all issues concerning the relative
rights of the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
governed by the internal laws of the State of New York, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
New York, or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of New York.
[Signature Page Follows]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
Peter B. Dunn, its President, to be effective as of the 14th day of March, 2000.
DIGS, INC.
By: /s/ PETER B. DUNN
----------------
Name: Peter B. Dunn
Title: President
<PAGE>
EXHIBIT A TO WARRANT
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
DIGS, INC.
The undersigned holder hereby exercises the right to purchase
_________________ of the shares of Common Stock ("Warrant Shares") of Digs,
Inc., a Delaware corporation (the "Company"), evidenced by the attached Warrant
(the "Warrant"). Capitalized terms used herein and not otherwise defined shall
have the respective meanings set forth in the Warrant.
1. Form of Warrant Exercise Price. The Holder intends that payment of
the Warrant Exercise Price shall be made as:
__________ a "Cash Exercise" with respect to _________________ Warrant
Shares; and/or
__________ a "Cashless Exercise" with respect to _______________Warrant
Shares (to the extent permitted by the terms of the Warrant).
2. Payment of Warrant Exercise Price. In the event that the holder has
elected a Cash Exercise with respect to some or all of the Warrant Shares to be
issued pursuant hereto, the holder shall pay the sum of $___________________ to
the Company in accordance with the terms of the Warrant.
3. Delivery of Warrant Shares. The Company shall deliver to the holder
__________ Warrant Shares in accordance with the terms of the Warrant.
Date: _______________ __, ______
Name of Registered Holder
By:
Name:
Title:
<PAGE>
EXHIBIT B TO WARRANT
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
________________, Federal Identification No. __________, a warrant to purchase
____________ shares of the capital stock of Digs, Inc., a Delaware corporation,
represented by warrant certificate no. _____, standing in the name of the
undersigned on the books of said corporation. The undersigned does hereby
irrevocably constitute and appoint ______________, attorney to transfer the
warrants of said corporation, with full power of substitution in the premises.
Dated: _________, ____
------------------------------------
By: _____________________________
Its: _____________________________
FORM OF WARRANT
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN A FORM REASONABLY
SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THIS WARRANT MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT.
DIGS, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No.: 101 Number of Shares: 100,000
Date of Issuance: March 14, 2000
Digs, Inc., a Delaware corporation (the "Company"), hereby certifies that, for
Ten United States Dollars ($10.00) and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, Calp II L.P., the
registered holder hereof or its permitted assigns, is entitled, subject to the
terms set forth below, to purchase from the Company upon surrender of this
Warrant, at any time or times on or after the date hereof, but not after 4:59
P.M. Pacific Time on the Expiration Date (as defined herein) One Hundred
Thousand (100,000) fully paid nonassessable shares of Common Stock (as defined
herein) of the Company (the "Warrant Shares") at the purchase price per share
provided in Section 1(b) below; provided, however, that in no event shall the
holder be entitled to exercise this Warrant for a number of Warrant Shares in
excess of that number of Warrant Shares which, upon giving effect to such
exercise, would cause the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates to exceed 4.99% of the
outstanding shares of the Common Stock following such exercise. For purposes of
the foregoing proviso, the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates shall include the number of
shares of Common Stock issuable upon exercise of this Warrant with respect to
which the determination of such proviso is being made, but shall exclude shares
of Common Stock which would be issuable upon (i) exercise of the remaining,
unexercised Warrants beneficially owned by the holder and its affiliates and
(ii) exercise or conversion of the unexercised or unconverted portion of any
other securities of the Company beneficially owned by the holder and its
affiliates (including, without limitation, any convertible notes or preferred
stock) subject to a limitation on conversion or exercise analogous to the
limitation contained herein. Except as set forth in the preceding sentence, for
<PAGE>
purposes of this paragraph, beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended. For purposes of this Warrant, in determining the number of outstanding
shares of Common Stock a holder may rely on the number of outstanding shares of
Common Stock as reflected in (1) the Company's most recent Form 10-Q or Form
10-K, as the case may be, (2) a more recent public announcement by the Company
or (3) any other notice by the Company or its transfer agent setting forth the
number of shares of Common Stock outstanding. Upon the written request of any
holder, the Company shall promptly, but in no event later than one (1) Business
Day following the receipt of such notice, confirm in writing to any such holder
the number of shares of Common Stock then outstanding. In any case, the number
of outstanding shares of Common Stock shall be determined after giving effect to
conversions of Preferred Shares and exercise of Warrants (as defined below) by
such holder and its affiliates since the date as of which such number of
outstanding shares of Common Stock was reported.
Section 1.
(a) Securities Purchase Agreement. This Warrant is one of the Common
Stock Purchase Warrants (the "Warrants") issued pursuant to the Securities
Purchase Agreement dated as of March 14, 2000, among the Company and the Buyers
referred to therein (the "Securities Purchase Agreement").
(b) Definitions. The following words and terms as used in this Warrant
shall have the following meanings:
(i) "Approved Stock Plan" shall mean any employee benefit plan
which has been approved by the Board of Directors of the Company, pursuant to
which the Company's securities may be issued to any employee, officer or
director for services provided to the Company.
(ii) "Business Day" means any day other than Saturday, Sunday or
other day on which commercial banks in the City of New York are authorized or
required by law to remain closed.
(iii) "Certificate of Designations" means the Company's
Certificate of Designations, Preferences and Rights of the Company's Series A
Redeemable Convertible Preferred Stock.
(iv) "Closing Bid Price" means the closing bid price of Common
Stock as quoted on the Principal Market (as reported by Bloomberg Financial
Markets ("Bloomberg") through its "Volume at Price" function).
(v) "Common Stock" means (i) the Company's common stock, par
value $0.01 per share, and (ii) any capital stock into which such Common Stock
<PAGE>
shall have been changed or any capital stock resulting from a reclassification
of such Common Stock.
(vi) "Convertible Securities" means any stock or securities
(other than Options) directly or indirectly convertible into or exchangeable for
Common Stock.
(vii) "Excluded Securities" means, provided such security is
issued at a price which is greater than or equal to the arithmetic average of
the Closing Bid Prices of the Common Stock for the ten (10) consecutive trading
days immediately preceding the date of issuance, any of the following: (a) any
issuance by the Company of securities in connection with a strategic partnership
or a joint venture (the primary purpose of which is not to raise equity
capital), (b) any issuance by the Company of securities as consideration for a
merger or consolidation or the acquisition of a business, product, license, or
other assets of another person or entity and (c) options to purchase shares of
Common Stock, provided (I) such options are issued after the date of this
Warrant to employees of the Company within 30 days of such employee starting his
employment with the Company, (II) an aggregate of no more than 1,000,000 options
are issued in reliance on this exclusion and (III) the exercise price of such
options is not less than the Closing Bid Price of the Common Stock on the date
of issuance of such option.
(viii) "Expiration Date" means the date three (3) years from the
Issuance Date of this Warrant or, if such date falls on a Saturday, Sunday or
other day on which banks are required or authorized to be closed in the City of
New York or the State of New York or on which trading does not take place on the
principal exchange or automated quotation system on which the Common Stock is
traded (a "Holiday"), the next date that is not a Holiday.
(ix) "Issuance Date" means, with respect to each Warrant, the
date of closing pursuant to the Securities Purchase Agreement on which the
applicable Warrant is issued.
(x) "Market Price" means, with respect to any security for any
date of determination, that price which shall be computed as the arithmetic
average of the Weighted Average Price for such security on each of the five (5)
consecutive trading days immediately preceding such date of determination (all
such determinations to be appropriately adjusted for any stock dividend, stock
split or similar transaction during the pricing period).
(xi) "Options" means any rights, warrants or options to subscribe
for or purchase Common Stock or Convertible Securities.
(xii) "Other Securities" means (i) those options and warrants of
the Company issued prior to, and outstanding on, the date of issuance of this
Warrant, (ii) the shares of Common Stock issuable on exercise of such options
and warrants, provided such options and warrants are not amended after the
issuance date of this Warrant, (iii) the Preferred Shares and (iv) the shares of
Common Stock issuabale upon conversion of the Preferred Shares or exercise of
the Warrants.
<PAGE>
(xiii) "Person" means an individual, a limited liability company,
a partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(xiv) "Preferred Shares" means the shares of the Company's Series
A Redeemable Convertible Preferred Stock, $0.01 par value per share, issued
pursuant to the Securities Purchase Agreement.
(xv) "Principal Market" means the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg or, if no
bid or sale information is reported for such security by Bloomberg, then the
average of the bid prices of each of the market makers for such security as
reported in the "pink sheets" by the National Quotation Bureau, Inc.
(xvi) "Registration Rights Agreement" means the Registration
Rights Agreement dated as of March 14, 2000 by and among the Company and the
Buyers referred to therein with respect to the registration rights pertaining to
the Common Stock issuable upon conversion of the Preferred Shares and exercise
of this Warrant.
(xvii) "Securities Act" means the Securities Act of 1933, as
amended.
(xviii) "Warrant" means this Warrant and all Warrants issued in
exchange, transfer or replacement thereof.
(xix) "Warrant Exercise Price" shall be equal to, with respect to
any Warrant Shares, 110%of the Closing Bid Price of the Common Stock on the
Issuance Date, subject to adjustment as hereinafter provided.
(xx) "Warrant Shares" means the shares of Common Stock issuable
at any time upon exercise of this Warrant.
(xxi) "Weighted Average Price" means, for any security as of any
date, the dollar volume-weighted average price for such security on the
Principal Market (as reported by Bloomberg). If the Weighted Average Price
cannot be calculated for such security on such date on any of the foregoing
bases, the Weighted Average Price of such security on such date shall be the
fair market value as mutually determined by the Company and the holders of the
Preferred Shares. If the Company and the holders of the Warrants are unable to
agree upon the fair market value of the Common Stock, then such dispute shall be
resolved pursuant to Section 2(a) below with the term "Weighted Average Price"
being substituted for the term "Market Price." All such determinations to be
appropriately adjusted for any stock dividend, stock split or other similar
transaction during such period.
<PAGE>
(c) Other Definitional Provisions.
(i) Except as otherwise specified herein, all references herein
(A) to the Company shall be deemed to include the Company's successors and (B)
to any applicable law defined or referred to herein shall be deemed references
to such applicable law as the same may have been or may be amended or
supplemented from time to time.
(ii) When used in this Warrant, the words "herein," "hereof," and
"hereunder," and words of similar import, shall refer to this Warrant as a whole
and not to any provision of this Warrant, and the words "Section," "Schedule,"
and AExhibit" shall refer to Sections of, and Schedules and Exhibits to, this
Warrant unless otherwise specified.
(iii) Whenever the context so requires, the neuter gender
includes the masculine or feminine, and the singular number includes the plural,
and vice versa.
Section 2. Exercise of Warrant.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the holder hereof then registered on the books of the Company, in
whole or in part, at any time on any Business Day on or after the opening of
business on the date hereof and prior to 4:59 P.M. Pacific Time on the
Expiration Date by (i) delivery of a written notice, in the form of the
subscription notice attached as Exhibit A hereto (the "Exercise Notice"), of
such holder's election to exercise this Warrant, which notice shall specify the
number of Warrant Shares to be purchased, (ii) (A) payment to the Company of an
amount equal to the applicable Warrant Exercise Price multiplied by the number
of Warrant Shares as to which this Warrant is being exercised (plus any
applicable issue or transfer taxes) (the "Aggregate Exercise Price") in cash or
wire transfer of immediately available funds or (B) by notifying the Company
that this Warrant is being exercised pursuant to a Cashless Exercise (as defined
in Section 2(f)) and (iii) the surrender to a common carrier for overnight
delivery to the Company as soon as practicable following such date, this Warrant
(or an indemnification undertaking with respect to this Warrant in the case of
its loss, theft or destruction). In the event of any exercise of the rights
represented by this Warrant in compliance with this Section 2(a), the Company
shall on the second Business Day following the date of receipt of the Exercise
Notice, the Aggregate Exercise Price (or notice of a Cashless Exercise) and this
Warrant (or an indemnification undertaking with respect to this Warrant in the
case of its loss, theft or destruction) (the "Exercise Delivery Documents"),
credit such aggregate number of shares of Common Stock to which the holder shall
be entitled to the holder's or its designee's balance account with The
Depository Trust Company; provided, however, if the holder who submitted the
Exercise Notice requested physical delivery of any or all of the Warrant Shares,
then the Company shall, on or before the second Business Day following receipt
of the Exercise Delivery Documents issue and surrender to a common carrier for
overnight delivery to the address specified in the Exercise Notice, a
certificate, registered in the name of the holder, for the number of shares of
Common Stock to which the holder shall be entitled pursuant to such request.
Upon delivery of the Exercise Notice and Aggregate Exercise Price referred to in
clause (ii)(A) above or notification to the Company of a Cashless Exercise
referred to in Section 2(e), the holder of this Warrant shall be deemed for all
corporate purposes to have become the holder of record of the Warrant Shares
with respect to which this Warrant has been exercised, irrespective of the date
of delivery of this Warrant as required by clause (iii) above or the
certificates evidencing such Warrant Shares. In the case of a dispute as to the
<PAGE>
determination of the Warrant Exercise Price or the Market Price or the
arithmetic calculation of the Warrant Shares, the Company shall promptly issue
to the holder the number of Warrant Shares that is not disputed and shall submit
the disputed determinations or arithmetic calculations to the holder via
facsimile within one (1) Business Day of receipt of the holder's subscription
notice. If the holder and the Company are unable to agree upon the determination
of the Warrant Exercise Price or arithmetic calculation of the Warrant Shares
within one day of such disputed determination or arithmetic calculation being
submitted to the holder, then the Company shall immediately submit via facsimile
(i) the disputed determination of the Warrant Exercise Price or the Market Price
to an independent, reputable investment banking firm or (ii) the disputed
arithmetic calculation of the Warrant Shares to its independent, outside
accountant The Company shall cause the investment banking firm or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the holder of the results no later than forty-eight
(48) hours from the time it receives the disputed determinations or
calculations. Such investment banking firm's or accountant's determination or
calculation, as the case may be, shall be deemed conclusive absent manifest
error.
(b) Unless the rights represented by this Warrant shall have expired
or shall have been fully exercised, the Company shall, as soon as practicable
and in no event later than five (5) Business Days after any exercise and at its
own expense, issue a new Warrant identical in all respects to this Warrant
exercised except it shall represent rights to purchase the number of Warrant
Shares purchasable immediately prior to such exercise under this Warrant
exercised, less the number of Warrant Shares with respect to which such Warrant
is exercised.
(c) No fractional Warrant Shares are to be issued upon the exercise of
this Warrant, but rather the number of Warrant Shares issued upon exercise of
this Warrant shall be rounded up or down to the nearest whole number.
(d) If the Company shall fail for any reason or for no reason to issue
to the holder within three (3) Business Days of receipt of the Exercise Delivery
Documents, a certificate for the number of Warrant Shares to which the holder is
entitled or to credit the holder's balance account with The Depository Trust
Company for such number of Warrant which the holder is entitled upon the
holder's exercise of this Warrant, the Company shall, in addition to any other
remedies under this Warrant or the Securities Purchase Agreement or otherwise
available to such holder, including any indemnification under Section 8 of the
Securities Purchase Agreement, pay as additional damages in cash to such holder
on each day the issuance of such certificate for Warrant Shares is not timely
effected an amount equal to 0.5% of the product of (A) the sum of the number of
Warrant Shares not issued to the holder on a timely basis and to which the
holder is entitled, and (B) the average of the Weighted Average Price of the
Common Stock for the three consecutive trading days immediately preceding the
last possible date which the Company could have issued such Common Stock to the
holder without violating this Section 2.
(e) If within five (5) Business Days after the Company's receipt of
<PAGE>
the Exercise Delivery Documents, the Company fails to deliver a new Warrant to
the holder for the number of Warrant Shares of Common Stock to which such holder
is entitled pursuant to Section 2(b) hereof, then, in addition to any other
available remedies under this Warrant or the Securities Purchase Agreement,
including indemnification pursuant to Section 8 thereof, or otherwise available
to such holder, the Company shall pay as additional damages in cash to such
holder on each day after such fifth (5th) Business Day that such delivery of
such new Warrant is not timely effected in an amount equal to 0.5% of the
product of (A) the number of Warrant Shares represented by the portion of this
Warrant which is not being exercised and (B) the average of the Weighted Average
Prices of the Common Stock for the three consecutive trading days immediately
preceding the last possible date which the Company could have issued such
Warrant to the holder without violating this Section 2.
(f) The holder of this Warrant may, at its election exercised in its
sole discretion, exercise this Warrant in whole or in part and, in lieu of
making the cash payment otherwise contemplated to be made to the Company upon
such exercise in payment of the Aggregate Exercise Price, elect instead to
receive upon such exercise the "Net Number" of shares of Common Stock determined
according to the following formula (a "Cashless Exercise"):
Net Number = (A x B) - (A x C)
-----------------
B
For purposes of the foregoing formula:
A= the total number of shares with respect to which this
Warrant is then being exercised.
B= the Closing Sale Price (as reported in Bloomberg) of the
Common Stock on the date immediately preceding the date of
the subscription notice.
C= the Warrant Exercise Price then in effect for the applicable
Warrant Shares at the time of such exercise.
Section 3. Covenants as to Common Stock. The Company hereby covenants and
agrees as follows:
(a) This Warrant is, and any Warrants issued in substitution for or
replacement of this Warrant will upon issuance be, duly authorized and validly
issued.
(b) All Warrant Shares which may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance, be validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issue thereof.
<PAGE>
(c) During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved at least 100% of the number of shares of Common Stock needed to provide
for the exercise of the rights then represented by this Warrant and the par
value of said shares will at all times be less than or equal to the applicable
Warrant Exercise Price.
(d) The Company shall promptly file a registration statement with the
Securities and Exchange Commission to secure the listing of the Warrant Shares
on the Principal Market in accordance with the terms and conditions regarding
the registration rights of holders of Warrants set forth in the Registration
Rights Agreement and shall maintain, so long as any other shares of Common Stock
shall be so listed, such listing of all Warrant Shares from time to time
issuable upon the exercise of this Warrant; and the Company shall so list on
each national securities exchange or automated quotation system, as the case may
be, and shall maintain such listing of, any other shares of capital stock of the
Company issuable upon the exercise of this Warrant if and so long as any shares
of the same class shall be listed on such national securities exchange or
automated quotation system.
(e) The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. No impairment of the designations, preferences and rights of the
Preferred Shares contained in the Company's Certificate of Designations or any
waiver thereof which has an adverse effect on the rights granted hereunder shall
be given effect until the Company has taken appropriate action (satisfactory to
the holders of the Warrants representing a majority of the shares of Common
Stock issuable upon the exercise of such Warrants then outstanding) to avoid
such adverse effect with respect to this Warrant. Without limiting the
generality of the foregoing, the Company (i) will not increase the par value of
any shares of Common Stock receivable upon the exercise of this Warrant above
the Warrant Exercise Price then in effect, and (ii) will take all such actions
as may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable shares of Common Stock upon the
exercise of this Warrant.
(f) This Warrant will be binding upon any entity succeeding to the
Company by merger, consolidation or acquisition of all or substantially all of
the Company's assets.
Section 4. Taxes. The Company shall pay any and all taxes which may be
payable with respect to the issuance and delivery of Warrant Shares upon
exercise of this Warrant.
<PAGE>
Section 5. Warrant Holder Not Deemed a Stockholder. Except as otherwise
specifically provided herein, no holder, as such, of this Warrant shall be
entitled to vote or receive dividends or be deemed the holder of shares of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities
on such holder to purchase any securities (upon exercise of this Warrant or
otherwise) or as a stockholder of the Company, whether such liabilities are
asserted by the Company or by creditors of the Company. Notwithstanding this
Section 5, the Company will provide the holder of this Warrant with copies of
the same notices and other information given to the stockholders of the Company
generally, contemporaneously with the giving thereof to the stockholders.
Section 6. Representations of Holder. The holder of this Warrant, by the
acceptance hereof, represents that it is acquiring this Warrant and the Warrant
Shares for its own account for investment only and not with a view towards, or
for resale in connection with, the public sale or distribution of this Warrant
or the Warrant Shares, except pursuant to sales registered or exempted under the
Securities Act; provided, however, that by making the representations herein,
the holder does not agree to hold this Warrant or any of the Warrant Shares for
any minimum or other specific term and reserves the right to dispose of this
Warrant and the Warrant Shares at any time in accordance with or pursuant to a
registration statement or an exemption under the Securities Act. The holder of
this Warrant further represents, by acceptance hereof, that, as of this date,
such holder is an "accredited investor" as such term is defined in Rule
501(a)(1) of Regulation D promulgated by the Securities and Exchange Commission
under the Securities Act (an "Accredited Investor"). Upon exercise of this
Warrant, other than pursuant to a Cashless Exercise, the holder shall, if
requested by the Company, confirm in writing, in a form satisfactory to the
Company, that the Warrant Shares so purchased are being acquired solely for the
holder's own account and not as a nominee for any other party, for investment,
and not with a view toward distribution or resale and that such holder is an
Accredited Investor. If such holder cannot make such representations because
they would be factually incorrect, it shall be a condition to such holder's
exercise of this Warrant, other than pursuant to a Cashless Exercise, that the
Company receive such other representations as the Company considers reasonably
necessary to assure the Company that the issuance of its securities upon
exercise of this Warrant shall not violate any United States or state securities
laws.
Section 7. Ownership and Transfer.
(a) The Company shall maintain at its principal executive offices (or
such other office or agency of the Company as it may designate by notice to the
holder hereof), a register for this Warrant, in which the Company shall record
the name and address of the person in whose name this Warrant has been issued,
as well as the name and address of each transferee. The Company may treat the
<PAGE>
person in whose name any Warrant is registered on the register as the owner and
holder thereof for all purposes, notwithstanding any notice to the contrary, but
in all events recognizing any transfers made in accordance with the terms of
this Warrant.
(b) This Warrant and the rights granted hereunder shall not be
assignable by the holder hereof without the written consent of the Company.
(c) The Company is obligated to register the Warrant Shares for resale
under the Securities Act pursuant to the Registration Rights Agreement and the
initial holder of this Warrant (and certain assignees thereof) is entitled to
the registration rights in respect of the Warrant Shares as set forth in the
Registration Rights Agreement.
Section 8. Adjustment of Warrant Exercise Price and Number of Shares. The
Warrant Exercise Price and the number of shares of Common Stock issuable upon
exercise of this Warrant shall be adjusted from time to time as follows:
(a) Adjustment of Warrant Exercise Price and Number of Shares upon
Issuance of Common Stock. If and whenever on or after the Issuance Date of this
Warrant, the Company issues or sells, or is deemed to have issued or sold, any
shares of Common Stock (other than (i) Excluded Securities and (ii) shares of
Common Stock which are issued or deemed to have been issued by the Company in
connection with an Approved Stock Plan or upon exercise or conversion of the
Other Securities) for a consideration per share less than a price (the
"Applicable Price") equal to the Warrant Exercise Price in effect immediately
prior to such issuance or sale, then immediately after such issue or sale the
Warrant Exercise Price then in effect shall be reduced to an amount equal to
such consideration per share. Upon each such adjustment of the Warrant Exercise
Price hereunder, the number of Warrant Shares issuable upon exercise of this
Warrant shall be adjusted to the number of shares determined by multiplying the
Warrant Exercise Price in effect immediately prior to such adjustment by the
number of Warrant Shares issuable upon exercise of this Warrant immediately
prior to such adjustment and dividing the product thereof by the Warrant
Exercise Price resulting from such djustment.
(b) Effect on Warrant Exercise Price of Certain Events. For purposes
of determining the adjusted Warrant Exercise Price under Section 8(a) above, the
following shall be applicable:
(i) Issuance of Options. If the Company in any manner grants any
Options and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion or exchange of
any Convertible Securities issuable upon exercise of any such Option is less
than the Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
granting or sale of such Option for such price per share. For purposes of this
Section 8(b)(i), the "lowest price per share for which one share of Common Stock
is issuable upon exercise of such Options or upon conversion or exchange of such
<PAGE>
Convertible Securities" shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon the granting or sale of the Option, upon exercise
of the Option or upon conversion or exchange of any Convertible Security
issuable upon exercise of such Option. No further adjustment of the Warrant
Exercise Price shall be made upon the actual issuance of such Common Stock or of
such Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange of such Convertible
Securities.
(ii) Issuance of Convertible Securities. If the Company in any
manner issues or sells any Convertible Securities and the lowest price per share
for which one share of Common Stock is issuable upon the conversion or exchange
thereof is less than the Applicable Price, then such share of Common Stock shall
be deemed to be outstanding and to have been issued and sold by the Company at
the time of the issuance or sale of such Convertible Securities for such price
per share. For the purposes of this Section 8(b)(ii), the "lowest price per
share for which one share of Common Stock is issuable upon such conversion or
exchange" shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to one share of Common
Stock upon the issuance or sale of the Convertible Security and upon conversion
or exchange of such Convertible Security. No further adjustment of the Warrant
Exercise Price shall be made upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustment of the Warrant Exercise Price had been or are to be made
pursuant to other provisions of this Section 8(b), no further adjustment of the
Warrant Exercise Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Rate of Conversion. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into
or exchangeable for Common Stock changes at any time, the Warrant Exercise Price
in effect at the time of such change shall be adjusted to the Warrant Exercise
Price which would have been in effect at such time had such Options or
Convertible Securities provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold and the number of Warrant Shares issuable upon
exercise of this Warrant shall be correspondingly readjusted. For purposes of
this Section 8(b)(iii), if the terms of any Option or Convertible Security that
was outstanding as of the Issuance Date of this Warrant are changed in the
manner described in the immediately preceding sentence, then such Option or
Convertible Security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such change. No adjustment pursuant to this Section 8(b) shall be made
if such adjustment would result in an increase of the Warrant Exercise Price
then in effect.
(c) Effect on Warrant Exercise Price of Certain Events. For purposes
of determining the adjusted Warrant Exercise Price under Sections 8(a) and 8(b),
the following shall be applicable:
<PAGE>
(i) Calculation of Consideration Received. If any Common Stock,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to
be the net amount received by the Company therefor. If any Common Stock, Options
or Convertible Securities are issued or sold for a consideration other than
cash, the amount of such consideration received by the Company will be the fair
value of such consideration, except where such consideration consists of
marketable securities, in which case the amount of consideration received by the
Company will be the Market Price of such securities on the date of receipt of
such securities. If any Common Stock, Options or Convertible Securities are
issued to the owners of the non-surviving entity in connection with any merger
in which the Company is the surviving entity, the amount of consideration
therefor will be deemed to be the fair value of such portion of the net assets
and business of the non-surviving entity as is attributable to such Common
Stock, Options or Convertible Securities, as the case may be. The fair value of
any consideration other than cash or securities will be determined jointly by
the Company and the holders of Warrants representing at least two-thirds (b) of
the Warrant Shares issuable upon exercise of the Warrants then outstanding. If
such parties are unable to reach agreement within ten (10) days after the
occurrence of an event requiring valuation (the "Valuation Event"), the fair
value of such consideration will be determined within five (5) Business Days
after the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the holders of Warrants
representing at least two-thirds (b) of the Warrant Shares issuable upon
exercise of the Warrants then outstanding. The determination of such appraiser
shall be final and binding upon all parties and the fees and expenses of such
appraiser shall be borne jointly by the Company and the holders of Warrants.
(ii) Integrated Transactions. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to
have been issued for a consideration of $.01.
(iii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time does not include shares owned or held by or for
the account of the Company, and the disposition of any shares so owned or held
will be considered an issue or sale of Common Stock.
(iv) Record Date. If the Company takes a record of the holders of
Common Stock for the purpose of entitling them (1) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (2) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
<PAGE>
(d) Adjustment of Warrant Exercise Price upon Subdivision or
Combination of Common Stock. If the Company at any time after the date of
issuance of this Warrant subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, any Warrant Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced and
the number of shares of Common Stock obtainable upon exercise of this Warrant
will be proportionately increased. If the Company at any time after the date of
issuance of this Warrant combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, any Warrant Exercise Price in effect immediately prior
to such combination will be proportionately increased and the number of Warrant
Shares issuable upon exercise of this Warrant will be proportionately decreased.
Any adjustment under this Section 8(d) shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(e) Distribution of Assets. If the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets)
to holders of Common Stock, by way of return of capital or otherwise (including,
without limitation, any distribution of cash, stock or other securities,
property or options by way of a dividend, spin off, reclassification, corporate
rearrangement or other similar transaction) (a "Distribution"), at any time
after the issuance of this Warrant, then, in each such case:
(i) any Warrant Exercise Price in effect immediately prior to the
close of business on the record date fixed for the determination of holders of
Common Stock entitled to receive the Distribution shall be reduced, effective as
of the close of business on such record date, to a price determined by
multiplying such Warrant Exercise Price by a fraction of which (A) the numerator
shall be the Closing Sale Price of the Common Stock on the trading day
immediately preceding such record date minus the value of the Distribution (as
determined in good faith by the Company's Board of Directors) applicable to one
share of Common Stock, and (B) the denominator shall be the Closing Sale Price
of the Common Stock on the trading day immediately preceding such record date;
and
(ii) either (A) the number of Warrant Shares obtainable upon
exercise of this Warrant shall be increased to a number of shares equal to the
number of shares of Common Stock obtainable immediately prior to the close of
business on the record date fixed for the determination of holders of Common
Stock entitled to receive the Distribution multiplied by the reciprocal of the
fraction set forth in the immediately preceding clause (i), or (B) in the event
that the Distribution is of common stock of a company whose common stock is
traded on a national securities exchange or a national automated quotation
system, then the holder of this Warrant shall receive an additional warrant to
purchase Common Stock, the terms of which shall be identical to those of this
Warrant, except that such warrant shall be exercisable into the amount of the
assets that would have been payable to the holder of this Warrant pursuant to
the Distribution had the holder exercised this Warrant immediately prior to such
record date and with an exercise price equal to the amount by which the exercise
price of this Warrant was decreased with respect to the Distribution pursuant to
<PAGE>
the terms of the immediately preceding clause (i).
(f) Certain Events. If any event occurs of the type contemplated by
the provisions of this Section 8 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's Board of Directors will make an appropriate adjustment in the Warrant
Exercise Price and the number of shares of Common Stock obtainable upon exercise
of this Warrant so as to protect the rights of the holders of the Warrants;
provided that no such adjustment pursuant to this Section 8(f) will increase the
Warrant Exercise Price or decrease the number of shares of Common Stock
obtainable as otherwise determined pursuant to this Section 8.
(g) Notices.
(i) Immediately upon any adjustment of the Warrant Exercise
Price, the Company will give written notice thereof to the holder of this
Warrant, setting forth in reasonable detail, and certifying, the calculation of
such adjustment.
(ii) The Company will give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which the Company closes its
books or takes a record (A) with respect to any dividend or distribution upon
the Common Stock, (B) with respect to any pro rata subscription offer to holders
of Common Stock or (C) for determining rights to vote with respect to any
Organic Change (as defined below), dissolution or liquidation, provided that
such information shall be made known to the public prior to or in conjunction
with such notice being provided to such holder.
(iii) The Company will also give written notice to the holder of
this Warrant at least ten (10) days prior to the date on which any Organic
Change, dissolution or liquidation will take place, provided that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to such holder.
Section 9. Purchase Rights; Reorganization, Reclassification,
Consolidation, Merger or Sale.
(a) In addition to any adjustments pursuant to Section 8 above, if at
any time the Company grants, issues or sells any Options, Convertible Securities
or rights to purchase stock, warrants, securities or other property pro rata to
the record holders of any class of Common Stock (the "Purchase Rights"), then
the holder of this Warrant will be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which such
holder could have acquired if such holder had held the number of shares of
Common Stock acquirable upon complete exercise of this Warrant immediately
before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of which the
record holders of Common Stock are to be determined for the grant, issue or sale
<PAGE>
of such Purchase Rights.
(b) Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's assets
to another Person or other transaction in each case which is effected in such a
way that holders of Common Stock are entitled to receive (either directly or
upon subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as an "Organic Change". Prior to
the consummation of any (i) sale of all or substantially all of the Company's
assets to an acquiring Person or (ii) other Organic Change following which the
Company is not a surviving entity, the Company will secure from the Person
purchasing such assets or the successor resulting from such Organic Change (in
each case, the "Acquiring Entity") a written agreement (in form and substance
satisfactory to the holders of Warrants representing at least two-thirds (b) of
the Warrant Shares issuable upon exercise of the Warrants then outstanding) to
deliver to each holder of Warrants in exchange for such Warrants, a security of
the Acquiring Entity evidenced by a written instrument substantially similar in
form and substance to this Warrant and satisfactory to the holders of the
Warrants (including an adjusted warrant exercise price equal to the value for
the Common Stock reflected by the terms of such consolidation, merger or sale,
and exercisable for a corresponding number of shares of Common Stock acquirable
and receivable upon exercise of the Warrants (without regard to any limitations
or exercise), if the value so reflected is less than any Warrant Exercise Price
in effect immediately prior to such consolidation, merger or sale). Prior to the
consummation of any other Organic Change, the Company shall make appropriate
provision (in form and substance satisfactory to the holders of Warrants
representing a majority of the Warrant Shares issuable upon exercise of the
Warrants then outstanding) to insure that each of the holders of the Warrants
will thereafter have the right to acquire and receive in lieu of or in addition
to (as the case may be) the Warrant Shares immediately theretofore issuable and
receivable upon the exercise of such holder's Warrants (without regard to any
limitations on exercise), such shares of stock, securities or assets that would
have been issued or payable in such Organic Change with respect to or in
exchange for the number of Warrant Shares which would have been issuable and
receivable upon the exercise of such holder's Warrant as of the date of such
Organic Change (without taking into account any limitations or restrictions on
the exercisability of this Warrant).
Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant
is lost, stolen, mutilated or destroyed, the Company shall promptly, on receipt
of an indemnification undertaking (or, in the case of a mutilated Warrant, the
Warrant), issue a new Warrant of like denomination and tenor as this Warrant so
lost, stolen, mutilated or destroyed.
Section 11. Notice. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Warrant must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit with
a nationally recognized overnight delivery service, in each case properly
<PAGE>
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
Digs, Inc.
17327 Ventura Blvd.
Encino, CA 91316
Telephone: (818) 995-3650
Facsimile: (818) 789-3985
Attention: President
With a copy to:
Silverman, Collura & Chernis, P.C.
381 Park Avenue South, Suite 1601
New York, New York 10016
Telephone: (212) 779-8600
Facsimile: (212) 779-8858
Attention: Martin C. Licht, Esq.
If to a holder of this Warrant, to it at the address and facsimile number
set forth on the Schedule of Buyers to the Securities Purchase Agreement, with
copies to such holder's representatives as set forth on such Schedule of Buyers,
or at such other address and facsimile as shall be delivered to the Company upon
the issuance or transfer of this Warrant. Each party shall provide five days'
prior written notice to the other party of any change in address or facsimile
number. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a nationally recognized overnight delivery
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
Section 12. Date. The date of this Warrant is March 14, 2000. This Warrant,
in all events, shall be wholly void and of no effect after the close of business
on the Expiration Date, except that notwithstanding any other provisions hereof,
the provisions of Section 7(c) shall continue in full force and effect after
such date as to any Warrant Shares or other securities issued upon the exercise
of this Warrant.
Section 13. Amendment and Waiver. Except as otherwise provided herein, the
provisions of the Warrants may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed by
it, only if the Company has obtained the written consent of the holders of
Warrants representing at least two-thirds (b) of the Warrant Shares issuable
upon exercise of the Warrants then outstanding; provided that no such action may
<PAGE>
increase the Warrant Exercise Price or decrease the number of shares or class of
stock obtainable upon exercise of any Warrant without the written consent of the
holder of such Warrant.
Section 14. Descriptive Headings; Governing Law. The descriptive headings
of the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The corporate
laws of the State of Delaware shall govern all issues concerning the relative
rights of the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
governed by the internal laws of the State of New York, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
New York, or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of New York.
[Signature Page Follows]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
Peter B. Dunn, its President, to be effective as of the 14th day of March, 2000.
DIGS, INC.
By: /s/ PETER B. DUNN
--------------
Name: Peter B. Dunn
Title: President
<PAGE>
EXHIBIT A TO WARRANT
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
DIGS, INC.
The undersigned holder hereby exercises the right to purchase
_________________ of the shares of Common Stock ("Warrant Shares") of Digs,
Inc., a Delaware corporation (the "Company"), evidenced by the attached Warrant
(the "Warrant"). Capitalized terms used herein and not otherwise defined shall
have the respective meanings set forth in the Warrant.
1. Form of Warrant Exercise Price. The Holder intends that payment of
the Warrant Exercise Price shall be made as:
____________ a "Cash Exercise" with respect to _________________ Warrant
Shares; and/or
____________ a "Cashless Exercise" with respect to _______________
Warrant Shares (to the extent permitted by the terms of the Warrant).
2. Payment of Warrant Exercise Price. In the event that the holder has
elected a Cash Exercise with respect to some or all of the Warrant Shares to be
issued pursuant hereto, the holder shall pay the sum of $___________________ to
the Company in accordance with the terms of the Warrant.
3. Delivery of Warrant Shares. The Company shall deliver to the holder
__________ Warrant Shares in accordance with the terms of the Warrant.
Date: _______________ __, ______
Name of Registered Holder
By:
Name:
Title:
<PAGE>
EXHIBIT B TO WARRANT
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
________________, Federal Identification No. __________, a warrant to purchase
____________ shares of the capital stock of Digs, Inc., a Delaware corporation,
represented by warrant certificate no. _____, standing in the name of the
undersigned on the books of said corporation. The undersigned does hereby
irrevocably constitute and appoint ______________, attorney to transfer the
warrants of said corporation, with full power of substitution in the premises.
Dated: _________, ____
By: _____________________________
Its: _____________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-KSB FOR THE FISCAL YEAR ENDED DECMBER 31, 2000, FOR DIGS, INC. AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 106,095
<SECURITIES> 116,875
<RECEIVABLES> 98,253
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 321,223
<PP&E> 325,909
<DEPRECIATION> 87,142
<TOTAL-ASSETS> 560,149
<CURRENT-LIABILITIES> 393,141
<BONDS> 0
0
0
<COMMON> 6,659
<OTHER-SE> 160,349
<TOTAL-LIABILITY-AND-EQUITY> 560,142
<SALES> 564,022
<TOTAL-REVENUES> 627,258
<CGS> 280,069
<TOTAL-COSTS> 1,081,868
<OTHER-EXPENSES> 7,850
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,653
<INCOME-PRETAX> (465,113)
<INCOME-TAX> 5,364
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<EXTRAORDINARY> 0
<CHANGES> 2,625
<NET-INCOME> (473,102)
<EPS-BASIC> (.07)
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</TABLE>
