EXHIBIT 10.16
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of May
11, 2000, by and among Diamond Entertainment Corporation, a New Jersey
corporation, with headquarters located at 800 Tucker Lane, Walnut, California
(the "Company"), and the investors listed on Schedule I attached hereto
(individually, a "Buyer" or collectively "Buyers").
WITNESSETH:
WHEREAS, the Company and the Buyers are executing and delivering this
Agreement in reliance upon an exemption from securities registration pursuant to
Section 4(2) and/or Regulation D ("Regulation D") as promulgated by the U.S.
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 Act");
WHEREAS, the Company has authorized the following new series of its
preferred stock, no par value per share (the "Preferred Stock"): the Company's
Series A Convertible Preferred Stock, no par value per share (the "Series A
Preferred Shares"), which shall be convertible into shares of the Company's
Common Stock, no par value per share (the "Common Stock") (as converted, the
"Conversion Shares"), in accordance with the terms of the Company's Certificate
of Amendment Designating the Series A Preferred Shares, substantially in the
form attached hereto as Exhibit A (the "Certificate of Designations");
WHEREAS, the Buyers wish to purchase, upon the terms and conditions
stated in this Agreement, up to 50 Series A Preferred Shares in the respective
amounts set forth opposite each Buyer's name on Schedule I and at a purchase
price of $10,000 per Series A Preferred Share (the "Purchase Price");
WHEREAS, 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 B (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; and
WHEREAS, the Series A Preferred Shares are being offered through May
Davis Group, Inc. (the "Placement Agent"), as the Company's exclusive placement
agent for the offering on a "best efforts" basis; and
WHEREAS, the aggregate proceeds of the sale of the Series A Preferred
Shares contemplated hereby shall be held in escrow pursuant to the terms of an
escrow agreement substantially in the form of the Amended and Restated Escrow
Agreement attached hereto as Exhibit C.
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NOW, THEREFORE, in consideration of the mutual covenants and other
agreements contained in this Agreement the Company and the Buyers hereby agree
as follows:
1. PURCHASE AND SALE OF SERIES A PREFERRED SHARES.
(a) Purchase of Series A Preferred Stock. Subject to the
satisfaction (or waiver) of the terms and conditions of this Agreement,
each Buyer agrees, severally and not jointly, to purchase at Closing
(as defined hereinbelow) and the Company agrees to sell and issue to
each Buyer, severally and not jointly, at Closing the number of Series
A Preferred Shares and at the purchase price set forth opposite each
Buyer's name on Schedule I hereto. Upon execution hereof by a Buyer,
the Buyer shall wire transfer the subscription amount set forth
opposite his name on Schedule I in same-day funds or a check payable to
"First Union National Bank, as Escrow Agent for Diamond Entertainment
Corporation," which subscription amount shall be held in escrow
pursuant to the terms of the Escrow Agreement (as hereinafter defined)
and disbursed in accordance therewith or the Buyer shall convert the
principal amount of the outstanding note(s) held by Buyer as set forth
on Schedule I whereupon such note shall be deemed cancelled and paid in
full. Notwithstanding the foregoing, a Buyer may withdraw his
subscription amount and terminate this Agreement as to such Buyer at
any time after the execution hereof and prior to Closing (as
hereinafter defined).
(b) Closing Date. The closing of the purchase and sale of the
Series A Preferred Shares (the "Closing") shall take place at 10:00
a.m. Eastern Standard Time on the fifth business day ("Closing Date")
following the date hereof, subject to notification of satisfaction (or
waiver) of the conditions to the Closing set forth in Sections 6 and 7
below (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 Butler Gonzalez, LLP, 1000 Stuyvesant Avenue, Suite 6, Union, NJ
07083.
(c) Escrow Arrangements; Form of Payment. Upon execution
hereof by Buyer and pending Closing, the aggregate proceeds of the sale
of the Series A Preferred Shares to Buyers pursuant hereto shall be
deposited in a non-interest bearing escrow account with First Union
National Bank, as escrow agent ("Escrow Agent"), pursuant to the terms
of an escrow agreement between the Company, the Placement Agent and the
Escrow Agent in the form attached hereto as Exhibit C. Subject to the
satisfaction of the terms and conditions of this Agreement, on the
Closing Date, (i) the Escrow Agent shall deliver to the Company in
accordance with the terms of the Escrow Agreement such aggregate gross
proceeds for the Series A Preferred Shares to be issued and sold to
such Buyer at the Closing, by wire transfer of immediately available
funds in accordance with the Company's written wire instructions, and
(ii) the Company shall deliver to each Buyer, certificates representing
such Series A Preferred Shares which such Buyer is then purchasing (as
indicated opposite such Buyer's name on Schedule I), duly executed on
behalf of the Company and registered in the name of such Buyer or its
designee (the "Certificates").
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2. BUYER'S REPRESENTATIONS AND WARRANTEES.
Each Buyer represents and warrants, severally and not jointly,
that:
(a) Investment Purpose. Each Buyer is acquiring the Series A
Preferred Shares and, upon conversion of the Series A Preferred Shares,
will acquire the Conversion Shares then issuable, 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 reserves
the right to dispose of Series A Preferred Shares or Conversion Shares
at any time in accordance with or pursuant to a registration statement
or an available exemption under the 1933 Act.
(b) Accredited Investor Status. Each Buyer is an "accredited
investor" as that term is defined in Rule 501(a)(3) of Regulation D.
(c) Reliance on Exemptions. Each Buyer understands that the
Series A Preferred Shares and the Conversion Shares are being offered
and sold to it in reliance on specific exemptions from the registration
requirements of United States Federal and state securities laws 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 such securities.
(d) Information. Such Buyer and its advisors (and his or, its
counsel), if any, have been furnished with all materials relating to
the business, finances and operations of the Company and information he
deemed material to making an informed investment decision regarding his
purchase of the Series A Preferred Shares and the Conversion Shares,
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 and its management. 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 Section 3 below. Such Buyer understands that its investment in the
Series A Preferred Shares and the Conversion Shares involves a high
degree of risk. Buyer is in a position regarding the Company, which,
based upon employment, family relationship or economic bargaining
power, enabled and enables Buyer to obtain information from the Company
in order to evaluate the merits and risks of this investment. 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 Series A Preferred Shares and the
Conversion Shares.
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(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 Series A Preferred Shares or the Conversion Shares,
or the fairness or suitability of the investment in the Series A
Preferred Shares or the Conversion Shares, nor have such authorities
passed upon or endorsed the merits of the offering of the Series A
Preferred Shares or the Conversion Shares.
(f) Transfer or Resale. Such Buyer understands that except as
provided in the Registration Rights Agreement: (i) the Series A
Preferred Shares and the Conversion Shares 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, or (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 requirements; (ii) any sale of
such securities made in reliance on Rule 144 under the 1933 Act (or a
successor rule thereto) ("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 such 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 such
securities under the 1933 Act or any state securities laws or to comply
with the terms and conditions of any exemption thereunder. The Company
reserves the right to place stop transfer instructions against the
shares and certificates for the Conversion Shares and Warrant Shares.
(g) Legends. Such Buyer understands that the certificates or
other instruments representing the Series A Preferred Shares and upon
issuance of the Conversion Shares, the stock certificates representing
the Conversion Shares shall bear a restrictive legend in substantially
the following form (and a stop transfer order may be placed against
transfer of such stock certificates):
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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 HAVE BEEN
ACQUIRED SOLELY FOR INVESTMENT PURPOSES AND NOT WITH A VIEW
TOWARD RESALE 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 GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS.
The legend set forth above shall be removed and the Company shall issue
a certificate without such legend to the holder of the Series A
Preferred Shares and/or the Conversion Shares upon which it is stamped,
if, unless otherwise required by state securities laws, (i) in
connection with a sale transaction, provided the Conversion Shares are
registered under the 1933 Act or (ii) in connection with a sale
transaction, such holder provides the Company with an opinion of
counsel, in form acceptable to the Company and its counsel, to the
effect that a public sale, assignment or transfer of the Conversion
Shares may be made without registration under the 1933 Act.
(h) Authorization, Enforcement. This Agreement has been duly
and validly authorized, executed and delivered on behalf of such Buyer
and is a valid and binding agreement of such Buyer enforceable in
accordance with its terms, except as such enforceability may be limited
by 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) Receipt of Documents. Such Buyer and his or its counsel
has received and read in their entirety: (i) this Agreement and each
representation, warranty and covenant set forth herein, the Certificate
of Designations, and the Escrow Agreement; (ii) all due diligence and
other information necessary to verify the accuracy and completeness of
such representations, warranties and covenants; (iii) the Company's
Form 10-KSB for the year ended March 31, 1999; (iv) the Company's Forms
10-QSB for the periods ended June 30, September 30, and December 31,
1999; (v) the Company's definitive proxy statement, dated March 27,
2000; and (vi) answers to all questions the Buyer submitted to the
Company regarding an investment in the Company; and the Buyer has
relied on the information contained therein and has not been furnished
any other documents, literature, memorandum or prospectus.
(j) Due Formation of Corporate and Other Investors. If the
Buyer is a corporation, trust, partnership or other entity that is not
an individual person, it has been formed and validly exists and has not
been organized for the specific purpose of purchasing the Series A
Preferred Shares and is not prohibited from doing so.
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(k) Due Authorization of Fiduciary Investors. If the Buyer
is purchasing the in a fiduciary capacity for another person or
entity, including without limitation a corporation, partnership, trust
or any other entity, the Buyer has been duly authorized and empowered
to execute this Agreement and such other person fulfills all the
requirements for purchase of the Series A Preferred Shares and agrees
to be bound by the obligations, representations, warranties, and
covenants contained herein. Upon request of the Company, the Buyer
will provide true, complete and current copies of all relevant
documents creating the Buyer, authorizing its investment in the
Company and/or evidencing the satisfaction of the foregoing.
(l) Further Representations by Foreign Investors.
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If Buyer is not a U.S. Person (as defined), such Buyer hereby
represents that such Buyer is satisfied as to full observance of the
laws of such Buyer's jurisdiction in connection with any invitation to
subscribe for the securities or any use of this Agreement, including:
(i) the legal requirements of such Buyer's jurisdiction for the
purchase of the securities, (ii) any foreign exchange restrictions
applicable to such purchase, (iii) any governmental or other consents
that may need to be obtained, and (iv) the income tax and other tax
consequences, if any, which may be relevant to the purchase, holding,
redemption, sale, or transfer of the securities. Such Buyer's
subscription and payment for, and such Buyer's continued beneficial
ownership of, the securities will not violate any applicable
securities or other laws of such Buyer's jurisdiction. The term "U.S.
Person" as used herein shall mean any person who is a citizen or
resident of the United States or Canada, or any state, territory or
possession thereof, including but not limited to any estate of any
such person, or any corporation, partnership, trust or other entity
created or existing under the laws thereof, or any entity controlled
or owned by any of the foregoing.
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 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 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 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 on the Company and its subsidiaries taken as a whole.
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(b) Authorization, Enforcement, Compliance with Other
Instruments. (i) The Company has the requisite corporate power and
authority to enter into and perform this Agreement, the Registration
Rights Agreement and any related agreements, and to issue the Series A
Preferred Shares and the Conversion Shares, the Warrants (as defined
hereinbelow), or shares of Common Stock issuable upon exercise of the
Warrants (the "Warrant Shares") in accordance with the terms hereof and
thereof, (ii) the execution and delivery of this Agreement, the
Registration Rights Agreement and any related agreements by the Company
and the consummation by it of the transactions contemplated hereby and
thereby, including without limitation the issuance of the Series A
Preferred Shares and the Warrants 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 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 and any
related agreements have been duly executed and delivered by the
Company, (iv) this Agreement, the Registration Rights Agreement and any
related agreements 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
substantially in the form attached hereto as Exhibit A has been filed
with the Secretary of State of the State of New Jersey and will be in
full force and effect, enforceable against the Company in accordance
with its terms.
(c) Capitalization. As of the date hereof, the authorized
capital stock of the Company consists of 100,000,000 shares of Common
Stock, of which as of April 10, 2000, 62,334,029 shares were issued and
outstanding, and 5,000,000 shares of preferred stock, no par value, of
which as of April 10, 2000, 483,251 shares were issued and outstanding.
All of such outstanding shares have been validly issued and are fully
paid and nonassessable. Except as disclosed in Schedule 3(c), no shares
of Common Stock are subject to preemptive rights or any other similar
rights or any liens or encumbrances suffered or permitted by the
Company. Except as disclosed in Schedule 3(c), as of the date of this
Agreement, (i) 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
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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, (ii) there are no outstanding debt
securities and (iii) 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 pursuant
to the Registration Rights Agreements). There are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the Series A Preferred Shares, the
Conversion Shares, the Warrants, or the Warrant Shares as described in
this Agreement. The Company has furnished to the Buyers 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 By-laws, as in effect on the date
hereof (the "By-laws"), 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 Series A Preferred Shares are
duly authorized and, upon issuance in accordance with the terms hereof,
shall be duly issued, fully paid and nonassessable, are free from all
taxes, liens and charges with respect to the issue thereof and are
entitled to the rights and preferences set forth in the Certificate of
Designations for the Series A Preferred Shares. The Conversion Shares
issuable upon conversion of the Series A Preferred Shares have been
duly authorized and reserved for issuance. Upon conversion or exercise
in accordance with the Certificate of Designations or the terms of the
Warrants and receipt of payment therefor (in the case of the Warrant
Shares), the Conversion Shares and the Warrant Shares will be duly
issued, fully paid and nonassessable.
(e) No Conflicts. Except as disclosed in Schedule 3(e), the
execution, delivery and performance of this Agreement by the Company
and the consummation by the Company of the transactions contemplated
hereby will not (i) result in a violation of the Certificate of
Incorporation, any certificate of designations of any outstanding
series of preferred stock of the Company or By-laws or (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
agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, or 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
Nasdaq Stock Market Inc.'s OTC Bulletin Board on which the Common Stock
is quoted) applicable to the Company or any of its subsidiaries or by
which any property or asset of the Company or any of its subsidiaries
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is bound or affected. Except as disclosed in Schedule 3(e), neither the
Company nor its subsidiaries is in violation of any term of or in
default under its Certificate of Incorporation or By-laws or their
organizational charter or by-laws, respectively, or any material
contract, agreement, mortgage, indebtedness, indenture, instrument,
judgment, decree or order or any statute, rule or regulation applicable
to the Company or its subsidiaries. The business of the Company and its
subsidiaries is not being conducted, and shall not be conducted in
violation of any material law, ordinance, regulation of any
governmental entity. Except as specifically contemplated by this
Agreement and as required under the 1933 Act and any applicable state
securities laws, 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 in order for it to execute, deliver or
perform any of its obligations under or contemplated by this Agreement
or the Registration Rights Agreement 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 circumstance, which might
give rise to any of the foregoing.
(f) SEC Documents: Financial Statements. Since June 11, 1999,
the Company has filed all reports, schedules, forms, statements and
other documents required to be filed by it with the SEC under 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
"SEC Documents"). The Company has delivered to the Buyers or their
representatives, or made available through the SEC's website at
http://www.sec.gov., true and complete copies of the SEC Documents. As
of their respective dates, the financial statements of the Company
disclosed in the SEC Documents (the "Financial Statements") 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 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 Buyer which is not
included in the SEC Documents, including, without limitation,
information referred to in Section 2(d) and (i) of this Agreement,
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 circumstances under which they were made, not misleading.
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(g) Absence of Certain Changes. Except as disclosed in
Schedule 3(g), since the Quarterly Report on Form 10-QSB for the period
ended December 31, 1999 filed February 22, 2000, there has been no
material adverse change and no material adverse development in the
business, properties, operations, financial condition, results of
operations 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 its subsidiaries have any knowledge or reason to believe
that its creditors intend to initiate involuntary bankruptcy
proceedings.
(h) Absence of Litigation. Except as disclosed on Schedule
3(h), 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 Company's subsidiaries,
wherein an unfavorable decision, ruling or finding would (i) have a
material adverse effect on the transactions contemplated hereby (ii)
adversely affect the validity or enforceability of, or the authority or
ability of the Company to perform its obligations under, this Agreement
or any of the documents contemplated herein, or (iii) except as
expressly disclosed in the SEC Documents, have a material adverse
effect on the business, operations, properties, financial condition or
results of operation of the Company and its subsidiaries taken as a
whole.
(i) Acknowledgment Regarding Buyer's Purchase of Series A
Preferred Shares. The Company acknowledges and agrees that the Buyer is
acting solely in the capacity of an arm's length purchaser with respect
to this Agreement and the transactions contemplated hereby. The Company
further acknowledges that the Buyer is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with
respect to this Agreement and the transactions contemplated hereby and
any advice given by the Buyer or any of their respective
representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to such Buyer's
purchase of the Series A Preferred Shares or the Conversion Shares. The
Company further represents to the Buyer that the Company's decision to
enter into this Agreement has been based solely on the independent
evaluation by the Company and its representatives.
(j) No Undisclosed Events, Liabilities, Developments or
Circumstances. 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 businesses, properties,
prospects, operations or financial condition, which could be material
but which has not been publicly announced or disclosed in writing to
the Buyer.
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(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 Series A Preferred Shares, the Conversion
Shares, the Warrants, or the Warrant Shares.
(1) 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 the Series A Preferred Shares, the
Conversion Shares, the Warrants, or the Warrant Shares under the 1933
Act or cause this offering of Series A Preferred Shares, the Conversion
Shares, the Warrants, or the Warrant Shares to be integrated with prior
offerings by the Company for purposes of the 1933 Act.
(m) Employee Relations. Neither the Company nor any of its
subsidiaries is involved in any 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 and the Company and its subsidiaries believe that their relations
with their employees are good.
(n) 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
rights necessary to conduct their respective businesses as now
conducted. Except as set forth on Schedule 3(n), none of the Company's
trademarks, trade names, service marks, service mark registrations,
service names, patents, patent rights, copyrights, inventions,
licenses, approvals, government authorizations, trade secrets, or other
intellectual property rights have expired or terminated, or are
expected to expire or terminate in the near future. The Company and its
subsidiaries do not have any knowledge of any infringement by the
Company or its subsidiaries of trademark, trade name rights, patents,
patent rights, copyrights, inventions, licenses, service names, service
marks, service mark registrations, trade secret or other similar rights
of others, or of any such development of similar or identical trade
secrets or technical information by others and, except as set forth on
Schedule 3(n), to the knowledge of the Company, 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 trademark, trade name, patents, patent rights, invention,
copyright, license, service names, service marks, service mark
registrations, trade secret or other infringement; 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.
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(o) Environmental Laws. The Company and its subsidiaries are
(i) 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"), (ii) have
received all permits, licenses or other approvals required of them
under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of
any such permit, license or approval.
(p) 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(p), are disclosed in the SEC Documents
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 its subsidiaries. Any real property and
facilities held under lease by the Company and 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 buildings by the Company
and its subsidiaries.
(q) 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 business at a cost that would not materially and adversely affect
the condition, financial or otherwise, or the earnings, business or
operations of the Company and its subsidiaries, taken as a whole.
(r) 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.
(s) 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.
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(t) No Materially Adverse Contracts, etc. Except as set forth
in the SEC Documents, 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 on the business, properties, operations,
financial condition, results of operations or prospects of the Company
or its subsidiaries. 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
on the business, properties, operations, financial condition, results
of operations or prospects of the Company or its subsidiaries.
(u) Tax Status. The Company and each of its subsidiaries 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) and 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 has set
aside on its books provision reasonably adequate for the payment of all
taxes for periods subsequent to the periods to which such returns,
reports or declarations apply. There are no 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.
(v) Certain Transactions. Except as set forth on Schedule 3(v)
and in the SEC Documents and except for arm's length transactions
pursuant to which the Company makes payments in the ordinary course of
business upon terms no less favorable than the Company could obtain
from third parties and other than the grant of stock options disclosed
on Schedule 3(c), none of the officers, directors, or employees of the
Company is presently a party to any transaction with the Company (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 officer,
director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer,
director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.
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(w) Dilutive Effect. The Company understands and acknowledges
that the number of Conversion Shares issuable upon conversion of the
Series A Preferred Shares will increase in certain circumstances and
that the number of Warrant Shares issuable upon exercise of the
Warrants will increase in certain circumstances. The Company further
acknowledges that its obligation to issue Conversion Shares upon
conversion of the Series A Preferred Shares in accordance with this
Agreement and the Certificate of Designations and the Series A
Preferred Shares is absolute and unconditional regardless of the
dilutive effect that such issuance may have on the ownership interests
of other stockholders of the Company.
(x) Fees and Rights of First Refusal. The Company is not
obligated to offer the securities offered hereunder on a right of first
refusal basis or otherwise to any third parties including, but not
limited to, current or former shareholders of the Company,
underwriters, brokers, agents or other third parties.
4. COVENANTS.
(a) Best Efforts. Each party shall use its best efforts timely
to satisfy each of the conditions to be satisfied by it as provided in
Sections 6 and 7 of this Agreement.
(b) Form D. The Company agrees to file a Form D with respect
to the Series A Preferred Shares and the Conversion Shares 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 Date,
take such action as the Company shall reasonably determine is necessary
to qualify the Series A Preferred Shares and the Conversion Shares for,
or obtain exemption for the Series A Preferred Shares and the
Conversion Shares for, sale to the Buyers 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.
(c) Reporting Status. Until the earlier of (i) 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), or (ii) the date on which (A) the Investors
shall have sold all the Conversion Shares and (B) none of the Series A
Preferred Shares or the Warrants are outstanding (the "Registration
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.
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(d) Use of Proceeds. The Company will use the proceeds from
the sale of the Series A 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 Registration Period: (i) within
five (5) days after the filing thereof with the SEC, a copy of its
Annual Reports on Form 10-KSB, its Quarterly Reports on Form 10-QSB,
any Current Reports on Form 8-K and any registration statements or
amendments filed pursuant to the 1933 Act; (ii) within one (1) day
after release thereof, copies of all press releases issued by the
Company or any of its subsidiaries; and (iii) copies of the same
notices and other information given to the stockholders of the Company
generally, contemporaneously with the giving thereof to the
stockholders.
(f) Reservation of Shares. The Company shall take all action
reasonably necessary to at all times have authorized, and reserved for
the purpose of issuance, 13,400,000 shares of Common Stock as shall be
necessary to effect the issuance of the Conversion Shares and the
Warrant Shares (specifically, 11,875,000 shares to cover the issuance
of the Conversion Shares, 1,500,000 shares to cover the issuance of the
Placement Agent's Warrant Shares (as hereinafter defined), and 25,000
shares for the Butler Gonzalez Warrant Shares (as hereinafter
defined)). If at any time the Company does not have available
13,400,000 shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all of the Conversion Shares and
the exercise of the Warrant Shares the Company shall call and hold a
special meeting within thirty (30) days of such occurrence, for the
sole purpose of increasing the number of shares authorized. The
Company's management shall recommend to the shareholders to vote in
favor of increasing the number of shares of common stock authorized.
Management shall also vote all of its shares in favor of increasing the
number of common shares authorized.
(g) Listings or Quotation. The Company shall promptly secure
the listing or quotation of the Conversion Shares upon each national
securities exchange, automated quotation system or over-the-counter
bulletin board or other market, if any, upon which shares of Common
Stock are then listed or quoted (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 Conversion Shares from
time to time issuable under the terms of this Agreement and the
Certificate of Designations. The Company shall maintain the Common
Stock's authorization for quotation in the over-the counter market. The
Company shall promptly provide to each Buyer copies of any notices it
receives regarding the continued eligibility of the Common Stock for
trading in the over-the-counter market.
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(h) Expenses. Each of the Company and the Buyers shall pay all
costs and expenses incurred by such party in connection with the
negotiation, investigation, preparation, execution and delivery of this
Agreement and the Registration Rights Agreement. The costs and expenses
of the Placement Agent and its counsel shall be paid for by the Company
at Closing in accordance with the terms of the Placement Agency
Agreement between the Company and the Placement Agent, dated April 14,
2000 as such agreement may be amended from time to time.
(i) Corporate Existence. So long as any Series A Preferred
Shares remain outstanding, the Company shall not directly or indirectly
consummate any merger, reorganization, restructuring, consolidation,
sale of all or substantially all of the Company's assets or any similar
transaction or related transactions (each such transaction, a "Sale of
the Company") unless, prior to the consummation of a Sale of the
Company, the Company makes appropriate provision (in form and substance
reasonably satisfactory to the holders of a majority of the Series A
Preferred Shares then outstanding) to insure that, upon the
consummation of such Sale of the Company, each of the holders of the
Series A Preferred Shares will thereafter have the right to acquire and
receive in lieu of the Series A Preferred Shares, such shares of stock,
securities or assets as may be issued or payable with respect to or in
exchange for the number of shares of Common Stock immediately
theretofore acquirable and receivable upon the conversion of such
holder's Series A Preferred Shares had such Sale of the Company not
taken place. In any such case, the Company will make appropriate
provision (in form and substance reasonably satisfactory to the holders
of a majority of the Series A Preferred Shares then outstanding) with
respect to such holders' rights and interests to insure that the
provisions of this Section 4(i) will thereafter be applicable to the
Series A Preferred Shares.
(j) Transactions With Affiliates. So long as any Series A
Preferred Shares are outstanding, the Company shall not, and shall
cause each of its subsidiaries not to, enter into, amend, modify or
supplement, or permit any subsidiary to enter into, amend, modify or
supplement any agreement, transaction, commitment, or arrangement with
any of its or any subsidiary's officers, directors, person 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 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, (c) any agreement transaction,
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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 subsidiary of the
Company shall not be 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 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.
(k) Warrant Issuances. Subject to the satisfaction of the
terms and condition of this Agreement, the Placement Agent will receive
on the Closing Date warrants ("Placement Agent's Warrants") to purchase
1,500,000 shares of Common Stock (the "Placement Agent's Warrant
Shares") at an exercise price equal to 100% of the Closing Bid Price
(as reported by Bloomberg) on the day immediately preceeding the
Closing Date and Butler Gonzalez, LLP, counsel to the Placement Agent,
will receive on the Closing Date warrants (the "Butler Gonzalez
Warrants") to purchase 25,000 shares of Common Stock ("Butler Gonzalez
Warrant Shares") at an exercise price equal to 100% of the Closing Bid
Price (as reported by Bloomberg) on the day immediately preceding the
Closing Date (the Placement Agent's Warrants and the Butler Gonzalez
Warrants shall collectively be referred to herein as the "Warrants").
The Warrants shall be exercisable for a period of five (5) years from
the date of issuance and shall be substantially in the form of the form
of Warrant hereto as Exhibit D.
(l) Forced Conversion. As means to raise additional capital,
the Company shall have the right to require the holders of the Warrants
to exercise such Warrants if the five (5) day average of the Company's
Common Stock (as reported by Bloomberg) closes at Thirty cents ($0.30 )
or higher ("Forced Exercise Event"). The Company shall furnish to the
holders of the Warrants written notice of the occurrence of a Forced
Exercise Event within ten (10) days thereof, whereupon the holders of
the Warrants shall within five (5) days of the receipt thereof exercise
his Warrants in accordance with the terms thereof.
(m) Transfer Agent. The Company covenants and agrees that, in
the event that the Company's agency relationship with the transfer
agent should be terminated for any reason prior to a date which is two
(2) years after the Closing Date, the Company shall immediately appoint
a new transfer agent and shall require that the transfer agent execute
and agree to be bound by the terms of the Irrevocable Instructions to
Transfer Agent.
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(n) Limitations on Short Sales. The Buyer and its Affiliates
shall not engage in short sales of the Company's Common Stock.
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions in the form
attached hereto as Exhibit E to its transfer agent to issue
certificates, registered in the name of the Buyer or its respective
nominee(s), for the Conversion Shares and the Warrant Shares in such
amounts as specified from time to time by the Buyer to the Company upon
conversion of the Series A Preferred Shares or the exercise of the
Warrants and payment therefor (the "Irrevocable Transfer Agent
Instructions"). Prior to registration of the Conversion Shares and the
Warrant Shares under the 1933 Act, all such certificates shall bear the
restrictive legend specified in Section 2(g) of this Agreement. 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) hereof (in the
case of the Conversion Shares or the Warrant Shares, prior to
registration of such shares under the 1933 Act) will be given by the
Company to its transfer agent and that the Conversion Shares or the
Warrant Shares shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement
and the Registration Rights Agreement. Nothing in this Section 5 shall
affect in any way the Buyer's obligations and agreement to comply with
all applicable securities laws upon resale of Conversion Shares or the
Warrant Shares. If the Buyer or Warrant holder provides the Company
with an opinion of counsel, reasonably satisfactory in form, and
substance to the Company, that registration of a resale by the Buyer of
any of the Conversion Shares, or the Warrant Shares is not required
under the 1933 Act, the Company shall permit the transfer, and, in the
case of the Conversion Shares or the Warrant Shares, promptly instruct
its transfer agent to issue one or more certificates in such name and
in such denominations as specified by the Buyer. The Company
acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Buyer 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 Buyer shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach and
requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being
required.
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6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the
Series A Preferred Shares to the Buyers 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 the
Company's sole benefit and may be waived by the Company at any time in
its sole discretion:
(a) Each Buyer shall have executed this Agreement and the
Registration Rights Agreement and delivered the same to the Company.
(b) The Certificate of Designations shall have been filed with
the Secretary of State of the State of New Jersey.
(c) The Buyers shall have delivered to the Escrow Agent the
Purchase Price for the Series A Preferred Shares being purchased by the
Buyers at the Closing and the Escrow Agent shall have delivered such
funds to the Company by wire transfer of immediately available U.S.
funds pursuant to the wire instructions provided by the Company.
(d) The representations and warranties of the Buyer shall be
true and correct in all material respects 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 Buyer shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Buyer at
or prior to the Closing Date.
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The obligation of the Buyer hereunder to purchase the Series A
Preferred Shares 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 the Buyer's sole benefit and may be
waived by the Buyer at any time in its sole discretion:
(a) The Company shall have executed this Agreement and the
Registration Rights Agreement, and delivered the same to the Buyer.
(b) The Common Stock shall be authorized for quotation on The
Nasdaq Stock Market, Inc.'s OTC Bulletin Board, trading in the Common
Stock shall not have been suspended for any reason and all of the
Conversion Shares issuable upon conversion of the Series A Preferred
Shares shall be approved for listing or quotation on The Nasdaq Stock
Market, Inc.'s OTC Bulletin Board.
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(c) The representations and warranties of the Company shall
be true and correct in all material respects (except to the extent
that any of such representations and warranties is already qualified
as to materiality in Section 3 above, in which case, such
representations and warranties shall be true and correct without
further qualification) 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 this Agreement to
be performed, satisfied or complied with by the Company at or prior to
the Closing Date. The Buyer shall have received a certificate,
executed by the Chief Executive Officer of the Company, dated as of
the Closing Date, to the foregoing effect and as to such other matters
as may be reasonably requested by the Buyer including, without
limitation an update as of the Closing Date regarding the
representation contained in Section 3(c) above.
(d) The Buyer shall have received the opinion of the Company's
counsel dated as of the Closing Date, in form, scope and substance
reasonably satisfactory to the Buyer and in substantially the form of
Exhibit F attached hereto.
(e) The Company shall have executed and delivered to the Buyer
the Certificates (in such denominations as the Buyer shall request) for
the Series A Preferred Shares being purchased by the Buyer at the
Closing.
(f) The Board of Directors of the Company shall have adopted
the resolutions in substantially the form of Exhibit G attached hereto.
(g) As of the Closing Date, the Company shall as of the
Closing Date have reserved out of its authorized and unissued Common
Stock, solely for the purpose of effecting the conversion of the Series
A Preferred Shares and permitting the exercise of the Warrants,
13,400,000 shares of Common Stock to effect the conversion of all of
the Series A Preferred Shares and the exercise of all the Warrants then
outstanding.
(h) The Irrevocable Transfer Agent Instructions, in form and
substance satisfactory to the Buyer, shall have been delivered to and
acknowledged in writing by the Company's transfer agent.
8. INDEMNIFICATION.
In consideration of the Buyer's execution and delivery of this
Agreement and acquiring the Series A Preferred Shares and the
Conversion Shares hereunder, and in addition to all of the Company's
other obligations under this Agreement, the Company shall defend,
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<PAGE>
protect, indemnify and hold harmless the Buyer and each other holder of
the Series A Preferred Shares and the Conversion Shares, and all of
their officers, directors, employees and agents (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 the Indemnitees or any of them
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 this Agreement, the Series A Preferred Shares or the
Registration Rights Agreement 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 this
Agreement, the Certificate of Designations, or the Registration Rights
Agreement or any other certificate, instrument or document contemplated
hereby or thereby, or (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 enforcement of this Agreement or
any other instrument, document or agreement executed pursuant hereto by
any of the Indemnities, any transaction financed or to be financed in
whole or in part, directly or indirectly, with the proceeds of the
issuance of the Series A Preferred Shares or the status of the Buyer or
holder of the Series A Preferred Shares, the Conversion Shares, as an
investor in the Company. To the extent that the foregoing undertaking
by the Company may be unenforceable for any reason, the Company shall
make the maximum contribution to the payment and satisfaction of each
of the Indemnified Liabilities, which is permissible under applicable
law.
9. GOVERNING LAW: MISCELLANEOUS.
(a) Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of New York
without regard to the principles of conflict of laws. The parties
further agree that any action between them shall be heard in New York
City, New York, and expressly consent to the jurisdiction and venue of
the Supreme Court of New York and the United States District Court for
the Southern District of New York for the adjudication of any civil
action asserted pursuant to this Paragraph.
(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. In the
event any signature page is delivered by facsimile transmission, the
party using such means of delivery shall cause four (4) additional
original executed signature pages to be physically delivered to the
other party within five (5) days of the execution and delivery hereof
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(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 Buyer, 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 waived or amended other than by an instrument in
writing signed by the party to be charged with enforcement.
(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 a copy is mailed by U.S.
certified mail, return receipt requested; (iii) three (3) days after
being sent by U.S. certified mail, return receipt requested, or (iv)
one (1) 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 Company, to: Diamond Entertainment Corporation
800 Tucker Lane
Walnut, CA 81709
Attention: James K.T. Lu, President
Telephone: (909) 839-1989
Facsimile: (909) 869-1990
With a copy to: De Martino Finkelstein Rosen & Virga
1818 N Street, N.W., Suite 400
Washington, D.C. 20036
Attention: Neil R. E. Carr, Esq.
Telephone: (202) 659-0494
Facsimile: (202) 659-1290
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If to the Transfer Agent, to: Continental Stock Transfer & Trust Co.
2 Broadway
19th Floor
New York, NY 10004
Attention: Steven G. Nelson, Chairman
Telephone: (212) 509-4000
Facsimile: (212) 509-5150
If to the Buyer, to its address and facsimile number on
Schedule I, with copies to the Buyer's counsel as set forth on Schedule
I. Each party shall provide five (5) days' prior written notice to the
other party of any change in address or facsimile number.
(g) Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective
successors and assigns. Neither the Company nor any Buyer shall assign
this Agreement or any rights or obligations hereunder without the prior
written consent of the other party hereto.
(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 Closing. The Buyer shall be
responsible only for its own representations, warranties, agreements
and covenants hereunder.
(j) Publicity. The Company and the Buyers shall have the right
to approve, before issuance any press release or any other public
statement with respect to the transactions contemplated hereby made by
any party; provided, however, that the Company shall be entitled,
without the prior approval of the Buyers, to issue any press release or
other public disclosure with respect to such transactions required
under applicable securities or other laws or regulations (the Buyers
shall be consulted by the Company in connection with any such press
release or other public disclosure prior to its release and Buyers
shall be provided with a copy thereof upon release 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 purposes of this
Agreement and the consummation of the transactions contemplated hereby.
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(1) Termination. In the event that the Closing shall not have
occurred with respect to the Buyers on or before five (5) business days
from the date hereof due to the Company's or the Buyer's failure to
satisfy the conditions set forth in Sections 6 and 7 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 the
Buyer for the expenses described in Section 4(h) above.
(m) Finder. The Company acknowledges that it has engaged The
May Davis Group, Inc. as a placement agent in connection with the sale
of the Series A Preferred Shares. The Company shall be responsible for
the payment of any placement agent fees (which includes cash and
warrants to purchase Common Stock) relating to or arising out of the
transactions contemplated hereby and from the proceeds thereof.
(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.
[THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK.]
24
<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.
DIAMOND ENTERTAINMENT CORPORATION
By: --------------------------------------
Name: James K. T. Lu
Title: President and Chief Executive Officer
[INSERT NAME OF BUYER]
By: --------------------------------------
Name: --------------------------------------
Title: --------------------------------------
25
<PAGE>
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
DIAMOND ENTERTAINMENT CORPORATION
Pursuant to the provisions of Section 14A:7-2, Corporations, General,
of the New Jersey Statutes, the undersigned executes the following Certificate
of Amendment to its Certificate of Incorporation:
1. The name of the corporation is Diamond Entertainment Corporation
(the "Corporation").
2. Set forth below is a copy of the resolutions of the Board of
Directors of the Corporation as required by Section 14A:7-2 of the New Jersey
Business Corporation Act which was duly adopted by the Board of Directors on
April 14, 2000, which amends the Certificate of Incorporation (i) authorizing a
series of the Corporation's authorized preferred stock, no par value per share,
and (ii) providing for the designations, preferences and relative,
participating, optional or other rights, and the qualifications, limitations or
restrictions thereof, of 50 shares of Series A Convertible Preferred Stock of
the Corporation, as follows:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation by the Certificate of
Incorporation of the Corporation, as amended (the "Certificate of
Incorporation"), there hereby is created out of the 5,000,000 shares of
Preferred Stock, no par value per share, of the Corporation authorized by
Article 4 of the Certificate of Incorporation (the "Preferred Stock"), a series
of Preferred Stock of the Corporation consisting of 50 shares, which shall be
designated Series A Convertible Preferred Stock, which shall have the following
powers, designations, preferences and relative, participating, optional or other
rights:
1. Designations, Amount and Par Value. The series of Preferred Stock
shall be designated as Series A Convertible Preferred Stock ("Series A Preferred
Shares") and the number of shares so designated shall be 50. Each Series A
Preferred Share shall have no par value and a stated value of $10,000 per share
(the "Stated Value").
2. Dividends. The Series A Preferred Shares shall not bear any
dividends.
3. Holder's Conversion of Series A Preferred Shares. A holder of Series
A Preferred Shares shall have the right, at such holder's option, to convert the
Series A Preferred Shares into shares of the Corporation's common stock, no par
value per share (the "Common Stock"), on the following terms and conditions:
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(a) Conversion Right. Subject to the provisions of Sections
3(g) and 4(a) below, at any time or times on or after the earlier of
(i) 90 days after the Issuance Date (as defined herein), (ii) 5 days
after receiving a "no-review" status from the Securities and Exchange
Commission (the "SEC") in connection with a registration statement
("Registration Statement") covering the resale of Common Stock issued
upon conversion of the Series A Preferred Shares and required to be
filed by the Corporation pursuant to the Registration Rights Agreement
between the Corporation and its initial holders of Series A Preferred
Shares (the "Registration Rights Agreement"), (iii) the date that the
Registration Statement is declared effective by the SEC any holder of
Series A Preferred Shares shall be entitled to convert any Series A
Preferred Shares into fully paid and nonassessable shares (rounded to
the nearest whole share in accordance with Section 3(h) below) of
Common Stock, at the Conversion Rate (as defined below); provided,
however, that in no event other than upon a Mandatory Conversion
pursuant to Section 3(g) hereof, or upon a Triggering Event pursuant to
Section 5(b) hereof, shall any holder be entitled to convert Series A
Preferred Shares in excess of that number of Series A 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 4.9% of the then issued and outstanding shares
of Common Stock of the Corporation 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 Series A 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
conversion of the remaining, non-converted Series A Preferred Shares
beneficially owned by the holder and its affiliates. Except as set
forth in the preceding sentence, for purposes of this paragraph,
beneficial ownership shall be calculated in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), and the rules thereunder;
(b) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of each of the Series A Preferred Shares
pursuant to Section (3)(a) shall be determined according to the
following formula (the "Conversion Rate"):
(.06)(N/365)(10,000) + 10,000
-----------------------------
Conversion Price
For purposes of this Certificate of Designations, the
following terms shall have the following meanings:
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<PAGE>
(i) "Conversion Price" means as, of any Conversion
Date (as defined below), the lower of the Fixed Conversion
Price and the Floating Conversion Price, each in effect as of
such date, if applicable, and subject to adjustment as
provided herein;
(ii) "Fixed Conversion Price" means 120% of the
Closing Bid Price on the day immediately preceding the day of
the closing of the sale and issuance of the Series A Preferred
Shares ("Closing Date") subject to adjustment, as provided
herein;
(iii) "Floating Conversion Price" means, as of any
date of determination, the amount obtained by multiplying the
Conversion Percentage in effect as of such date by the Average
Market Price for the Common Stock for any five (5) trading
days of the previous ten (10) trading days immediately
preceding the date of conversion;
(iv) "Conversion Percentage" means 80% as adjusted
as described herein;
(v) "Average Market Price" means, with respect to any
security for any period, that price which shall be computed as
the arithmetic average of the Closing Bid Prices (as defined
below) for such security for each trading day in such period;
(vi) "Closing Bid Price" means, for any security as
of any date, the last closing bid price on The Nasdaq Stock
Market, Inc.'s SmallCap Market (the "Nasdaq-Small Cap") as
reported by Bloomberg Financial Markets ("Bloomberg"), or, if
the Nasdaq-SmallCap is not the principal 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 Nasdaq Stock Market, Inc.'s OTC Bulletin Board
or, if not so quoted, in the "pink sheets" 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. 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 reasonably determined in good faith by the Board of
Directors of the Corporation (all as appropriately adjusted
for any stock dividend, stock split or other similar
transaction during such period); and
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<PAGE>
(vii) "N" means the number of days from, but
excluding, the Issuance Date through and including the
Conversion Date for the Series A Preferred Shares for which
conversion is being elected; and
(viii) "Issuance Date" means the date of issuance of
the Series A Preferred Shares.
(c) Penalty - Registration Statement. If the Registration
Statement is not declared effective by the SEC on or before the one
hundred and fiftieth (150th) day following the Issuance Date (the
"Scheduled Effective Date"), or if after the Registration Statement has
been declared effective by the SEC, sales cannot be made pursuant to
the Registration Statement (whether because of a failure to keep the
Registration Statement effective, to disclose such information as is
necessary for sales to be made pursuant to the Registration Statement,
to register sufficient shares of Common Stock or otherwise), then, as
partial relief for the damages to any holder by reason of any such
delay in or reduction of its ability to sell the underlying shares of
Common Stock (which remedy shall not be exclusive of any other remedies
at law or in equity), then:
(i) the Corporation will pay as liquidated damages
(the "Liquidated Damages") in penalties to the Buyer(s) a cash
amount within three (3) business days of the end of the month
immediately following the Scheduled Effective Date and for
each month thereafter in an amount equal to one and one half
percent (1 1/2 %) of the Liquidation Value. (For example, if
the Registration Statement becomes effective one (l) month
after the Scheduled Effective Date, the Corporation will pay
in cash to the Buyer(s) an aggregate of Seven Thousand Five
dollars ($7,500) in Liquidated Damages (1 1/2% of $500,000);
if, as a further example, thereafter sales could not be made
pursuant to the Registration Statement for a period of one and
one half (1 1/2) months, the Corporation will pay in cash to
the Buyer(s) an aggregate of Eleven Thousand Two Hundred and
Fifty dollars ($11,250) in Liquidated Damages ($7,500 for the
first month plus $3,750 for the half of second month); and if,
as a further example, thereafter sales could not be made
pursuant to the Registration Statement for a period of two (2)
months after the Scheduled Effective Date, the Corporation
will pay in cash to the Buyer(s) an aggregate of Fifteen
Thousand dollars ($15,000) in Liquidated Damages ($7,500 for
the first month plus $7,500 for the second month).
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<PAGE>
(d) Adjustment to Conversion Price - Dilution and Other
Events. In order to prevent dilution of the rights granted under this
Certificate of Designations, the Conversion Price will be subject to
adjustment from time to time as provided in this Section 2(d).
(i) Adjustment of Fixed Conversion Price upon
Subdivision or Combination of Common Stock. If the Corporation
at any time subdivides (by any stock split, stock dividend,
re-capitalization 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
Corporation 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.
(ii) Reorganization, Reclassification, Consolidation,
Merger, or Sale. Any recapitalization, reorganization
reclassification, consolidation, merger, sale of all or
substantially all of the Corporation's assets to another
Person (as defined below) or other similar 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 an "Organic
Change." Prior to the consummation of any Organic Change, the
Corporation will make appropriate provision (in form and
substance reasonably satisfactory to the Holders of a majority
of the Series A Preferred Shares then outstanding) to insure
that, upon the consummation of such Organic Change, each of
the Holders of the Series A Preferred Shares will thereafter
have the right to acquire and receive in lieu of the Series A
Preferred Shares, such shares of stock, securities or assets
as may be issued or payable with respect to or in exchange for
the number of shares of Common Stock immediately theretofore
acquirable and receivable upon the conversion of such holder's
Series A Preferred Shares had such Organic Change not taken
place. In any such case, the Corporation will make appropriate
provision (in form and substance reasonably satisfactory to
the Holders of a majority of the Series A Preferred Shares
then outstanding) with respect to such holders' rights and
interests to insure that the provisions of this Section 3(d)
and Section 3(e) below will thereafter be applicable to the
Series A Preferred Shares. For purposes of this Agreement,
"Person" shall mean 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.
A-5
<PAGE>
(iii) Notices.
(A) Immediately upon any adjustment of the
Conversion Price pursuant to this Section 3(d), the
Corporation will give written notice thereof to each
holder of Series A Preferred Shares, setting forth in
reasonable detail and certifying the calculation of
such adjustment.
(B) The Corporation will give written notice
to each Holder of Series A Preferred Shares at least
twenty (20) days prior to the date on which the
Corporation closes its books or takes a record (I)
with respect to any dividend or 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.
(C) The Corporation will also give written
notice to each Holder of Series A Preferred Shares at
least twenty (20) days prior to the date on which any
Organic Change, Major Transaction (as defined below),
dissolution or liquidation will take place.
(e) Purchase Rights. If at any time the Corporation 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 Series A 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 Series A Preferred Shares immediately before
the date an 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.
(f) Mechanics of Conversion. Subject to the Corporation's
inability to fully satisfy its obligations under a Conversion Notice
(as defined below) as provided for in Section 6 below:
(i) Holder's Delivery Requirements. Subject to
Section 3(a), in order to convert Series A Preferred Shares
into full shares of Common Stock on any date (the "Conversion
Date"), the holder thereof shall (A) deliver or transmit by
facsimile, for receipt on or prior to 11:59 p.m., Eastern
A-6
<PAGE>
Standard 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 Corporation or its designated
transfer agent (the "Transfer Agent"), and (B) surrender to a
common carrier for delivery to the Corporation or the Transfer
Agent as soon as practicable following such date, the original
certificates representing the Series A 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") and the originally
executed Conversion Notice. Each Conversion Notice shall
specify the number of Series A Preferred Shares to be
converted and the date on which such conversion is to be
effected, which date may not be prior to the date the holder
delivers such Conversion Notice.
(ii) Corporation's Response. Upon receipt by the
Corporation of a facsimile copy of a Conversion Notice, the
Corporation shall immediately send, via facsimile, a
confirmation of receipt of such Conversion Notice to such
holder. Upon receipt by the Corporation or the Transfer Agent
of the Preferred Stock Certificates to be converted pursuant
to a Conversion Notice, together with the originally executed
Conversion Notice, the Corporation or the Transfer Agent (as
applicable) shall, within ten (10) business days following the
date of receipt, (A) issue and surrender to a common carrier
for overnight delivery 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) credit the
aggregate number of shares of Common Stock to which the holder
shall be entitled to the holder's or its designee's balance
account at The Depository Trust Corporation.
(iii) Dispute Resolution. In the case of a dispute as
to the determination of the Average Market Price or the
arithmetic calculation of the Conversion Rate, the Corporation
shall promptly 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 three (3) business days of receipt
of such holder's Conversion Notice. If such holder and the
Corporation are unable to agree upon the determination of the
Average Market Price or arithmetic calculation of the
Conversion Rate within two (2) business days of such disputed
determination or arithmetic calculation being submitted to the
holder, then the Corporation shall within one (1) business day
A-7
<PAGE>
submit via facsimile (A) the disputed determination of the
Average Market Price to an independent, reputable investment
bank designated by the Corporation, or (B) the disputed
arithmetic calculation of the Conversion Rate to its
independent, outside accountant. The Corporation shall cause
the investment bank or the accountant, as the case may be, to
perform the determinations or calculations and notify the
Corporation 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 bank's or
accountant's determination or calculation, as the ease may be,
shall be binding upon all parties absent manifest error.
(iv) Record Holder. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion
of Series A Preferred Shares shall be treated for all purposes
as the record holder or holders of such shares of Common Stock
following such conversion.
(v) Corporation's Failure to Timely Convert. If the
Corporation shall fail to issue to a holder within seven (7)
business days following the date of receipt by the Corporation
or the Transfer Agent of the Preferred Stock Certificates to
be converted pursuant to a Conversion Notice, a certificate
for the number of shares of Common Stock to which such holder
is entitled upon such holder's conversion of Series A
Preferred Shares, in addition to all other available remedies
which such holder may pursue hereunder and under the
securities purchase agreement between the Corporation and the
initial holders of the Series A Preferred Shares pursuant to
which such holders purchased the Series A Preferred Shares
(the "Securities Purchase Agreement") (including
indemnification pursuant to Section 8 thereof), the
Corporation shall pay additional damages to such holder on
each day after the seven (7th) business day following the date
of receipt by the Corporation or the Transfer Agent of the
Preferred Stock Certificates to be converted pursuant to the
Conversion Notice, for which such conversion is not timely
effected, an amount calculated in accordance with the
following schedule:
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Late Payment for Each
Principal Amount Being Series A Preferred Share
No. Business Days Late Converted
---------------------- ------------------------
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
11 $1,000 + $200 for
each Business Days
Late Beyond 10 days
(g) Mandatory Conversion. If any Series A Preferred Shares
remain outstanding on April 14, 2002, then all such Series A Preferred
Shares shall be converted as of such date in accordance with this
Section 2 as if the holders of such Series A Preferred Shares had given
the Conversion Notice on April 14, 2002, and the Conversion Date had
been fixed as of April 14, 2002, for all purposes of this Section 2,
and all holders of Series A Preferred Shares shall thereupon and with
two (2) business days thereafter surrender all Preferred Stock
Certificates, duly endorsed for cancellation, to the Corporation or the
Transfer Agent. No person shall thereafter have any rights in respect
of Series A Preferred Shares, except the right to receive shares of
Common Stock on conversion thereof as provided in this Section 2.
(h) Fractional Shares. The Corporation shall not issue any
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 share of the Series A Preferred Shares 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 Corporation shall round such fraction of a share of Common Stock up
or down to the nearest whole share.
A-9
<PAGE>
(i) Notwithstanding anything to the contrary set forth in this
Certificate of Designations, the Corporation shall not be obligated to
issue in excess of 11,875,000 conversion Shares upon conversion of the
Series A Preferred Shares.
4. Corporation's Right to Redeem at its Election.
(a) At any time, commencing 120 days after the Issuance Date,
as long as the Corporation has not breached any of the representations,
warranties, and covenants contained herein or in any related
agreements, the Corporation shall have the right, in it sole
discretion, to redeem ("Redemption at Corporation's Election"), from
time to time, any or all of the Series A Preferred Shares which have
not previously been redeemed at a price equal to the Redemption Price
at Corporation's Election below, provided (i) Corporation shall first
provide thirty (30) days advance written notice as provided in
subparagraph 4(a)(ii) below (which can be given any time on or after 90
days after the Issuance Date, and (ii) that the Corporation shall only
be entitled to redeem Series A Preferred Shares having an aggregate
Stated Value of at least One Hundred Thousand Dollars ($100,000). If
the Corporation elects to redeem some, but not all, of the Series A
Preferred Shares, the Corporation shall redeem a pro-rata amount from
each Holder of the Series A Preferred Shares.
(i) Redemption Price At Corporation's Election. The
"Redemption Price at Corporation's Election" shall be
calculated as 120% of the Liquidation Value, as that term is
defined in Section 10 hereof.
(ii) Mechanics of Redemption at Corporation's
Election. The Corporation shall effect each such redemption by
giving at least thirty (30) days prior written notice ("Notice
of Redemption at Corporation's Election") to (A) the holders
of the Series A Preferred Shares selected for redemption at
the address and facsimile number of such holder appearing in
the Corporation's Series A Preferred Shares register and (B)
the Transfer Agent, which Notice of Redemption At
Corporation's Election shall be deemed to have been delivered
three (3) business days after the Corporation's mailing (by
overnight or two (2) day courier, with a copy by facsimile) of
such Notice of Redemption at Corporation's Election. Such
Notice of Redemption At Corporation's Election shall indicate
(i) the number of shares of Series A Preferred Shares that
have been selected for redemption, (ii) the date which such
redemption is to become effective (the "Date of Redemption At
Corporation's Election") and (iii) the applicable Redemption
Price At Corporation's Election, as defined in subsection
(a)(i) above. Notwithstanding the above, a holder may convert
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into Common Stock, prior to the close of business on the Date
of Redemption at Corporation's Election, any Series A
Preferred Shares which it is otherwise entitled to convert,
including Series A Preferred Shares that has been selected for
redemption at Corporation's election pursuant to this
subsection 4(a).
(b) Corporation Must Have Immediately Available Funds or
Credit Facilities. The Corporation shall not be entitled to send any
Notice of Redemption at Corporation's Election and begin the redemption
procedure under Sections 4(a) unless it has:
(i) the full amount of the redemption price in cash,
available in a demand or other immediately available account
in a bank or similar financial institution; or
(ii) immediately available credit facilities, in the
full amount of the redemption price with a bank or similar
financial institution; or
(iii) an agreement with a standby underwriter willing
to purchase from the Corporation a sufficient number of shares
of stock to provide proceeds necessary to redeem any stock
that is not converted prior to redemptions; or
(iv) a combination of the items set forth in (i),
(ii), and (iii) above, aggregating the full amount of the
redemption price.
(c) Payment of Redemption Price. Each Holder submitting Series
A Preferred Shares being redeemed under this Section 4 shall send their
Series A Preferred Share Certificates to be redeemed to the Corporation
or its Transfer Agent, and the Corporation shall pay the applicable
redemption price to that Holder within five (5) business days of the
Date of Redemption at Corporation's Election.
5. Redemption at Option of Holders.
(a) Redemption Option Upon Major Transaction. In addition to
all other rights of the holders of Series A Preferred Shares contained
herein, after a Major Transaction (as defined below), the holders of
Series A Preferred Shares then outstanding shall have the right in
accordance with Section 5(f), at the option of the holders of at least
two-thirds (2/3) of the Series A Preferred Shares then outstanding, to
require the Corporation to redeem all of the Series A Preferred Shares
then outstanding at a price per Series A Preferred Share equal to the
greater of (i) 100% of the Liquidation Value (as defined below) of such
shares and (ii) the price calculated in accordance with the Redemption
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Rate (as defined below) calculated as of the date of the public
announcement of such Major Transaction or the next date on which the
exchange or market on which the Common Stock is traded is open if such
public announcement is made (A) after 1:00 p.m. Eastern Standard Time
on such date or (B) on a date on which the exchange or market on which
the Common Stock is traded or quoted is closed.
(b) Redemption Option Upon Triggering Event. In addition to
all other rights of the holders of Series A Preferred Shares contained
herein, after a Triggering Event (as defined below), the holders of
Series A Preferred Shares the outstanding shall have the right in
accordance with Section 5(g), at the option of the holders of at least
two-thirds (2/3) of the Series A Preferred Shares then outstanding, to
require the Corporation to redeem all of the Series A Preferred Shares
then outstanding at a price per Series A Preferred Share equal to the
greater of (i) 125% of the Liquidation Value of such share and (ii) the
price calculated in accordance with the Redemption Rate as of the date
immediately preceding such Triggering Event on which the exchange or
market on which the Common Stock is traded or quoted is open.
(c) "Redemption Rate." The "Redemption Rate" shall, as of any
date of determination, be equal to (i) the Conversion Rate in effect as
of such date as calculated pursuant to Section 3(b) multiplied by (ii)
the Closing Bid Price of the Common Stock on such date.
(d) "Major Transaction." A "Major Transaction" shall be deemed
to have occurred at such time as any of the following events:
(i) the consummation of any merger, reorganization,
restructuring, consolidation, or similar transaction by or involving
the Corporation except (A) a merger or consolidation where the
Corporation is the survivor, or where the holders of the capital stock
of the Corporation immediately prior to such merger or consolidation
own at least 50% of the outstanding capital stock of the surviving
entity, (B) pursuant to a migratory merger effected solely for the
purpose of changing the jurisdiction of incorporation of the
Corporation, or (C) any such transaction in which each of the holders
of the Series A Preferred Shares receives cash at least equal to 120%
of the Liquidation Value of such shares in accordance with Section
5(d)(ii) hereof;
(ii) sale of all or substantially all of the assets
of the Corporation on a consolidated basis or any similar transaction
or related transactions which effectively results in a sale of all or
substantially all of the assets of the Corporation on a consolidated
basis, unless, upon consummation of such transaction, the Corporation
reserves an amount in cash at least equal to 125% of the Liquidation
Value of the Series A Preferred Shares for payment to the holders
thereof.
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(e) "Triggering Event." A "Triggering Event" shall be
deemed to have occurred at such time as any of the following events:
(i) either (A) the failure of the Registration
Statement to be declared effective by the SEC or to cover the resale of
all of the shares of Common Stock issued or issuable upon conversion of
the Series A Preferred Shares at any time after ninety (90) days after
the Scheduled Effective Date (provided that for purposes of determining
the Closing Bid Price under Section 5(c) above, the Triggering Event
shall be deemed to have occurred on the first day of such ninety (90)
day period) or (B) for any period of ninety (90) consecutive days after
the date that is ninety (90) days after the Scheduled Effective Date
that Common Stock issued or issuable upon conversion of the Series A
Preferred Shares cannot be sold under the Registration Statement for
any reason (provided that for purposes of determining the Closing Bid
Price under Section 5(c) above, the Triggering Event shall be deemed to
have occurred on the first day of such ninety (90) day period);
(ii) if for any reason the Corporation fails to
perform or observe any covenant, agreement, or other provision
contained in Section 9 or 10 hereof;
(iii) the Corporation's notice to the holders of
Series A Preferred Shares as a class, including by way of public
announcement, at any time, of its intention not to comply, other than
in accordance with the terms hereof, with requests for conversion of
any Series A Preferred Shares for shares of Common Stock;
(iv) if for any reason the Corporation fails to
perform or observe any covenant, agreement, or other provision
contained herein or in the Securities Purchase Agreement, the
Registration Rights Agreement, or in any related agreement, and such
failure is not cured within 30 days after the Corporation knows, or
should have known with the exercise of reasonable diligence, of the
occurrence thereof, and such failure has had, or could reasonably be
expected to have, a material adverse effect on (A) the financial
condition, operating results, business, properties, or operations of
the Corporation and its subsidiaries taken as a whole taking into
account any proceeds reasonably expected to be received by the
Corporation or its subsidiaries in the foreseeable future from
insurance policies or rights of indemnification or (B) the Series A
Preferred Shares; or
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(v) any representation or warranty contained in the
Securities Purchase Agreement or the Registration Rights Agreement is
false or misleading on or as of the date made and which either reflects
or has had a material adverse effect on and which, upon the date that
the holders require the Corporation to redeem the Class A Preferred
Shares continues to have a material adverse effect on (A) the financial
condition, operating results, business, properties, or operations of
the Corporation and its subsidiaries taken as a whole taking into
account any proceeds reasonably expected to be received by the
Corporation or its subsidiaries in the foreseeable future from
insurance policies or rights of indemnification or (B) the Series A
Preferred Shares.
(f) Mechanics of Redemption at Option of Buyer Upon Major
Transaction. No sooner than fifteen (15) days nor later than ten (10)
days prior to the consummation of a Major Transaction, but not prior to
the public announcement of such Major Transaction, the Corporation
shall deliver written notice thereof via facsimile and overnight
courier ("Notice of Major Transaction") to each holder of Series A
Preferred Shares. At any time after receipt of a Notice of Major
Transaction, the holders of at least two-thirds (2/3) of the Series A
Preferred Shares then outstanding may require the Corporation to redeem
all of the holders' Series A Preferred Shares then outstanding in
accordance with Section 5(a) by delivering written notice thereof via
facsimile and overnight courier ("Notice of Redemption at Option of
Buyer Upon Major Transaction") to the Corporation, which Notice of
Redemption at Option of Buyer Upon Major Transaction shall indicate (i)
the number of Series A Preferred Shares that such holders are voting in
favor of redemption and (ii) the applicable redemption price, as
calculated pursuant to Section 5(a) above. Unless the Corporation shall
fail to fully redeem all of the holder's Series A Preferred Shares
pursuant to this Section 5, any notice delivered by the holder pursuant
to this subsection shall be irrevocable.
(g) Mechanics of Redemption at Option of Buyer Upon Triggering
Event. As soon as practicable, but in any event no more than five (5)
business days after the occurrence of a Triggering Event, the
Corporation shall deliver written notice thereof via facsimile and
overnight courier ("Notice of Triggering Event") to each holder of
Series A Preferred Shares. At any time after receipt of a Notice of
Triggering Event, the holders of at least two-thirds (2/3) of the
Series A Preferred Shares then outstanding may require the Corporation
to redeem all of the Series A Preferred Shares then outstanding in
accordance with Section 5(b) by delivering written notice thereof via
facsimile and overnight courier ("Notice of Redemption at Option of
Buyer Upon Triggering Event") to the Corporation, which Notice of
Redemption at Option of Buyer Upon Triggering Event shall indicate (i)
the number of Series A Preferred Shares that such holders are voting in
favor of redemption and (ii) the applicable redemption price, as
calculated pursuant to Section 5(b) above. Unless the Corporation shall
fail to fully redeem all of the holder's Series A Preferred Shares
pursuant to this Section 5, any notice delivered by the holder pursuant
to this subsection shall be irrevocable.
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(h) Payment of Redemption Price. Upon the Corporation's
receipt of a Notice(s) of Redemption at Option of Buyer Upon Major
Transaction or a Notice(s) of Redemption at Option of Buyer Upon
Triggering Event, as the case may be, from the holders of at least
two-thirds (2/3) of the Series A Preferred Shares then outstanding, the
Corporation shall immediately notify each holder by facsimile of the
Corporation's receipt of such requisite notices necessary to effect a
redemption and each holder of Series A Preferred Shares shall
thereafter promptly send such holder's Preferred Stock Certificates to
be redeemed to the Corporation or its Transfer Agent. The Corporation
shall pay the applicable redemption price, as calculated pursuant to
Section 5(a) or 5(b) above, in cash to such holder within thirty (30)
days after the Corporation's receipt of the requisite notices required
to effect a redemption; provided that a holder's Preferred Stock
Certificates shall have been so delivered to the Corporation or its
Transfer Agent; provided further that if the Corporation is unable to
redeem all of the Series A Preferred Shares, the Corporation shall
redeem an amount from each holder of Series A Preferred Shares equal to
such holder's pro-rata amount (based on the number of Series A
Preferred Shares held by such holder relative to the number of Series A
Preferred Shares outstanding) of all Series A Preferred Shares being
redeemed. If the Corporation shall fall to redeem all of the Series A
Preferred Shares submitted for redemption (other than pursuant to a
dispute as to the determination of the Closing Bid Price or the
arithmetic calculation of the Redemption Rate), the applicable
redemption price payable in respect of such unredeemed Series A
Preferred Shares shall bear interest at the rate of 2.5% per month (pro
rated for partial months) until paid in full. Until the Corporation
pays such unpaid applicable redemption price in full to each holder,
holders of at least two-thirds (2/3) of the Series A Preferred Shares
then outstanding, including shares of Series A Preferred Shares
submitted for redemption pursuant to this Section 4 and for which the
applicable redemption price has not been paid, shall have the option
(the "Void Optional Redemption Option") to, in lieu of redemption,
require the Corporation to promptly return to each holder all of the
Series A Preferred Shares that were submitted for redemption by such
holder under this Section 5 and for which the applicable redemption
price has not been paid, by sending written notice thereof to the
Corporation via facsimile (the "Void Optional Redemption Notice"). Upon
the Corporation's receipt of such Void Optional Redemption Notice(s)
and prior to payment of the full applicable redemption price to each
holder, (i) the Notice(s) of Redemption at Option of Buyer Upon
Triggering Event or the Notice(s) of Redemption at Option of Buyer Upon
Major Transaction, as the case may be, shall be null and void with
respect to those Series A Preferred Shares submitted for redemption and
for which the applicable redemption price has not been paid, (ii) the
Corporation shall immediately return any Certificates for Series A
Preferred Shares submitted to the Corporation by each holder for
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redemption under this Section 4(h) and for which the applicable
redemption price had not been paid, (iii) the Fixed Conversion Price of
such returned Series A Preferred Shares shall be adjusted to the lesser
of (A) the Fixed Conversion Price as in effect on the date on which the
Void Option Redemption Notice(s) is delivered to the Corporation and
(B) the lowest Closing Bid Price during the period beginning on the
date on which the Notice(s) of Redemption of Option of Buyer Upon Major
Transaction or the Notice(s) of Redemption at Option of Buyer Upon
Triggering Event, as the case may be, is delivered to the Corporation
and ending on the date on which the Void Optional Redemption Notice(s)
is delivered to the Corporation; provided that no adjustment shall be
made if such adjustment would result in an increase of the Fixed
Conversion Price then in effect, and (iv) the Conversion Percentage in
effect at such time and thereafter shall be reduced by a number of
percentage points equal to the product of (A) two and one-half (2.5)
and (B) the number of months (prorated for partial months) in the
period beginning on the date on which the Notice(s) of Redemption at
Option of Buyer Upon Major Transaction or the Notice(s) of Redemption
at Option of Buyer Upon Triggering Event, as the case may be, is
delivered to the Corporation and ending on the date on which the Void
Optional Redemption Notice(s) is delivered to the Corporation.
Notwithstanding the foregoing, in the event of a dispute as to the
determination of the Closing Bid Price or the arithmetic calculation of
the Redemption Rate, such dispute shall be resolved pursuant to Section
3(f)(iii) above with the term "Closing Bid Price" being substituted for
the term "Average Market Price" and the term "Redemption Rate" being
substituted for the term "Conversion Rate."
6. Inability to Fully Convert.
(a) Holder's Option if Corporation Cannot Fully Convert. If at
any time after the earlier to occur of (i) effectiveness of the
Registration Statement or (ii) ninety (90) days after the Scheduled
Effective Date, upon the Corporation's receipt of a Conversion Notice,
the Corporation does not issue shares of Common Stock which are
registered for resale under the Registration Statement within seven (7)
business days of the time required in accordance with Section 3(f)
hereof, for any reason or for no reason, including, without limitation,
because the Corporation (x) does not have a sufficient number of shares
of Common Stock authorized and available, (y) is otherwise prohibited
by applicable law or by the rules or regulations of any stock exchange,
inter-dealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or its securities from issuing
all of the Common Stock which is to be issued to a holder of Series A
Preferred Shares pursuant to a Conversion Notice or (z) fails to have a
sufficient number of shares of Common Stock registered and eligible for
resale under the Registration Statement, then the Corporation shall
issue as many shares of Common Stock as it is able to issue in
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<PAGE>
accordance with Stockholder's Conversion Notice and pursuant to Section
3(f) above and, with respect to the unconverted Series A Preferred
Shares, the holder, solely at such holder's option, can, in addition to
any other remedies such holder may have hereunder, under the Securities
Purchase Agreement (including indemnification under Section 8 thereof),
under the Registration Rights Agreement, at law or in equity, elect to:
(i) require the Corporation to redeem from such
holder those Series A Preferred Shares for which the Corporation is
unable to issue Common Stock in accordance with such holder's
Conversion Notice ("Mandatory Redemption") at a price per Series A
Preferred Share (the "Mandatory Redemption Price") equal to the greater
of (x) 120% of the Liquidation Value of such share and (y) the
Redemption Rate as of such Conversion Date;
(ii) void its Conversion Notice and retain or have
returned, as the case may be the Certificates representing the
unconverted Series A Preferred Shares that were to be converted
pursuant to such holder's Conversion Notice.
7. Reissuance of Certificates. In the event of a conversion or
redemption pursuant to this Certificate of Designations of less than all of the
Series A Preferred Shares represented by a particular Preferred Stock
Certificate, the Corporation shall promptly cause to be issued and delivered to
the holder of such Series A Preferred Shares a Preferred Stock Certificate
representing the remaining Series A Preferred Shares which have not been so
converted or redeemed.
8. Reservation of Shares. The Corporation shall, so long as any of the
Series A Preferred Shares are outstanding, reserve and keep available out of its
authorized and unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the Series A Preferred Shares, 11,875,000 shares of
the Common Stock to effect the conversion of all of the Series A Preferred
Shares. If at any time, the Corporation does not have available 11,500,000
authorized and unissued shares of Common Stock to satisfy conversion of all of
the Series A Preferred Shares outstanding, the Corporation shall call and hold a
special shareholders meeting with thirty (30) days of such occurrence, for the
sole purpose of increasing the number of authorized shares. Furthermore,
management of the Corporation shall recommend to the shareholders to vote in
favor of increasing the number of common shares authorized. Management shall
also vote all of its shares in favor of increasing the number of authorized
shares of Common Stock.
9. Voting Rights. Holders of Series A 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 New Jersey and as expressly provided in
this Certificate of Designations.
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<PAGE>
10. Liquidation, Dissolution, Winding-Up. In the event of any voluntary
or involuntary liquidation, dissolution, or winding up of the Corporation, the
holders of the Series A Preferred Shares shall be entitled to receive in cash
out of the assets of the Corporation, whether from capital or from earnings
available for distribution to its stockholders (the "Preferred Funds"), before
any amount shall be paid to the holders of any of the capital stock of the
Corporation of any class junior in rank to the Series A Preferred Shares in
respect of the preferences as to the distributions and payments on the
liquidation, dissolution and winding up of the Corporation, an amount per Series
A Preferred Share equal to the sum off (i) $10,000 and (ii) an amount equal to
the product of (.06) (N/365) ($10,000) (such sum being referred to as the
"Liquidation Value"); provided that, if the Preferred Funds are insufficient to
pay the full amount due to the holders of Series A Preferred Shares and holders
of shares of other classes or series of preferred stock of the Corporation that
are of equal rank with the Series A Preferred Shares as to payments of Preferred
Funds (thc "Pari Passu Shares"), then each holder of Series A Preferred Shares
and Pari Passu Shares shall receive a percentage of the Preferred Funds equal to
the full amount of Preferred Funds payable to such holder as a liquidation
preference, in accordance with their respective Certificate of Designations,
Preferences and Rights as a percentage or the full amount of Preferred Funds
payable to all holders of Series A Preferred Shares and Pari Passu Shares. The
purchase or redemption by the Corporation 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 Corporation. Neither the
consolidation or merger of the Corporation with or into any other Person, nor
the sale or transfer by the Corporation 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 Corporation. No holder of Series A Preferred
Shares shall be entitled to receive any amounts with respect thereto upon any
liquidation, dissolution or winding up of the Corporation other than the amounts
provided for herein.
11. Preferred Rank. All shares of Common Stock shall be of junior rank
to all Series A Preferred Shares in respect to the preferences as to
distributions and payments upon the liquidation, dissolution, and winding up of
the Corporation. The rights of the shares of Common Stock shall be subject to
the preferences and relative rights of the Series A Preferred Shares. The Series
A Preferred Shares shall be senior in rights and liquidation preference to the
Common Stock or and any series of Preferred Stock hereinafter issued by the
Corporation. Without the prior express written consent of the holders of not
less than two-thirds (2/3) of the then issued and outstanding Series A Preferred
Shares, the Corporation shall not hereafter authorize or issue additional or
other capital stock that is of senior or equal rank to the Series A Preferred
Shares in respect of the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Corporation. Without the prior
express written consent of the holders off not less than two-thirds (2/3) of the
then issued and outstanding Series A Preferred Shares, the Corporation shall not
hereafter authorize or make any amendment to the Corporation's Certificate of
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<PAGE>
Incorporation or Bylaws, or make any resolution of the board of directors with
the New Jersey Secretary of State containing any provisions, which would
adversely affect or otherwise impair the rights or relative priority of the
holders of the Series A 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 Corporation with or into another corporation, the
Series A Preferred Shares shall maintain their relative powers, designations,
and preferences provided for herein and no merger shall result inconsistent
therewith.
12. Restriction on Redemption and Dividends.
(a) Restriction on Dividend. If any Series A Preferred Shares
are outstanding, without the prior express written consent of the
holders of not less than two-thirds (2/3) of the then outstanding
Series A Preferred Shares, the Corporation shall not directly or
indirectly declare, pay or make any dividends or other distributions
upon any of the Common Stock so long as written notice thereof has been
given to holders of the Series A Preferred Shares at least 30 days
prior to the earlier of (a) the record date taken for or (b) the
payment of any such dividend or other distribution. Notwithstanding the
foregoing, this Section 12(a) shall not prohibit the Corporation from
declaring and paying a dividend in cash with respect to the Common
Stock so long as the Corporation: (i) pays simultaneously to each
holder of Series A Preferred Shares an amount in cash equal to the
amount such holder would have received had all of such holder's Series
A Preferred Shares been converted to Common Stock pursuant to Section 2
hereof one business day prior to the record date for any such dividend,
and (ii) after giving effect to the payment of any dividend and any
other payments required in connection therewith including to the
holders of the Series A Preferred Shares under clause 12(a)(i) hereof,
the Corporation has in cash or cash equivalents an amount equal to the
aggregate of: (A) all of its liabilities reflected on its most recently
available balance sheet, (B) the amount of any indebtedness incurred by
the Corporation or any of its subsidiaries since its most recent
balance sheet and (C) 125% of the amount payable to all holders of any
shares of any class of preferred stock of the Corporation assuming a
liquidation of the Corporation as the date of its most recently
available balance sheet.
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<PAGE>
(b) Restriction on Redemption. If any Series A Preferred
Shares are outstanding, without the prior express written consent of
the holders of not less than two-thirds (2/3) of the then outstanding
Series A Preferred Shares, the Corporation shall not directly or
indirectly redeem, purchase or otherwise acquire from any person or
entity' other than from a direct or indirect wholly-owned subsidiary of
the Corporation, or permit any subsidiary of the Corporation to redeem,
purchase or otherwise acquire from any person or entity other than from
the Corporation or another direct or indirect wholly-owned subsidiary
of the Corporation, any of the Corporation's or any subsidiary's
capital stock or other equity securities (including, without
limitation, warrants, options and other rights to acquire such capital
stock or other equity securities).
13. Vote to Change the Terms of Series A 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 Series A Preferred Shares, shall be required for any change
to this Certificate of Designations or the Corporation's Certificate of
Incorporation which would amend, alter, change or repeal any of the powers,
designations, preferences and rights of the Series A Preferred Shares.
14. Lost or Stolen Certificates. Upon receipt by the Corporation of
evidence satisfactory to the Corporation of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Series A
Preferred Shares, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the holder to the Corporation and, in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Corporation shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Corporation shall
not be obligated to re-issue Preferred Stock Certificates if the holder
contemporaneously requests the Corporation to convert such Series A Preferred
Shares into Common Stock.
15. Withholding Tax Obligations. Notwithstanding anything herein to the
contrary, to the extent that the Corporation receives advice in writing from its
counsel that there is a reasonable basis to believe that the Corporation is
required by applicable federal laws or regulations and delivers a copy of such
written advice to the holders of the Series A Preferred Shares so affected, the
Corporation may reasonably condition the making of any distribution (as such
term is defined under applicable federal tax law and regulations) in respect of
any Series A Preferred Shares on the holder of such Series A Preferred Shares
depositing with the Corporation an amount of cash sufficient to enable the
Corporation to satisfy its withholding tax obligations (the "Withholding Tax")
with respect to such distribution, Notwithstanding the foregoing or anything to
the contrary, if any holder of the Series A Preferred Shares so affected
receives advice in writing from its counsel that there is a reasonable basis to
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<PAGE>
believe that the Corporation is not so required by applicable federal laws or
regulations and delivers a copy of such written advice to the Corporation, the
Corporation shall not be permitted to condition the making of any such
distribution in respect of any Series A Preferred Share on the holder of such
Series A Preferred Shares depositing with the Corporation any Withholding Tax
with respect to such distribution, provided, however, the Corporation may
reasonably condition the making of any such distribution in respect of any
Series A Preferred Share on the holder of such Series A Preferred Shares
executing and delivering to the Corporation, at the election of the holder,
either: (i) if applicable, a properly completed Internal Revenue Service Form
4224, or (a) an indemnification agreement in reasonably acceptable form, with
respect to any federal tax liability, penalties and interest that may be imposed
upon the Corporation by the Internal Revenue Service as a result of the
Corporation's failure to withhold in connection with such distribution to such
holder. If the conditions in the preceding two sentences are fully satisfied,
the Corporation shall not be required to pay any additional damages set forth in
Section 3(f)(v) of this Certificate of Designations if its failure to timely
deliver any Conversion Shares results solely from the holder's failure to
deposit any withholding tax hereunder or provide to the Corporation an executed
indemnification agreement in the form reasonably satisfactory to the
Corporation.
3. The Certificate of Incorporation of the Corporation is amended so
that the designation and number of shares of each class and series acted upon in
the resolutions set forth above, and the relative rights, preferences, and
limitations of each such class and series are as state in the above resolutions.
[THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK.]
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IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by James K.T. Lu, its President, as of this day of 14th
April, 2000.
DIAMOND ENTERTAINMENT CORPORATION
By:
Name: James K. T. Lu
Title: President and Chief Executive Officer
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EXHIBIT I
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert Shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series
A Convertible Preferred Stock indicated below, into shares of Common Stock, no
par value per share (the "Common Stock"), of Diamond Entertainment Corporation
(the "Company") according to the condition hereof, as of the date written below.
If shares are to be issued in the name of a person other than the undersigned,
the under signed will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the Holder for
any conversion, except for such transfer taxes.
Conversion calculations: ---------------------------------------
Date to Effect Conversion
---------------------------------------
Number of Shares of Preferred Stock
to be Converted
---------------------------------------
Number of shares of Common Stock to be issued
---------------------------------------
Applicable Conversion Price
---------------------------------------
Signature
---------------------------------------
Name
---------------------------------------
Address
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EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May
__, 2000, is made and entered into by and between Diamond Entertainment
Corporation, a New Jersey corporation (the "Company"), and
-------------------------- (the "Investor").
WITNESSETH:
WHEREAS, the Company and the Investor have entered into a Securities
Purchase Agreement, dated as of the date hereof (the "Securities Purchase
Agreement"), pursuant to which the Company issued and sold to the Investor and
certain other Investors identified on Schedule I to the Securities Purchase
Agreement, up to $500,000 worth of the Company's Series A Preferred Stock, no
par value per share (the "Preferred Stock"), which may be converted into shares
of the Company's common stock, no par value per share (the "Common Stock"),
pursuant to the terms of the Certificate of Amendment to the Company's
Certificate of Incorporation establishing the designations, preferences and
other rights of the Preferred Stock ("Certificate of Designations"); and
WHEREAS, pursuant to the terms of, and in partial consideration for,
the Investor's agreement to enter into the Securities Purchase Agreement, the
Company has agreed to provide the Investor with certain registration rights with
respect to the Registrable Securities;
NOW, THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements contained herein and in the Securities
Purchase Agreement, and for other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, intending to be legally bound
hereby, the parties hereto agree as follows (capitalized terms used herein and
not defined herein shall have the respective meanings ascribed to them in the
Securities Purchase Agreement):
ARTICLE I
REGISTRATION RIGHTS
Section 1.1 Form S-1, SB-2 or S-3 Registration Statements.
(a) Filing of Registration Statement. Subject to the terms and
conditions of this Agreement, the Company shall prepare and, within ninety (90)
days following the date hereof (the "Filing Deadline"), file with the Securities
and Exchange Commission ("SEC") a registration statement on Form S-1 or SB-2
(or, if the Company is then eligible, on Form S-3) under the Securities Act (the
"Initial Registration Statement") for the registration for the resale by all
Investors who purchased Preferred Stock pursuant to the Securities Purchase
Agreement up to 11,875,000 shares of Common Stock and up to 1,525,000 shares
underlying the Warrants issued pursuant to Section 4(k) of the Securities
Purchase Agreement to May Davis Group, Inc. (the "Placement Agent"), and Butler
Gonzalez, LLP ("Butler Gonzalez") (collectively, the "Initial Registrable
Securities"). Prior to the filing of the Initial Registration Statement with the
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<PAGE>
SEC, the Company shall furnish a copy of the Initial Registration Statement to
Investors, the Placement Agent and Butler Gonzalez for their review and comment
together with a Selling Shareholder Questionnaire in form prepared by the
Company. Investors, the Placement Agent and Butler Gonzalez shall furnish
comments on the Initial Registration Statement and an executed Selling
Shareholder Questionnaire to the Company within five (5) days of the receipt
thereof from the Company. Thereafter, if the Company desires to issue to the
Investor and/or the Investor desires to convert any Registrable Securities in
addition to the Initial Registrable Securities, the Company shall first file
with the SEC a registration statement on Form S-1 or SB-2 (or, if the Company is
then eligible, on Form S-3) under the Securities Act (the Initial Registration
Statement and any subsequent registration statement, each, a "Registration
Statement").
(b) Effectiveness of the Initial Registration Statement. The
Company shall use its commercially reasonable efforts (i) to have the Initial
Registration Statement declared effective by the SEC by no later than one
hundred and fifty (150) days after the date hereof (the "Registration Deadline")
and (ii) to insure that the Initial Registration Statement and any subsequent
Registration Statement remains in effect throughout the term of this Agreement
as set forth in Section 4.2, subject to the terms and conditions of this
Agreement.
(c) Failure to File the Initial Registration Statement. In the
event that the Initial Registration Statement is not filed by the Company with
the SEC by the Filing Deadline, then the Applicable Discount (as defined in the
Certificate of Designations) shall be reduced by an additional 2% for the first
thirty (30) days.
(d) Failure to Maintain Effectiveness of a Registration
Statement. Subject to Section 1.1(e) hereto, in the event the Company fails to
maintain the effectiveness of any Registration Statement (or the underlying
prospectus) throughout the period set forth in Section 4.2, other than any
temporary suspensions permitted by Section 1.1(e), and the Investor holds any
Registrable Securities at any time during the period of such ineffectiveness (an
"Ineffective Period"), the Company shall pay to the Investor in immediately
available funds into an account designated by the Investor an amount equal to
one percent (1%) of the aggregate Purchase Price of all of the Registrable
Securities then held by the Investor for each thirty (30) calendar day period
(prorated for partial periods) of such Ineffective Period. The payments required
by this Section 1.1(d) shall be made on the first Trading Day after the
expiration of an Ineffective Period (or if an Ineffective Period shall last more
than thirty (30) calendar days, the expiration of each additional thirty (30)
calendar day period of an Ineffective Period).
(e) Deferral or Suspension During a Blackout Period. Sections
1.1(c) and (d) notwithstanding, if the Company shall furnish to the Investor
notice (a "Blackout Notice") signed by the Chief Executive Officer or Chief
Financial Officer of the Company stating that he has determined in good faith
that it would be seriously detrimental to the Company and its shareholders for
the Initial Registration Statement to be filed (or for any Registration
Statement to remain in effect) and it is therefore desirable to defer the filing
B-2
<PAGE>
of such Initial Registration Statement (or temporarily suspend the effectiveness
of any Registration Statement or use of the related prospectus), the Company
shall have the right (i) immediately to defer such filing for a period of not
more than thirty (30) days beyond the date by which such Initial Registration
Statement was otherwise required hereunder to be filed or (ii) suspend the
effectiveness of any Registration Statement for a period of not more than thirty
(30) days (any such deferral or suspension period of up to thirty days, a
"Blackout Period"). The Investor acknowledges that it would be seriously
detrimental to the Company and its shareholders for such initial Registration
Statement to be filed (or for any Registration Statement to remain in effect)
during a Blackout Period and therefore essential to defer such filing (or
suspend such effectiveness) during such Blackout Period and agrees to cease any
disposition of Registrable Securities during such Blackout Period. The Company
may not utilize any of its rights under this Section 1.1(e) to defer the filing
of a Registration Statement (or suspend its effectiveness) more than twice in
any twelve (12) month period. Following such deferral or suspension, the
Investor shall be entitled to the payment required by Section 3(c) of the
Certificate of Designations establishing the designations and preferences of the
Preferred Stock.
(f) Liquidated Damages. The Company and the Investor hereto
acknowledge and agree that the sums payable under subsections 1(c) or 1(d) above
shall constitute liquidated damages and not penalties. The parties further
acknowledge that (i) the amount of loss or damages likely to be incurred is
incapable or is difficult to precisely estimate, (ii) the amounts specified in
such subsections bear a reasonable relationship to, and are not plainly or
grossly disproportionate to the probable loss likely to be incurred in
connection with any failure by the Company to obtain or maintain the
effectiveness of a Registration Statement, (iii) one of the reasons for the
Company and the Investor reaching an agreement as to such amounts was the
uncertainty and cost of litigation regarding the question of actual damages, and
(iv) the Company and the Investor are sophisticated business parties and have
been represented by sophisticated and able legal counsel and negotiated this
Agreement at arm's length.
ARTICLE II
REGISTRATION PROCEDURES
Section 2.1 Filings; Information. The Company will effect the
registration and sale of the Registrable Securities in accordance with the
intended methods of disposition thereof. Without limiting the foregoing, the
Company in each such case will do the following as expeditiously as possible,
but in no event later than the deadline, if any, prescribed therefor in this
Agreement:
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(a) The Company shall (i) prepare and file with the SEC a
Registration Statement on Form S-1 or SB-2 (or, if the Company is then eligible,
Form S-3) within ninety (90) days from the date hereof (if use of such form is
then available to the Company pursuant to the rules of the SEC and, if not, on
such other form promulgated by the SEC for which the Company then qualifies,
that counsel for the Company shall deem appropriate and which form shall be
available for the sale of the Registrable Securities to be registered thereunder
in accordance with the provisions of this Agreement and in accordance with the
intended method of distribution of such Registrable Securities); (ii) use
commercially reasonable efforts to cause such filed Registration Statement to
become effective within one hundred and fifty (150) days of the date hereof and
remain effective during the period set forth in Section 1.1(b) hereof (pursuant
to Rule 415 under the Securities Act or otherwise); (iii) prepare and file with
the SEC such amendments and supplements to such Registration Statement and the
prospectus used in connection therewith as may be necessary to keep such
Registration Statement effective for the time period prescribed by Section
1.1(b); and (iv) comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such Registration Statement
during such period in accordance with the intended methods of disposition by the
Investor set forth in such Registration Statement.
(b) The Company shall file all necessary amendments and
supplements to any Registration Statement in order to effectuate the purpose of
this Agreement and the Securities Purchase Agreement.
(c) No later than ten (10) days prior to filing any amendment
or supplement to the Initial Registration Statement or any subsequent
Registration Statement or prospectus, or any amendment or supplement thereto
(excluding, in each case, amendments deemed to result from the filing of
documents incorporated by reference therein), or such shorter period as is
reasonable under the circumstances, the Company shall deliver to the Investor
and one firm of counsel representing the Investor, in accordance with the notice
provisions of Section 4.8, copies of such Registration Statement as proposed to
be filed, together with exhibits thereto, which documents will be subject to
review by the Investor and such counsel, and thereafter deliver to the Investor
and such counsel, in accordance with the notice provisions of Section 4.8, such
number of copies of the Registration Statement, each amendment and supplement
thereto (in each case including all exhibits thereto), the prospectus included
in such Registration Statement (including each preliminary prospectus) and such
other documents or information as the Investor or counsel may reasonably request
in order to facilitate the disposition of the Registrable Securities.
(d) The Company shall deliver, in accordance with the notice
provisions of Section 4.8, to each seller of Registrable Securities covered by a
Registration Statement such number of conformed copies of such Registration
Statement and of each amendment and supplement thereto (in each case including
all exhibits and documents incorporated by reference), such number of copies of
the prospectus contained in any Registration Statement (including each
preliminary prospectus and any summary prospectus) and any other prospectus
filed under Rule 424 promulgated under the Securities Act relating to such
seller's Registrable Securities, and such other documents, as such seller may
reasonably request to facilitate the disposition of its Registrable Securities.
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(e) After the filing of a Registration Statement, the Company
shall promptly notify the Investor of any stop order issued or threatened by the
SEC in connection therewith and take all reasonable actions required to prevent
the entry of such stop order or to remove it if entered.
(f) The Company shall use its commercially reasonable efforts
to (i) register or qualify the Registrable Securities under such other
securities or blue sky laws of such jurisdictions in the United States as the
Investor may reasonably request in light of its intended plan of distribution
and (ii) cause the Registrable Securities to be registered with or approved by
such other governmental agencies or authorities in the United States as may be
necessary by virtue of the business and operations of the Company and do any and
all other acts and things that may be reasonably necessary or advisable to
enable the Investor to consummate the disposition of the Registrable Securities
in light of its intended plan of distribution; provided, however, that the
Company will not be required to qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
paragraph (f), subject itself to taxation in any such jurisdiction, or consent
or subject itself to general service of process in any such jurisdiction.
(g) The Company shall immediately notify the Investor upon the
occurrence of any of the following events in respect of a Registration Statement
or related prospectus in respect of an offering of Registrable Securities: (i)
receipt of any request by the SEC or any other federal or state governmental
authority for additional information, amendments or supplements to such
Registration Statement or related prospectus; (ii) the issuance by the SEC or
any other federal or state governmental authority of any stop order suspending
the effectiveness of such Registration Statement or notification of the
initiation of any proceedings for that purpose; (iii) receipt of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose; (iv) the happening of any event that makes any statement made in such
Registration Statement or related prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires the making of any changes in such Registration Statement, related
prospectus or documents so that, in the case of such Registration Statement, it
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, in the light of the circumstances under which they were
made, and that in the case of the related prospectus, it will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; and (v) the
Company's reasonable determination that a post-effective amendment to such
Registration Statement would be appropriate, and the Company will promptly make
available to the Investor any such supplement or amendment to the related
prospectus.
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(h) The Company shall enter into customary agreements and take
such other customary actions as are reasonably required in order to expedite or
facilitate the disposition by the Investor of such Registrable Securities
(whereupon the Investor may, at its option, require that any or all of the
representations, warranties and covenants of the Company also be made to and for
the benefit of the Investor).
(i) The Company shall make available to the Investor (and will
deliver to Investor's counsel), subject to restrictions imposed by the United
States federal government or any agency or instrumentality thereof, copies of
all correspondence between the SEC and the Company, its counsel or its auditors
and will also make available for inspection by the Investor and any attorney,
accountant or other professional retained by the Investor (collectively, the
"Inspectors"), all financial and other records, pertinent corporate documents
and properties of the Company (collectively, the "Records") as shall be
reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company's officers and employees to supply all
information reasonably requested by any Inspectors in connection with a
Registration Statement. Records that the Company determines, in good faith, to
be confidential and that it notifies the Inspectors are confidential shall not
be disclosed by the Inspectors unless (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement or (ii) the disclosure or release of such Records is requested or
required pursuant to oral questions, interrogatories, requests for information
or documents or a subpoena or other order from a court of competent jurisdiction
or other legal process; provided, however, that prior to any disclosure or
release pursuant to clause (ii), the Inspectors shall provide the Company with
prompt notice of any such request or requirement so that the Company may seek an
appropriate protective order or waive such Inspectors' obligation not to
disclose such Records; and, provided, further, that if failing the entry of a
protective order or the waiver by the Company permitting the disclosure or
release of such Records, the Inspectors, upon advice of counsel, are compelled
to disclose such Records, the Inspectors may disclose that portion of the
Records that counsel has advised the Inspectors that the Inspectors are
compelled to disclose. The Investor agrees that information obtained by it as a
result of such inspections (not including any information obtained from a third
party who, insofar as is known to the Investor after reasonable inquiry, is not
prohibited from providing such information by a contractual, legal or fiduciary
obligation to the Company) shall be deemed confidential and shall not be used by
it as the basis for any market transactions in the securities of the Company
unless and until such information has been made generally available to the
public. The Investor further agrees that it will, upon learning that disclosure
of such Records is sought in a court of competent jurisdiction, give notice to
the Company and allow the Company, at its expense, to undertake appropriate
action to prevent disclosure of the Records deemed confidential.
(j) The Company shall otherwise comply with all applicable
rules and regulations of the SEC, including, without limitation, compliance with
applicable reporting requirements under the Exchange Act.
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(k) The Company may require the Investor to promptly furnish
in writing to the Company such information as may be legally required in
connection with such registration including, without limitation, all such
information as may be requested by the SEC or the NASD. The Investor agrees to
provide such information requested in connection with such registration within
five (5) calendar days after receiving such written request, or such shorter
period as is reasonable under the circumstances, and the Company shall not be
responsible for any delays in obtaining or maintaining the effectiveness of any
Registration Statement caused by the Investor's failure to timely provide such
information.
(l) The Company shall use its best efforts either: (i) to
secure the inclusion for quotation on The Nasdaq Stock Market Inc.'s OTC
Bulletin Board Bulletin for such Resgistrable Securities, or (ii) if, despite
the Company's best efforts to satisfy the preceding clause (i), the Company is
unsuccessful in satisfying the preceding clause (i), to secure the inclusion for
quotation in the "pink sheets" for such Registrable Securities, and, without
limiting the generality of the foregoing, in the case of clause (i) or (ii), to
arrange for at least two market makers to register with the National Association
of Securities Dealers, Inc. ("NASD"), as such with respect to such Registrable
Securities. The Company shall pay all fees and expenses in connection with
satisfying its obligation under this Section 2(l).
Section 2.2 Registration Expenses. In connection with each Registration
Statement, the Company shall pay all registration expenses incurred in
connection with the registration thereunder (the "Registration Expenses"),
including, without limitation: (a) all registration, filing, securities exchange
listing and fees required by the NASD, (b) all registration, filing,
qualification and other fees and expenses of compliance with securities or blue
sky laws (including reasonable fees and disbursements of counsel for the
Company), (c) all word processing, duplicating, printing, messenger and delivery
expenses, (d) the Company's internal expenses (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties), and (e) reasonable fees and disbursements of counsel for the
Company and customary fees and expenses for independent certified public
accountants retained by the Company; but excluding underwriting fees, discounts,
transfer taxes or commissions, if any, attributable to the sale of the
Registrable Securities, which shall be payable by each holder of Registrable
Securities pro rata on the basis of the number of Registrable Securities of each
holder that are included under this Agreement.
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ARTICLE III
INDEMNIFICATION AND CONTRIBUTION
Section 3.1 Indemnification.
(a) Indemnification by the Company. The Company agrees to
indemnify and hold harmless the Investor, its partners, Affiliates, officers,
directors, employees, counsel and duly authorized agents, and each Person or
entity, if any, who controls the Investor within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act, together with the
partners, Affiliates, officers, directors, employees, counsel and duly
authorized agents of such controlling Person or entity (collectively, the "
Controlling Persons"), from and against any loss, claim, damage, liability,
costs and expenses (including, without limitation, reasonable attorneys' fees
and disbursements and costs and expenses of investigating and defending any such
claim) (collectively, "Damages"), joint or several, and any action or proceeding
in respect thereof to which the Investor, its partners, Affiliates, officers,
directors, employees and duly authorized agents, and any Controlling Person, may
become subject under the Securities Act or otherwise, as incurred, insofar as
such Damages (or actions or proceedings in respect thereof) arise out of, or are
based upon, any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement, preliminary prospectus or prospectus
relating to the Registrable Securities or arises out of, or are based upon, any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, except insofar as any
such untrue statement, alleged untrue statement, omission or alleged omission is
made in reliance upon and in conformity with written information furnished to
the Company by the Investor which is specifically intended by the Investor for
use in the preparation of any such Registration Statement, preliminary
prospectus or prospectus, and shall reimburse the Investor, its partners,
Affiliates, officers, directors, employees, counsel and duly authorized agents,
and each such Controlling Person, for any legal and other expenses reasonably
incurred by the Investor, its partners, Affiliates, officers, directors,
employees, counsel and duly authorized agents, or any such Controlling Person,
as incurred, in investigating or defending or preparing to defend against any
such Damages or actions or proceedings; provided, however, that the Company
shall not be liable to the Investor to the extent that any such Damages arise
out of or are based upon an untrue statement or omission made in any preliminary
prospectus if (i) the Investor failed to send or deliver a copy of the final
prospectus delivered by the Company to the Investor with or prior to the
delivery of written confirmation of the sale by the Investor to the Person
asserting the claim from which such Damages arise, and (ii) the final prospectus
would have corrected such untrue statement or alleged untrue statement or such
omission or alleged omission.
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(b) Indemnification by the Investor. The Investor agrees to
indemnify and hold harmless the Company, its Affiliates, officers, directors,
employees, counsel and duly authorized agents, and each Controlling Persons of
the Company, from and against any and all Damages, joint or several, and any
action or proceeding in respect thereof to which the Investor, its partners,
Affiliates, officers, directors, employees, counsel and duly authorized agents,
and any such Controlling Person, may become subject under the Securities Act or
otherwise, as incurred, insofar as such Damages (or actions or proceedings in
respect thereof) arise out of, or are based upon, any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement, preliminary prospectus or prospectus relating to the Registrable
Securities or arises out of, or are based upon, any omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances under
which they were made, but only to the extent that any such untrue statement,
alleged untrue statement, omission or alleged omission is made in reliance upon
and in conformity with written information furnished to the Company by the
Investor which is specifically intended by the Investor for use in the
preparation of any such Registration Statement, preliminary prospectus or
prospectus, and shall reimburse the Company, its partners, Affiliates, officers,
directors, employees, counsel and duly authorized agents, and each such
Controlling Person, for any legal and other expenses reasonably incurred by the
Investor, its partners, Affiliates, officers, directors, employees, counsel and
duly authorized agents, or any such Controlling Person, as incurred, in
investigating or defending or preparing to defend against any such Damages or
actions or proceedings.
Section 3.2 Conduct of Indemnification Proceedings. Promptly after
receipt by any person or entity in respect of which indemnity may be sought
pursuant to Section 3.1 (an "Indemnified Party") of notice of any claim or the
commencement of any action, the Indemnified Party shall, if a claim in respect
thereof is to be made against the person or entity against whom such indemnity
may be sought (the "Indemnifying Party"), notify the Indemnifying Party in
writing of the claim or the commencement of such action. In the event an
Indemnified Party shall fail to give such notice as provided in this Section 3.2
and the Indemnifying Party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by the
failure to give such notice, the indemnification provided for in Section 3.1
shall be reduced to the extent of any actual prejudice resulting from such
failure to so notify the Indemnifying Party; provided, however, that the failure
to notify the Indemnifying Party shall not relieve the Indemnifying Party from
any liability that it may have to an Indemnified Party otherwise than under
Section 3.1. If any such claim or action shall be brought against an Indemnified
Party, and it shall notify the Indemnifying Party thereof, the Indemnifying
Party shall be entitled to participate therein, and, to the extent that it
wishes, jointly with any other similarly notified Indemnifying Party, to assume
the defense thereof with counsel reasonably satisfactory to the Indemnified
Party. After notice from the Indemnifying Party to the Indemnified Party of its
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election to assume the defense of such claim or action, the Indemnifying Party
shall not be liable to the Indemnified Party for any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Indemnified Party shall have the right to employ separate counsel to
represent the Indemnified Party and its Controlling Persons who may be subject
to liability arising out of any claim in respect of which indemnity may be
sought by the Indemnified Party against the Indemnifying Party, but the fees and
expenses of such counsel shall be for the account of such Indemnified Party,
unless (i) the Indemnifying Party and the Indemnified Party shall have mutually
agreed to the retention of such counsel or (ii) in the reasonable judgment of
the Indemnifying Party and the Indemnified Party, representation of both parties
by the same counsel would be inappropriate due to actual or potential conflicts
of interest between them, it being understood, however, that the Indemnifying
Party shall not, in connection with any one such claim or action or separate but
substantially similar or related claims or actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (together with
appropriate local counsel) at any time for all Indemnified Parties, or for fees
and expenses that are not reasonable. No Indemnifying Party shall, without the
prior written consent of the Indemnified Party, effect any settlement of any
claim or pending or threatened proceeding in respect of which the Indemnified
Party is or could have been a party and indemnity is sought hereunder by such
Indemnified Party, unless such settlement includes an unconditional release of
such Indemnified Party from all liability arising out of such claim or
proceeding. Whether or not the defense of any claim or action is assumed by the
Indemnifying Party, such Indemnifying Party will not be subject to any liability
for any settlement made without its consent, which consent will not be
unreasonably withheld.
Section 3.3 Other Indemnification. Indemnification similar to that
specified in the preceding paragraphs of this Article III (with appropriate
modifications) shall be given by the Company with respect to any required
registration or other qualification of securities under any federal or state law
or regulation of any governmental authority other than the Securities Act. The
provisions of this Article III shall be in addition to any other rights to
indemnification, contribution or other remedies which an Indemnified Party may
have pursuant to law, equity, contract or otherwise.
Section 3.4 Contribution. If the indemnification and reimbursement
obligations provided for in any section of this Article III is unavailable or
insufficient to hold harmless the Indemnified Parties in respect of any Damages
referred to herein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Damages as between the Company on the one
hand and the Investor on the other, in such proportion as is appropriate to
reflect the relative fault of the Company and of the Investor in connection with
such statements or omissions, as well as other equitable considerations. The
relative fault of the Company on the one hand and of the Investor on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by such party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
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The Company and the Investor agree that it would not be just and
equitable if contribution pursuant to this Section 3.4 were determined by pro
rata allocation or by any other method of allocation that does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party as a result of the
Damages referred to in the immediately preceding paragraph shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 3.4, the Investor shall in no event be required to contribute any amount
in excess of the amount by which the total price at which the Registrable
Securities of the Investor were sold to the public (less underwriting discounts
and commissions) exceeds the amount of any damages which the Investor has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. 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.
ARTICLE IV
MISCELLANEOUS
Section 4.1 No Outstanding Registration Rights. The Company represents
and warrants to the Investor that there is not in effect on the date hereof any
agreement by the Company pursuant to which any holders of securities of the
Company have a right to cause the Company to register or qualify such securities
under the Securities Act or any securities or blue sky laws of any jurisdiction,
except for piggyback registration rights granted to the holders of three
convertible notes in the aggregate amount of $250,000 issued to Mr. James K.T.
Lu, Balmore Funds and Mr. Jeffrey I. Schillen which notes are convertible into
5,000,000 shares of Common Stock of the Company.
Section 4.2 Term. The obligations of the Company and the rights
provided to the holders of Registrable Securities hereunder shall terminate at
such time as all Registrable Securities have been issued and have ceased to be
Registrable Securities. Notwithstanding the foregoing, Section 1.1(c) and (d),
Article III, Section 4.8, and Section 4.9 shall survive the termination or
expiration of this Agreement.
Section 4.3 Rule 144. The Company will use its commercially reasonable
efforts to file in a timely manner information, documents and reports in
compliance with the Securities Act and the Exchange Act and will, at its
expense, promptly take such further action as holders of Registrable Securities
may reasonably request to enable such holders of Registrable Securities to sell
Registrable Securities without registration under the Securities Act within the
limitation of the exemptions provided by (a) Rule 144 under the Securities Act
("Rule 144"), as such Rule may be amended from time to time, or (b) any similar
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rule or regulation hereafter adopted by the SEC. If at any time the Company is
not required to file such reports, it will, at its expense, forthwith upon the
written request of any holder of Registrable Securities, make available adequate
current public information with respect to the Company within the meaning of
paragraph (c)(2) of Rule 144 or such other information as necessary to permit
sales pursuant to Rule 144. Upon the request of the Investor, the Company will
deliver to the Investor a written statement, signed by the Company's principal
executive or financial officer, as to whether it has complied with such
requirements.
Section 4.4 Certificate. The Company will, at its expense, forthwith
upon the request of any holder of Registrable Securities, deliver to such holder
a certificate, signed by the Company's principal financial officer, stating (a)
the Company's name, address and telephone number (including area code), (b) the
Company's Internal Revenue Service identification number, (c) the Company's SEC
file number, (d) the number of shares of each class of capital stock outstanding
as shown by the most recent report or statement published by the Company, and
(e) whether the Company has filed the reports required to be filed under the
Exchange Act for a period of at least ninety (90) days prior to the date of such
certificate and in addition has filed the most recent annual report required to
be filed thereunder.
Section 4.5 Amendment and Modification. No provision of this Agreement
may be waived, unless such waiver is set forth in a writing executed by both
parties to this Agreement. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given,
unless the Company has obtained the written consent of the holders of a majority
of the then outstanding Registrable Securities. Notwithstanding the foregoing,
the waiver of any provision hereof with respect to a matter that relates
exclusively to the rights of holders of Registrable Securities whose securities
are being sold pursuant to a Registration Statement and does not directly or
indirectly affect the rights of other holders of Registrable Securities may be
given by holders of at least a majority of the Registrable Securities being sold
by such holders; provided that the provisions of this sentence may not be
amended, modified or supplemented except in accordance with the provisions of
the immediately preceding sentence. No course of dealing between or among any
Person having any interest in this Agreement will be deemed effective to modify,
amend or discharge any part of this Agreement or any rights or obligations of
any person under or by reason of this Agreement.
Section 4.6 Successors and Assigns; Entire Agreement. This Agreement
and all of the provisions hereof shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and permitted assigns. The
Investor may assign its rights under this Agreement to any subsequent holder of
the Registrable Securities, provided that the Company shall have the right to
require any holder of Registrable Securities to execute a counterpart of this
Agreement as a condition to such holder's claim to any rights hereunder. This
Agreement, together with the Securities Purchase Agreement, sets forth the
entire agreement and understanding between the parties as to the subject matter
hereof and merges and supersedes all prior discussions, agreements and
understandings of any and every nature among them.
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Section 4.7 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that such severability shall be
ineffective if it materially changes the economic benefit of this Agreement to
any party.
Section 4.8 Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (a) personally served,
(b) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (c) delivered by reputable air courier service with charges
prepaid, or (d) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice given in accordance herewith. Any notice or
other communication required or permitted to be given hereunder shall be deemed
effective (i) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (ii) on the second business day
following the date of mailing by express courier service or on the fifth
business day after deposited in the mail, in each case, fully prepaid, addressed
to such address, or upon actual receipt of such mailing, whichever shall first
occur. The addresses for such communications shall be:
If to the Company, to: Diamond Entertainment Corporation
800 Tucker Lane
Walnut, CA 81709
Attention: President
Telephone: (909) 839-1989
Facsimile: (909) 869-1990
With a copy(which shall not
constitute notice), to: De Martino Finkelstein Rosen & Virga
1818 N Street, N.W.
Suite 400
Washington, D.C. 20036
Attention: Neil R.E. Carr, Esq.
Telephone: (202) 659-0494
Facsimile: (202) 659-1290
If to the Investor, to: ---------------------------------
---------------------------------
---------------------------------
---------------------------------
Attention:
Telephone: (---) --------
Facsimile: (---) --------
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Either party hereto may from time to time change its address or
facsimile number for notices under this Section 4.8 by giving at least ten (10)
days' prior written notice of such changed address or facsimile number to the
other party hereto.
Section 4.9 Governing Law, Jurisdiction. This Agreement shall be
governed by and interpreted in accordance with the laws of the State of New York
without regard to the principles of conflicts of law. The parties hereto hereby
submit to the exclusive jurisdiction of the United States Federal and state
courts located in New York, New York with respect to any dispute arising under
this Agreement, the agreements entered into in connection herewith or the
transactions contemplated hereby or thereby.
Section 4.10 Title and Subtitles. The titles and subtitles used in this
Agreement are used for the convenience of reference and are not to be considered
in construing or interpreting this Agreement.
Section 4.11 Counterparts. This Agreement may be executed in multiple
counterparts, each of which may be executed by less than all of the parties and
shall be deemed to be an original instrument which shall be enforceable against
the parties actually executing such counterparts and all of which together shall
constitute one and the same instrument. This Agreement, once executed by a
party, may be delivered to the other parties hereto by facsimile transmission of
a copy of this Agreement bearing the signature of the parties so delivering this
Agreement.
Section 4.12 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 purposes of this Agreement and the consummation of the
transactions contemplated hereby.
Section 4.13 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.
(THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK.)
B-14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be executed by the undersigned, thereunto duly authorized,
as of the date first set forth above.
DIAMOND ENTERTAINMENT CORPORATION
By: ----------------------------------------------
Name: James K. T. Lu
Title: President and Chief Executive Officer
----------------------------------------------
[Name of Investor]
By: ----------------------------------------------
Name: ---------------------------------------
Title: ---------------------------------------
B-15
<PAGE>
EXHIBIT C
AMENDED AND RESTATED
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is made and entered into
effective as of April 14, 2000, by and May Davis Group, a Maryland corporation
(the "Placement Agent"), Diamond Entertainment Corporation, a New Jersey
Corporation (the "Company"), and First Union National Bank, a national banking
association, as Escrow Agent hereunder (the "Escrow Agent").
BACKGROUND
WHEREAS, the Company and the Placement Agent have entered into a
Placement Agency Agreement (the "Placement Agency Agreement"), dated as of April
14, 2000 as amended, pursuant to which the Company proposes to offer for sale to
investors ("Investors") through the Placement Agent on a "best efforts" basis up
to 50 Shares of Series A Preferred Stock, no par value per share (the
"Securities") resulting in gross proceeds to the Company of up to $500,000 (the
"Proceeds"). The Securities will be sold to investors pursuant to a Securities
Purchase Agreement (the "Securities Purchase Agreement") between the Company and
each Investor listed on Schedule I thereto. The Securities Purchase Agreement
provides that the Investor shall deposit the purchase price of the Securities
purchased pursuant to the Securities Purchase Agreement in a segregated escrow
account to be held by Escrow Agent in order to effectuate a disbursement of the
proceeds to the Company at one or more closings to be held as set forth in the
Securities Purchase Agreement. (the "Closing")
WHEREAS, the Placement Agent intends to sell the Securities as the
Company's agent on a "best efforts" basis (the "Offering").
WHEREAS, Escrow Agent has agreed to accept, hold, and disburse the
funds deposited with it in accordance with the terms of this agreement .
WHEREAS, in order to establish the escrow of funds and to effect the
provisions of the Securities Purchase Agreement, the parties hereto have entered
into this Agreement.
NOW THEREFORE, in consideration of the foregoing, it is hereby agreed
as follows:
1. Definitions. The following terms shall have the following meanings when used
herein:
a. "Escrow Funds" shall mean the funds deposited with the Escrow Agent
pursuant to this Agreement, which funds shall include, without limitation, the
sum of up to $500,000.
C-1
<PAGE>
b. "Joint Written Direction" shall mean a written direction executed by
the Placement Agent and the Company directing Escrow Agent to disburse all or a
portion of the Escrow Funds or to take or refrain from taking any action
pursuant to this Agreement.
c. "Escrow Period" shall begin with the commencement of the Offering
and shall terminate upon the earlier to occur of the following dates:
(i) The date upon which the Escrow Agent disburses at one or more
closings from the Escrow Account all $500,000 of the Proceeds;
(ii) The expiration of twenty-six (26) days from the date of
commencement of the Offering (unless extended by mutual written agreement
between the Company and the Placement Agent with a copy of such extension to the
Escrow Agent); or
(iii) The date upon which a determination is made by the Company and
the Placement Agent to terminate the Offering prior to the sale of all the
Securities.
During the Escrow Period, the Company and the Placement Agent are aware that
they are not entitled to any funds received into escrow and no amounts deposited
in the Escrow Account shall become the property of the Company or the Placement
Agent or any other entity, or be subject to the debts of the Company or the
Placement Agent or any other entity.
2. Appointment of and Acceptance by Escrow Agent. The Placement Agent and the
Company hereby appoint Escrow Agent to serve as Escrow Agent hereunder. Escrow
Agent hereby accepts such appointment and, upon receipt by wire transfer of the
Escrow Funds in accordance with Section 3 below, agrees to hold, invest and
disburse the Escrow Funds in accordance with this Agreement.
3. Creation of Escrow Funds. On or prior to the date of the commencement of the
Offering, the parties shall establish an escrow account with the Escrow Agent,
which escrow account shall be entitled as follows: Diamond Entertainment
Corporation/May Davis Group, Inc. Escrow Account for the deposit of the Escrow
Funds. The Placement Agent will instruct subscribers to wire funds to the
account of the Escrow Agent as follows:
Bank: First Union National Bank of New Jersey
Routing # 031201467
Account # 2020000659170
Name on Account: Butler Gonzalez, LLP/First Union Escrow Account
Name on Sub-Account: Diamond Entertainment Corporation/May Davis Group, Inc.
Escrow account
Reference Sub-Account # 1077-00
Attn: Robert Mercado (732) 452-3005
Carmela Agugliaro (732) 452-3005
C-2
<PAGE>
4. Deposits into the Escrow Account. The Placement Agent agrees that it
shall promptly deliver all monies received from subscribers for the payment of
the Securities to the Escrow Agent for deposit in the Escrow Account.
5. Disbursements from the Escrow Account.
(a) At such time as Escrow Agent has collected and deposited
instruments of payment with regard to the purchase of the Securities, Escrow
Agent shall notify the Company and the Placement Agent. The Escrow Agent will
continue to hold such funds until Placement Agent and Company execute a Joint
Written Direction directing the Escrow Agent to disburse the Proceeds pursuant
to a closing statement signed by the Company (the "Closing Statement"). The
Proceeds may be disbursed in one or more closings to be held from time to time
during the offering period. In disbursing such funds, Escrow Agent is authorized
to rely upon such Closing Statement from Company and may accept any signatory
from the Company listed on the signature page to this Agreement and any
signature from the Placement Agent that Escrow Agent already has on file.
For purposes of this Agreement, the term "collected funds" shall mean
all funds received by the Escrow Agent which have cleared normal banking
channels and are in the form of cash.
6. Collection Procedure. The Escrow Agent is hereby authorized to
forward each instrument or wire for collection and, upon collection of the
proceeds of each instrument or wire deposit the collected proceeds in the Escrow
Account.
Any checks or wires returned unpaid to the Escrow Agent shall be
returned to the Placement Agent. In such cases, the Escrow Agent will promptly
notify the Company for such return.
If the Company rejects any subscription for which the Escrow Agent has
already collected funds, the Escrow Agent shall promptly issue a refund check or
wire to the rejected subscriber. If the Company rejects any subscription for
which the Escrow Agent has not yet collected funds but has submitted the
subscriber's wire for collection, the Escrow Agent shall promptly issue a check
or wire the amount of the subscriber's wire to the rejected subscriber after the
Escrow Agent has cleared such funds. The purchase money returned to each
subscriber shall be free and clear of any and all claims of the Company, the
Placement Agent or any of their creditors. If the Escrow Agent has not yet
submitted a rejected subscriber's wire for collection, the Escrow Agent shall
promptly remit the subscriber's wire directly to the subscriber. The Company
shall provide payment instructions to the Escrow Agent.
C-3
<PAGE>
7. Suspension of Performance: Disbursement Into Court. If at any time,
there shall exist any dispute between the Company and the Placement Agent with
respect to holding or disposition of any portion of the Escrow Funds or any
other obligations of Escrow Agent hereunder, or if at any time Escrow Agent is
unable to determine, to Escrow Agent's sole satisfaction, the proper disposition
of any portion of the Escrow Funds or Escrow Agent's proper actions with respect
to its obligations hereunder, or if the parties have not within 30 days of the
furnishing by Escrow Agent of a notice of resignation pursuant to Section 9
hereof, appointed a successor Escrow Agent to act hereunder, then Escrow Agent
may, in its sole discretion, take either or both of the following actions:
a. suspend the performance of any of its obligations (including
without limitation any disbursement obligations) under this
Escrow Agreement until such dispute or uncertainty shall be
resolved to the sole satisfaction of Escrow Agent or until a
successor Escrow Agent shall be appointed (as the case may be);
provided however, Escrow Agent shall continue to invest the
Escrow Funds in accordance with Section 9 hereof; and/or
b. petition (by means of an interpleader action or any other
appropriate method) any court of competent jurisdiction in any
venue convenient to Escrow Agent, for instructions with respect
to such dispute or uncertainty, and to the extent required by
law, pay into such court, for holding and disposition in
accordance with the instructions of such court, all funds held by
it in the Escrow Funds, after deduction and payment to Escrow
Agent of all fees and expenses (including court costs and
attorneys' fees) payable to, incurred by, or expected to be
incurred by Escrow Agent in connection with performance of its
duties and the exercise of its rights hereunder.
c. Escrow Agent shall have no liability to the Company, the
Placement Agent, or any person with respect to any such
suspension of performance or disbursement into court,
specifically including any liability or claimed liability that
may arise, or be alleged to have arisen, our of or as a result of
any delay in the disbursement of funds held in the Escrow Funds
or any delay in with respect to any other action required or
requested of Escrow Agent.
8. Investment of Escrow Funds. The Escrow Agent shall deposit the
Escrow Funds in a non interest bearing money market account.
If Escrow Agent has not received a Joint Written Direction at any time
that an investment decision must be made, Escrow Agent shall invest the Escrow
Fund, or such portion thereof, as to which no Joint Written Direction has been
received, in investments described above. The foregoing investments shall be
made by the Escrow Agent. Notwithstanding anything to the contrary contained,
C-4
<PAGE>
Escrow Agent may, without notice to the parties, sell or liquidate any of the
foregoing investments at any time if the proceeds thereof are required for any
release of funds permitted or required hereunder, and Escrow Agent shall not be
liable or responsible for any loss, cost or penalty resulting from any such sale
or liquidation. With respect to any funds received by Escrow Agent for deposit
into the Escrow Funds or any Joint Written Direction received by Escrow Agent
with respect to investment of any funds in the Escrow Funds after ten o'clock,
a.m., New York, New York time, Escrow Agent shall not be required to invest such
funds or to effect such investment instruction until the next day upon which
banks in New Jersey are open for business.
9. Resignation and Removal of Escrow Agent. Escrow Agent may resign
from the performance of its duties hereunder at any time by giving ten (10)
days' prior written notice to the parties or may be removed, with or without
cause, by the parties, acting jointly, by furnishing a Joint Written Direction
to Escrow Agent, at any time by the giving of ten (10) days' prior written
notice to Escrow Agent as provided herein below. Upon any such notice of
resignation or removal, the representatives of the Placement Agent and the
Company identified in Sections 13a.(iv) and 13b.(iv), below, jointly shall
appoint a successor Escrow Agent hereunder, which shall be a commercial bank,
trust company or other financial institution with a combined capital and surplus
in excess of $10,000,000.00. Upon the acceptance in writing of any appointment
of Escrow Agent hereunder by a successor Escrow Agent, such successor Escrow
Agent shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Escrow Agent, and the retiring Escrow
Agent shall be discharged from its duties and obligations under this Escrow
Agreement, but shall not be discharged from any liability for actions taken as
Escrow Agent hereunder prior to such succession. After any retiring Escrow
Agent's resignation or removal, the provisions of this Escrow Agreement shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was Escrow Agent under this Escrow Agreement. The retiring Escrow Agent shall
transmit all records pertaining to the Escrow Funds and shall pay all funds held
by it in the Escrow Funds to the successor Escrow Agent, after making copies of
such records as the retiring Escrow Agent deems advisable and after deduction
and payment to the retiring Escrow Agent of all fees and expenses (including
court costs and attorneys' fees) payable to, incurred by, or expected to be
incurred by the retiring Escrow Agent in connection with the performance of its
duties and the exercise of its rights hereunder.
10. Liability of Escrow Agent.
a. Escrow Agent shall have no liability or obligation with respect to the
Escrow Funds except for Escrow Agent's willful misconduct or gross negligence.
Escrow Agent's sole responsibility shall be for the safekeeping, investment, and
disbursement of the Escrow Funds in accordance with the terms of this Agreement.
Escrow Agent shall have no implied duties or obligations and shall not be
charged with knowledge or notice o any fact or circumstance not specifically set
forth herein. Escrow Agent may rely upon any instrument, not only as to its due
C-5
<PAGE>
execution, validity and effectiveness, but also as to the truth and accuracy of
any information contained therein, which Escrow Agent shall in good faith
believe to be genuine, to have been signed or presented by the person or parties
purporting to sign the same and conform to the provisions of this Agreement. In
no event shall Escrow Agent be liable for incidental, indirect, special,
consequential or punitive damages. Escrow Agent shall not be obligated to take
any legal action or commence any proceeding in connection with the Escrow Funds,
any account in which Escrow Funds are deposited, this Agreement or the
Securities Purchase Agreement, or to appear in, prosecute or defend any such
legal action or proceeding. Escrow Agent may consult legal counsel selected by
it in any event of any dispute or question as to construction of any of the
provisions hereof or of any other agreement or its duties hereunder, or relating
to any dispute involving any party hereto, and shall incur no liability and
shall be fully indemnified from any liability whatsoever in acting in accordance
with the opinion or instructions of such counsel. The Company and the Placement
Agent jointly and severally shall promptly pay, upon demand, the reasonable fees
and expenses of any such counsel.
b. The Escrow Agent is hereby authorized, in its sole discretion, to comply
with orders issued or process entered by any court with respect to the Escrow
Funds, without determination by the Escrow Agent of such court's jurisdiction in
the matter. If any portion of the Escrow Funds is at any time attached,
garnished or levied upon under any court order, or in case the payment,
assignment, transfer, conveyance or delivery of any such property shall be
stayed or enjoined by any court order, or in any case any order judgment or
decree shall be made or entered by any court affecting such property or ay part
thereof, then and in any such event, the Escrow Agent is authorized, in its sole
discretion, to rely upon and comply with any such order, writ judgment or decree
which it is advised by legal counsel selected by its binding upon without the
need for appeal or other action; and if the Escrow Agent complies with any such
order, writ, judgment or decree, it shall not be liable to any of the parties
hereto or to any other person or entity by reason of such compliance even though
such order, writ judgment or decree may be subsequently reversed, modified,
annulled, set aside or vacated.
11. Indemnification of Escrow Agent. From and at all times after the date
of this Agreement, the parties jointly and severally, shall, to the fullest
extent permitted by law and to the extent provided herein, indemnify and hold
harmless Escrow Agent and each director, officer, employee, attorney, agent and
affiliate of Escrow Agent (collectively, the "Indemnified Parties") against any
and all actions, claims (whether or not valid), losses, damages, liabilities,
costs and expenses of any kind or nature whatsoever (including without
limitation reasonable attorney's fees, costs and expenses) incurred by or
asserted against any of the Indemnified Parties from and after the date hereof,
whether direct, indirect or consequential, as a result of or arising from or in
any way relating to any claim, demand, suit, action, or proceeding (including
any inquiry or investigation) by any person, including without limitation the
parties to this Agreement, whether threatened or initiated, asserting a claim
C-6
<PAGE>
for any legal or equitable remedy against any person under any statute or
regulation, including, but not limited to, any federal or state securities laws,
or under any common law or equitable cause or otherwise, arising from or in
connection with the negotiation, preparation, execution, performance or failure
of performance of this Agreement or any transaction contemplated herein, whether
or not any such Indemnified Party is a party to any such action or proceeding,
suit or the target of any such inquiry or investigation; provided, however, that
no Indemnified Party shall have the right to be indemnified hereunder for
liability finally determined by a court of competent jurisdiction, subject to no
further appeal, to have resulted solely from the gross negligence or willful
misconduct of such Indemnified Party. If any such action or claim shall be
brought or asserted against any Indemnified Party, such Indemnified Party shall
promptly notify the Company and the Placement Agent hereunder in writing, and
the Placement Agent and the Company shall assume the defense thereof, including
the employment of counsel and the payment of all expenses. Such Indemnified
Party shall, in its sole discretion, have the right to employ separate counsel
(who may be selected by such Indemnified Party in its sole discretion) in any
such action and to participate and to participate in the defense thereof, and
the fees and expenses of such counsel shall be paid by such Indemnified Party,
except that the Placement Agent and/or the Company shall be required to pay such
fees and expense if (a) the Placement Agent or the Company agree to pay such
fees and expenses, or (b) the Placement Agent and/or the Company shall fail to
assume the defense of such action or proceeding or shall fail, in the sole
discretion of such Indemnified Party, to employ counsel satisfactory to the
Indemnified Party in any such action or proceeding, (c) the Placement Agent and
the Company is the plaintiff in any such action or proceeding or (d) the named
or potential parties to any such action or proceeding (including any potentially
impleaded parties) include both Indemnified Party the Company and/or the
Placement Agent Indemnified Party shall have been advised by counsel that there
may be one or more legal defenses available to it which are different from or
additional to those available to the Company or the Placement Agent. The
Placement Agent and the Company shall be jointly and severally liable to pay
fees and expenses of counsel pursuant to the preceding sentence, except that any
obligation to pay under clause (a) shall apply only to the party so agreeing.
All such fees and expenses payable by the Company and/or the Placement Agent
pursuant to the foregoing sentence shall be paid from time to time as incurred,
both in advance of and after the final disposition of such action or claim. The
obligations of the parties under this section shall survive any termination of
this Agreement, and resignation or removal of the Escrow Agent shall be
independent of any obligation of Escrow Agent.
The parties agree that neither payment by the Company or the Placement
Agent of any claim by Escrow Agent for indemnification hereunder shall impair,
limit, modify, or affect, as between the Placement Agent and the Company, the
respective rights and obligations of Placement Agent, on the one hand, and the
Company, on the other hand, under the Placement Agency Agreement.
C-7
<PAGE>
12. Expenses of Escrow Agent. The Company shall reimburse Escrow Agent for
all of its reasonable out-of-pocket expenses, including attorneys fees, travel
expenses, telephone and facsimile transmission costs, postage (including express
mail and overnight delivery charges), copying charges and the like. All of the
compensation and reimbursement obligations set forth in this Section shall be
payable by the Company, upon demand by Escrow Agent. The obligations of the
Company under this Section shall survive any termination of this Agreement and
the resignation or removal of Escrow Agent.
13. Warranties.
a. Placement Agent makes the following representations and warranties to
Escrow Agent:
(i) Placement Agent and has full power and authority to
execute and deliver this Escrow Agreement and to perform its
obligations hereunder.
(ii) This Escrow Agreement has been duly approved by all
necessary corporate action of Placement Agent, including any
necessary shareholder approval, has been executed by duly
authorized officers of the Placement Agent, enforceable in
accordance with its terms.
(iii) The execution, delivery, and performance of the
Placement Agent of this Agreement will not violate, conflict
with, or cause a default under the certificate of
incorporation or bylaws of Placement Agent, any applicable law
or regulation, any court order or administrative ruling or
degree to which the Placement Agent is a party or any of its
property is subject, or any agreement, contract, indenture, or
other binding arrangement.
(iv) Michael Jacobs has been duly appointed to act as the
representative of the Placement Agent hereunder and has full
power and authority to execute, deliver, and perform this
Escrow Agreement, to execute and deliver any Joint Written
Direction, to amend, modify, or waive any provision of this
Agreement, and to take any and all other actions as the
Placement Agent's representative under this Agreement, all
without further consent or direction form, or notice to, the
Placement Agent or any other party.
(v) No party other than the parties hereto and the Investors
have, or shall have, any lien, claim or security interest in
the Escrow Funds or any part thereof. No financing statement
under the Uniform Commercial Code is on file in any
jurisdiction claiming a security interest in or describing
(whether specifically or generally) the Escrow Funds or any
part thereof.
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(vi) All of the representations and warranties of the
Placement Agent contained herein are true and complete as of
the date hereof and will be true and complete at the time of
any disbursement from the Escrow Funds.
b. The Company makes the following representations and warranties to Escrow
Agent:
(i) The Company is a corporation duly organized, validly
existing, and in good standing under the laws of the State of
New Jersey, and has full power and authority to execute and
deliver this Escrow Agreement and to perform its obligations
hereunder.
(ii) This Escrow Agreement has been duly approved by all
necessary corporate action of the Company, including any
necessary shareholder approval, has been executed by duly
authorized officers of the Company, enforceable in accordance
with its terms.
(iii) The execution, delivery, and performance by the Company
of this Escrow Agreement is in accordance with the Securities
Purchase Agreement and will not violate, conflict with, or
cause a default under the certificate of incorporation or
bylaws of the Company, any applicable law or regulation, any
court order or administrative ruling or decree to which the
Company is a party or any of its property is subject, or any
agreement, contract, indenture, or other binding arrangement,
including without limitation to the Securities Purchase
Agreement, to which the Company is a party or any of its land
is subject.
(iv) James K.T. Lu and/or Fred Odaka have been duly appointed
to act as the representatives of the Company hereunder and
have individually full power and authority to execute,
deliver, and perform this Escrow Agreement, to execute and
deliver any Joint Written Direction, to amend, modify or waive
any provision of this Agreement and to take all other actions
as the Company's Representative under this Agreement, all
without further consent or direction from, or notice to, the
Company or any other party.
(v) No party other than the parties hereto and the Investors
have, or shall have, any lien, claim or security interest in
the Escrow Funds or any part thereof. No financing statement
under the Uniform Commercial Code is on file in any
jurisdiction claiming a security interest in or describing
(whether specifically or generally) the Escrow Funds or any
part thereof.
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(vi) All of the representations and warranties of the Company
contained herein are true and complete as of the date hereof
and will be true and complete at the time of any disbursement
from the Escrow Funds.
14. Consent to Jurisdiction and Venue. In the event that any party hereto
commences a lawsuit or other proceeding relating to or arising from this
Agreement, the parties hereto agree that the United States District Court for
the District of New Jersey shall have the sole and exclusive jurisdiction over
any such proceeding. If all such courts lack federal subject matter
jurisdiction, the parties agree that the Superior Court Division of New Jersey,
Chancery Division of Essex County shall have sole and exclusive jurisdiction.
Any of these courts shall be proper venue for any such lawsuit or judicial
proceeding and the parties hereto waive any objection to such venue. The parties
hereto consent to and agree to submit to the jurisdiction of any of the courts
specified herein and agree to accept the service of process to vest personal
jurisdiction over them in any of these courts.
15. Notice. All notices and other communications hereunder shall be in
writing and shall be deemed to have been validly served, given or delivered five
(5) days after deposit in the United States mails, by certified mail with return
receipt requested and postage prepaid, when delivered personally, one (1) day
delivered to any overnight courier, or when transmitted by facsimile
transmission and addressed to the party to be notified as follows:
If to Placement Agent, to:
The May Davis Group, Inc.
One World Trade Center
New York, NY 10048
Attention: Michael Jacobs
Facsimile: (212) 775-7400
With Copy to:
Butler Gonzalez, LLP
1000 Stuyvesant Avenue
Suite #6
Union, NJ 07083
Attention: David Gonzalez, Esq.
Facsimile: (908) 810-0973
If to Company, to:
Diamond Entertainment Corporation
800 Tucker Lane
Walnut, CA 81709
Attention: President
Facsimile: (909) 939-1989
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With a copy to:
DeMartino Finkelstein Rosen & Virga 1818 N Street, N.W.
Suite 400
Washington, DC 20036
Attention: Neil R.E. Carr, Esq.
Facsimile: (202) 659-1290
If to Escrow Agent, to:
First Union National Bank,
407 Main Street
Metuchen, NJ 08840
Attention: Robert Mercado
Carmela Agugliaro
Facsimile Number: (732) 452-3005
Or to such other address as each party may designate for itself by like
notice.
16. Amendment or Waiver. This Agreement may be changed, waived, discharged
or terminated only by a writing signed by the parties of the Escrow Agent. No
delay or omission by any party in exercising any right with respect hereto shall
operate as waiver. A waiver on any one occasion shall not be construed as a bar
to, or waiver of, any right or remedy on any future occasion.
17. Severability. To the extent any provision of this Agreement is
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition, or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
18. Governing Law. This Agreement shall be construed and interpreted in
accordance with the internal laws of the State of New Jersey without giving
effect to the conflict of laws principles thereof.
19 Entire Agreement. This Agreement constitutes the entire Agreement
between the parties relating to the holding, investment, and disbursement of the
Escrow Funds and sets forth in their entirety the obligations and duties of the
Escrow Agent with respect to the Escrow Funds.
20. Binding Effect. All of the terms of this Agreement, as amended from
time to time, shall be binding upon, inure to the benefit of and be enforceable
by the respective heirs, successors and assigns of the Placement Agent, the
Company, or the Escrow Agent.
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21. Execution of Counterparts. This Agreement and any Joint Written
Direction may be executed in counter parts, which when so executed shall
constitute one and same agreement or direction.
22. Termination. Upon the first to occur of the disbursement of all amounts
in the Escrow Funds pursuant to Joint Written Directions or the disbursement of
all amounts in the Escrow Funds into court pursuant to Section 5 hereof, this
Agreement shall terminate and Escrow Agent shall have no further obligation or
liability whatsoever with respect to this Agreement or the Escrow Funds.
IN WITNESS WHEREOF the parties have hereunto set their hands and seals the
day and year above set forth.
ESCROW AGENT:
FIRST UNION NATIONAL BANK
By: --------------------------
Name:--------------------------
Title: As Agent
PLACEMENT AGENT:
MAY DAVIS GROUP, INC.
By: --------------------------
Name: Michael Jacobs
Title:-------------------------
COMPANY:
DIAMOND ENTERTAINMENT CORPORATION
By: --------------------------
Name: James K.T. Lu
Title: President and Chief Executive Officer
C-12
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EXHIBIT D
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 PURPOSES ONLY AND NOT WITH A VIEW
TOWARD RESALE OR DISTRIBUTION. THIS WARRANT 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 FORM, SUBSTANCE AND SCOPE
REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT.
DIAMOND ENTERTAINMENT CORPORATION
Void after 5:00 p.m. Eastern Standard Time on May ---, 2005.
WARRANT TO PURCHASE COMMON STOCK
Warrant No.: PAW- Number of Shares Issuable
Date of Issuance: May , 2000 Upon Exercise: ----------
Diamond Entertainment Corporation, a New Jersey corporation (the
"Company"), hereby certifies that, for value received, the registered holder
hereof or its 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 5:00 P.M. Eastern Standard Time on
the Expiration Date (as defined herein) ----------- fully paid nonassessable
shares of Common Stock (as defined herein) of the Company (the "Warrant Shares")
at the Warrant Exercise Price per share provided in Section l(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 would cause the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates to exceed 4.9% of the total
issued and 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 exercise of the remaining,
unexercised Series A Preferred Share Warrants (as defined below) beneficially
owned by the holder and its affiliates. Except as set forth in the preceding
sentence, for purposes of this paragraph, beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and the rules thereunder.
D-1
<PAGE>
Section 1. General Provisions
(a) Securities Purchase Agreement. This Warrant is one of the warrants
(the "Series A Preferred Share Warrants") issued pursuant to the Securities
Purchase Agreement between the Company and certain investors, dated May --,
2000.
(b) Definitions. The following words and terms as used in this Warrant
shall have the following meanings:
"Average Market Price" means, with respect to any security for any
period, that price which shall be computed as the arithmetic average of the last
closing bid prices for such security for each trading day in such period on the
principal securities exchange or trading market for such security where such
security is listed, traded or quoted as reported by Bloomberg Financial Markets
("Bloomberg"), or if the market price cannot be calculated for such period on
the foregoing bases, the last closing bid price of such security in the
over-the-counter market on the pink sheets or over-the-counter 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. If the market price cannot be calculated for
such period on any of the foregoing bases, the Average Market Price shall be the
average fair market value during such period as reasonably determined in good
faith by the Board of Directors of the Company (all as appropriately adjusted
for any stock dividend, stock, split or other similar transaction during such
period).
"Certificate of Designations" means the Company's Certificate of
Designations for the Company's Series A Convertible Preferred Stock ("Series A
Preferred Shares").
"Closing Bid Price" shall have the meaning as defined in the
Certificate of Designations of the Company.
"Common Stock" means (i) the Company's common stock, no par value 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.
"Expiration Date" means the date five (5) years from the date of the
issuance of the 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 (a "Holiday"), the next preceding date that is not
a Holiday.
"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.
D-2
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
"Warrant" shall mean this warrant and all warrants issued in exchange,
transfer or replacement of any thereof.
"Warrant Exercise Price" shall be equal to $-----, subject to
adjustment as hereinafter provided.
(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 during normal business hours on any business
day on or after the opening of business on the date hereof and prior to 5:00
P.M. Eastern Standard Time on the Expiration Date by (i) delivery of a written
notice, in the form of the subscription notice attached as Exhibit A hereto, of
such holder's election to exercise this Warrant, which notice shall specify the
number of Warrant Shares to be purchased, (ii) payment to the Company of an
amount equal to the Warrant Exercise Price multiplied by the number of Warrant
Shares as to which the Warrant is being exercised (plus any applicable issue or
transfer taxes) (the "Aggregate Exercise Price") in cash or by check or wire
transfer, and (iii) the surrender of this Warrant, at the principal executive
office of the Company; provided, that if such Warrant Shares are to be issued in
any name other than that of the registered holder of this Warrant, such issuance
shall be deemed a transfer and the provisions of Section 7 shall be applicable.
D-3
<PAGE>
(b) This Warrant may also be exercised on a cashless basis, by
submitting the Warrant as described above with an indication of election to use
cashless exercise, the number of shares of Common Stock to be issued on cashless
exercise shall be determined as follows:
X = Y (A-B)
-----------
A
where "X" equals the number of shares of Common Stock to be received on cashless
exercise, "Y" equals the number of Warrants so exercised, "A" equals the Average
Market Price of the Common Stock for the period of five (5) trading days
immediately preceding the date of exercise, and "B" equals the Warrant Exercise
Price. For purposes of Rule 144(d)(3)(ii), it is understood that the Common
Stock issuable on exercise of this Warrant in a cashless exercise transaction
shall be deemed to have been acquired, and the holding period applicable thereto
shall have commenced, on the date this Warrant was issued.
(c) In the event of any exercise of the rights represented by this
Warrant in compliance with this Section 2, a certificate or certificates for the
Warrant Shares so purchased, in such denominations as may be requested by the
holder hereof and registered in the name of, or as directed by, the holder,
shall be delivered at the Company's expense to, or as directed by, such holder
as soon as practicable after such rights shall have been so exercised, and in
any event no later than five (5) business days after such exercise. In the case
of a dispute as to the determination of the Warrant Exercise Price or the
Average Market Price of a security or the arithmetic calculation of the Warrant
Shares, the Company shall promptly 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 three (3) business
days 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 Average Market Price or arithmetic calculation of the Warrant Shares within
three (3) business days 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
Average 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 bank's or accountant's determination or
calculation, as the case may be, shall be deemed conclusive absent manifest
error.
D-4
<PAGE>
(d) 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 any event no later than ten (10) business days after any exercise and at its
own expense, issue a new Warrant identical in all respects to the Warrant
exercised except (i) it shall represent rights to purchase the number of Warrant
Shares purchasable immediately prior to such exercise under the Warrant
exercised, less the number of Warrant Shares with respect to which such Warrant
is exercised, and (ii) the holder thereof shall be deemed for all corporate
purposes to have become the holder of record of such Warrant Shares immediately
prior to the close of business on the date on which the Warrant is surrendered
and payment of the amount due in respect of such exercise and any applicable
taxes is made, irrespective of the date of delivery of certificates evidencing
such Warrant Shares, except that, if the date of such surrender and payment is a
date when the stock transfer books of the Company are properly closed, such
person shall be deemed to have become the holder of such Warrant Shares at the
opening of business on the next succeeding date on which the stock transfer
books are open. Upon presentation of a duly executed Subscription Form in the
Form of Exhibit A to this Warrant, the holder shall be entitled to exercise this
Warrant in whole or in part, if the holder shall have previously exercised and
surrendered this Warrant and the Company shall not have issued a new Warrant
representing the number of shares issuable following such prior exercise.
(e) No fractional share of Common Stock are to be issued upon the
exercise of this Warrant, but rather the number of shares of Common Stock issued
upon exercise of this Warrant shall be rounded up or down to the nearest whole
number.
(f) If the Company shall fail for any reason or for no reason to issue
to holder within fifteen (15) business days after the time required under this
Section 2, a certificate for the number of shares of Common Stock to which the
holder is entitled upon the holder's exercise of this Warrant, the Company
shall, in addition to any other remedies under this Agreement or otherwise
available to such holder including any indemnification pursuant to Section 8 of
the Securities Purchase Agreement, pay as additional damages in cash to such
holder for each day such issuance is not timely effected after the fifteenth
(15) business day following the time required under this Section 2, an amount
equal to 0.1% of the product of (x) the number of shares of Common Stock not
issued to the holder as required hereunder and (y) the Closing Bid Price (as
defined in the Certificate of Designations for the Series A Convertible
Preferred Stock of the Company) of the Common Stock on the last possible date
which the Company could have issued such shares of Common Stock to such holder
without violating this Section 2.
Section 3. Covenants as to Common Stock. The Company hereby covenants
and agrees as follows:
(a) This Warrant is, and any Series A Preferred Share Warrants issued
in substitution for or replacement of this Warrant will upon issuance be, duly
authorized and validly issued.
D-5
<PAGE>
(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 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 secure the listing of the shares of
Common Stock issuable upon exercise of this Warrant upon each national
securities exchange or automated quotation system, if any, or
over-the-counter-bulletin board upon which shares of Common Stock are then
listed or quoted (subject to official notice of the over-the-counter bulletin
board of issuance upon exercise of this Warrant) and shall maintain, so long as
any other shares of Common Stock shall be so listed or quoted, such listing or
quotation of all shares of Common Stock from time to time issuable upon the
exercise of this Warrant; and the Company shall so list or obtain quotation on
each such national securities exchange, automated quotation system or
over-the-counter bulletin board, as the case may be, and shall maintain such
listing in quotation 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, automated
quotation system or over-the-counter bulletin board.
(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
Series A Preferred Shares contained in the 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 Series A Preferred Share Warrants representing a majority of the
shares of Common Stock issuable upon the exercise of such Series A Preferred
Share 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 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.
D-6
<PAGE>
(f) Forced Conversion. The Company shall have the right to force the
Warrant Holders to exercise the Warrants if the five (5) day average Closing Bid
Price of the Company's Common Stock (as reported by Bloomberg) is $0.30 or
higher ("Forced Exercise Event"). The Company shall furnish to the Warrant
Holders written notice of the occurrence of a Forced Exercise Event within ten
(10) days thereof, whereupon the Warrant Holders shall within five (5) days of
the receipt thereof exercise their Warrants in accordance with the terms hereof.
(g) 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 not be required to pay any tax or
taxes attributable to the initial issuance of the Warrant Shares or any
permitted transfer involved in the issue or delivery of any certificates for
Warrant Shares in a name other than that of the registered holder hereof or upon
any permitted transfer 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 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 (and any assignor shall represent) that it is
acquiring this Warrant and the Warrant Shares for its own account for investment
purposes and not with a view to, or for sale in connection with, any
distribution hereof, and not with any present intention of distributing any of
the same. The holder of this Warrant further represents (and any assignor shall
represent), 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, the holder shall, if
D-7
<PAGE>
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 the Warrant 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 the Warrant shall not violate any
United States Federal 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 permissible 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 to the holder hereof are
transferable, in whole or in part, upon surrender of this Warrant, together with
a properly executed warrant power in the form of Exhibit B attached hereto;
provided, however, that any transfer or assignment shall subject to the
conditions set forth in Section 6 above and Section 7(c) below.
(c) The holder of this Warrant understands that this Warrant has not
been and is not expected to be, registered under the Securities Act or any state
securities laws, and may not be offered for sale, sold, assigned or transferred
unless (a) subsequently registered thereunder, or (b) such holder shall have
delivered to the Company an opinion of counsel, reasonably satisfactory in form,
scope and substance to the Company, to the effect that the securities to be
sold, assigned or transferred may be sold, assigned or transferred pursuant to
an exemption from such registration. Any sale of such securities made in
reliance on Rule 144 promulgated under the Securities Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such 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 Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the Securities and Exchange Commission thereunder; and neither
the Company nor any other person is under any obligation to register the Series
A Preferred Share Warrants under the Securities Act or any state securities laws
or to comply with the terms and conditions of any exemption thereunder except as
set forth in Section 7(d) below.
D-8
<PAGE>
(d) The Company is obligated to register the Warrant Shares for resale
under the Securities Act pursuant to the Registration Rights Agreement dated as
of May --, 2000, by and between the Company and the Buyers listed on the
signature page thereto (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. In order to prevent
dilution of the rights granted under this Warrant, the Warrant Exercise Price
shall be adjusted from time to time as follows:
(a) 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, the 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, the Warrant Exercise Price in effect immediately prior
to such combination will be proportionately increased and the number of shares
of Common Stock obtainable upon exercise of this Warrant will be proportionately
decreased.
(b) 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 similar 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 in "Organic Change." Prior to the consummation of any
Organic Change, the Company will make appropriate provision (in form and
substance reasonably satisfactory to the holders of a majority of the Warrants
then outstanding) to insure that, upon the consummation of such Organic Change,
each of the holders of the Warrants will thereafter have the right to acquire
and receive in lieu of the Common Stock, such shares of stock, securities or
assets as may be issued or payable with respect to or in exchange for the number
of shares of Common Stock immediately theretofore acquirable and receivable upon
exercise of the Warrants had such Organic Change not taken place. In any such
case, the Company will make appropriate provision (in form and substance
reasonably satisfactory to the holders of a majority of the Warrants then
outstanding) with respect to such holders' rights and interests to insure that
the provisions of this Section 8(b) will thereafter be applicable to the
Warrants.
D-9
<PAGE>
(c) Notices.
(i) Immediately upon any adjustment of the Warrant Exercise
Price pursuant to this Section 8, 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 twenty (20) 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, dissolution or liquidation, except that
in no event shall such notice be provided to such holder prior to such
information being made known to the public.
(iii) The Company will also give written notice to the holder
of this Warrant at least twenty (20) days prior to the date on which any Organic
Change, dissolution or liquidation will take place.
Section 9. 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 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 of such Purchase Rights.
Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this
Warrant is lost, stolen, mutilated or destroyed, the Company shall, on receipt
of an indemnification undertaking, issue a new Warrant of like denomination and
tenor as the 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 a
copy is mailed by U.S. certified mail, return receipt requested; (iii) three (3)
days after being sent by U.S. certified mail, return receipt requested; or (iv)
one (1) 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:
D-10
<PAGE>
If to the Company: Diamond Entertainment Corporation
800 Tucker Lane
Walnut, CA 81709
Attention: James Lu, President
Telephone: (909) 839-1989
Facsimile: (909) 869-1990
With a copy to: De Martino Finkelstein Rosen & Virga
1818 N Street, N.W.
Suite 400
Washington, DC 20036
Attention: Neil R.E. Carr, Esq.
Telephone: (202) 659-0494
Facsimile: (202) 659-1290
If to a holder of this Warrant, to it at the address set forth below
such holder's signature on the signature page hereof. Each party shall provide
five (5) days' prior written notice to the other party of any change in address
or facsimile number.
Section 12. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged, or terminated only by an instrument in writing
signed by the party or holder hereof against which enforcement of such change,
waiver, discharge or termination is sought. The headings in this Warrant are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof. This Warrant shall be governed by and interpreted under the laws
of the State of New York.
Section 13. Date. The date of this Warrant is May --, 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 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.
DIAMOND ENTERTAINMENT CORPORATION
By: ------------------------------
Name: James K.T. Lu
Title: President and Chief Executive Officer
ACCEPTED:
President and Chief Executive Officer
---------------------------------------
[HOLDER]
By: ------------------------------
Name: ------------------------------
Title: ------------------------------
Address: ------------------------------
------------------------------
------------------------------
D-11
<PAGE>
EXHIBIT A
FORM OF SUBSCRIPTION
(Complete and sign only exercise of the Warrant in whole or in part.)
TO: Diamond Entertainment Corporation
The undersigned, the holder of the attached Warrant to which this Form
of Subscription applies, hereby irrevocably elects to exercise the purchase
rights represented by such warrant for and to purchase thereunder ------- shares
of Common Stock, no par value per share (the "Shares"), from Diamond
Entertainment Corporation (or such other securities issuable pursuant to the
terms of the Warrant) and either: (i) herewith makes payment of $-------
therefor in cash or by certified or official bank check or (ii) elects to make
payment upon a cashless basis pursuant to Section 2(b) of the Warrant and hereby
exercises ------ Warrants and the Average Market Price Per Share for purposes
hereof is $_------. The undersigned hereby requests that the certificate(s)
representing such securities be issued in the name(s) and delivered t the
address(es) as follows:
Name: -------------------------------------------
Address: -------------------------------------------
Social Security Number: -------------------------------------------
Deliver to: -------------------------------------------
Address: -------------------------------------------
This the foregoing subscription evidences an exercise of the Warrant to
purchase fewer than all of the Shares (or other securities issuable pursuant to
the terms of the Warrant) to which the undersigned is entitled under such
warrant, please issue a new warrant, of like tenor, relating to the remaining
portion of the securities issuable upon exercise of such warrant (or other
securities issuable pursuant to the terms of such warrant) in the name(s), and
deliver the same to the address(es), as follow:
Name: -------------------------------------------
Address: -------------------------------------------
-------------------------------------------
Dated: -------------------------------------------
----------------------------- -------------------------------------------
(Name of Holder) (Social Security or Taxpayer Identification
Number of Holder, if applicable)
-----------------------------
(Signature of Holder or Authorized
Signatory)
Signature Guaranteed: -------------------------------------------
D-12
<PAGE>
EXHIBIT B
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 Diamond Entertainment
Corporation, a New Jersey 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:-------------------------------
D-13
<PAGE>
EXHIBIT E
TRANSFER AGENT INSTRUCTIONS
May --, 2000
Continental Stock Transfer
& Trust Company
2 Broadway
19th Floor
New York, New York 10004
Ladies and Gentlemen:
Reference is made to that certain Securities Purchase Agreement, dated
May --, 2000 ("Securities Purchase Agreement"), by and among Diamond
Entertainment Corporation, a New Jersey corporation (the "Company"), and each of
the buyers listed in Schedule I attached to the Securities Purchase Agreement
(collectively, the "Holders") pursuant to which the Company is issuing to the
Holder(s) an aggregate of 50 shares of Series A Preferred Stock, no par value
per share, of the Company (the "Preferred Shares"), which shall be convertible
into shares of the Company's common stock, no par value per share ("Common
Stock"). The shares of Common Stock issuable upon conversion of the Preferred
Shares are collectively referred to herein as the "Underlying Shares."
This letter shall serve as our irrevocable authorization and direction
to you (provided that you are the transfer agent of the Company at such time) to
issue Underlying Shares from time to time upon notice from the Company to issue
such Underlying Shares. So long as you have previously received (x) an opinion
of the Company's outside counsel substantially in the form of Exhibit I attached
hereto (which the Company shall direct be delivered to you by such outside
counsel upon the effectiveness of the registration statement covering resales of
Underlying Shares) stating that a registration statement covering resales of
Underlying Shares has been declared effective by the Securities and Exchange
Commission ("SEC") under the Securities Act of 1933, as amended ("Securities
Act"), and that the Underlying Shares may be issued (or reissued if they have
been issued at a time when there was not such an effective registration
statement) or resold without any restrictive legend (the "Opinion"), (y) a
certification from the clearing broker for the Holder as to the compliance with
the prospectus delivery requirements and as to the fact that the sale of the
Underlying Share was made in compliance with the Plan of Distribution set forth
in such registration statement (the "Broker Certification"), and (z) a copy of
such registration statement, then certificates representing Underlying Shares
shall not bear any legend restricting transfer of Underlying Shares and should
not be subject to any stop-transfer restriction. Provided, however, that if you
have not previously received a copy of the Opinion, the Broker Certification and
such registration statement, then the certificates representing the Underlying
Shares shall be issued upon receipt of an opinion of counsel covering an
exemption from registration under the Securities Act and shall bear the
following legend:
E-1
<PAGE>
"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 HAVE BEEN ACQUIRED
FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TOWARD RESALE 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 GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE
SECURITIES LAWS.
and, provided further, that the Company may from time to time notify you to
place stop transfer restrictions on the certificates for the Underlying Shares
in the event a registration statement covering the Underlying Shares is subject
to amendment for events then current.
Please be advised that the Holder(s) have relied upon this letter as an
inducement to enter into the Securities Purchase Agreement and, accordingly,
each of the Holder(s) are a third party beneficiary to these instructions.
Should you have any questions concerning this matter please contact me at (909)
839-1989
Very truly yours,
DIAMOND ENTERTAINMENT CORPORATION
By: ----------------------------------------------
Name: James K.T. Lu
Title: President and Chief Executive Officer
ACKNOWLEDGED AND AGREED:
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY
By: -------------------------------------------
Name: ---------------------------------
Title: ---------------------------------
Date: -------------------------------------------
cc: Holder(s)
E-2
<PAGE>
Exhibit I
[Form of Outside Counsel's Opinion]
------------, 2000
[Addressee]
--------------------
--------------------
--------------------
To Whom It May Concern:
The Registration Statement (the "Registration Statement") on Form ----
(File No. 333---------) of Diamond Entertainment Corporation, a New Jersey
corporation (the "Company"), was declared effective by the Securities and
Exchange Commission at --;-- --.M. Eastern Time on ---------------, 2000. Upon
issuance of the Underlying Shares referred to in the Company's instruction
letter attached hereto, you are authorized to issue certificates for the
Company's common stock, no par value per share without restrictive legends.
Very truly yours,
E-3
<PAGE>
EXHIBIT F
May --, 2000
The May Davis Group, Inc.
One World Trade Center
New York, NY 10048
Buyers Listed on Schedule I
to the Securities Purchase Agreement
c/o The May Davis Group, Inc.
One World Trade Center
New York, NY 10048
Re: Diamond Entertainment Corporation
Securities Purchase Agreement
Ladies and Gentlemen:
We have acted as counsel for Diamond Entertainment Corporation, a New
Jersey corporation (the "Company"), in connection with (i) that certain
Securities Purchase Agreement between the Company and the Buyers listed on
Schedule I ("Buyers") to the Purchase Agreement, dated May --, 2000 (the
"Purchase Agreement"); (ii) the Registration Rights Agreement, between the
Company and each Buyer, dated May --, 2000 (the "Registration Rights
Agreements"); (iii) the Certificate of Amendment to the Articles of Amendment
designating the Series A Convertible Preferred Stock filed with the Secretary of
State of New Jersey on May --, 2000 (the "Certificate of Designations"); (iv)
the Escrow Agreement between the Company, May Davis Group, Inc. ("May Davis")
and First Union National Bank, as escrow agent (the "Escrow Agent"), dated April
14, 2000 (the "Escrow Agreement"); and (v) the Warrants, dated May --, 2000 (the
"Warrants"), issued to May Davis and Butler Gonzalez, LLP (collectively the
"Transaction Documents"). Capitalized terms used but not otherwise defined
herein shall have the respective meanings given to such terms in the Purchase
Agreement.
The Securities Purchase Agreement relates to the private offering
(pursuant to Regulation D under the Securities Act of 1933, as amended (the
"Act") and pursuant to exemption provisions of the state "Blue Sky" laws and/or
dealer registration provisions, as applicable, of the following states:
Colorado, Virginia, --------------) of 50 shares of Series A Convertible
Preferred Stock, no par value per share ("Series A Preferred Stock"), by the
Company. May Davis is acting as the placement agent for the Company in the
offering pursuant to that certain Placement Agency Agreement between the Company
and May Davis, dated April 14, 2000.
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<PAGE>
This opinion is being delivered to you pursuant to Section 7(d) of the
Purchase Agreement.
For purposes of this opinion, we have examined originals (or copies
certified or otherwise identified to our satisfaction) of the Transaction
Documents, the Placement Agency Agreement and have relied on the representations
and warranties made by the Company therein and we have reviewed such questions
of law and have examined copies, certified or otherwise authenticated to our
satisfaction, a specimen copy of certificates for the Series A Preferred Stock,
the certificate of incorporation and the by-laws of the Company, minutes of
meetings of the Board of Directors of the Company and stockholders of the
Company, and all other records, agreements, instruments, certificates of public
officials, certificates of officers and representative of the Company (including
the Transfer Agent), and such other documents as we have deemed necessary or
appropriate for the purposes of the opinions rendered below. We have received
such certificates, statements, information and assurances as to matters of fact
as we have deemed necessary in order to render the opinions hereinafter
expressly set forth; however, we are not, except as expressly set forth, passing
upon and do not assume responsibility for the accuracy, completeness or fairness
of the statements contained in the Transaction Documents or the Company's SEC
Documents (as such term is defined in the Purchase Agreement). Furthermore, we
express no opinion with respect to the financial statements and other financial
information included in the SEC Documents.
In such examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals and the
conformity with original documents of all documents submitted to us as
certified, conformed or photostatic copies.
We have further assumed the due authorization, execution and delivery
of each such document by or on behalf of all of the parties thereto (other than
the Company) and that none of such documents has been subsequently rescinded,
revoked, restated, modified or amended in any way other than as set forth in the
documents submitted to us. As to any facts material to such opinion, we have
relied, to the extent that relevant facts were not independently established by
us and to the extent we deemed reliance proper, on certificates of public
officials and certificates, oaths and declarations of officers and other
representatives of the Company, upon which we have no reason to believe that we
and you are not entitled to so rely, and the representations and warranties of
the parties set forth in the Transaction Documents.
In connection with the preparation of this opinion, we have reviewed
such questions of law as we have deemed necessary. We do not give any opinion
herein with respect to the laws of any jurisdiction other than and our opinion
is limited to the general federal law of the United States of America, the
General Corporation Law of the State of New Jersey and the laws of the District
of Columbia. Except as otherwise provided herein, we have assumed that, insofar
as the laws of another jurisdiction may be applicable to any matters to which
this opinion may relate, such laws are identical to the laws of the District of
Columbia; however, we express no opinion as to the extent to which the laws of
the District of Columbia or such other jurisdiction may apply.
F-2
<PAGE>
Insofar as this opinion relates to any state statute which regulates
the offer and sale of securities or similar transactions (i) we have relied
without independent investigation on information furnished to us by you as to
the state of incorporation of each Buyer listed on Schedule I to the Purchase
Agreement, and (ii) we have relied solely upon an examination of such laws and
related rules and regulations as reported in the most recent unofficial
compilations available to us and have not consulted with local counsel in any
such state.
Whenever we assert herein that a matter is known "to the best of our
knowledge," our knowledge is limited to actual knowledge gained without
independent inquiry or investigation by those lawyers in our firm who have
participated in the representation related to the transactions described above
in the first paragraph of this opinion.
Based solely upon and in reliance on the foregoing, and subject in all
respect to the qualifications, limitations and assumptions set forth herein, it
is our opinion that:
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of New Jersey, has all requisite power
and authority to own or lease its properties, to carry on its business as
currently conducted and as proposed to be conducted, to execute and deliver the
Securities Purchase Agreement, the Registration Rights Agreements, the Escrow
Agreement and the Warrants, and to carry out the transactions contemplated by
such agreements and is duly qualified or licensed to do business as a foreign
corporation and is in good standing in each other jurisdiction, to such
counsel's knowledge, in which the ownership or leasing of its properties or
conduct of its business requires such qualification, except where the failure to
be so qualified or licensed would not have a material adverse effect on the
business, financial condition or prospects of the Company.
2. Each of the Transaction Documents and the Placement Agency Agreement
has been duly and validly authorized, executed and delivered by the Company, and
is the valid and binding obligation of the Company, enforceable against it in
accordance with its terms, subject to any applicable bankruptcy, insolvency or
other laws affecting the rights of creditors generally and to general equitable
principles and except that the enforcement of the indemnification provisions
thereof may be limited or denied on the basis of federal or applicable state
securities laws and the public policy underlying such laws.
3. The authorized capital stock of the Company as of April 10, 2000
(before giving effect to the transactions contemplated by the Transaction
Documents) is as set forth in the Securities Purchase Agreement. Except as set
forth on Schedule 3(c) to the Purchase Agreement, the Series A Preferred Stock
and the Warrants and the shares of common stock, no par value per share ("Common
Stock"), of the Company issuable upon conversion or exercise thereof, to the
best of our knowledge, there are no outstanding warrants, options, agreements,
F-3
<PAGE>
convertible securities, preemptive rights to subscribe for or other commitments
pursuant to which the Company is, or may become, obligated to issue any shares
of its capital stock or other securities of the Company. To the best of our
knowledge, all of the issued and outstanding shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid and
nonassessable and have not been issued in violation of the preemptive rights of
any security holder of the Company under New Jersey law. The (i) shares of
Series A Preferred Stock and (ii) the Warrants have been duly authorized and,
when issued and delivered in accordance with the terms of the Purchase Agreement
will be validly issued, fully paid and nonassessable and no personal liability
will attach to the ownership thereof. The shares of Common Stock issuable upon
conversion of the Series A Preferred Stock and upon exercise of the Warrants
have been duly reserved for issuance and, when issued in accordance with the
terms of the Certificate of Designations or Warrants, as applicable, and, in the
case of the Warrants, upon payment therefor, will be validly issued, fully paid
and nonassessable and such shares will not be issued in violation of or subject
to any preemptive or any other similar rights and no personal liability will
attach to the ownership thereof.
4. The execution, delivery, and performance of the Transaction
Documents will not violate (a) any law or regulation; or (b) any order, writ, or
decree of any court or governmental instrumentality of which we have knowledge
(and we have made inquiry as to the existence thereof); (c) the Certificate of
Incorporation or Bylaws of the Company; or (d) to the best of our knowledge, any
agreement or instrument to which the Company is a party or which purports to be
binding upon it or any of its assets, of which we have knowledge (and we have
made inquiry of the Company as to the existence and terms thereof).
5. No consent of any person or entity (including, but not limited to,
other stockholders of the Company) and, except with respect to the State of New
York, no license, approval, or authorization of, or registration or declaration
with, any governmental authority, bureau, or agency, is required in connection
with the execution, delivery, and performance of the Transaction Documents.
6. To our knowledge, there is no legal action, suit, proceeding or
inquiry (whether or not purportedly on behalf of the Company) pending or
threatened against or affecting the Company, or any of its assets, that involve
any of the transactions contemplated by the Transaction Documents, or which may
result in a material adverse change in the business operations, assets,
prospects, or condition (financial or otherwise) of the Company, except as set
forth in the SEC Documents or on Schedule 3(h) to the Purchase Agreement.
7. The issuance and sale of the Series A Preferred Stock is exempt from
registration under the Act and the Regulations pursuant to Regulation D
promulgated under the Act subject to the following assumptions:
F-4
<PAGE>
(a) other than the Company, no party to the transactions
contemplated by the Purchase Agreement executed by each Buyer and the Placement
Agreement, or any document relating thereto, is subject to any statute, rule or
regulation, or to any impediment to which contracting parties are generally not
subject, that requires the Company or such party to obtain the consent of, or
make a declaration or filing with, any governmental authority;
(b) all terms, provisions and conditions of, or relating to,
the offer and the sale of the shares of Series A Preferred Stock are correctly
and completely set forth in the Purchase Agreement, which we have no reason to
doubt as of the date thereof;
(c) all offers and sales of the shares of Series A Preferred
Stock have been or will be made in a manner complying with the terms of the
Purchase Agreement, Regulation D under the Act and applicable state securities
and similar laws. Without limiting the generality of the foregoing, such counsel
may assume (i) the accuracy of the representations and warranties of the
Company, the Buyers and the Placement Agent contained in the Securities Purchase
Agreement and Placement Agency Agreement, and the full and complete performance
of all covenants of the Company, the Buyers and the Placement Agent as set forth
in the Purchase Agreement and the Placement Agency Agreement, and (ii) that
offers and sale of the shares of Series A Preferred Stock have been made only to
"accredited investors," as that term is defined under the Act.
(d) neither the Company, the Placement Agent, nor any person
or entity acting on the Company's or the Placement Agent's behalf has offered or
sold the shares of Series A Preferred Stock by any form of general solicitation
or general advertising, including, but not limited to, (i) any advertisement,
article, notice, or other communication published in any newspaper, magazine or
similar media or broadcast over television or radio; or (ii) any seminar or
meeting whose attendees have been invited by any general solicitation or general
advertising. The Placement Agent has confined its selling activities to those
states referenced in this firm's Blue Sky Survey;
(e) the Buyers are not "underwriters" within the meaning of
Section 2(11) of the Act; and
(f) a Notice of Sale of Securities Pursuant to Regulation D or
Section 4(6) ("Form D"), including any required amendments to such Form D, has
been or will be filed with the Securities and Exchange Commission in accordance
with the requirements of Rule 503 of Regulation D.
9. The Company is not an "investment company" or, to the best of our
knowledge, an entity controlled by an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended.
F-5
<PAGE>
We give no other opinion except as set forth above, and no opinion may
be inferred beyond the matters expressly stated herein. This opinion is being
delivered solely to you and may not be relied upon by you for any other purpose,
or by any other person for any other purpose without our express written
consent. You are not authorized to distribute this opinion or copies hereof to
any person or entity, including but not limited to, any state or federal
regulatory authority, absent any court order requiring such production. In the
event of your receipt of any such process, we request that you notify us
immediately.
Very truly yours,
DE MARTINO FINKELSTEIN ROSEN & VIRGA
By: ---------------------------------
Neil R.E. Carr, Esq.
cc: Mr. James K.T. Lu
F-6
<PAGE>
EXHIBIT G
DIAMOND ENTERTAINMENT CORPORATION
UNANIMOUS WRITTEN CONSENT IN LIEU OF
SPECIAL MEETING OF THE BOARD OF DIRECTORS
The undersigned, being all of the directors of Diamond Entertainment
Corporation, a New Jersey corporation (the "Corporation"), do hereby take the
following actions and adopt the following resolutions by written consent to be
effective as of the latest date set forth below, and do hereby direct the
Secretary of the Corporation to make this instrument a part of the records of
the Corporation.
WHEREAS, Article 4 of the Certificate of Incorporation of the
Corporation, as amended (the "Certificate of Incorporation"), authorizes the
Corporation to issue up to 5,000,000 shares of preferred stock, no par value per
share (the "Preferred Stock"), and the Board of Directors is authorized to issue
the Preferred Stock in series, and to fix and determine the voting powers,
designate preferences, rights, qualifications and other terms of the Preferred
Stock pursuant to Section 14A:7-2 of the New Jersey Business Corporation Act;
and
WHEREAS, the Board of Directors now wishes to designate fifty (50) of
such shares of Preferred Stock to be Series A Convertible Preferred Stock, no
par value per share (the "Series A Preferred Shares"); and to designate the
number, rights, preferences, privileges and other special rights and the
qualifications, limitations, restrictions, and other distinguishing
characteristics of the same; and
WHEREAS, the Corporation intends to offer (the "Offering") to certain
"accredited investors" 50 Series A Preferred Shares. The shares are proposed to
be offered on a "best efforts all or none" basis for consideration of ten
thousand dollars $10,000 per share, or an aggregate consideration of $500,000,
or such other maximum number of shares, price per share and such other aggregate
consideration as the officers of the Corporation shall determine pursuant to
Rule 506 of Regulation D under the Securities Act of 1933, as amended (the
"Securities Act"); and
WHEREAS, the Corporation has engaged May Davis Group, Inc.("May
Davis"), to act as its placement agent in connection with the contemplated
Offering.
NOW, THEREFORE, BE IT RESOLVED, that pursuant to the authority
expressly granted to and vested in the Board of Directors of the Corporation by
the Certificate of Incorporation of the Corporation, there hereby is created out
of the 5,000,000 shares of Preferred Stock, no par value per share, of the
Corporation authorized by Article 4 of the Certificate of Incorporation, a
series of Preferred Stock of the Corporation consisting of 50 shares, which
shall be designated Series A Convertible Preferred Stock, which shall have the
following powers, designations, preferences and relative, participating,
optional or other rights:
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<PAGE>
1. Designations, Amount and Par Value. The series of Preferred Stock
shall be designated as Series A Convertible Preferred Stock ("Series A Preferred
Shares") and the number of shares so designated shall be 50. Each Series A
Preferred Share shall have no par value and a stated value of $10,000 per share
(the "Stated Value").
2. Dividends. The Series A Preferred Shares shall not bear any
dividends.
3. Holder's Conversion of Series A Preferred Shares. A holder of Series
A Preferred Shares shall have the right, at such holder's option, to convert the
Series A Preferred Shares into shares of the Corporation's common stock, no par
value per share (the "Common Stock"), on the following terms and conditions:
(a) Conversion Right. Subject to the provisions of Sections
3(g) and 4(a) below, at any time or times on or after the earlier of
(i) 90 days after the Issuance Date (as defined herein), (ii) 5 days
after receiving a "no-review" status from the Securities and Exchange
Commission (the "SEC") in connection with a registration statement
("Registration Statement") covering the resale of Common Stock issued
upon conversion of the Series A Preferred Shares and required to be
filed by the Corporation pursuant to the Registration Rights Agreement
between the Corporation and its initial holders of Series A Preferred
Shares (the "Registration Rights Agreement"), (iii) the date that the
Registration Statement is declared effective by the SEC any holder of
Series A Preferred Shares shall be entitled to convert any Series A
Preferred Shares into fully paid and nonassessable shares (rounded to
the nearest whole share in accordance with Section 3(h) below) of
Common Stock, at the Conversion Rate (as defined below); provided,
however, that in no event other than upon a Mandatory Conversion
pursuant to Section 3(g) hereof, or upon a Triggering Event pursuant to
Section 5(b) hereof, shall any holder be entitled to convert Series A
Preferred Shares in excess of that number of Series A 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 4.9% of the then issued and outstanding shares
of Common Stock of the Corporation 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 Series A 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
conversion of the remaining, non-converted Series A Preferred Shares
beneficially owned by the holder and its affiliates. Except as set
forth in the preceding sentence, for purposes of this paragraph,
beneficial ownership shall be calculated in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), and the rules thereunder;
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(b) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of each of the Series A Preferred Shares
pursuant to Section (3)(a) shall be determined according to the
following formula (the "Conversion Rate"):
(.06)(N/365)(10,000) + 10,000
-----------------------------
Conversion Price
For purposes of this Certificate of Amendment, the following
terms shall have the following meanings:
(i) "Conversion Price" means as, of any Conversion
Date (as defined below), the lower of the Fixed Conversion
Price and the Floating Conversion Price, each in effect as of
such date, if applicable, and subject to adjustment as
provided herein;
(ii) "Fixed Conversion Price" means 120% of the
Closing Bid Price on the day immediately preceding the day of
the closing of the sale and issuance of the Series A Preferred
Shares ("Closing Date") subject to adjustment, as provided
herein;
(iii) "Floating Conversion Price" means, as of any
date of determination, the amount obtained by multiplying the
Conversion Percentage in effect as of such date by the Average
Market Price for the Common Stock for any five (5) trading
days of the previous ten (10) trading days immediately
preceding the date of conversion;
(iv) "Conversion Percentage" means 80% as adjuste
as described herein;
(v) "Average Market Price" means, with respect to any
security for any period, that price which shall be computed as
the arithmetic average of the Closing Bid Prices (as defined
below) for such security for each trading day in such period;
(vi) "Closing Bid Price" means, for any security as
of any date, the last closing bid price on The Nasdaq Stock
Market, Inc.'s SmallCap Market (the "Nasdaq-Small Cap") as
reported by Bloomberg Financial Markets ("Bloomberg"), or, if
the Nasdaq-SmallCap is not the principal 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
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security in The Nasdaq Stock Market, Inc.'s OTC Bulletin Board
or, if not so quoted, in the "pink sheets" 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. 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 reasonably determined in good faith by the Board of
Directors of the Corporation (all as appropriately adjusted
for any stock dividend, stock split or other similar
transaction during such period); and
(vii) "N" means the number of days from, but
excluding, the Issuance Date through and including the
Conversion Date for the Series A Preferred Shares for which
conversion is being elected; and
(viii) "Issuance Date" means the date of issuance of
the Series A Preferred Shares.
(c) Penalty - Registration Statement. If the Registration
Statement is not declared effective by the SEC on or before the one
hundred and fiftieth (150th) day following the Issuance Date (the
"Scheduled Effective Date"), or if after the Registration Statement has
been declared effective by the SEC, sales cannot be made pursuant to
the Registration Statement (whether because of a failure to keep the
Registration Statement effective, to disclose such information as is
necessary for sales to be made pursuant to the Registration Statement,
to register sufficient shares of Common Stock or otherwise), then, as
partial relief for the damages to any holder by reason of any such
delay in or reduction of its ability to sell the underlying shares of
Common Stock (which remedy shall not be exclusive of any other remedies
at law or in equity), then:
(i) the Corporation will pay as liquidated damages
(the "Liquidated Damages") in penalties to the Buyer(s) a cash
amount within three (3) business days of the end of the month
immediately following the Scheduled Effective Date and for
each month thereafter in an amount equal to one and one half
percent (1 1/2 %) of the Liquidation Value. (For example, if
the Registration Statement becomes effective one (l) month
after the Scheduled Effective Date, the Corporation will pay
in cash to the Buyer(s) an aggregate of Seven Thousand Five
dollars ($7,500) in Liquidated Damages (1 1/2% of $500,000);
if, as a further example, thereafter sales could not be made
pursuant to the Registration Statement for a period of one and
one half (1 1/2) months, the Corporation will pay in cash to
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<PAGE>
the Buyer(s) an aggregate of Eleven Thousand Two Hundred and
Fifty dollars ($11,250) in Liquidated Damages ($7,500 for the
first month plus $3,750 for the half of second month); and if,
as a further example, thereafter sales could not be made
pursuant to the Registration Statement for a period of two (2)
months after the Scheduled Effective Date, the Corporation
will pay in cash to the Buyer(s) an aggregate of Fifteen
Thousand dollars ($15,000) in Liquidated Damages ($7,500 for
the first month plus $7,500 for the second month).
(d) Adjustment to Conversion Price - Dilution and Other
Events. In order to prevent dilution of the rights granted under this
Certificate of Amendment, the Conversion Price will be subject to
adjustment from time to time as provided in this Section 2(d).
(i) Adjustment of Fixed Conversion Price upon
Subdivision or Combination of Common Stock. If the Corporation
at any time subdivides (by any stock split, stock dividend,
re-capitalization 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
Corporation 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.
(ii) Reorganization, Reclassification, Consolidation,
Merger, or Sale. Any recapitalization, reorganization
reclassification, consolidation, merger, sale of all or
substantially all of the Corporation's assets to another
Person (as defined below) or other similar 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 an "Organic
Change." Prior to the consummation of any Organic Change, the
Corporation will make appropriate provision (in form and
substance reasonably satisfactory to the Holders of a majority
of the Series A Preferred Shares then outstanding) to insure
that, upon the consummation of such Organic Change, each of
the Holders of the Series A Preferred Shares will thereafter
have the right to acquire and receive in lieu of the Series A
Preferred Shares, such shares of stock, securities or assets
as may be issued or payable with respect to or in exchange for
the number of shares of Common Stock immediately theretofore
acquirable and receivable upon the conversion of such holder's
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<PAGE>
Series A Preferred Shares had such Organic Change not taken
place. In any such case, the Corporation will make appropriate
provision (in form and substance reasonably satisfactory to
the Holders of a majority of the Series A Preferred Shares
then outstanding) with respect to such holders' rights and
interests to insure that the provisions of this Section 3(d)
and Section 3(e) below will thereafter be applicable to the
Series A Preferred Shares. For purposes of this Agreement,
"Person" shall mean 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.
(iii) Notices.
(A) Immediately upon any adjustment of the
Conversion Price pursuant to this Section 3(d), the
Corporation will give written notice thereof to each
holder of Series A Preferred Shares, setting forth in
reasonable detail and certifying the calculation of
such adjustment.
(B) The Corporation will give written notice
to each Holder of Series A Preferred Shares at least
twenty (20) days prior to the date on which the
Corporation closes its books or takes a record (I)
with respect to any dividend or 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.
(C) The Corporation will also give written
notice to each Holder of Series A Preferred Shares at
least twenty (20) days prior to the date on which any
Organic Change, Major Transaction (as defined below),
dissolution or liquidation will take place.
(e) Purchase Rights. If at any time the Corporation 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 Series A 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 Series A Preferred Shares immediately before
the date an 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.
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(f) Mechanics of Conversion. Subject to the Corporation's
inability to fully satisfy its obligations under a Conversion Notice
(as defined below) as provided for in Section 6 below:
(i) Holder's Delivery Requirements. Subject to
Section 3(a), in order to convert Series A Preferred Shares
into full shares of Common Stock on any date (the "Conversion
Date"), the holder thereof shall (A) deliver or transmit by
facsimile, for receipt on or prior to 11:59 p.m., Eastern
Standard 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 Corporation or its designated
transfer agent (the "Transfer Agent"), and (B) surrender to a
common carrier for delivery to the Corporation or the Transfer
Agent as soon as practicable following such date, the original
certificates representing the Series A 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") and the originally
executed Conversion Notice. Each Conversion Notice shall
specify the number of Series A Preferred Shares to be
converted and the date on which such conversion is to be
effected, which date may not be prior to the date the holder
delivers such Conversion Notice.
(ii) Corporation's Response. Upon receipt by the
Corporation of a facsimile copy of a Conversion Notice, the
Corporation shall immediately send, via facsimile, a
confirmation of receipt of such Conversion Notice to such
holder. Upon receipt by the Corporation or the Transfer Agent
of the Preferred Stock Certificates to be converted pursuant
to a Conversion Notice, together with the originally executed
Conversion Notice, the Corporation or the Transfer Agent (as
applicable) shall, within ten (10) business days following the
date of receipt, (A) issue and surrender to a common carrier
for overnight delivery 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) credit the
aggregate number of shares of Common Stock to which the holder
shall be entitled to the holder's or its designee's balance
account at The Depository Trust Corporation.
(iii) Dispute Resolution. In the case of a dispute as
to the determination of the Average Market Price or the
arithmetic calculation of the Conversion Rate, the Corporation
shall promptly issue to the holder the number of shares of
Common Stock that is not disputed and shall submit the
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<PAGE>
disputed determinations or arithmetic calculations to the
holder via facsimile within three (3) business days of receipt
of such holder's Conversion Notice. If such holder and the
Corporation are unable to agree upon the determination of the
Average Market Price or arithmetic calculation of the
Conversion Rate within two (2) business days of such disputed
determination or arithmetic calculation being submitted to the
holder, then the Corporation shall within one (1) business day
submit via facsimile (A) the disputed determination of the
Average Market Price to an independent, reputable investment
bank designated by the Corporation, or (B) the disputed
arithmetic calculation of the Conversion Rate to its
independent, outside accountant. The Corporation shall cause
the investment bank or the accountant, as the case may be, to
perform the determinations or calculations and notify the
Corporation 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 bank's or
accountant's determination or calculation, as the ease may be,
shall be binding upon all parties absent manifest error.
(iv) Record Holder. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion
of Series A Preferred Shares shall be treated for all purposes
as the record holder or holders of such shares of Common Stock
following such conversion.
(v) Corporation's Failure to Timely Convert. If the
Corporation shall fail to issue to a holder within seven (7)
business days following the date of receipt by the Corporation
or the Transfer Agent of the Preferred Stock Certificates to
be converted pursuant to a Conversion Notice, a certificate
for the number of shares of Common Stock to which such holder
is entitled upon such holder's conversion of Series A
Preferred Shares, in addition to all other available remedies
which such holder may pursue hereunder and under the
securities purchase agreement between the Corporation and the
initial holders of the Series A Preferred Shares pursuant to
which such holders purchased the Series A Preferred Shares
(the "Securities Purchase Agreement") (including
indemnification pursuant to Section 8 thereof), the
Corporation shall pay additional damages to such holder on
each day after the seven (7th) business day following the date
of receipt by the Corporation or the Transfer Agent of the
Preferred Stock Certificates to be converted pursuant to the
Conversion Notice, for which such conversion is not timely
effected, an amount calculated in accordance with the
following schedule:
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Late Payment for Each
Principal Amount Being Series A Preferred Share
No. Business Days Late Converted
---------------------- ------------------------
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
11 $1,000 + $200 for
each Business Days
Late Beyond 10 days
(g) Mandatory Conversion. If any Series A Preferred Shares
remain outstanding on April 14, 2002, then all such Series A Preferred
Shares shall be converted as of such date in accordance with this
Section 2 as if the holders of such Series A Preferred Shares had given
the Conversion Notice on April 14, 2002, and the Conversion Date had
been fixed as of April 14, 2002, for all purposes of this Section 2,
and all holders of Series A Preferred Shares shall thereupon and with
two (2) business days thereafter surrender all Preferred Stock
Certificates, duly endorsed for cancellation, to the Corporation or the
Transfer Agent. No person shall thereafter have any rights in respect
of Series A Preferred Shares, except the right to receive shares of
Common Stock on conversion thereof as provided in this Section 2.
(h) Fractional Shares. The Corporation shall not issue any
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 share of the Series A Preferred Shares 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 Corporation shall round such fraction of a share of Common Stock up
or down to the nearest whole share.
(i) Notwithstanding anything to the contrary set forth in this
Certificate of Designations, the Corporation shall not be obligated to
issue in excess of 11,875,000 conversion Shares upon conversion of the
Series A Preferred Shares.
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4. Corporation's Right to Redeem at its Election.
(a) At any time, commencing 120 days after the Issuance Date,
as long as the Corporation has not breached any of the representations,
warranties, and covenants contained herein or in any related
agreements, the Corporation shall have the right, in it sole
discretion, to redeem ("Redemption at Corporation's Election"), from
time to time, any or all of the Series A Preferred Shares which have
not previously been redeemed at a price equal to the Redemption Price
at Corporation's Election below, provided (i) Corporation shall first
provide thirty (30) days advance written notice as provided in
subparagraph 4(a)(ii) below (which can be given any time on or after 90
days after the Issuance Date, and (ii) that the Corporation shall only
be entitled to redeem Series A Preferred Shares having an aggregate
Stated Value of at least One Hundred Thousand Dollars ($100,000). If
the Corporation elects to redeem some, but not all, of the Series A
Preferred Shares, the Corporation shall redeem a pro-rata amount from
each Holder of the Series A Preferred Shares.
(i) Redemption Price At Corporation's Election. The
"Redemption Price at Corporation's Election" shall be
calculated as 120% of the Liquidation Value, as that term is
defined in Section 10 hereof.
(ii) Mechanics of Redemption at Corporation's
Election. The Corporation shall effect each such redemption by
giving at least thirty (30) days prior written notice ("Notice
of Redemption at Corporation's Election") to (A) the holders
of the Series A Preferred Shares selected for redemption at
the address and facsimile number of such holder appearing in
the Corporation's Series A Preferred Shares register and (B)
the Transfer Agent, which Notice of Redemption At
Corporation's Election shall be deemed to have been delivered
three (3) business days after the Corporation's mailing (by
overnight or two (2) day courier, with a copy by facsimile) of
such Notice of Redemption at Corporation's Election. Such
Notice of Redemption At Corporation's Election shall indicate
(i) the number of shares of Series A Preferred Shares that
have been selected for redemption, (ii) the date which such
redemption is to become effective (the "Date of Redemption At
Corporation's Election") and (iii) the applicable Redemption
Price At Corporation's Election, as defined in subsection
(a)(i) above. Notwithstanding the above, a holder may convert
into Common Stock, prior to the close of business on the Date
of Redemption at Corporation's Election, any Series A
Preferred Shares which it is otherwise entitled to convert,
including Series A Preferred Shares that has been selected for
redemption at Corporation's election pursuant to this
subsection 4(a).
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<PAGE>
(b) Corporation Must Have Immediately Available Funds or
Credit Facilities. The Corporation shall not be entitled to send any
Notice of Redemption at Corporation's Election and begin the redemption
procedure under Sections 4(a) unless it has:
(i) the full amount of the redemption price in cash,
available in a demand or other immediately available account
in a bank or similar financial institution; or
(ii) immediately available credit facilities, in the
full amount of the redemption price with a bank or similar
financial institution; or
(iii) an agreement with a standby underwriter willing
to purchase from the Corporation a sufficient number of shares
of stock to provide proceeds necessary to redeem any stock
that is not converted prior to redemptions; or
(iv) a combination of the items set forth in (i),
(ii), and (iii) above, aggregating the full amount of the
redemption price.
(c) Payment of Redemption Price. Each Holder submitting Series
A Preferred Shares being redeemed under this Section 4 shall send their
Series A Preferred Share Certificates to be redeemed to the Corporation
or its Transfer Agent, and the Corporation shall pay the applicable
redemption price to that Holder within five (5) business days of the
Date of Redemption at Corporation's Election.
5. Redemption at Option of Holders.
(a) Redemption Option Upon Major Transaction. In addition to
all other rights of the holders of Series A Preferred Shares contained
herein, after a Major Transaction (as defined below), the holders of
Series A Preferred Shares then outstanding shall have the right in
accordance with Section 5(f), at the option of the holders of at least
two-thirds (2/3) of the Series A Preferred Shares then outstanding, to
require the Corporation to redeem all of the Series A Preferred Shares
then outstanding at a price per Series A Preferred Share equal to the
greater of (i) 100% of the Liquidation Value (as defined below) of such
shares and (ii) the price calculated in accordance with the Redemption
Rate (as defined below) calculated as of the date of the public
announcement of such Major Transaction or the next date on which the
exchange or market on which the Common Stock is traded is open if such
public announcement is made (A) after 1:00 p.m. Eastern Standard Time
on such date or (B) on a date on which the exchange or market on which
the Common Stock is traded or quoted is closed.
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<PAGE>
(b) Redemption Option Upon Triggering Event. In addition to
all other rights of the holders of Series A Preferred Shares contained
herein, after a Triggering Event (as defined below), the holders of
Series A Preferred Shares the outstanding shall have the right in
accordance with Section 5(g), at the option of the holders of at least
two-thirds (2/3) of the Series A Preferred Shares then outstanding, to
require the Corporation to redeem all of the Series A Preferred Shares
then outstanding at a price per Series A Preferred Share equal to the
greater of (i) 125% of the Liquidation Value of such share and (ii) the
price calculated in accordance with the Redemption Rate as of the date
immediately preceding such Triggering Event on which the exchange or
market on which the Common Stock is traded or quoted is open.
(c) "Redemption Rate." The "Redemption Rate" shall, as of any
date of determination, be equal to (i) the Conversion Rate in effect as
of such date as calculated pursuant to Section 3(b) multiplied by (ii)
the Closing Bid Price of the Common Stock on such date.
(d) "Major Transaction." A "Major Transaction" shall be deemed
to have occurred at such time as any of the following events:
(i) the consummation of any merger, reorganization,
restructuring, consolidation, or similar transaction by or involving
the Corporation except (A) a merger or consolidation where the
Corporation is the survivor, or where the holders of the capital stock
of the Corporation immediately prior to such merger or consolidation
own at least 50% of the outstanding capital stock of the surviving
entity, (B) pursuant to a migratory merger effected solely for the
purpose of changing the jurisdiction of incorporation of the
Corporation, or (C) any such transaction in which each of the holders
of the Series A Preferred Shares receives cash at least equal to 120%
of the Liquidation Value of such shares in accordance with Section
5(d)(ii) hereof;
(ii) sale of all or substantially all of the assets
of the Corporation on a consolidated basis or any similar transaction
or related transactions which effectively results in a sale of all or
substantially all of the assets of the Corporation on a consolidated
basis, unless, upon consummation of such transaction, the Corporation
reserves an amount in cash at least equal to 125% of the Liquidation
Value of the Series A Preferred Shares for payment to the holders
thereof.
(e) "Triggering Event." A "Triggering Event" shall be deemed
to have occurred at such time as any of the following events:
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<PAGE>
(i) either (A) the failure of the Registration
Statement to be declared effective by the SEC or to cover the resale of
all of the shares of Common Stock issued or issuable upon conversion of
the Series A Preferred Shares at any time after ninety (90) days after
the Scheduled Effective Date (provided that for purposes of determining
the Closing Bid Price under Section 5(c) above, the Triggering Event
shall be deemed to have occurred on the first day of such ninety (90)
day period) or (B) for any period of ninety (90) consecutive days after
the date that is ninety (90) days after the Scheduled Effective Date
that Common Stock issued or issuable upon conversion of the Series A
Preferred Shares cannot be sold under the Registration Statement for
any reason (provided that for purposes of determining the Closing Bid
Price under Section 5(c) above, the Triggering Event shall be deemed to
have occurred on the first day of such ninety (90) day period);
(ii) if for any reason the Corporation fails to
perform or observe any covenant, agreement, or other provision
contained in Section 9 or 10 hereof;
(iii) the Corporation's notice to the holders of
Series A Preferred Shares as a class, including by way of public
announcement, at any time, of its intention not to comply, other than
in accordance with the terms hereof, with requests for conversion of
any Series A Preferred Shares for shares of Common Stock;
(iv) if for any reason the Corporation fails to
perform or observe any covenant, agreement, or other provision
contained herein or in the Securities Purchase Agreement, the
Registration Rights Agreement, or in any related agreement, and such
failure is not cured within 30 days after the Corporation knows, or
should have known with the exercise of reasonable diligence, of the
occurrence thereof, and such failure has had, or could reasonably be
expected to have, a material adverse effect on (A) the financial
condition, operating results, business, properties, or operations of
the Corporation and its subsidiaries taken as a whole taking into
account any proceeds reasonably expected to be received by the
Corporation or its subsidiaries in the foreseeable future from
insurance policies or rights of indemnification or (B) the Series A
Preferred Shares; or
(v) any representation or warranty contained in the
Securities Purchase Agreement or the Registration Rights Agreement is
false or misleading on or as of the date made and which either reflects
or has had a material adverse effect on and which, upon the date that
the holders require the Corporation to redeem the Class A Preferred
Shares continues to have a material adverse effect on (A) the financial
condition, operating results, business, properties, or operations of
the Corporation and its subsidiaries taken as a whole taking into
account any proceeds reasonably expected to be received by the
Corporation or its subsidiaries in the foreseeable future from
insurance policies or rights of indemnification or (B) the Series A
Preferred Shares.
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<PAGE>
(f) Mechanics of Redemption at Option of Buyer Upon Major
Transaction. No sooner than fifteen (15) days nor later than ten (10)
days prior to the consummation of a Major Transaction, but not prior to
the public announcement of such Major Transaction, the Corporation
shall deliver written notice thereof via facsimile and overnight
courier ("Notice of Major Transaction") to each holder of Series A
Preferred Shares. At any time after receipt of a Notice of Major
Transaction, the holders of at least two-thirds (2/3) of the Series A
Preferred Shares then outstanding may require the Corporation to redeem
all of the holders' Series A Preferred Shares then outstanding in
accordance with Section 5(a) by delivering written notice thereof via
facsimile and overnight courier ("Notice of Redemption at Option of
Buyer Upon Major Transaction") to the Corporation, which Notice of
Redemption at Option of Buyer Upon Major Transaction shall indicate (i)
the number of Series A Preferred Shares that such holders are voting in
favor of redemption and (ii) the applicable redemption price, as
calculated pursuant to Section 5(a) above. Unless the Corporation shall
fail to fully redeem all of the holder's Series A Preferred Shares
pursuant to this Section 5, any notice delivered by the holder pursuant
to this subsection shall be irrevocable.
(g) Mechanics of Redemption at Option of Buyer Upon Triggering
Event. As soon as practicable, but in any event no more than five (5)
business days after the occurrence of a Triggering Event, the
Corporation shall deliver written notice thereof via facsimile and
overnight courier ("Notice of Triggering Event") to each holder of
Series A Preferred Shares. At any time after receipt of a Notice of
Triggering Event, the holders of at least two-thirds (2/3) of the
Series A Preferred Shares then outstanding may require the Corporation
to redeem all of the Series A Preferred Shares then outstanding in
accordance with Section 5(b) by delivering written notice thereof via
facsimile and overnight courier ("Notice of Redemption at Option of
Buyer Upon Triggering Event") to the Corporation, which Notice of
Redemption at Option of Buyer Upon Triggering Event shall indicate (i)
the number of Series A Preferred Shares that such holders are voting in
favor of redemption and (ii) the applicable redemption price, as
calculated pursuant to Section 5(b) above. Unless the Corporation shall
fail to fully redeem all of the holder's Series A Preferred Shares
pursuant to this Section 5, any notice delivered by the holder pursuant
to this subsection shall be irrevocable.
(h) Payment of Redemption Price. Upon the Corporation's
receipt of a Notice(s) of Redemption at Option of Buyer Upon Major
Transaction or a Notice(s) of Redemption at Option of Buyer Upon
Triggering Event, as the case may be, from the holders of at least
two-thirds (2/3) of the Series A Preferred Shares then outstanding, the
Corporation shall immediately notify each holder by facsimile of the
Corporation's receipt of such requisite notices necessary to effect a
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<PAGE>
redemption and each holder of Series A Preferred Shares shall
thereafter promptly send such holder's Preferred Stock Certificates to
be redeemed to the Corporation or its Transfer Agent. The Corporation
shall pay the applicable redemption price, as calculated pursuant to
Section 5(a) or 5(b) above, in cash to such holder within thirty (30)
days after the Corporation's receipt of the requisite notices required
to effect a redemption; provided that a holder's Preferred Stock
Certificates shall have been so delivered to the Corporation or its
Transfer Agent; provided further that if the Corporation is unable to
redeem all of the Series A Preferred Shares, the Corporation shall
redeem an amount from each holder of Series A Preferred Shares equal to
such holder's pro-rata amount (based on the number of Series A
Preferred Shares held by such holder relative to the number of Series A
Preferred Shares outstanding) of all Series A Preferred Shares being
redeemed. If the Corporation shall fall to redeem all of the Series A
Preferred Shares submitted for redemption (other than pursuant to a
dispute as to the determination of the Closing Bid Price or the
arithmetic calculation of the Redemption Rate), the applicable
redemption price payable in respect of such unredeemed Series A
Preferred Shares shall bear interest at the rate of 2.5% per month (pro
rated for partial months) until paid in full. Until the Corporation
pays such unpaid applicable redemption price in full to each holder,
holders of at least two-thirds (2/3) of the Series A Preferred Shares
then outstanding, including shares of Series A Preferred Shares
submitted for redemption pursuant to this Section 4 and for which the
applicable redemption price has not been paid, shall have the option
(the "Void Optional Redemption Option") to, in lieu of redemption,
require the Corporation to promptly return to each holder all of the
Series A Preferred Shares that were submitted for redemption by such
holder under this Section 5 and for which the applicable redemption
price has not been paid, by sending written notice thereof to the
Corporation via facsimile (the "Void Optional Redemption Notice"). Upon
the Corporation's receipt of such Void Optional Redemption Notice(s)
and prior to payment of the full applicable redemption price to each
holder, (i) the Notice(s) of Redemption at Option of Buyer Upon
Triggering Event or the Notice(s) of Redemption at Option of Buyer Upon
Major Transaction, as the case may be, shall be null and void with
respect to those Series A Preferred Shares submitted for redemption and
for which the applicable redemption price has not been paid, (ii) the
Corporation shall immediately return any Certificates for Series A
Preferred Shares submitted to the Corporation by each holder for
redemption under this Section 4(h) and for which the applicable
redemption price had not been paid, (iii) the Fixed Conversion Price of
such returned Series A Preferred Shares shall be adjusted to the lesser
of (A) the Fixed Conversion Price as in effect on the date on which the
Void Option Redemption Notice(s) is delivered to the Corporation and
(B) the lowest Closing Bid Price during the period beginning on the
date on which the Notice(s) of Redemption of Option of Buyer Upon Major
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<PAGE>
Transaction or the Notice(s) of Redemption at Option of Buyer Upon
Triggering Event, as the case may be, is delivered to the Corporation
and ending on the date on which the Void Optional Redemption Notice(s)
is delivered to the Corporation; provided that no adjustment shall be
made if such adjustment would result in an increase of the Fixed
Conversion Price then in effect, and (iv) the Conversion Percentage in
effect at such time and thereafter shall be reduced by a number of
percentage points equal to the product of (A) two and one-half (2.5)
and (B) the number of months (prorated for partial months) in the
period beginning on the date on which the Notice(s) of Redemption at
Option of Buyer Upon Major Transaction or the Notice(s) of Redemption
at Option of Buyer Upon Triggering Event, as the case may be, is
delivered to the Corporation and ending on the date on which the Void
Optional Redemption Notice(s) is delivered to the Corporation.
Notwithstanding the foregoing, in the event of a dispute as to the
determination of the Closing Bid Price or the arithmetic calculation of
the Redemption Rate, such dispute shall be resolved pursuant to Section
3(f)(iii) above with the term "Closing Bid Price" being substituted for
the term "Average Market Price" and the term "Redemption Rate" being
substituted for the term "Conversion Rate."
6. Inability to Fully Convert.
(a) Holder's Option if Corporation Cannot Fully Convert. If at
any time after the earlier to occur of (i) effectiveness of the
Registration Statement or (ii) ninety (90) days after the Scheduled
Effective Date, upon the Corporation's receipt of a Conversion Notice,
the Corporation does not issue shares of Common Stock which are
registered for resale under the Registration Statement within seven (7)
business days of the time required in accordance with Section 3(f)
hereof, for any reason or for no reason, including, without limitation,
because the Corporation (x) does not have a sufficient number of shares
of Common Stock authorized and available, (y) is otherwise prohibited
by applicable law or by the rules or regulations of any stock exchange,
inter-dealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or its securities from issuing
all of the Common Stock which is to be issued to a holder of Series A
Preferred Shares pursuant to a Conversion Notice or (z) fails to have a
sufficient number of shares of Common Stock registered and eligible for
resale under the Registration Statement, then the Corporation shall
issue as many shares of Common Stock as it is able to issue in
accordance with Stockholder's Conversion Notice and pursuant to Section
3(f) above and, with respect to the unconverted Series A Preferred
Shares, the holder, solely at such holder's option, can, in addition to
any other remedies such holder may have hereunder, under the Securities
Purchase Agreement (including indemnification under Section 8 thereof),
under the Registration Rights Agreement, at law or in equity, elect to:
(i) require the Corporation to redeem from such
holder those Series A Preferred Shares for which the Corporation is
unable to issue Common Stock in accordance with such holder's
Conversion Notice ("Mandatory Redemption") at a price per Series A
Preferred Share (the "Mandatory Redemption Price") equal to the greater
of (x) 120% of the Liquidation Value of such share and (y) the
Redemption Rate as of such Conversion Date;
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<PAGE>
(ii) void its Conversion Notice and retain or have
returned, as the case may be the Certificates representing the
unconverted Series A Preferred Shares that were to be converted
pursuant to such holder's Conversion Notice.
7. Reissuance of Certificates. In the event of a conversion or
redemption pursuant to this Certificate of Amendment of less than all of the
Series A Preferred Shares represented by a particular Preferred Stock
Certificate, the Corporation shall promptly cause to be issued and delivered to
the holder of such Series A Preferred Shares a Preferred Stock Certificate
representing the remaining Series A Preferred Shares which have not been so
converted or redeemed.
8. Reservation of Shares. The Corporation shall, so long as any of the
Series A Preferred Shares are outstanding, reserve and keep available out of its
authorized and unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the Series A Preferred Shares, 11,875,000 shares of
the Common Stock to effect the conversion of all of the Series A Preferred
Shares. If at any time, the Corporation does not have available 11,875,000
authorized and unissued shares of Common Stock to satisfy conversion of all of
the Series A Preferred Shares outstanding, the Corporation shall call and hold a
special shareholders meeting with thirty (30) days of such occurrence, for the
sole purpose of increasing the number of authorized shares. Furthermore,
management of the Corporation shall recommend to the shareholders to vote in
favor of increasing the number of common shares authorized. Management shall
also vote all of its shares in favor of increasing the number of authorized
shares of Common Stock.
9. Voting Rights. Holders of Series A 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 New Jersey and as expressly provided in
this Certificate of Amendment.
10. Liquidation, Dissolution, Winding-Up. In the event of any voluntary
or involuntary liquidation, dissolution, or winding up of the Corporation, the
holders of the Series A Preferred Shares shall be entitled to receive in cash
out of the assets of the Corporation, whether from capital or from earnings
available for distribution to its stockholders (the "Preferred Funds"), before
any amount shall be paid to the holders of any of the capital stock of the
Corporation of any class junior in rank to the Series A Preferred Shares in
respect of the preferences as to the distributions and payments on the
liquidation, dissolution and winding up of the Corporation, an amount per Series
A Preferred Share equal to the sum off (i) $10,000 and (ii) an amount equal to
the product of (.06) (N/365) ($10,000) (such sum being referred to as the
"Liquidation Value"); provided that, if the Preferred Funds are insufficient to
pay the full amount due to the holders of Series A Preferred Shares and holders
of shares of other classes or series of preferred stock of the Corporation that
are of equal rank with the Series A Preferred Shares as to payments of Preferred
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<PAGE>
Funds (thc "Pari Passu Shares"), then each holder of Series A Preferred Shares
and Pari Passu Shares shall receive a percentage of the Preferred Funds equal to
the full amount of Preferred Funds payable to such holder as a liquidation
preference, in accordance with their respective Certificate of Designations,
Preferences and Rights as a percentage or the full amount of Preferred Funds
payable to all holders of Series A Preferred Shares and Pari Passu Shares. The
purchase or redemption by the Corporation 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 Corporation. Neither the
consolidation or merger of the Corporation with or into any other Person, nor
the sale or transfer by the Corporation 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 Corporation. No holder of Series A Preferred
Shares shall be entitled to receive any amounts with respect thereto upon any
liquidation, dissolution or winding up of the Corporation other than the amounts
provided for herein.
11. Preferred Rank. All shares of Common Stock shall be of junior rank
to all Series A Preferred Shares in respect to the preferences as to
distributions and payments upon the liquidation, dissolution, and winding up of
the Corporation. The rights of the shares of Common Stock shall be subject to
the preferences and relative rights of the Series A Preferred Shares. The Series
A Preferred Shares shall be senior in rights and liquidation preference to the
Common Stock or and any series of Preferred Stock hereinafter issued by the
Corporation. Without the prior express written consent of the holders of not
less than two-thirds (2/3) of the then issued and outstanding Series A Preferred
Shares, the Corporation shall not hereafter authorize or issue additional or
other capital stock that is of senior or equal rank to the Series A Preferred
Shares in respect of the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Corporation. Without the prior
express written consent of the holders off not less than two-thirds (2/3) of the
then issued and outstanding Series A Preferred Shares, the Corporation shall not
hereafter authorize or make any amendment to the Corporation's Certificate of
Incorporation or Bylaws, or make any resolution of the board of directors with
the New Jersey Secretary of State containing any provisions, which would
adversely affect or otherwise impair the rights or relative priority of the
holders of the Series A 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 Corporation with or into another corporation, the
Series A Preferred Shares shall maintain their relative powers, designations,
and preferences provided for herein and no merger shall result inconsistent
therewith.
12. Restriction on Redemption and Dividends.
(a) Restriction on Dividend. If any Series A Preferred Shares
are outstanding, without the prior express written consent of the
holders of not less than two-thirds (2/3) of the then outstanding
G-18
<PAGE>
Series A Preferred Shares, the Corporation shall not directly or
indirectly declare, pay or make any dividends or other distributions
upon any of the Common Stock so long as written notice thereof has been
given to holders of the Series A Preferred Shares at least 30 days
prior to the earlier of (a) the record date taken for or (b) the
payment of any such dividend or other distribution. Notwithstanding the
foregoing, this Section 12(a) shall not prohibit the Corporation from
declaring and paying a dividend in cash with respect to the Common
Stock so long as the Corporation: (i) pays simultaneously to each
holder of Series A Preferred Shares an amount in cash equal to the
amount such holder would have received had all of such holder's Series
A Preferred Shares been converted to Common Stock pursuant to Section 2
hereof one business day prior to the record date for any such dividend,
and (ii) after giving effect to the payment of any dividend and any
other payments required in connection therewith including to the
holders of the Series A Preferred Shares under clause 12(a)(i) hereof,
the Corporation has in cash or cash equivalents an amount equal to the
aggregate of: (A) all of its liabilities reflected on its most recently
available balance sheet, (B) the amount of any indebtedness incurred by
the Corporation or any of its subsidiaries since its most recent
balance sheet and (C) 125% of the amount payable to all holders of any
shares of any class of preferred stock of the Corporation assuming a
liquidation of the Corporation as the date of its most recently
available balance sheet.
(b) Restriction on Redemption. If any Series A Preferred
Shares are outstanding, without the prior express written consent of
the holders of not less than two-thirds (2/3) of the then outstanding
Series A Preferred Shares, the Corporation shall not directly or
indirectly redeem, purchase or otherwise acquire from any person or
entity' other than from a direct or indirect wholly-owned subsidiary of
the Corporation, or permit any subsidiary of the Corporation to redeem,
purchase or otherwise acquire from any person or entity other than from
the Corporation or another direct or indirect wholly-owned subsidiary
of the Corporation, any of the Corporation's or any subsidiary's
capital stock or other equity securities (including, without
limitation, warrants, options and other rights to acquire such capital
stock or other equity securities).
13. Vote to Change the Terms of Series A 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 Series A Preferred Shares, shall be required for any change
to this Certificate of Designations or the Corporation's Certificate of
Incorporation which would amend, alter, change or repeal any of the powers,
designations, preferences and rights of the Series A Preferred Shares.
G-19
<PAGE>
14. Lost or Stolen Certificates. Upon receipt by the Corporation of
evidence satisfactory to the Corporation of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Series A
Preferred Shares, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the holder to the Corporation and, in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Corporation shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Corporation shall
not be obligated to re-issue Preferred Stock Certificates if the holder
contemporaneously requests the Corporation to convert such Series A Preferred
Shares into Common Stock.
15. Withholding Tax Obligations. Notwithstanding anything herein to the
contrary, to the extent that the Corporation receives advice in writing from its
counsel that there is a reasonable basis to believe that the Corporation is
required by applicable federal laws or regulations and delivers a copy of such
written advice to the holders of the Series A Preferred Shares so affected, the
Corporation may reasonably condition the making of any distribution (as such
term is defined under applicable federal tax law and regulations) in respect of
any Series A Preferred Shares on the holder of such Series A Preferred Shares
depositing with the Corporation an amount of cash sufficient to enable the
Corporation to satisfy its withholding tax obligations (the "Withholding Tax")
with respect to such distribution, Notwithstanding the foregoing or anything to
the contrary, if any holder of the Series A Preferred Shares so affected
receives advice in writing from its counsel that there is a reasonable basis to
believe that the Corporation is not so required by applicable federal laws or
regulations and delivers a copy of such written advice to the Corporation, the
Corporation shall not be permitted to condition the making of any such
distribution in respect of any Series A Preferred Share on the holder of such
Series A Preferred Shares depositing with the Corporation any Withholding Tax
with respect to such distribution, provided, however, the Corporation may
reasonably condition the making of any such distribution in respect of any
Series A Preferred Share on the holder of such Series A Preferred Shares
executing and delivering to the Corporation, at the election of the holder,
either: (i) if applicable, a properly completed Internal Revenue Service Form
4224, or (a) an indemnification agreement in reasonably acceptable form, with
respect to any federal tax liability, penalties and interest that may be imposed
upon the Corporation by the Internal Revenue Service as a result of the
Corporation's failure to withhold in connection with such distribution to such
holder. If the conditions in the preceding two sentences are fully satisfied,
the Corporation shall not be required to pay any additional damages set forth in
Section 3(f)(v) of this Certificate of Designations if its failure to timely
deliver any Conversion Shares results solely from the holder's failure to
deposit any withholding tax hereunder or provide to the Corporation an executed
indemnification agreement in the form reasonably satisfactory to the
Corporation.
G-20
<PAGE>
FURTHER RESOLVED, that the offer, sale and issuance of up to 50 shares
of the Preferred Stock to an unlimited number of accredited investors pursuant
to Rule 506 of Regulation D under the Securities Act through May Davis Group,
Inc., ("May Davis") as placement agent and upon substantially the terms
described above, with such changes thereto as the officers of the Corporation
shall deem to be in the best interests of the Corporation and which such
officers shall have approved, be, and the same hereby are, authorized and
approved; and
FURTHER RESOLVED, that the executive officers of the Corporation, and
each of them, be, and the same hereby are, authorized and directed to execute
and deliver, for and on behalf of the Corporation, a placement agreement, by and
between the Corporation and May Davis Group, Inc. ("May Davis"), pursuant to
which May Davis will act as placement agent on behalf of the Corporation in the
Offering, such placement agreement to contain such terms and conditions as such
officers, or each of them, deem to be in the best interests of the Corporation,
the execution of such placement agreement by such officers, or any of them, to
be conclusive evidence of their authority hereunder; and
FURTHER RESOLVED, that the executive officers of the Corporation, and
each of them, be, and the same hereby are, authorized and directed to execute
and deliver, for and on behalf of the Corporation, an escrow agreement by and
between the Corporation, May Davis, and an escrow agent to be determined by the
Corporation (the "Escrow Agent"), pursuant to which the Escrow Agent shall act
as escrow agent on behalf of the Corporation and the investors in the Offering,
such escrow agreement to contain such terms and conditions as such officers, or
any of them, deem to be in the best interests of the Corporation, the execution
of such escrow agreement by such officers, or any of them, to be conclusive
evidence of their authority hereunder; and
FURTHER RESOLVED, that the execution and delivery by the executive
officers of the Corporation of (i) Securities Purchase Agreements, acceptable in
form and substance to such executive officers and relating to the purchase of
the shares of Common Stock in the Offering; and (ii) up to 50 shares of
Preferred Stock, be, and the same hereby are, approved; and
FURTHER RESOLVED, that 50 shares of Series A Preferred Shares be, and
the same hereby are, authorized and reserved for issuance; and
FURTHER RESOLVED, that 11,875,000 shares of Common Stock, and the same
hereby are, authorized and reserved to cover the issuance of the shares of the
Company's Common Stock, no par value per share, upon conversion of the Series A
Preferred Shares (the "Convertible Shares"), and
FURTHER RESOLVED, the executive officers of the Corporation, and each
of them, be, and the same hereby are, authorized and directed to pay to May
Davis, pursuant to the terms of the placement agreement with May Davis
contemplated by the foregoing resolutions, for and on behalf of the Corporation
(i) a commission equal to 8% of the gross proceeds of the Offering and (ii) a
reimbursement of its accountable expenses and the expenses of counsel to May
Davis; and
G-21
<PAGE>
FURTHER RESOLVED, that the executive officers of the Corporation, and
each of them, be, and the same hereby are, authorized and directed to execute
and deliver, pursuant to the terms of the placement agreement with May Davis
contemplated by the foregoing resolutions, for and on behalf of the Corporation,
placement agent's warrants for a number of shares of Common Stock equal to one
million five hundred thousand (1,500,000) of the shares of Common Stock (the
"Placement Agent's Warrants"), at an exercise price equal to 100% of the Closing
Bid Price on the day immediately preceding the closing date of the offering,
such warrants to be exercisable for a period of five years beginning on the
applicable closing date of the Corporation's Offering and to contain such
transferability restrictions and such piggy-back registration rights as are
deemed to be proper and necessary; the execution of such placement agent's
warrants by said officers, or any of them, to be conclusive evidence of their
authority hereunder; and
FURTHER RESOLVED, that the 1,500,000 shares of Common Stock issuable
upon exercise of the Placement Agent's warrants, together with such additional
shares as may be issuable in accordance with the anti-dilution provisions of
such warrants, be, and the same hereby are, authorized and reserved for issuance
upon the exercise of such warrants; and
FURTHER RESOLVED, that the executive officers of the Corporation, and
each of them, be, and the same hereby are, authorized and directed to execute
and deliver to Butler Gonzalez, LLP, pursuant to the terms of the Placement
Agent's Agreement with the Corporation (25,000) warrants for a number of shares
of Common Stock equal to twenty five thousand (25,000) of the shares of Common
Stock, at an exercise price per share equal to 100% of the Closing Bid Price on
the day immediately preceding the Closing Date, such warrants to be exercisable
for a period of five years beginning on the applicable closing date of the
Corporation's Offering and to contain such transferability restrictions and such
piggy-back registration rights as are deemed to be proper and necessary; the
execution of such placement agent's warrants by said officers, or any of them,
to be conclusive evidence of their authority hereunder; and
FURTHER RESOLVED, that the 25,000 shares of Common Stock issuable upon
exercise of the warrants granted to Butler Gonzalez, LLP, pursuant to the
Placement Agent's Agreement, together with such additional shares as may be
issuable in accordance with the anti-dilution provisions of such warrants, be,
and the same hereby are, authorized and reserved for issuance upon the exercise
of such warrants; and
FURTHER RESOLVED, that the executive officers of the Corporation, and
each of them, be, and the same hereby are, authorized and directed to execute
and deliver, for and on behalf of the Corporation, a registration rights
agreement by and between the Corporation and the investors, pursuant to which
the Corporation shall file a registration statement on Form S-1, SB-2, or S-3
under the Securities Act of 1933, as amended, with the Securities and Exchange
Commission within ninety days of execution of the registration rights agreement,
relating to the offer and resale of at least 13,400,000 (11,875,000 shares of
the Conversion Shares, 1,500,0000 shares for the Placement Agent's Warrants, and
25,000 for the Butler Gonzalez LLP's Warrant Shares) registrable securities
underlying the shares of Series A Preferred Shares that are the subject of the
Offering and the Warrants; and
G-22
<PAGE>
FURTHER RESOLVED, that it is desirable and in the best interests of the
Corporation that its securities be qualified or registered for sale in various
states; that the executive officers of the Corporation be, and the same hereby
are, authorized to determine the states and other jurisdictions in which
appropriate action shall be taken to qualify or register for sale all or such
part of the securities of this Corporation as said officers may deem advisable;
that said officers be, and the same hereby are, authorized to perform on behalf
of this Corporation any and all such acts as they may deem necessary or
advisable in order to comply with the applicable laws of any such states and
other jurisdictions, and in connection therewith to execute and file all
requisite papers and documents, including, but not limited to, applications,
reports, surety bonds, irrevocable consents and appointments of attorneys for
service of process; and the execution by such officers of any such paper or
document or the doing by them of any act in connection with the foregoing
matters shall conclusively establish their authority therefor from this
Corporation and the approval and ratification by the Corporation of the papers
and documents so executed and the action so taken; and
FURTHER RESOLVED, that the form of stock certificate substantially in
the form of the stock certificate attached hereto as Exhibit A (with such
changes as the proper officers of the Corporation shall determine in accordance
with the By-Laws and law) be, and the same hereby is, approved and adopted as
the certificate to represent the shares of Series A Convertible Preferred Stock,
no par value; and
FURTHER RESOLVED, that the officers of the Corporation, and each of
them, be, and the same hereby are, authorized and directed to execute and
deliver, for and on behalf of the Corporation, and affix the corporate seal
thereto, where appropriate, such agreements and such covenants, guarantees,
representations, certificates and such other documents, and to pay such amounts,
deliver such notes, checks and agreements, to take such action and in general to
do all such things as may be necessary or appropriate to give effect to the
foregoing resolutions; and
FURTHER RESOLVED, that any acts of any of the officers of the
Corporation, which acts would have been authorized by the foregoing resolutions
except that such acts were taken prior to the adoption of the foregoing
resolutions, be, and the same hereby are, severally ratified, confirmed,
approved and adopted as acts in the name and on behalf of the Corporation.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and
seal as of the date indicated below.
Dated: ----------------- ------------------------------
James K.T. Lu
Dated: ----------------- ------------------------------
Jeffrey I. Schillen
Dated: ----------------- ------------------------------
Murray T. Scott
G-23
<PAGE>
SCHEDULE I
SCHEDULE OF BUYERS
Number of
Series A
Name Address/Facsimile Number Preferred Aggregate
of Buyer Shares Proceeds $
------------------------ -------------------------- --------- --------------
Jeffrey Hrutkay, M.D. 1463 Chesam Circle 5 50,000.00(1)
Boulder, Colorado 80907
Charles & Jane Adkins 9502 Lynhall Place 5 50,000.00(1)
Alexandria, Virginia
22309
Gordon D. Mogerley Hudson Tank Terminals 30 300,000.00(2)
173 Export Street
Port Newark, New Jersey
07114
Michelle Levite 401 Second Avenue 2 20,000.00
Apt. 5G
New York, New York 10010
Ralph Lowry P.O. Box 688 3 30,000.00
Newton, Kansas 67114
Anthony E. Rakos Naperville, Illinois 1 10,000.00
60549
Gerald Holland 22 Coult Lane 2 20,000.00
Old Lyne, CT 06372
John Bolliger 1775 North Elk Road 2 20,000.00
Pocatello, Idaho 83204
-----------
Total: $500,000.00
(1) Represents proceeds from conversion of a Non-Negotiable Promissory Note,
issued April 20, 2000 to Mr. Hrutkay and Mr. and Mrs. Adkins, which Note is
deemed paid in full and cancelled effective as of May 10, 2000.
(2) Represents proceeds from conversion of a Non-Negotiable Promissory Note,
issued May 2, 2000 to Mr. Mogerely, which Note is deemed paid in full and
cancelled effective as of May 10, 2000.
SI-1
<PAGE>
SCHEDULE 3(c)
Capitalization
As of April 10, 2000:
Common Stock Authorized - No Par Value (1) 100,000,000
Common Stock Issued and Outstanding(1) 62,334,029
Common Stock Options and Warrants Outstanding (2) 24,254,000
Total Common Stock Issued and Options and Warrants
Outstanding 86,588,029
-----------
Balance of Authorized Common Stock remaining after
deducting shares issued and outstanding and Stock
Options and Warrants outstanding 13,411,971
===========
Convertible Preferred Stock Authorized - No Par Value 5,000,000
Convertible Preferred Stock Issued of which 172,923
are held in Treasury 483,251
-----------
Balance of Authorized Convertible Preferred Stock -
No Par Value 4,516,749
===========
(1) The Company on March 21, 2000 filed its definitive proxy statement
dated March 27, 2000, with the U.S. Securities and Exchange Commission whereby
notice was given that the annual meeting of shareholders of the Company will be
held on April 27, 2000. Among the proposals to the shareholders to consider and
vote upon are the proposals 1) to increase the authorized common stock of the
Company from 100,000,000 shares of common stocks no par value to 600,000,000,
and 2) approval and consent in giving the Board of Directors of the Company the
authority and power to effectuate a reverse stock split up to a maximum ratio of
10 to 1 of the authorized common stock of the Company.
(2) Includes warrants of 5,000,000 shares of Common Stock upon conversion
of Convertible Notes issued by the Company in March and June of 1999 having
"Piggy Back Rights" if the Company files one or more Registration Statements
within six (6) years from the date of the notes whereby the Company will use its
best efforts to include all the underlying Common Stock into which the notes are
convertible in such Registration Statement, subject to the terms and conditions
of the Subscription Agreement executed by the Payee.
S3-1
<PAGE>
SCHEDULE 3(e)
Conflicts
There are no conflicts.
S3-2
<PAGE>
SCHEDULE 3(g)
Material Adverse Change
1. Company Facility
In an effort to reduce the Company's overhead expenses to be more in
line with the sales levels achieved during calendar year 1999, the Company at
the end of January, 2000 moved its principal executive offices and plant
operations to a smaller, 20,000 square feet facility in Walnut, California, from
its former facility of approximately 49,000 square feet facility located in
Cerritos, California. In anticipation of this move, the Company ceased payment
of its monthly rental payment to its former lessor for several months. This
resulted in the Company entering into a stipulation for judgement on March 15,
2000, whereby the lessor received a judgment for a total amount of $119,000,
plus interest of 10%. The parties to the stipulation for judgement further
agreed that the judgement amount would be settled by the Company paying a total
amount of $72,000 at 10% interest at $6,600 per month for twelve (12)
consecutive months, beginning April 1, 2000, through and including March 1,
2001. The Company made its first monthly payment within the guidelines of the
payment schedule. As a result of this move, the Company reduced its current rent
by approximately $14,000 per month.
2. Reduction of Employees
As part of the overhead expense reduction plan the Company reduced its
number of full time employees as follows:
No. of Employees No. of Employees Total
at 11/01/99 at 3/31/00 Reduction
---------------- ---------------- ---------
Sales Administration 4 1 3
Admin/Accounting 9 4 5
Mfg. Operations 30 11 19
-- -- --
Total 44 17 27
== == ==
Although, the number of permanent employees have been significantly
reduced, the Company has been able to maintain its operations at its current
level. The Company has been utilizing temporary employees when required and
expects to increase its number of permanent employees in the coming months as
sales orders levels increase.
S3-3
<PAGE>
SCHEDULE 3(h)
Litigation
The Company has in the past been named as defendant and co-defendant in
various legal actions filed against the Company in the normal course of
business. All past litigation have been resolved without material adverse impact
on the Company. For the fiscal year ended March 31, 2000 and for the period
through April 11, 2000, the Company is aware, to the best of its knowledge, of
three civil actions against the Company.
1) One action is for a stipulation judgement entered on March 15, 2000,
whereby the Company entered into a settlement agreement with its former landlord
for unpaid rent of $72,000 with interest at 10% per annum payable over a period
of twelve (12) months with monthly payments of $6,600 per month, commencing
April 1, 2000, whereby the Company has made its first required payment.
2) The second action is for a complaint filed against the Company on
February 15, 2000, for unpaid invoices by the Company for purchases of products
totaling approximately $39,000. The Company is currently negotiating a
settlement agreement proposing payments of $1,000 per week until the amount
owing is paid in full. Since, the filing of this complaint, the Company has made
weekly payments totaling $7,000 leaving a balance still remaining of
approximately $32,000.
3) The third action is for a judgement against the Company for
$15,300.01 for unpaid fulfillment services and financing charges incurred by its
subsidiary prior to its acquisition by the Company, plus continuing interest at
the rate of 1.5% per month, plus attorney's fee in the amount of $2,295.00. The
judgement amount of $15,300.01 was for disputed invoices covering services
rendered by the plaintiff and included monthly financing charges of
approximately $6,000. On of April 3, 2000, the Company received a settlement
proposal from the plaintiff's attorney whose client is willing to accept
payments of $1,000 per month toward the judgement amount and agrees to terminate
any additional finance charges bearing on the unpaid balance upon receipt of the
first monthly payment of $1,000. The Company is currently renegotiating the
terms of this settlement proposal to lower the settlement amount to exclude the
financing charges of $6,000.
S3-4
<PAGE>
SCHEDULE 3(n)
Intellectual Property
The Company has intellectual property and proprietary technology
protecting its product. In the toy product line, the Woblong(R), a double winged
flying toy, is protected by patent claims in the form of a utility patent
registered with the U.S. Patent and Trademark Office. The U.S. Patent number is
5,131,879. In addition, a design patent was issued on March 9, 1994 - D344,989.
The Company has also registered the name Zoombie for this toy. The Company has
also registered the name "CineChrome" for its line of collectible greeting
cards.
The name Diamond Entertainment is a registered trademark.
S3-5
<PAGE>
SCHEDULE 3(p)
Liens
There are no liens.
S3-6
<PAGE>
SCHEDULE 3(v)
Certain Transactions
Please refer to the following SEC documents filed with U.S. Securities and
Exchange Commission:
1. Form 10-KSB/A#1 for the fiscal year ended March 31, 1999 2. Form 10-QSB for
the quarterly period ended June 30, 1999 3. Form 10-QSB for the quarterly period
ended September 30, 1999 4. Form 10-QSB for the quarterly period ended December
31, 1999 5. Form DEF 14A - Proxy Statement dated March 27, 2000
S3-7
<PAGE>
SCHEDULE 4(d)
Use of Proceeds
Accounts Payable Invoices $120,000
Capital Equipment 60,000
Short Term Notes Payable 30,000
Federal Payroll Taxes 4th Qtr - 1999 25,000
Working Capital 200,000
Closing Fees and Expenses:
Placement fee $40,000
Legal fees 15,000
Escrow fees 5,000
Other fees and Expenses 5,000
Total Closing Fees and Expenses 65,000
---------------
Total Use of Proceeds $500,000
===============
S3-8
