EXHIBIT 10.07
ENTERTAINMENT UNIVERSE, INC.
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Regulation D Subscription Agreement
ENTERTAINMENT UNIVERSE, INC.
REGULATION D SUBSCRIPTION AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW, AND MAY
NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF OR
EXERCISED UNLESS (i) A REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE
STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR
(ii) AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR
TRANSFER.
THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES DESCRIBED
HEREIN BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. THESE SECURITIES HAVE NOT BEEN
RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES AUTHORITIES, NOR HAVE SUCH
AUTHORITIES REVIEWED OR DETERMINED THE ACCURACY OF THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SUBSCRIBERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND
ASSESSMENT OF THE RISKS INVOLVED.
SEE ADDITIONAL LEGENDS AT SECTION 3.7 AND ATTACHED AS EXHIBIT B.
THIS REGULATION D SUBSCRIPTION AGREEMENT (the "Agreement") is made as of
the ____ day of April, 1999, by and among Entertainment Universe, Inc., a
corporation duly organized and existing under the laws of the State of
California ("EUI" or the "Company"), ▇▇▇▇ ▇▇▇▇▇▇▇▇▇, and the undersigned
subscriber executing this Agreement ("Subscriber"). The Company shall assign
this Agreement, on or prior to the closing date of this Offering, to a publicly
traded shell corporation (the "Public Entity") of which EUI intends to be the
wholly-owned subsidiary by the closing of this Offering. Upon such assignment,
references to the Company shall mean the Public Entity.
THE PARTIES HEREBY AGREE AS FOLLOWS:
This Agreement is executed by Subscriber in connection with the offer by
the Company and the purchase by Subscriber of Series A Preferred Stock, $.001
par value (the "Preferred Stock"), of the Company. The Preferred Stock is being
offered at a purchase price of Three Dollars and Sixty Cents ($3.60), U.S., per
share, in minimum subscription amounts of at least Twenty-Seven Thousand, Seven
Hundred Seventy Eight (27,778) shares ($100,000.80), with a minimum aggregate
offering amount, placed on a "best efforts" basis, of Six Hundred Eighty Seven
Thousand Five Hundred (687,500) shares of Preferred Stock, or Two Million Four
Hundred Seventy-Five Thousand Dollars ($2,475,000) (the "Minimum Amount"), and
up to a maximum aggregate amount, placed on a "best efforts" basis, of One
Million Nine Hundred Thirty-Seven Thousand Five Hundred (1,937,500) shares of
Preferred Stock, or Six Million Nine Hundred Seventy-Five Thousand Dollars
($6,975,000) (the "Maximum Amount") (collectively, the "Offering"). The terms
of the Preferred Stock, including the terms on which the Preferred Stock may be
converted into common stock, $.001 par value, of the Company (the "Common
Stock"), are set forth in the Certificate of Designation of Preferred Stock (the
"Certificate of Designation"), substantially in the form attached hereto as
Exhibit A. The solicitation of this subscription and, if accepted by the
Company, the offer and sale of the Preferred Stock are being made in reliance
upon the provisions of Section 4(2) of and Regulation D ("Regulation D")
promulgated under the Securities Act of 1933, as amended ("the Act"). The
Preferred Stock and the Common Stock issuable upon conversion thereof (the
"Conversion Shares"), are sometimes referred to herein singularly as "Security"
and collectively as the "Securities."
It is agreed as follows:
1. Offering
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1.1 Offer to Subscribe; Purchase Price and Closing; and Placement Fees.
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Subject to satisfaction of the conditions to Subscriber's obligations set forth
in Section 1.2 below, Subscriber hereby offers to subscribe for and purchase
Preferred Stock for the aggregate purchase price in the amount set forth on the
last page of this Agreement, in accordance with the terms and conditions of this
Agreement. Assuming that the Minimum Amount and corresponding subscription
agreements accepted by the Company are received into the Company's designated
escrow account for this Offering established pursuant to the Escrow Agreement
(the "Escrow Agreement") by and between the Company and American National Bank
and Trust Company of Chicago (the "Escrow Agent") (the "Escrow Account"), the
closing of a sale and purchase of Preferred Stock and the P.E. Common Stock (as
hereinafter defined) as to each Subscriber (the "Closing") shall be deemed to
occur when this Agreement has been executed by both Subscriber and the Company
and full payment shall have been made by Subscriber, by wire transfer to the
Escrow Account as set forth in Section 7.1(a) for payment in consideration for
the Company's delivery of certificates representing the Preferred Stock
subscribed for.
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1.2 Conditions to Subscriber's Obligations. Subscriber's obligations
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hereunder are conditioned upon all of the following:
(a) the following documents shall have been deposited with the Escrow
Agent: the Registration Rights Agreement, substantially in the form attached
hereto as Exhibit C (the "Registration Rights Agreement") executed by the
Company, an opinion of counsel, substantially in the form attached hereto as
Exhibit D (the "Opinion of Counsel") signed by the Company's counsel, the
Irrevocable Instructions to Transfer Agent, substantially in the form attached
hereto as Exhibit E (the "Irrevocable Instructions to Transfer Agent")
executed by the Company and the Company's transfer agent (the "Transfer
Agent"), and the Certificate of Designation, substantially in the form
attached hereto as Exhibit A, together with evidence showing that it has been
filed with the Secretary of State of California; certificates representing the
Preferred Stock and the P.E. Common Stock issued in the name of the
Subscriber;
(b) the Company's Common Stock shall be included for quotation on the
Nasdaq Stock Market (including the OTC Bulletin Board);
(c) there shall have been no material adverse changes in the Company's
business prospects or financial condition since the date of the last balance
sheet included in the Disclosure Documents (defined below in Section 2.2.4),
including but not limited to incurring material liabilities;
(d) the representations and warranties of the Company and ▇▇▇▇ ▇▇▇▇▇▇▇▇▇
shall be true and correct in material respects at the Closing as if made on
such date, and the Company and ▇▇▇▇ ▇▇▇▇▇▇▇▇▇ shall deliver a certificate,
signed by an officer of the Company, to such effect to the Escrow Agent;
(e) the Minimum Amount and corresponding subscription agreements accepted
by the Company shall have been received by the Escrow Agent;
(f) the Company shall have reserved for issuance a sufficient number of
shares of Common Stock to effect conversions of the Preferred Stock, which
number of shares shall initially be equal to or greater than two hundred
percent (200%) of the number of shares of Common Stock issuable upon
conversion of the Preferred Stock on the date the Preferred Stock is issued to
the Subscriber; and
(g) the Subscriber shall have received an opinion of counsel to the Company
satisfactory to Subscriber's counsel to the effect that any shares of P.E.
Common Stock purchased by Subscriber under Section 5.6.3 hereof are freely
tradeable without restriction or limitation under any arrangement, agreement,
law or regulation to which such shares or the Company are subject.
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2. Representations and Warranties of Subscriber. Subscriber hereby
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represents and warrants to the Company as follows:
2.1 Accredited Investor. Subscriber is an accredited investor, as defined
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in Rule 501 of Regulation D, and has checked the applicable box set forth in
Section 10 of this Agreement. Subscriber shall notify the Company immediately of
any material change in any of such information occurring prior to and after the
Closing of the purchase of any Preferred Stock and Additional Common Stock.
2.2 Investment Experience; Access to Information; Independent
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Investigation.
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2.2.1 Access to Information. Subscriber or Subscriber's professional
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advisor has been granted the opportunity to ask questions of and receive
answers from representatives of the Company, its officers, directors,
employees and agents concerning the terms and conditions of this Offering,
the Company and its business and prospects, and to obtain any additional
information which Subscriber or Subscriber's professional advisor deems
necessary to verify the accuracy and completeness of the information
received.
2.2.2 Reliance on Own Advisors. Subscriber has relied completely on
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the advice of, or has consulted with, Subscriber's own personal tax,
investment, legal or other advisors and has not relied on the Company or
any of its affiliates, officers, directors, attorneys, accountants or any
affiliates of any thereof and each other person, if any, who controls any
thereof, within the meaning of Section 15 of the Act for any tax or legal
advice (other than reliance on information in the Disclosure Documents as
defined in Section 2.2.4 below and on the Opinion of Counsel). The
foregoing, however, does not limit or modify Subscriber's right to rely
upon representations and warranties of the Company in Section 4 of this
Agreement.
2.2.3 Capability to Evaluate. Subscriber has such knowledge and
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experience in financial and business matters so as to enable such
Subscriber to utilize the information made available to it in connection
with the Offering in order to evaluate the merits and risks of the
prospective investment, which are substantial, including without limitation
those set forth in the Disclosure Documents (as defined in Section 2.2.4
below).
2.2.4 Disclosure Documents. Subscriber, in making Subscriber's
investment decision to subscribe for the Securities hereunder, represents
that (a) Subscriber has received and had an opportunity to review the
Company's Confidential Private Placement Memorandum, dated March 12, 1999
(the "Memorandum") and Subscriber has read, reviewed, and relied solely on
the Memorandum, the Company's
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representations and warranties and other information in this Agreement,
including the exhibits, any other written information prepared by the
Company which has been specifically provided to Subscriber in connection
with this Offering (the documents described in this Section 2.2.4 (a) are
collectively referred to as the "Disclosure Documents"), and an independent
investigation made by Subscriber and Subscriber's representatives, if any;
and (b) Subscriber is not relying on any oral representation of the Company
or any other person, nor any written representation or assurance from the
Company other than those referred to in Section 4 or otherwise contained in
the Disclosure Documents or incorporated herein or therein. The foregoing,
however, does not limit or modify Subscriber's right to rely upon
representations and warranties of the Company in Section 4 of this
Agreement.
2.2.5 Investment Experience; Fend for Self. Subscriber has substantial
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experience in investing in securities and he, she or it has made
investments in securities other than those of the Company. Subscriber
acknowledges that Subscriber is able to fend for Subscriber's self in the
transaction contemplated by this Agreement, that Subscriber has the ability
to bear the economic risk of Subscriber's investment pursuant to this
Agreement and that Subscriber is an "Accredited Investor" by virtue of the
fact that Subscriber meets the investor qualification standards set forth
in Section 2.1 above. Subscriber has not been organized for the purpose of
investing in securities of the Company, although such investment is
consistent with Subscriber's purposes.
2.2.6 Purchaser Representative. The Subscriber understands if he, she
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or it uses the services of a Purchaser Representative(s), as such term is
defined in Rule 501 of Regulation D and applicable state securities laws
("Purchaser Representative"), acceptable to the Company in connection
herewith, either by the Subscriber's choice or pursuant to the Company's
request, that:
(a) the Subscriber must acknowledge, in writing by so indicating
in Section 11 of this Agreement prior to his, her or its purchase of
Securities, that such Purchaser Representative(s) is the Subscriber's
Purchaser Representative(s) in connection with evaluating the merits
and risks of the Subscriber's prospective investment in the Company;
(b) such Purchaser Representative(s) must disclose to the
Subscriber, in writing, prior to the acknowledgment referred to above,
any material relationship between such Purchaser Representative(s) or
its affiliates and you or your affiliates which now exists or is
mutually understood to be contemplated or which has existed at any
time during the previous two years, and any compensation received or
to be received in connection with the offering of the Securities; and
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(c) the Subscriber must furnish true and complete copies of the
foregoing instruments to the Company promptly upon their execution.
2.3 Exempt Offering Under Regulation D.
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2.3.1 Investment; No Distribution. Subscriber is acquiring the
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Securities to be issued and sold hereunder for his, her or its own account
(or a trust account if such Subscriber is a trustee) for investment and not
as a nominee and not with a present view to the re-distribution thereof.
Subscriber is aware that there are legal and practical limits on
Subscriber's ability to sell or dispose of the Securities and, therefore,
that Subscriber must bear the economic risk of the investment for an
indefinite period of time and has adequate means of providing for
Subscriber's current needs and possible personal contingencies and has need
for only limited liquidity of this investment. Subscriber's commitment to
illiquid investments is reasonable in relation to Subscriber's net worth.
By making the representations in this Section 2.3.1, the Subscriber does
not agree to hold the Securities for any minimum or other specific term and
reserves the right to dispose of the Securities at any time in accordance
with or pursuant to a registration statement or an exemption from
registration under the Act, except as otherwise required in this Agreement
or in the Registration Rights Agreement.
2.3.2 No General Solicitation. The Securities were not offered
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to Subscriber through, and Subscriber is not aware of, any form of general
solicitation or general advertising, including, without limitation, (a) any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio,
and (b) any seminar or meeting whose attendees have been invited by any
general solicitation or general advertising.
2.3.3 Restricted Securities. Subscriber understands that the
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Preferred Stock issued at Closing is, and the Conversion Shares will be,
characterized as "restricted securities" under the federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving any public offering and that under such laws and applicable
regulations such securities may not be transferred or resold without
registration under the Act or pursuant to an exemption therefrom. In this
connection, Subscriber represents that Subscriber is familiar with Rule 144
under the Act, as presently in effect, and understands the resale
limitations imposed thereby and by the Act.
2.3.4 Disposition. Without in any way limiting the
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representations set forth above, Subscriber further agrees not to make any
disposition of all or any portion of the Securities unless and until:
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(a) There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) (i) Subscriber shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement
of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, Subscriber shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company,
that such disposition is made in accordance with the rules and regulations
of the Act. It is agreed that the Company will not require opinions of
counsel for transactions made pursuant to Rule 144 unless required by its
Transfer Agent or as otherwise reasonably requested by the Company.
2.4 Due Authorization.
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2.4.1 Authority. Subscriber, if executing this Agreement in a
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representative or fiduciary capacity, has full power and authority to
execute and deliver this Agreement and each other document included herein
for which a signature is required in such capacity and on behalf of the
subscribing individual, partnership, limited liability company, trust,
estate, corporation or other entity for whom or which Subscriber is
executing this Agreement. Subscriber has reached the age of majority (if
an individual) according to the laws of the state in which he or she
resides, has adequate means for providing for his or her current needs and
personal contingencies, is able to bear the economic risk of his or her
investment in the Securities for an indefinite period of time and can
afford a complete loss of such investment. Subscriber's commitment to
illiquid investments is reasonable in relation to Subscriber's net worth.
2.4.2 Due Authorization. If Subscriber is a corporation, Subscriber
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is duly and validly organized, validly existing and in good tax and
corporate standing as a corporation under the laws of the jurisdiction of
its incorporation with full power and authority to purchase the Securities
to be purchased by Subscriber and to execute and deliver this Agreement.
2.4.3 Partnership; Limited Liability Company. If Subscriber is a
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partnership or a limited liability company, the representations,
warranties, agreements and understandings set forth above are true with
respect to all partners or members of Subscriber (and if any such partner
or member is itself a partnership or limited liability company, all persons
holding an interest in such partnership or limited liability company,
directly or indirectly, including through one or more partnerships or
limited liability companies), and the person executing this Agreement has
made due inquiry to determine the truthfulness of the representations and
warranties made hereby.
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2.4.4 Representatives. If Subscriber is purchasing in a
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representative or fiduciary capacity, the representations and warranties
shall be deemed to have been made on behalf of the person or persons for
whom Subscriber is so purchasing.
3. Acknowledgments. Subscriber is aware that:
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3.1 Risks of Investment. Subscriber recognizes that an
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investment in the Company involves substantial risks, including the potential
loss of Subscriber's entire investment herein. Subscriber recognizes that this
Agreement and the exhibits hereto do not purport to contain all the information
which would be contained in a registration statement under the Act.
3.2 No Government Approval. No federal or state agency has passed
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upon the Securities, recommended or endorsed the Offering, or made any finding
or determination as to the fairness of this transaction.
3.3 No Registration. The Securities and any component thereof
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have not been registered under the Act or any applicable state securities laws
by reason of exemptions from the registration requirements of the Act and such
laws, and may not be sold, pledged, assigned or otherwise disposed of in the
absence of an effective registration of the Securities and any component thereof
under the Act or unless an exemption from such registration is available.
3.4 Restrictions on Transfer. Subscriber may not attempt to
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sell, transfer, assign, pledge or otherwise dispose of all or any portion of the
Securities or any component thereof in the absence of either an effective
registration statement or an exemption from the registration requirements of the
Act and applicable state securities laws.
3.5 No Assurances of Registration. There can be no assurance
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that any registration statement will become effective at the scheduled time.
Therefore, Subscriber may bear the economic risk of Subscriber's investment for
an indefinite period of time.
3.6 Exempt Transaction. Subscriber understands that the
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Securities are being offered and sold in reliance on specific exemptions from
the registration requirements of federal and state law and that the
representations, warranties, agreements, acknowledgments and understandings set
forth herein are being relied upon by the Company in determining the
applicability of such exemptions and the suitability of Subscriber to acquire
such Securities.
3.7 Legends. It is understood that the certificates evidencing
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the Preferred Stock and the Conversion Shares shall bear substantially the
following legend (the "Legend"), prior to registration as provided in Section
5.3:
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"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended, or applicable state securities laws,
nor the securities laws of any other jurisdiction. They may not be sold or
transferred in the absence of an effective registration statement under
those securities laws or pursuant to an exemption therefrom."
4. Representations and Warranties of the Company. The Company and ▇▇▇▇
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▇▇▇▇▇▇▇▇▇, jointly and severally, hereby make the following representations and
warranties to Subscriber (which shall be true at the signing of this Agreement,
as of Closing, and as of any such later date as contemplated hereunder) and
agree with Subscriber that:
4.1 Organization, Good Standing, and Qualification. The Company is a
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corporation duly organized, validly existing, and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to carry on its business as now conducted and as proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on the business or properties of the Company and its
subsidiaries taken as a whole. The Company is not the subject of any pending,
threatened or, to its knowledge, contemplated investigation or administrative or
legal proceeding by the Internal Revenue Service, the taxing authorities of any
state or local jurisdiction, or the Securities and Exchange Commission ("SEC"),
or any state securities commission, or any other governmental entity, which have
not been disclosed in the Disclosure Documents.
4.2 Corporate Condition. The Company's condition is, in all material
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respects, as described in the Disclosure Documents, except for changes in the
ordinary course of business. Since the date as of which information is given in
the Memorandum (exclusive of any amendments or supplements thereto subsequent to
the date of this Agreement other than as set forth in the Memorandum), (a) there
has been no material adverse change or any development involving a prospective
material adverse change to the Company's business, condition, financial or
otherwise, or the earnings, business management, operations or prospects since
the date of such Memorandum; (b) there has not been any material adverse change
in the capital stock or in the long term debt of the Company; and (c) the
Company has not incurred any liability or obligation, direct or contingent, not
in the ordinary course of business and not consistent with past practices. The
financial statements contained in the Disclosure Documents have been prepared in
accordance with generally accepted accounting principles, consistently applied
(except as otherwise permitted by Regulation S-X under the Securities Exchange
Act of 1934, as amended, ("Exchange Act"), and fairly present the consolidated
financial condition of the Company as of the dates of the balance sheets
included therein and the consolidated results of its operations and cash flows
for the periods then ended; and all the other financial and statistical
information and data set forth in the Memorandum (and any amendment or
supplement thereto) are, in all material respects,
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accurately presented and prepared on a basis consistent with such financial
statements and the books and records of the Company. Without limiting the
foregoing, there are no material liabilities, contingent or actual, that are not
disclosed in the Disclosure Documents (other than liabilities incurred by the
Company in the ordinary course of its business, consistent with its past
practice, after the period covered by the Disclosure Documents). The Company has
paid all material taxes which are due, except for taxes which it reasonably
disputes and which have been disclosed to Subscriber. There is no material
claim, litigation, or administrative proceeding pending, or, to the best of the
Company's knowledge, threatened against the Company, except as disclosed in the
Disclosure Documents. This Agreement and the Disclosure Documents do not contain
any untrue statement of a material fact and do not omit to state any material
fact required to be stated therein or herein necessary to make the statements
contained therein or herein not misleading in the light of the circumstances
under which they were made. The Company is not prompted to sell the Preferred
Stock by any material information that is not contained in the Disclosure
Documents.
4.3 Authorization. Except for the filing of the Certificate of
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Designation, all corporate action on the part of the Company by its officers,
directors and shareholders necessary for the authorization, execution and
delivery of this Agreement, the performance of all obligations of the Company
hereunder and the authorization, issuance and delivery of the Preferred Stock
being sold hereunder and the issuance (and/or the reservation for issuance) of
the Conversion Shares have been taken, and this Agreement, the Certificate of
Designation, the Irrevocable Instructions to Transfer Agent, the Escrow
Agreement and the Registration Rights Agreement constitute valid and legally
binding obligations of the Company, enforceable in accordance with the terms,
except insofar as the enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, or other similar laws affecting creditors' rights
generally or by principles governing the availability of equitable remedies.
The Company has obtained all consents and approvals required for it to execute,
deliver and perform each agreement referenced in the previous sentence.
4.4 Valid Issuance of Preferred Stock and Common Stock. The Preferred
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Stock, when issued, sold and delivered in accordance with the terms hereof, for
the consideration expressed herein, will be validly issued, fully paid and
nonassessable and, based in part upon the representations of Subscriber in this
Agreement, will be issued in compliance with all applicable U.S. federal and
state securities laws. The Conversion Shares when issued in accordance with the
terms of the Certificate of Designation shall be duly and validly issued and
outstanding, fully paid and nonassessable, and based in part on the
representations and warranties of Subscriber of the Preferred Stock, will be
issued in compliance with all applicable U.S. federal and state securities laws.
The Preferred Stock and the Conversion Shares will be issued free of any
preemptive rights. The Company currently has that number of shares of its
Common Stock required by the Registration Rights Agreement reserved for issuance
upon conversion of the Preferred Stock.
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4.5 Compliance with Other Instruments. The Company is not in violation or
---------------------------------
default of any provisions of its Certificate of Incorporation or Bylaws each as
it may be amended and in effect on and as of the date of the Agreement or of any
provision of any instrument or contract to which it is a party or by which it is
bound or, to its knowledge, of any provision of any federal or state judgment,
writ, decree, order, statute, rule or governmental regulation applicable to the
Company, which would have a material adverse effect on the Company's business or
prospects, except as described in the Disclosure Documents. There exists no
condition that, with notice, the passage of time or otherwise, would constitute
a default under any such instrument or contract, except where such a default
would not have a material adverse effect. The execution, delivery and
performance of this Agreement and the other agreements entered into in
conjunction with the Offering and the consummation of the transactions
contemplated hereby will not result in any such violation or be in conflict with
or constitute, with of without the passage of time and giving of notice, either
a default under any such provision, instrument or contract or an event which
results in the creation of any lien, charge or encumbrance upon any assets of
the Company.
4.6 Reporting Company. No later than sixty (60) days following the
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Initial Issuance Date (as defined in Section 5 of the Certificate of Designation
of Preferred Stock), the Company will file a registration statement on Form 10
to register its Securities under Section 12(b) or 12(g) of the Exchange. At all
times following the effective date of such registration statement, the Company
will be in material compliance with the reporting requirements of the Exchange
Act and will file all reports required by the Exchange Act. The Company
undertakes to furnish Subscriber with copies of such reports as may be
reasonably requested by Subscriber after consummation of this Offering and to
make such reports available, as long as Subscriber holds the Securities. The
Company is not in violation of the listing requirements of the Nasdaq SmallCap
Market and does not reasonably anticipate that the Common Stock will be delisted
by the Nasdaq SmallCap Market, if listed thereon, for the foreseeable future.
4.7 Capitalization. The capitalization of the Company as set forth in the
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Company's Private Placement Memorandum dated March 12, 1999, is, and the
capitalization as of the Closing, after taking into account the offering of the
Securities contemplated by this Agreement and all other share issuances
occurring prior to this Offering, will be, as set forth in the Memorandum.
Except as disclosed in the Memorandum, as of the date of this Agreement, (a)
there are no outstanding options, warrants, scrip, rights to subscribe for,
calls or commitments of any character whatsoever relating to, or securities or
rights convertible into or exercisable or exchangeable for, any shares of
capital stock of the Company or any of its subsidiaries, or arrangements by
which the Company or any of its subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its subsidiaries,
and (b) other than the Registration Rights Agreement there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of its or their securities under the Act.
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4.8 Intellectual Property. Except as described in the Memorandum, the
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Company has valid, unrestricted and exclusive ownership or possession of all
patents, trademarks, trademark registrations, trade names, copyrights, know-how,
technology and other intellectual property necessary to the conduct of its
business. To the best of the Company's knowledge, the Company is not infringing
on the intellectual property rights of any third party, nor is any third party
infringing on the Company's intellectual property rights. There are no
restrictions in any material agreements, licenses, franchises, or other
instruments which preclude the Company from engaging in its business as
presently conducted.
4.9 Use of Proceeds. As of the date hereof, the Company expects to use
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the proceeds from this Offering (less fees and expenses) for the purposes and in
the approximate amounts set forth in the Memorandum. These purposes and amounts
are estimates and are subject to change without notice to any Subscriber.
4.10 No Rights of Participation. No person or entity, including, but not
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limited to, current or former shareholders of the Company, underwriters,
brokers, agents or other third parties, has any right of first refusal,
preemptive right, right of participation, or any similar right to participate
in the financing contemplated by this Agreement which has not been waived.
4.11 Company Acknowledgment. The Company hereby acknowledges that
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Subscriber may elect to hold the Securities for various periods of time, as
permitted by the terms of this Agreement, the Certificate of Designation, and
other agreements contemplated hereby, and the Company further acknowledges that
Subscriber and the Placement Agent, if any, have made no representations or
warranties, either written or oral, as to how long the Securities will be held
by Subscriber or regarding Subscriber's trading history or investment
strategies.
4.12 Termination Date of Offering. In no event shall the last closing
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("Last Closing") of a sale and purchase of the Preferred Stock occur later than
April 9, 1999, which date can be extended by up to ten (10) days upon written
approval by the Company and the Placement Agent, if any.
4.13 Underwriter's Fees and Rights of First Refusal. The Company is not
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obligated to pay any compensation or other fees, costs or related expenditures
in cash or securities to any underwriter, broker, agent or other representative
other than the Placement Agent in connection with this Offering.
4.14 Current Public Information. The Company is currently eligible to
--------------------------
register the resale of its Common Stock on a registration statement on Form SB-2
under the Act.
12
4.15 No Integrated Offering. Neither the Company, nor any of its
----------------------
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any of the Company's securities or
solicited any offers to buy any security under circumstances that would prevent
the parties hereto from consummating the transactions contemplated hereby
pursuant to an exemption from registration under the Act pursuant to the
provisions of Regulation D.
4.16 Acknowledgment of Dilution. The number of Conversion Shares issuable
--------------------------
upon conversion of the Preferred Stock may increase substantially in certain
circumstances, including the circumstance wherein the trading price of the
Common Stock declines. The Company's executive officers and directors have
studied and fully understand the nature of the Securities being sold hereunder
and recognize that they have a potential dilutive effect. The board of
directors of the Company has concluded in its good faith business judgment that
such issuance is in the best interests of the Company. The Company acknowledges
that its obligation to issue Conversion Shares upon conversion of the Preferred
Stock is binding upon it and enforceable regardless of the dilution that such
issuance may have on the ownership interests of the other stockholders.
4.17 Foreign Corrupt Practices. Neither the Company, nor, to the best of
-------------------------
its knowledge, any of its subsidiaries, nor any director, officer, agent,
employee or other person acting on behalf of the Company or any subsidiary has,
in the course of its actions for, or on behalf of, the Company, used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official or employee from
corporate funds; violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate,
payoff, influence payment, kickback or other unlawful payment to any foreign or
domestic government official or employee.
4.18 Key Employees. No Key Employee (as defined below), to the best
-------------
knowledge of the Company and its subsidiaries, is, or is now expected to be, in
violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement, non-competition agreement, or
any other contract or agreement or any restrictive covenant, and the continued
employment of each Key Employee does not subject the Company or any of its
subsidiaries to any liability with respect to any of the foregoing matters. No
Key Employee has, to the best knowledge of the Company and its subsidiaries, any
intention to terminate his employment with, or services to, the Company or any
of its subsidiaries. "Key Employee" means each of ▇▇▇▇ ▇▇▇▇▇▇▇▇▇, Chairman;
▇▇▇▇▇▇ ▇▇▇▇▇▇, Chief Executive Officer; and ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, Chief Operating and
Chief Technical Officer.
13
4.19 No Proceedings. Except as disclosed in the Memorandum, there are no
--------------
legal or governmental proceedings pending or, to the knowledge of the Company,
threatened to which the Company is a party or to which any of their respective
property is subject (a) that would be required to be set forth in a registration
statement on Form SB-2, (b) that could reasonably be expected to result, singly
or in the aggregate, in a material adverse effect, or (c) that could reasonably
be expected to adversely effect the issuance or validity of the Securities to be
issued and sold by the Company hereunder or the issuance of the Conversion
Shares. No contract or document of a character that would be required to be
described in the Memorandum if the Memorandum were a prospectus included in a
registration statement on Form SB-2 filed with the SEC is not so described.
4.20 Environmental, ERISA Compliance. The Company has not violated any
-------------------------------
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environmental or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws") or any provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
the rules and regulations promulgated thereunder, except for such violations
which , singly or in the aggregate, would not have a material adverse effect.
4.21 Approvals. The Company has such permits, licenses, consents,
---------
exemptions, franchises, authorizations and other approvals (each, an
"Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including without limitation, under any applicable
environmental laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect. Each such
authorization is valid and in full force and effect. The Company is in
compliance with all the terms and conditions thereof and with the rules and
regulations of the authorities and governing bodies having jurisdiction with
respect thereto; and no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which allows or,
after notice or lapse of time or both, would allow, revocation, suspension or
termination of any such Authorization or results or, after notice or lapse of
time or both, would result in any other impairment of the rights of the holder
of any such Authorization; and such Authorizations contain no restrictions that
are burdensome to the Company; except where such failure to be valid and in full
force and effect or to be in compliance, the occurrence of any such event or the
presence of any such restriction would not, singly or in the aggregate, have a
material adverse effect.
4.22 Title to Properties. The Company has good and marketable title in
-------------------
fee simple to all real property and good and marketable title to all personal
property owned by it which is material to the business of the Company, in each
case free and clear of all liens and defects, except such as are described in
the Memorandum or such as do not materially affect
14
the value of such property and do not interfere with the use made and proposed
to be made of such property by the Company; and any real property and buildings
held under lease by the Company are held by the Company under valid, subsisting
and enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company, in each case except as described in the Memorandum.
All leases to which the Company is a party are valid and binding and no default
by the Company has occurred and is continuing thereunder, which could reasonably
be expected to have a material adverse effect.
4.23 Insurance. The Company is insured by insurers of recognized
---------
financial responsibility against such losses and risks and in such amounts as
are adequate in accordance with customary industry practice; and the Company (a)
has not received notice from any insurer or agent of such insurer that
substantial capital improvements or other material expenditures will have to be
made in order to continue such insurance or (b) has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers at a cost
that would not have a material adverse effect. All such insurance is
outstanding and duly in force on the date hereof and will be outstanding and
fully in force on the Last Closing.
4.24 Conflicts. Except as disclosed in the Memorandum, no relationship,
---------
direct or indirect, exists between or among the Company on the one hand, and the
directors, officers, stockholders, customers or suppliers of the Company on the
other hand, which would be required by the Act to be described in the Memorandum
if the Memorandum were a prospectus included in a registration statement filed
with the SEC.
4.25 Internal Controls. The Company maintains a system of internal
-----------------
accounting controls sufficient to provide reasonable assurance that (a)
transactions are executed in accordance with management's general or specific
authorizations; (b) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (c) access to assets is
permitted only in accordance with management's general or specific
authorization; and (d) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
4.26 Regulation M Compliance. The Company (a) has not taken, directly or
-----------------------
indirectly (provided that no representation or warranty is made as to the
Placement Agent or any persons acting on its behalf), any action designed to, or
that might reasonably be expected to, cause or result in stabilization or
manipulation of the price of any securities of the Company to facilitate the
sale of the Securities or the resale of the Conversion Shares or (b) since the
date of the Memorandum, has not (i) sold, bid for, purchased or paid any person
any compensation for soliciting purchases of the Securities or (ii) paid or
agreed to pay to any
15
person any compensation for soliciting another to purchase any other securities
of the Company.
4.27 No Other Registration Arrangements. There are no contracts,
----------------------------------
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Act with respect to any securities of the Company or to require the Company
to include such securities with the Conversion Shares registered pursuant to any
registration statement, which are not disclosed in the Disclosure Documents.
4.28 Adequacy of Disclosures. The Memorandum and the other Disclosure
-----------------------
Documents contain all material statements which are required to be stated
therein in accordance with the Act and the rules and regulations of the SEC
promulgated thereunder, and in all material respects conform to the requirements
of the Act and the rules and regulations promulgated thereunder; the offering
documents, taken as a whole, do not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, except that the representations and
warranties contained in this Paragraph 4.28 shall not apply to statements in or
omissions from the Memorandum (or any supplement or amendment thereto) based
upon information relating to a Placement Agent furnished to the Company on
behalf of a Placement Agent expressly for use therein or inaccurate statements
in or omissions from the Memorandum or the other Disclosure Documents as a
result of arms-length negotiations between the Company and the Subscriber.
4.29 Representations Correct. The foregoing representations, warranties
-----------------------
and agreements are true, correct and complete in all material respects, and
shall survive the Closing and the issuance of the shares of Preferred Stock.
5. Covenants of the Company.
-------------------------
5.1 Independent Auditors. The Company shall, until at least three (3)
--------------------
years after the date of the Last Closing, maintain as its independent auditors
an accounting firm authorized to practice before the SEC.
5.2 Corporate Existence and Taxes. The Company shall, until at least the
-----------------------------
later of (a) the date that is three (3) years after the date of the Last Closing
or (b) the conversion or redemption of all of the Preferred Stock purchased
pursuant to this Agreement maintain its corporate existence in good standing
(provided, however, that the foregoing covenant shall not prevent the Company
from entering into any merger or corporate reorganization as long as the
surviving entity in such transaction, if not the Company, assumes the Company's
obligations with respect to the Preferred Stock and has Common Stock listed for
trading on
16
a stock exchange or on Nasdaq and is a "Reporting Issuer") and shall
pay all its taxes when due except for taxes which the Company disputes.
5.3 Registration Rights. The Company will enter into a registration
-------------------
rights agreement covering the resale of the Conversion Shares and the
registration of the Company's Securities substantially in the form of the
Registration Rights Agreement attached as Exhibit C.
5.4 Notification of Last Closing Date by Company. Within five (5)
--------------------------------------------
business days after the Last Closing, the Company shall notify Subscriber in
writing that the Last Closing has occurred, the date of the Last Closing, the
date of Subscriber's Closing, the dates that Subscriber is entitled to convert
Subscriber's Preferred Stock, the value of the Fixed Conversion Price, as that
term is defined in the Certificate of Designation, and the name and telephone
number of an administrative contact person at the Company whom Subscriber may
contact regarding information related to conversion of the Preferred Stock as
contemplated by the Certificate of Designation.
5.5 Filing of SB-2 Registration Statement. The Company shall, no later
-------------------------------------
than one hundred fifty (150) days after the date of the Initial Issuance Date,
as defined in the Certificate of Designation, file a registration statement or a
post-effective amendment to an effective registration statement (collectively,
the "Registration Statement") on Form SB-2 (or other suitable form, at the
Company's discretion but subject to the reasonable approval of Subscribers) with
the SEC, covering the resale of the Conversion Shares issuable to all
Subscribers in this Offering. The Company shall, within ten (10) days of the
filing of the Registration Statement, send a copy of the Registration Statement
to Subscribers. Such Registration Statement, and the rights and obligations of
the Company and the Subscribers in connection therewith, shall be in conformance
with and subject to Section 2 of the Registration Rights Agreement attached
hereto as Exhibit C. The Company shall use its best efforts to have the
Registration Statement declared effective as soon as possible. The Company
covenants to use its best efforts to remain eligible to use Form SB-2 for the
registration required by this Section 5.5 (and Sections 2 and 3 of the
Registration Rights Agreement) during all applicable times contemplated by this
Agreement.
5.6 Capital Raising Limitations; Rights of First Refusal.
-----------------------------------------------------
5.6.1 Capital Raising Limitations. Except as hereinafter set forth, for a
---------------------------
period of one hundred eighty (180) days following the date of Last Closing,
the Company shall not issue or agree to issue, except (a) as contemplated
hereunder, (b) pursuant to any employee stock purchase plan or employee
stock option plan of the Company in effect on the date of the Closing, and
disclosed in the Disclosure Documents, (c) pursuant to any security,
option, warrant, scrip, call or commitment or right disclosed in the
Memorandum, any equity securities of the Company (or any security
convertible into or exercisable or exchangeable, directly or indirectly,
for equity securities of the
17
Company) if such securities are issued at a price (or in the case of
securities which are convertible into or exercisable or exchangeable,
directly or indirectly, for Common Stock, if such securities are
convertible, exercisable or exchangeable, as appropriate, at a conversion
price, exercise price or exchange price) less than the Fixed Conversion
Price (as defined in the Certificate of Designation), (d) pursuant to any
acquisition by the Company provided that the purchase price of such
acquisition is paid solely with shares of Common Stock and the price per
share of the Common Stock is the greater of $3.60 or the then closing bid
price of the Common Stock on the date the purchase price is determined, or
(e) pursuant to a private placement if the closing bid price of the Common
Stock is $5.00 or greater, provided that the sale price of the Common Stock
to be issued in connection with the private placement is at the market
price or above. In addition, during such period, the Company shall not
issue, or agree to issue, any debt securities which are issued at a
discount to the principal amount thereof.
5.6.2 Right of First Offer. The Company agrees that, during the period
--------------------
beginning on the date hereof and terminating on the first anniversary of
the date of the Last Closing, the Company will not, without the prior
written consent of each Subscriber (which shall be deemed given for any
warrants to purchase Common Stock issued or to be issued to the Placement
Agent in consideration of its services in connection with this Agreement
and the transactions contemplated hereby) issue or sell, or agree to issue
or sell any equity or debt securities of the Company or any of its
subsidiaries (or any security convertible into exercisable or exchangeable,
directly or indirectly, for equity or debt securities of the Company or any
of its subsidiaries) ("Future Offering") unless the Company shall have
first delivered to each Subscriber at least thirty (30) days prior to the
closing of such Future Offering, written notice describing the proposed
Future Offering, including, the terms and conditions thereof, and providing
each Subscriber and its affiliates an option during the twenty (20) day
period following delivery of such notice to purchase up to the full amount
of the securities being offered in the Future Offering on the same terms as
contemplated by such Future Offering (the limitations referred to in this
sentence are collectively referred to as the "Capital Raising
Limitations"). Notwithstanding the foregoing, if any Subscriber chooses
not to participate in any Future Offering, then any debt or equity security
issued as a result of said Future Offering will be ineligible for resale
and/or conversion, as the case may be, until the date which is nine (9)
months after the Last Closing. The Capital Raising Limitations shall not
apply to any transaction involving issuances of securities in connection
with a merger, consolidation, acquisition or sale of assets, or in
connection with any strategic partnership or joint venture (the primary
purpose of which is not to raise equity capital), or in connection with the
disposition or acquisition of a business, product or license by the Company
or exercise of options by employees, consultants or directors. The Capital
Raising Limitations also shall not apply to (a) the issuance of securities
pursuant to an underwritten public offering, (b) the issuance of securities
upon exercise or conversion of (including issuances as a result
18
of the anti-dilution provisions, if any, applicable to such options,
warrants or convertible securities) the Company's options, warrants or
other convertible securities outstanding as of the date hereof or (c) the
grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option or restricted stock plan for the
benefit of the Company's employees, directors or consultants.
5.6.3 Entitlement to Participate in Rule 504 Offering. As a condition
-----------------------------------------------
precedent to any business combination or reorganization with or into the
Public Entity, the Public Entity shall offer to each Subscriber that
purchases Preferred Stock the option to purchase shares of common stock of
the Public Entity (the "P.E. Common Stock") under Securities and Exchange
Commission Rule 504 at the rate of $100,000 of P.E. Common Stock for each
purchase of $900,000 of Preferred Stock in this placement; but in no event
shall no more than $1,000,000 of P.E. Common Stock be issued. The purchase
price for each share of Common Stock hereunder shall be the "adjusted
pricing point" as set forth in Exhibit 1 to the Certificate of Designation
of Preferred Stock, a copy of which is attached hereto as Exhibit A. Any
of such shares of P.E. Common Stock purchased as aforesaid shall be freely
tradeable by the holder without restriction or limitation under any
agreement, arrangement, law or regulation.
5.7 Annual and Quarterly Reports on Form 10-K(SB) and Form 10-Q(SB) and
-------------------------------------------------------------------
Current Reports on Form 8-K. The Company shall make available to the Subscriber
---------------------------
copies of its annual reports on Form 10-K(SB), quarterly reports on Form 10-
Q(SB) and current reports on Form 8-K for as long as the Preferred Stock may
remain outstanding.
5.8.1 Opinion of Counsel. Subscribers shall, upon purchase of the
------------------
Preferred Stock pursuant to this Agreement, receive an opinion letter from
Jeffer, Mangels, ▇▇▇▇▇▇ & Mamaro, LLP ("Counsel"), counsel to the Company,
to the effect that (a) the Company is duly incorporated and validly
existing; (b) this Agreement, the issuance of the Preferred Stock at
Closing and the issuance of the Conversion Shares upon conversion of the
Preferred Stock have been duly approved by all required corporate action,
and that all such securities, upon due issuance, shall be validly issued,
fully paid and non-assessable; (c) this Agreement, the Registration Rights
Agreement, the Irrevocable Instructions to Transfer Agent and the Escrow
Agreement are valid and binding obligations of the Company, enforceable in
accordance with their terms, except as enforceability of the
indemnification provisions may be limited by principles of public policy,
and subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of laws governing specific
performance and other equitable remedies; (d) based upon the
representations and acknowledgments of Subscribers contained in Sections 2
and 3 hereof, the Preferred Stock has been, and the Conversion Shares will
be, issued in a transaction that is exempt from the registration
requirements of the Act and applicable state securities laws; (e) the
Conversion Shares are authorized for listing on the Nasdaq market,
19
including OTC Bulletin Board, where the Company's Common Stock is then
trading, subject to notice of issuance; and (f) the Certificate of
Designation has been duly authorized and adopted by the Company and has
been or forthwith will be duly filed and/or recorded under applicable law.
5.8.2 Opinion of Special Counsel. Subscriber shall, upon purchase of
--------------------------
the P.E. Common Stock, receive an opinion letter from ▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
("Special Counsel"), Special Counsel to the Company and the Public Entity,
to the effect that (a) any P.E. Common Stock subscribed for on or prior to
April 7, 1999 is, or when actually issued will be, freely tradable without
registration or further action by the holder(s) thereof under Rule 504
promulgated by the Securities and Exchange Commission and in effect on or
prior to said date, and (b) that the offering of the Preferred Stock and
the separate offering of the P.E. Common Stock are not subject to the
"integration doctrine" as originally promulgated in Securities Act Release
4552, as such "integration doctrine" has been amended or applied since such
promulgation.
5.9 Removal of Legend Upon Conversion. As contemplated by the
---------------------------------
Certificate of Designation, upon conversion of the Preferred Stock, Subscriber
shall submit a Notice of Conversion. The Legend shall be removed and the Company
shall issue a certificate without such Legend to the holder of any Security upon
which it is stamped, and a certificate for a security shall be originally issued
without the Legend, if, unless otherwise required by state securities laws, (a)
the sale of such Security is registered under the Act, or (b) such holder
provides the Company with an opinion of counsel, in form, substance and scope
customary for opinions of counsel in comparable transactions (the reasonable
cost of which shall be borne by the Company), to the effect that a public sale
or transfer of such Security may be made without registration under the Act, or
(c) such holder provides the Company with reasonable assurances that such
Security may be sold pursuant to Rule 144. Each Subscriber agrees to sell all
Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
pursuant to an effective registration statement relating thereto and to deliver
a prospectus in connection with such sale or in compliance with an exemption
from the registration requirements of the Act. If the Legend is removed from any
Security or any Security is issued without the Legend and thereafter the
effectiveness of a registration statement covering the resale of such Security
is suspended or the Company determines that a supplement or amendment thereto is
required by applicable securities laws, then upon reasonable advance notice to
Subscriber holding such Security, the Company may require that the Legend be
placed on any such Security that cannot then be sold pursuant to an effective
registration statement or Rule 144 or with respect to which the opinion referred
to in clause (b) next above has not been rendered, which Legend shall be removed
when such Security may be sold pursuant to an effective registration statement
or Rule 144 or such holder provides the opinion with respect thereto described
in clause (b) next above.
20
5.10 Listing. Subject to the remainder of this Section 5.10, the Company
-------
shall use its best efforts to ensure that its shares of Common Stock (including
all Conversion Shares) are approved and included for quotation on the Nasdaq
Small Cap Market ("NASDAQ"). Thereafter, the Company shall (a) use its best
efforts to continue the quotation of its Common Stock on the NASDAQ, or on the
Nasdaq National Market System ("NMS"), the New York Stock Exchange ("NYSE"), or
the American Stock Exchange ("AMEX") or any other national exchange or over-the-
counter market system; (b) take all action necessary to cause and maintain the
quotation of its Common Stock on the OTC Bulletin Board at any time the Common
Stock is not included for quotation on NASDAQ, NMS, NYSE or AMEX; and (c) comply
in all respects with the Company's reporting. filing, and other obligations
under the by-laws or rules of the National Association of Securities Dealers
("NASD") and such exchanges, as applicable.
5.11 The Company's Instructions to Transfer Agent. The Company will
--------------------------------------------
issue to its Transfer Agent the Irrevocable Instructions to Transfer Agent
substantially in the form of Exhibit E instructing the Transfer Agent to issue
certificates, registered in the name of each Subscriber or its nominee, for the
Conversion Shares in such amounts as specified from time to time by such
Subscriber to the Company upon conversion of the Preferred Stock. Such
certificates shall bear a Legend only to the extent permitted by Section 5.9
hereof. The Company warrants that no instruction, other than such instructions
referred to in Section 5.9 hereof or in this Section 5.11 and stop transfer
instructions to give effect to Section 3.7 hereof in the case of Conversion
Shares prior to registration of the Conversion Shares under the Act, will be
given by the Company to its Transfer Agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights Agreement.
Nothing in this Section shall affect in any way each Subscriber's obligations
and agreement set forth in Sections 2.3.3 or 2.3.4 hereof to resell the
Securities pursuant to an effective registration statement and to deliver a
prospectus in connection with such sale or in compliance with an exemption from
the registration requirements of applicable securities laws. If (a) a Subscriber
provides the Company with an opinion of counsel, which opinion of counsel shall
be in form, substance and scope customary for opinions of counsel in comparable
transactions and acceptable to counsel for the Company (the reasonable cost of
which shall be borne by the Company), to the effect that the Securities to be
sold or transferred may be sold or transferred pursuant to an exemption from
registration or (b) a Subscriber transfers Securities to an affiliate which is
an accredited investor as defined under the Act, the Company shall permit the
transfer, and, in the case of Conversion Shares, promptly instruct its transfer
agent to issue one or more certificates in such name and in such denomination as
specified by such Subscriber. The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to a Subscriber by
violating the intent and purpose of the transaction contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations under this Section 5.11 will be inadequate and agrees, in the event
of a breach or threatened breach by the Company of the provisions of this
Section 5.11, that a Subscriber
21
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required. The Company hereby agrees that it will not unilaterally
terminate its relationship with the Transfer Agent for any reason prior to the
date which is three (3) years after the Last Closing or one (1) month after the
first date that no Preferred Stock is outstanding, whichever is earlier (the
"Ending Date"). In the event the Company's agency relationship with the Transfer
Agent should be terminated for any other reason prior to the date which is three
(3) years after the Last Closing, the Company's Transfer Agent shall continue
acting as transfer agent pursuant to the terms of the Irrevocable Instructions
to Transfer Agent until such time that a successor transfer agent (i) is
appointed by the Company; (ii) is approved by seventy-five percent (75%) of the
Subscribers of outstanding Preferred Stock; and (iii) executes and agrees to be
bound by the terms of the Irrevocable Instructions to Transfer Agent.
5.12 Filing of Form 10-SB to Register Under Section 12(b) or 12(g) of the
--------------------------------------------------------------------
Exchange Act. The Company shall, no later than sixty (60) days after the
------------
Initial Issuance Date (as defined in Section 5 of the Company's Certificate of
Designation of Preferred Stock), file a registration statement on Form 10-SB
with the SEC registering the Securities under Section 12(b) or 12(g) of the
Exchange Act. The Company shall, within ten (10) days of the filing of such
registration statement on Form 10-SB, send a copy to Subscribers. The Company
shall use its best efforts to have such registration statement declared
effective within one hundred fifty (150) days after the Initial Issuance Date.
6. Subscriber Covenant/Miscellaneous.
----------------------------------
6.1 Representations and Warranties Survive the Closing; Severability.
----------------------------------------------------------------
Subscriber's and the Company's representations and warranties, including but not
limited to the Public Entity, shall survive the Closing of the transactions
contemplated by this Agreement notwithstanding any due diligence investigation
made by or on behalf of the party seeking to rely thereon. In the event that any
provision of this Agreement becomes or is declared by a court of competent
jurisdiction to be illegal, unenforceable or void, this Agreement shall continue
in full force and effect without said provision; provided that no such
severability shall be effective if it materially changes the economic benefit of
this Agreement to any party.
6.2 Successors and Assigns. The terms and conditions of this Agreement
----------------------
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties. Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. Subscriber may assign Subscriber's rights hereunder, in
connection with any private sale of the Preferred Stock of such Subscriber, so
long as, as a condition precedent to
22
such transfer, the transferee executes an acknowledgment agreeing to be bound by
the applicable provisions of this Agreement.
6.3 Governing Law. This Agreement shall be governed by and construed under
-------------
the laws of the State of Delaware without regard to its conflict of laws rules
or principles.
6.4 Execution in Counterparts Permitted. This Agreement may be executed in
------------------------------------
any number of counterparts, each of which shall be enforceable against the
parties actually executing such counterparts, and all of which together shall
constitute one (1) instrument.
6.5 Titles and Subtitles; Gender. The titles and subtitles used in this
----------------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement. The use in this Agreement of a
masculine, feminine or neither pronoun shall be deemed to include a reference to
the others.
6.6 Written Notices, Etc. Any notice, demand or request required or
---------------------
permitted to be given by the Company or Subscriber pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally, or by facsimile (with a hard copy to follow by two (2) day courier),
addressed to the parties at the addresses and/or facsimile telephone number of
the parties set forth at the end of this Agreement or such other address as a
party may request by notifying the other in writing.
6.7 Expenses. Each of the Company and Subscriber shall pay all costs and
--------
expenses that it respectively incurs, with respect to the negotiation,
execution, delivery and performance of this Agreement.
6.8 Entire Agreement; Written Amendments Required. This Agreement,
---------------------------------------------
including the Exhibits attached hereto, the Certificate of Designation, the
Preferred Stock certificates, the Registration Rights Agreement, the Escrow
Agreement, the Irrevocable Instructions to Transfer Agent and the other
documents delivered pursuant hereto constitute the full and entire understanding
and agreement between the parties with regard to the subjects hereof and
thereof, and no party shall be liable or bound to any other party in any manner
by any warranties, representations or covenants except as specifically set forth
herein or therein. Except as expressly as provided herein, neither this
Agreement nor any term hereof may be amended, waived, discharged or terminated
other than by a written instrument signed by the party against whom enforcement
of any such amendment, waiver, discharge or termination is sought.
6.9 Arbitration. Any controversy or claim arising out of or related to
-----------
this Agreement or the breach thereof, shall be settled by binding arbitration in
Chicago, Illinois in accordance with the Expedited Procedures (Rules 53-57) of
the Commercial Arbitration Rules of the American Arbitration Association
("AAA"). A proceeding shall be commenced
23
upon written demand by Company or any Subscriber to the other. The arbitrator(s)
shall enter a judgment by default against any party which fails or refuses to
appear in any properly noticed arbitration proceeding. The proceeding shall be
conducted by one (1) arbitrator, unless the amount alleged to be in dispute
exceeds two hundred fifty thousand dollars ($250,000), in which case three (3)
arbitrators shall preside. The arbitrator(s) will be chosen by the parties from
a list provided by the AAA, and if they are unable to agree within ten (10)
days, the AAA shall select the arbitrator(s). The arbitrators must be experts in
securities law and financial transactions. The arbitrators shall assess costs
and expenses of the arbitration, including all attorneys' and experts' fees, as
the arbitrators believe is appropriate in light of the merits of the parties'
respective positions in the issues in dispute. Each party submits irrevocably to
the jurisdiction of any state court sitting in Chicago, Illinois or to the
United States District Court sitting in Chicago for purposes of enforcement of
any discovery order, judgment or award in connection with such arbitration. The
award of the arbitrator(s) shall be final and binding upon the parties and may
be enforced in any court having jurisdiction. The arbitration shall be held in
such place as set by the arbitrator(s) in accordance with Rule 55.
7. Subscription and Wiring Instructions; Irrevocabilitv.
-----------------------------------------------------
7.1 Subscription
------------
(a) Wire Transfer of Subscription Funds. Subscriber shall send this
-----------------------------------
signed Agreement by facsimile to Company at ▇▇▇-▇▇▇-▇▇▇▇, and send the
subscription funds by wire transfer, to the Escrow Agent as follows:
American National Bank and Trust Company of Chicago
ABA ▇▇▇▇▇▇▇▇▇
Account Number ▇▇▇▇▇▇▇ - Corporate Trust Clearing Account
Attention: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇
"Entertainment"
(b) Irrevocable Subscription. Subscriber hereby acknowledges and agrees,
------------------------
subject to the provisions of any applicable laws providing for the refund
of subscription amounts submitted by Subscriber, that this Agreement is
irrevocable and that Subscriber is not entitled to cancel, terminate or
revoke this Agreement or any other agreements executed by such Subscriber
and delivered pursuant hereto, and that this Agreement and such other
agreements shall survive the death or disability of such Subscriber and
shall be binding upon and inure to the benefit of the parties and their
heirs, executors, administrators, successors, legal representatives and
assigns. If the Securities subscribed for are to be owned by more than one
person, the obligations of all such owners under this Agreement shall be
joint and several, and the agreements, representations, warranties and
acknowledgments herein contained shall be deemed to be made by and be
binding upon each such person and his heirs, executors,
24
administrators, successors, legal representatives and assigns.
Notwithstanding the foregoing, (i) if any material condition to Closing
required to be satisfied by a party other than Subscriber is not satisfied
or (ii) if the Disclosure Documents are discovered prior to Closing to
contain statements which are materially inaccurate, or omit statements of
material fact, Subscriber may revoke or cancel this Agreement.
(c) Company's Right to Reject Subscription. Subscriber understands
--------------------------------------
that this Agreement is not binding on the Company until the Company accepts
it. This Agreement shall be accepted by the Company when the Company
countersigns this Agreement. Subscriber hereby confirms that the Company
has full right in its sole and absolute discretion, for any reason or no
reason, to accept or reject the subscription of Subscriber, in whole or in
part, provided that, if the Company decides to reject such subscription,
the Company must do so promptly and in writing. In the case of rejection,
the Company will promptly return any rejected payments and (if rejected in
whole) copies of all executed subscription documents (including without
limitation this Agreement) to Subscriber. In the event of rejection, no
interest will be payable by the Company to Subscriber on any return of
payment, provided however, that any such interest accrued on such funds in
the Escrow Account shall be returned to the Subscriber by the Escrow Agent.
7.2 Acceptance of Subscription. In the case of acceptance of
--------------------------
Subscriber's subscription, ownership of the number of securities being purchased
hereby will pass to Subscriber upon the Closing.
7.3 Subscriber to Forward Original Signed Subscription Agreement to
---------------------------------------------------------------
Company. Subscriber agrees to courier to Company his, her or its original inked
-------
signed Subscription Agreement within two (2) days after faxing said signed
agreement to Placement Agent.
8. Indemnification.
----------------
The Company and ▇▇▇▇ ▇▇▇▇▇▇▇▇▇ agree, jointly and severally, to
indemnify and hold harmless Subscriber and the Escrow Agent and each of their
respective officers, directors, employees and agents, and each person who
controls Subscriber or the Escrow Agent within the meaning of the Act or the
Exchange Act (each, a "Subscriber Indemnified Party") against any losses,
claims, damages or liabilities, joint or several, to which it, they or any of
them, may become subject and not otherwise reimbursed arising from any material
breach of any representation or warranty made by the Company or the Public
Entity contained in this Agreement, in writing to the Subscriber, in any
statements contained in the Disclosure Documents or otherwise disclosed.
25
Subscriber agrees to indemnify and hold harmless the Company and the Escrow
Agent and each of their respective officers, directors, employees and agents,
and each person who controls Company or the Escrow Agent within the meaning of
the Act or the Exchange Act (each, a "Company Indemnified Party") (a Subscriber
Indemnified Party or a Company Indemnified Party may be hereinafter referred to
singularly as "Indemnified Party") against any losses, claims, damages or
liabilities, joint or several, to which it, they or any of them, may become
subject and not otherwise reimbursed arising from any material breach of any
representation or warranty made by Subscriber contained in this Agreement.
Promptly after receipt by an Indemnified Party of notice of the
commencement of any action pursuant to which indemnification may be sought, such
Indemnified Party will, if a claim in respect thereof is to be made against the
other party (hereinafter "Indemnitor") under this Section 8, deliver to the
Indemnitor a written notice of the commencement thereof and the Indemnitor shall
have the right to participate in and to assume the defense thereof with counsel
reasonably selected by the Indemnitor, provided, however, that an Indemnified
Party shall have the right to retain its own counsel, with the reasonably
incurred fees and expenses of such counsel to be paid by the Indemnitor, if
representation of such Indemnified Party by the counsel retained by the
Indemnitor would be inappropriate due to actual or potential conflicts of
interest between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
Indemnitor within a reasonable time of the commencement of any such action, if
prejudicial to the Indemnitor's ability to defend such action, shall relieve the
Indemnitor of any liability to the Indemnified Party under this Section 8, but
the omission to so deliver written notice to the Indemnitor will not relieve it
of any liability that it may have to any Indemnified Party other than under this
Section 8 to the extent it is prejudicial.
9. Number of Shares and Purchase Price. Subscriber subscribes for shares
-----------------------------------
of Preferred Stock against payment by wire transfer in the amount of ("Purchase
Price") as set forth on the last page of this Agreement.
10. Accredited Investor. Subscriber is an "accredited investor" because
-------------------
(check all applicable boxes):
(a) [ ] it is an organization described in Section 501(c)(3) of the
Internal Revenue Code, or a corporation, business trust, or
partnership not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000.
(b) [ ] any trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the securities offered,
whose purchase is directed by a sophisticated person who has such
knowledge and experience in financial and business matters that
he is capable of evaluating the merits and risks of the
prospective investment.
26
(c) [ ] a natural person, who:
[ ] is a director, executive officer or general partner of the issuer
of the securities being offered or sold or a director, executive
officer or general partner of a general partner of that issuer.
[ ] has an individual net worth, or joint net worth with that
person's spouse, at the time of his purchase exceeding
$1,000,000.
[ ] had an individual income in excess of $200,000 in each of the two
most recent years or joint income with that person's spouse in
excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current
year.
(d) [ ] an entity each equity owner of which is an entity described in
a - b above or is an individual who could check one (1) of the
last three (3) boxes under subparagraph (c) above.
(e) [ ] other [specify]
11. If Subscriber is using the services of a Purchaser Representative,
such Purchaser Representative is _________________________.
The undersigned acknowledges that this Agreement and the subscription
represented hereby shall not be effective unless accepted by the Company as
indicated below.
27
IN WITNESS WHEREOF, the undersigned Subscriber does represent and certify
under penalty of perjury that the foregoing statements are true and correct and
that Subscriber by the following signature(s) executed this Agreement.
Dated this _____ day of April, 1999.
______________________________ ________________________________________
Your Signature PRINT EXACT NAME IN WHICH YOU WANT THE
SECURITIES TO BE REGISTERED
______________________________ DELIVERY INSTRUCTIONS:
----------------------
Name: Please Print Please type or print address where your
security is to be delivered
______________________________ ATTN:__________________________________
Title/Representative Capacity
(if applicable)
______________________________ _______________________________________
Name of Company You Represent (if applicable) ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
___________________________________ _______________________________________
Place of Execution of this Agreement City, State or Province, Country,
Offshore Postal Code
Aggregate number of shares of Preferred
_______________________________________
Stock subscribed for: ________________________ Phone number (for Federal
Express) and Fax Number (re: Notice)
Amount Subscribed for: $_____________________
(number of shares subscribed
for x $_______ per share)
THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF $___________ ON
THE ____ DAY OF APRIL, 1999.
_________________________________
By:______________________________
Name:____________________________
Title:_____________________________
Agreed To and Accepted By:
__________________________________
▇▇▇▇ ▇▇▇▇▇▇▇▇▇
28