Stock Purchase Agreement - eUniverse Inc. and 550 Digital Media Ventures Inc.
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of the 13th day of July, 2001 (the "Purchase Date") by and between
eUniverse, Inc., a Nevada corporation (the "Company"), and 550 Digital Media
Ventures Inc., a Delaware corporation (the "Purchaser"). Certain terms used and
not otherwise defined in the text of this Agreement are defined in Section 11 of
this Agreement.
W I T N E S S E T H
WHEREAS, the Company desires to issue and to sell to the Purchaser, and
the Purchaser desires to purchase from the Company, the Series B Preferred
Shares (as hereinafter defined), all in accordance with the terms and provisions
of this Agreement; and
WHEREAS, the Company desires to issue to the Purchaser, and the
Purchaser desires to accept from the Company, in exchange for those certain
rights to subscribe for and purchase common stock pursuant to that certain
"Warrant for the Purchase of up to 1,101,260 Shares of Common Stock" of
eUniverse, Inc. issued to New Technology Holdings, Inc. (n/k/a 550 Digital Media
Ventures, Inc.) dated September 6, 2000 (the "Existing Warrants") shares of
Common Stock (as hereinafter defined, all in accordance with the terms and
provisions of this Agreement).
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties and covenants herein contained, the parties hereto
hereby agree as follows:
1. Authorization of Securities. The Company has authorized the issuance and sale
of shares of its Series B Convertible Preferred Stock, par value $.10 per share
(the "Series B Preferred Shares"), which will be convertible into shares of the
Company's common stock, par value $.001 per share (the "Common Stock"). In
addition, the Company has authorized the issuance and delivery, in exchange for
the Existing Warrants, of shares of Common Stock. The Series B Preferred Shares
will have the rights, preferences and privileges set forth in the form of
Certificate of Designations, Powers, Preferences and Rights substantially in the
form attached hereto as Exhibit A (the "Certificate of Designation"). The shares
of Common Stock into which the Series B Preferred Shares are convertible are
sometimes referred to herein as the "Conversion Shares" and the Series B
Preferred Shares delivered pursuant to this Agreement, the Common Stock
delivered pursuant to this Agreement
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and the Conversion Shares are sometimes referred to herein collectively as the
"Securities".
2. Sale and Purchase of the Securities.
2.1 Upon the terms and subject to the conditions herein contained, the
Company agrees to sell to the Purchaser, and the Purchaser agrees to purchase
from the Company, at the Closing (as hereinafter defined), such number of Series
B Preferred Shares as equals $5,000,000 (the "Purchase Price") divided by $2.60
per share (as adjusted for a stock split, reverse split, stock dividend, merger,
consolidation, exchange of shares, recapitalization, reorganization or other
similar event).
2.2 Upon the terms and subject to the conditions herein contained, the
Company agrees to deliver to the Purchaser, and the Purchaser agrees to accept
from the Company, at the Closing and in exchange for the Existing Warrants, such
number of shares of Common Stock as equals $1,000,000 divided by the per share
price calculated pursuant to Section 2.3 hereof. As additional consideration for
the exchange of the Existing Warrants, the Purchaser and the Company shall enter
into a Letter Agreement in the substantially in the form attached hereto as
Exhibit B (the "Advertising Agreement").
2.3 The per share price for purposes of Sections 2.2 hereof shall be
the Share Price or Adjusted Share Price, as the case may be, as such terms are
defined in that certain Share Purchase Agreement by and among the Company, the
Purchaser, Indimi, L.L.C., and Indimi, Inc. dated the date hereof (the "Share
Purchase Agreement").
3. Closing. The closing of the sale to, and purchase by, the Purchaser of the
Series B Preferred Shares and the shares of Common Stock to be delivered
pursuant to this Agreement (the "Closing") shall occur at the offices of
Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York
10036-6522, on the third business day after the satisfaction or waiver of all of
the conditions set forth in Section 6 hereof or at such other time and place as
the Company and the Purchaser may agree (the "Closing Date"). At the Closing,
the Company shall deliver to the Purchaser one or more certificates evidencing
the Series B Preferred Shares and the shares of Common Stock to be delivered
pursuant to this Agreement (in such denomination as shall be specified in
writing by the Purchaser), each of which shall be registered in the Purchaser's
name or its designee, against delivery to the Company of the Purchase Price
payable by (x)(i) wire transfer of immediately available funds to an account
that the Company will designate in writing to the
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Purchaser at least two business days prior to the Closing Date, (ii) by
cancellation of any indebtedness under the Promissory Note (as defined in
Section 13 hereof) and/or (iii) credit for Third Party Reimbursement Fees (as
defined in that certain Transition Services Agreement between the Purchaser and
the Company dated July 12, 2001 (the "Transition Services Agreement")), to the
extent permitted in the Transition Services Agreement, and (y) cancellation of
the Existing Warrants.
4. Representations and Warranties of the Purchaser; Register of Securities;
Restrictions on Transfer. The Purchaser represents and warrants to the Company
as follows:
4.1 Organization. The Purchaser is validly existing and in good
standing under the laws of the State of Delaware, and has all requisite power
and authority to enter into this Agreement and consummate the transactions
contemplated hereby.
4.2 Validity. The execution, delivery and performance of this
Agreement, and the other documents and instruments referred to herein, in each
case to which the Purchaser is a party, and the consummation of the transactions
contemplated hereby, have been duly authorized by all necessary action on the
part of the Purchaser. This Agreement has been duly executed and delivered by
the Purchaser and constitutes a valid and binding obligation of the Purchaser
enforceable against it in accordance with its terms.
4.3 Brokers. There is no broker, investment banker, financial advisor,
finder or other Person which has been retained by or is authorized to act on
behalf of the Purchaser who might be entitled to any fee or commission for which
the Company will be liable in connection with the execution of this Agreement.
4.4 Investment Representations and Warranties. The Purchaser
understands that the Securities have not been, and will not upon issuance be,
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and that the certificates evidencing the Securities shall bear a legend to that
effect, unless prior to conversion of any Series B Preferred Shares, the Common
Stock issuable upon conversion thereof shall have been so registered.
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4.5 Acquisition for Own Account. The Purchaser is acquiring the
Securities for its own account for investment and not with a view toward
distribution in a manner which would violate the Securities Act.
4.6 Ability to Protect Its Own Interests and Bear Economic Risks. The
Purchaser represents that by reason of the business and financial experience of
its management, the Purchaser has the capacity to protect its own interests in
connection with the transactions contemplated by this Agreement. The Purchaser
further represents that the Purchaser is able to bear the economic risk of an
investment in the Securities, and has an adequate income independent of any
income produced from an investment in the Securities and has sufficient net
worth to sustain a loss of all of its investment in the Securities without
economic hardship if such a loss should occur.
4.7 Accredited Investor. The Purchaser represents that it is an
"accredited investor" as that term is defined in Regulation D promulgated under
the Securities Act.
4.8 Access to Information. The Purchaser has had adequate opportunity
to ask questions of, and receive answers from, the Company's officers,
employees, agents, accountants, and representatives concerning the Company's
business, operations, financial condition, assets, liabilities, and all other
matters relevant to its investment in the Securities.
5. Representations and Warranties by the Company. The Company represents and
warrants to the Purchaser as follows:
5.1 Capitalization. (a)The authorized capital stock of the Company
consists of 250,000,000 shares of Common Stock, par value $.001 per share, and
40,000,000 shares of preferred stock ("Preferred Stock"), par value $.10 per
share. Ten million (10,000,000) shares of the Preferred Stock have been
designated as Series A 6% Convertible Preferred Stock (the "Series A") and,
immediately prior to Closing 4,098,335 shares of preferred stock will be
designated Series B Preferred Shares. There are outstanding 18,825,808 shares of
Common Stock, 1,454,572 shares of Series A and no Series B Preferred Shares and
the Company has no other shares of capital stock authorized, issued or
outstanding.
(b) Except as set forth on Schedule 5.1 and the Existing Warrants,
(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 or exercisable or exchangeable for, any shares of
capital stock of the
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Company, or arrangements by which the Company is or may become bound to issue
additional shares of capital stock, nor are any such issuances or arrangements
contemplated other than pursuant to Existing Stock Option Plans, (ii) there are
no agreements or arrangements under which the Company is obligated to register
the sale of any of its securities under the Securities Act (except as provided
hereunder), (iii) the Company has no obligation (contingent or otherwise) to
purchase, redeem or otherwise acquire any of its equity securities or any
interests therein or to pay any dividend or make any distribution in respect
thereof and (iv) except as set forth on Schedule 5.1 the Company has not
reserved any shares of capital stock for issuance pursuant to any stock option
plan or similar arrangement. The capitalization of the Company as of the date
hereof, including, without limitation, the authorized capital stock, the number
of shares issued and outstanding, the number of shares issuable and reserved for
issuance pursuant to the Company's stock option plans, the number of shares
issuable and reserved for issuance pursuant to securities (other than the Series
B Preferred Shares) exercisable for, or convertible into or exchangeable for any
shares of capital stock and the number of shares to be reserved for issuance
upon conversion of the Series B Preferred Shares is set forth on Schedule 5.1 of
the disclosure schedule delivered by the Company to the Purchaser in connection
herewith. Schedule 5.1 also lists any stockholders that, to the Company's
knowledge, beneficially own five percent (5%) or more of the Common Stock,
determined in accordance with Rule 13d-3 under the Exchange Act. Except as set
forth on Schedule 5.1 there are no securities or instruments containing
antidilution or similar provisions that will be triggered by the issuance of the
Securities in accordance with the terms of this Agreement or the issuance of the
Conversion Shares in accordance with the Certificate of Designation.
(c) The Company has furnished to the Purchaser true and correct
copies of the Company's articles of incorporation (the "Articles of
Incorporation") as in effect on the date hereof, and the Company's by-laws (the
"By-laws") as in effect on the date hereof.
5.2 Due Issuance and Authorization of Capital Stock. All of the
outstanding shares of capital stock of the Company have been duly authorized,
validly issued and are fully paid and nonassessable. Except as set forth on
Schedule 5.2, no shares of capital stock of the Company are subject to (a)
preemptive rights or any other similar rights of the stockholders of the Company
or (b) any lien, claim, judgment, charge, mortgage, security interest, pledge,
escrow equity or other encumbrance (collectively, "Encumbrances") and the sale
and delivery of the Securities to the Purchaser pursuant to the terms hereof and
the issuance of the Conversion Shares to the Purchaser upon conversion of the
Series B Preferred Shares will vest in the Purchaser legal and valid title to
such Securities, free and clear of all
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Encumbrances. The Securities will be duly authorized, validly issued, fully paid
and nonassessable and a sufficient number of shares of Common Stock have been
reserved for issuance upon conversion of the Series B Preferred Shares. Except
as set forth on Schedule 5.2 none of the Securities are subject to (a)
preemptive rights or any other similar rights of the stockholders of the Company
or (b) Encumbrances.
5.3 Organization. The Company was incorporated in the State of Nevada.
The Company (a) is a corporation duly organized, validly existing and in good
standing under the laws of the State of Nevada, (b) is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
where the nature of the property owned or leased by it or the nature of the
business conducted by it makes such qualification necessary, except where the
failure to be so qualified would not have a "Material Adverse Effect" on the
Company, (c) has its principal place of business and chief executive office at
6300 Wilshire Blvd., Suite 1700, Los Angeles, CA 90048 and (d) has all requisite
corporate power and authority to own or lease and operate its assets and carry
on its business as presently being conducted. For purposes of this Agreement,
"Material Adverse Effect" shall mean any material adverse effect on (i) the
Securities, (ii) the ability of the Company or the Purchaser to perform their
respective obligations under this Agreement, the Certificate of Designation, the
Promissory Note, the Share Purchase Agreement, the Voting Agreement, or the
Registration Rights Agreement (collectively, the "Transaction Documents"), or
(iii) the financial condition, properties, assets, liabilities, business,
prospects or operations of the Company and any of its Subsidiaries.
5.4 Subsidiaries. Except as set forth on Schedule 5.4, the Company has
no subsidiaries and has no equity interest in any corporation, partnership,
joint venture, limited liability company or other Person.
5.5 Consents. Neither the execution, delivery or performance of this
Agreement or any other Transaction Document by the Company, nor the consummation
by it of the obligations and transactions contemplated hereby or thereby
(including, without limitation, the issuance, the reservation for issuance and
the delivery of the Securities) requires any consent of, authorization by,
exemption from, filing with or notice to any governmental authority or any other
Person, other than (a) the filings under applicable securities laws required to
comply with the Company's registration obligations under the Registration Rights
Agreement and (b) the filing of the Certificate of Designation with the
Secretary of State of Nevada.
5.6 Financial Statements. The Company has delivered or caused to be
delivered to the Purchaser an audited consolidated balance sheet of the Company
and the Subsidiaries, as applicable, as of March 31, 2001 (the "Balance
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Sheet"), and audited consolidated statements of income and retained earnings and
cash flows of the Company and any Subsidiaries, as applicable, for the year
ended March 31, 2001 (collectively with the Balance Sheet, the "Financial
Statements"), and as of the Closing Date together with an unqualified opinion
thereon from the Company's independent accountants, except as set forth on
Schedule 5.6. The Financial Statements were prepared in conformity with GAAP
applied on a consistent basis (except as may be indicated in the notes thereto)
and present fairly, in all material respects, the financial position and the
results of operations of the Company and the Subsidiaries, as applicable, as of
the dates, and for the periods, referred to therein.
5.7 Title to Property and Assets. Neither the Company nor any
Subsidiary, as the case may be, owns any real property. Each of the Company and
the Subsidiaries owns its personal property and assets free and clear of all
Encumbrances, except liens that arise in the ordinary course of business which
do not materially affect the value of such property and do not materially
interfere with the use made and proposed to be made of such property by the
Company and its Subsidiaries. Except as set forth on Schedule 5.7 with respect
to any real property, the Company is not in material violation of any of its
leases. All machinery, equipment, furniture, fixtures and other personal
property and all plants, buildings, structures and other facilities, including,
without limitation, office space used by the Company and the Subsidiaries in the
conduct of its business, is in good operating condition and fit for operation in
the ordinary course of business (subject to normal wear and tear) except for any
defects which will not materially interfere with the conduct of normal
operations of the Company and the Subsidiaries. The Company has delivered to the
Purchaser true and complete copies of any leases related to the real property
used by the Company and the Subsidiaries in the conduct of their business (the
"Real Property").
5.8 SEC Documents. Since June 16, 1999, the Company has timely filed
all reports, schedules, forms, statements and other documents required to be
filed by it with the SEC pursuant to the reporting requirements of the Exchange
Act (all of the foregoing filed prior to the date hereof and after June 16,
1999, and all exhibits included therein and financial statements and schedules
thereto and documents incorporated by reference therein, being hereinafter
referred to herein as the "SEC Documents"). The Company has delivered to the
Purchaser true and complete copies of the SEC Documents, except the exhibits and
schedules thereto and the documents incorporated therein. As of their respective
dates, the SEC Documents complied with the requirements of the Exchange Act or
the Securities Act, as the case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at
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the time they were filed with the SEC, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. As of their respective
dates, the financial statements of the Company included in the SEC Documents
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC applicable with
respect thereto. Such financial statements have been prepared in accordance with
GAAP applied on a consistent basis during the periods involved (except (a) as
may be otherwise indicated in such financial statements or the notes thereto, or
(b) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements) and fairly present
in all material respects the consolidated financial position of the Company and
its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to immaterial year-end audit adjustments).
5.9 Authorization; Enforcement. The Company has all requisite corporate
power and has taken all necessary corporate action required for the due
authorization, execution, delivery and performance by the Company of this
Agreement and the consummation of the transactions contemplated hereby
(including, without limitation, the issuance of the Securities and the
Conversion Shares). The execution, delivery and performance by the Company of
each of the Transaction Documents, the execution and filing of the Certificate
of Designation, and the consummation by the Company of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action on the part of the Company. The Company has taken all actions
under its Articles of Incorporation and its By-laws as may be necessary or
advisable to provide the Purchaser with the rights hereby contemplated.
This Agreement and each other Transaction Document have been duly and
validly executed and delivered by the Company and constitute the valid and
binding obligation of the Company, enforceable against the Company in accordance
with their respective terms.
5.10 Issuance of Shares. The Securities have been duly authorized and a
sufficient number of shares of authorized but unissued Common Stock have been
reserved for issuance upon conversion of the Series B Preferred Shares, and upon
such issuance or conversion in accordance with the terms of this Agreement or
the Certificate of Designation (as applicable), all such Securities will be duly
authorized, validly issued, fully paid and non-assessable, and free from all
taxes,
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liens, claims and Encumbrances, and will not be subject to preemptive rights or
other similar rights of stockholders of the Company and will not impose personal
liability upon the holder thereof.
5.11 No Conflicts. The execution, delivery and performance of this
Agreement and each other Transaction Document, the execution and filing of the
Certificate of Designation, and the consummation of the transactions
contemplated hereby and thereby (including, without limitation, the issuance and
reservation for issuance, as applicable, of the Securities) will not (a) result
in a violation of the Articles of Incorporation or By-laws of the Company, (b)
conflict with or result in the breach of the terms, conditions or provisions of
or constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give rise to any right of termination,
acceleration or cancellation under, any agreement, lease, mortgage, license,
indenture, instrument or other contract to which the Company or any Subsidiary
is a party, (c) result in a violation of any law, rule, regulation, order,
judgment or decree (including, without limitation, U.S. federal and state
securities laws and regulations) applicable to the Company or any Subsidiary or
by which any property or asset of the Company or any Subsidiary is bound or
affected, or (d) result in the creation of any Encumbrance upon any of their
assets. Neither the Company nor any Subsidiary is in violation of its
certificate of incorporation, certificate of formation, articles of
organization, limited liability company agreement, partnership agreement or
by-laws (as applicable in each case), and except as set forth on Schedule 5.11
neither the Company nor any Subsidiary is in default (and no event has occurred
which, with notice or lapse of time or both, would cause the Company or any
Subsidiary to be in default) under, nor has there occurred any event giving
others (with notice or lapse of time or both) any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture or
instrument to which the Company or any Subsidiary is a party. The business of
the Company and its Subsidiaries are not being conducted in violation of any
law, ordinance or regulation of any Governmental Entity, except for violations
that, either singly or in the aggregate, would not have a Material Adverse
Effect. The Company is not in violation of the qualification or maintenance
requirements of the Nasdaq Small Cap Market and is not subject to any threat of
a proceeding or any proceeding to disqualify the Common Stock from qualification
to trade on the Nasdaq Small Cap Market.
5.12 Intellectual Property. (a) "Intellectual Property" means (i) all
inventions (whether patentable or unpatentable and whether or not reduced to
practice), all improvements thereon, and all patents, patent applications and
patent disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions and reexaminations thereof, (ii)
all trademarks, service marks,
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trade dress, logos, trade names, Internet domain names and corporate names,
together with all translations, adaptations, derivations and combinations
thereof and including all goodwill associated therewith, and all applications,
registrations and renewals in connection therewith (collectively, "Trademarks"),
(iii) all copyrightable works, all copyrights and all applications,
registrations and renewals in connection therewith, and all content and
information contained on any website (iv) all trade secrets and confidential
business information (including, without limitation, ideas, research and
development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, pricing and cost information and business and
marketing plans and proposals), (v) all computer software (including, without
limitation, data and related documentation) and source codes, (vi) all other
proprietary rights, (vii) all copies and tangible embodiments of the foregoing
(in whatever form or medium) and (viii) all licenses or agreements in connection
with the foregoing. "Company Intellectual Property" means all Intellectual
Property which is used in connection with the business of, or as presently
contemplated to be conducted by, the Company or any Subsidiary, and which the
Company or any Subsidiary owns or has rights in and to pursuant to a License
Agreement, the absence of which would have a Material Adverse Effect.
(b) Except as set forth on Schedule 5.12(a), with respect to each
material item of Company Intellectual Property:
(i) the Company and the Subsidiaries possess all right, title
and interest in and to the item, free and clear of any Encumbrance, license or
other restriction, and the Company or its Subsidiaries has taken or caused to be
taken reasonable and prudent steps to protect its rights in and to, and the
validity and enforceability of, the item and no trade secret of the Company or
any Subsidiary has been disclosed or authorized to be disclosed to any third
party other than pursuant to a written nondisclosure agreement that adequately
protects the Company's and the applicable Subsidiary's proprietary interests in
and to such trade secrets;
(ii) the item is not subject to any outstanding injunction,
judgment, order, decree, ruling or charge;
(iii) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim or demand is pending or, to the knowledge of the
Company, is threatened which challenges the legality, validity, enforceability,
use or ownership of the item;
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(iv) the Company has never agreed to indemnify any Person for
or against any interference, infringement, misappropriation or other conflict
with respect to the item;
(v) each license, sublicense, agreement or permission covering
the item ("License Agreements") is legal, valid, binding, enforceable and in
full force and effect; and
(vi) neither the Company nor any Subsidiary has licensed or
sublicensed its rights in any Company Intellectual Property, or received or been
granted any such rights, other than pursuant to the License Agreements;
(vii) to the knowledge of the Company or any subsidiary
thereof no party (other than the Company) to any license, sublicense or
agreement is in breach or default, and no event has occurred which, with notice
or lapse of time, would constitute a breach or default or permit termination,
modification or acceleration thereunder, except for any such breach, default or
event which would not have a Material Adverse Effect.
Schedule 5.12(b) sets forth a list of all material Company Intellectual
Property and identifies which is owned, licensed, leased or otherwise used, as
the case may be. All Company or Subsidiary registered patents, and all
registered and unregistered copyrights, trademarks, and service marks are valid
and subsisting and in full force and effect and are not subject to any taxes or
other fees except for annual filing and maintenance fees. Neither the Company
nor any Subsidiary is aware of (a) any notice, claim or assertion that any item
of Company Intellectual Property is or potentially may be invalid or (b) any
facts which would cause a reasonable person to conclude that any item of Company
Intellectual Property is or potentially may be invalid. Neither the Company nor
any Subsidiary, nor any Website that is affiliated with or otherwise contains
any Company or Subsidiary trademark, service mark, logo, or other indicia of
ownership or attribution, is currently or has interfered with, infringed upon,
misappropriated or otherwise come into conflict with any Intellectual Property
rights of third parties, and there is no pending or, to the best of knowledge of
the Company, threatened claim or litigation against the Company or any
Subsidiary contesting the right to use its Intellectual Property rights,
asserting the misuse of any thereof, or asserting the infringement or other
violation of any Intellectual Property rights of a third party. True and
complete copies of all issued patents and copies of all filed patent, trademark
and copyright applications of the Company have been provided to the Purchaser.
All Trademarks have been in
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continuous use by the Company or Subsidiaries, and the Trademarks listed on
Schedule 5.12(b) for which the Company or any Subsidiary has obtained or applied
for a registration have been continuously used in the form appearing in, and in
connection with the goods and services listed in, their respective registration
certificates. To the knowledge of the Company and its Subsidiaries, there has
been no material prior use of such Trademarks by any third party which would
confer upon said third party superior rights in such Trademarks. The Company and
its Subsidiaries have adequately policed the material Trademarks against third
party infringement so as to maintain the validity of such Trademarks.
(c) Other than as set forth on Schedule 5.12(c), which Schedule
sets forth a list of all material Company Intellectual Property so effected,
there are no outstanding options, licenses, or agreements of any kind relating
to Company Intellectual Property, nor is the Company or any Subsidiary bound by
or a party to any options, licenses, or agreements of any kind with respect to
Company Intellectual Property. To the best of knowledge of the Company and any
Subsidiary, no third party has interfered with, infringed upon, misappropriated
or otherwise come into conflict with the material Intellectual Property rights
of the Company or any Subsidiary.
(d) To the best of knowledge of the Company, none of the key
employees, contractors or agents of the Company or any Subsidiary are obligated
under any contract (including, without limitation, licenses, covenants, or
commitments of any nature) or other agreement, or subject to any judgment,
decree, or order of any court or administrative agency, that would interfere
with the use of his or her reasonable diligence to promote the interests of the
Company or any Subsidiary or that would conflict with the Company's or the
Subsidiary's businesses as presently conducted or contemplated to be conducted.
Neither the execution, delivery or performance of this Agreement, nor the
carrying on of the Company's or the Subsidiaries' businesses by the employees,
contractors or agents of the Company or the Subsidiaries, nor the conduct of the
Company's and the Subsidiaries' businesses as presently conducted or
contemplated to be conducted, will conflict with or result in a breach of the
terms, conditions or provisions of, or constitute a default under, any contract,
covenant, or instrument under which any such key employee, contractors or agents
is obligated, and which conflict, breach or default would be materially adverse
to the Company or any Subsidiary.
(e) The Company has entered into written agreements with all key
employees, contractors or agents of the Company and each Subsidiary with
provisions seeking to protect the confidentiality of all Company Intellectual
Property and to ensure full and unencumbered ownership by the Company or a
Subsidiary of
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all Company Intellectual Property including, without limitation, appropriate
"work for hire" language. The Company, without an independent investigation, is
not aware of any violation by any such employees, contractors or agents of such
agreements. All proprietary Company Intellectual Property was either developed:
(i) by employees of the Company or any Subsidiary within the scope of their
employment; or (ii) by independent contractors who have assigned all of their
rights to the Company or any Subsidiary pursuant to written agreement.
(f) No stockholder, member, director, officer, employee,
contractors or agents of the Company or any Subsidiary has any interest in any
of the Company Intellectual Property.
(g) The consummation of the transactions contemplated hereby will
not result in the loss or impairment of the Company's or any Subsidiary's rights
to own, use, or to bring any action for the infringement of, any of the Company
Intellectual Property, nor will such consummation require the consent of any
third party in respect of any Company Intellectual Property.
(h) Except as set forth in Schedule 5.12(h), neither the Company
nor any Subsidiary:
(i) has granted to any third party any exclusive rights of any
kind (including, without limitation, exclusivity with regard to categories of
advertisers on any World Wide Web site, territorial exclusivity or exclusivity
with respect to particular versions, implementations or translations of any of
the Company Intellectual Property), nor has the Company or any Subsidiary
granted any third party any right to market any of the Company Intellectual
Property under any private label or "OEM" arrangements;
(ii) has any material outstanding sales or advertising
contract, commitment or proposal (including, without limitation, insertion
orders, slotting agreements or other agreements under which the Company or any
Subsidiary has allowed third parties to advertise on or otherwise be included in
a World Wide Web site) that the Company currently expects to result in any loss
to the Company upon completion or performance thereof;
(iii) has any material oral contracts or arrangements for the
sale of advertising or any other product or service.
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5.13 Foreign Corrupt Practices Act. Neither the Company nor any
Subsidiary, director, officer, agent, employee or other Person acting on behalf
of the Company or any Subsidiary has, in the course of his, her or its actions
for, or on behalf of, the Company or any Subsidiary, offered or made, directly
or indirectly through any other Person, any payments of anything of value (in
the form of a contribution, gift, entertainment or other expense), to (a) any
Person employed by, or acting in an official capacity on behalf of, any
governmental agency, department or instrumentality, or (b) any foreign or
domestic government official, political party or official of such party, or any
candidate for political office or employee thereof. Neither the Company, any
Subsidiary, nor any director, officer, agent, employee or other Person acting on
behalf of the Company or any Subsidiary has 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 unlawful payment to
any foreign or domestic government or political party official, employee,
appointee or candidate.
5.14 Material Contracts. Each Material Contract of the Company and any
of its Subsidiaries is listed on Schedule 5.14 hereof . Each such contract is
the legal, valid and binding obligation of the Company, enforceable against the
Company and/or such Subsidiary, as the case may be, in accordance with its
terms. Except as set forth on Schedule 5.14 there has not occurred any breach,
violation or default or any event that, with the lapse of time, the giving of
notice or the election of any Person, or any combination thereof, would
constitute a breach, violation or default by the Company or its Subsidiary, as
the case may be, under any such contract or, to the knowledge of the Company or
its Subsidiary, as the case may be, by any other Person to any such contract.
Except as set forth on Schedule 5.14 neither the Company nor any Subsidiary has
been notified that any party to any Material Contract intends to cancel,
terminate, not renew or exercise an option under any Material Contract, whether
in connection with the transactions contemplated hereby or otherwise.
5.15 Right of First Refusal; Voting and Registration Rights. To the
best of the Company's knowledge and except as set forth on Schedule 5.15, no
party has any right of first refusal, right of first offer, right of co-sale,
preemptive right or other similar right regarding the Company's securities.
Except as set forth on Schedule 5.15, there are no provisions of the Articles of
Incorporation or the By-laws of the Company or any of its Subsidiaries, no
agreements to which the Company or any of its Subsidiaries is a party and no
agreements by which the Company, any of its Subsidiaries or the Securities are
bound, which (a) may affect or restrict the voting rights of the Purchaser with
respect to the Securities in its capacity as a stockholder of the Company, (b)
restrict the ability of the Purchaser, or any successor
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thereto or assignee or transferee thereof, to transfer the Securities, (c) would
adversely affect the Company's or the Purchaser's right or ability to consummate
the transactions contemplated by this Agreement or comply with the terms of the
Transaction Documents and the transactions contemplated hereby or thereby, (d)
require the vote of more than a majority of the Company's issued and outstanding
Common Stock, voting together as a single class, to take or prevent any
corporate action, other than those matters requiring a class vote under Nevada
law, or (e) entitle any party to nominate or elect any director of the Company
or require any of the Company's stockholders to vote for any such nominee or
other Person as a director of the Company in each case, except as provided for
in this Agreement, in each case, except as provided for in or contemplated by
this Agreement.
5.16 Form S-3 Eligibility. As of the filing of its annual report on
Form 10-K for its fiscal year ended March 31, 2001, the Company will be eligible
under the eligibility requirements of General Instruction I to Registration
Statement on Form S-3 to register the resale of its Common Stock on a
registration statement on Form S-3 under the Securities Act. Except as disclosed
on Schedule 5.16 to the knowledge of the Company, there exist no facts or
circumstances that would reasonably be expected to prohibit or delay the
preparation and filing of a registration statement on Form S-3 with respect to
the Conversion Shares in accordance with the terms of this Agreement and the
Registration Rights Agreement. Except as disclosed on Schedule 5.16, the Company
is not under any obligation, contractual or otherwise, to register for sale any
of its securities.
5.17 Previous Issuances Exempt. All shares of capital stock and other
securities either issued by the Company prior to the Closing Date have been
issued in transactions registered under the Securities Act or exempt from the
registration requirements under the Securities Act and all applicable state
securities or "blue sky" laws, and in compliance with all applicable corporate
laws. The Company has not offered any of its capital stock, or any other
securities, for sale to, or solicited any offers to buy any of the foregoing
from the Company, or otherwise approached or negotiated with any other Person in
respect thereof, in such a manner as to require registration under the
Securities Act. No holder of any of the Company's capital stock has any
rescission or pre-emptive rights.
5.18 No Integrated Offering. Neither the Company, nor any of its
Affiliates or any other Person acting on the Company's behalf, has directly or
indirectly engaged in any form of general solicitation or general advertising
with respect to the Securities nor have any of such Persons made any offers or
sales of any security or solicited any offers to buy any security under
circumstances that would require registration of the Securities under the
Securities Act or cause this
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offering of Securities to be integrated with any prior offering of securities of
the Company for purposes of the Securities Act or any applicable stockholder
approval provisions, including, without limitation, NASD Rule 4460(i) or any
similar rule.
5.19 Absence of Certain Developments. Except as set forth on Schedule
5.19 since March 31, 2001, neither the Company nor its Subsidiaries have
suffered any change or development which has had a Material Adverse Effect.
Since March 31, 2001, the Company and its Subsidiaries have conducted their
business in the ordinary and usual course consistent with past practices and
have not (a) sold, leased, transferred or otherwise disposed of any of the
assets (other than dispositions in the ordinary course of business consistent
with past practices), (b) terminated or amended in any material respect any
Material Contract or lease to which the Company or any of its Subsidiaries is a
party or to which it is bound or to which its properties are subject, (c)
suffered any loss, damage or destruction, whether or not covered by insurance,
which have had a Material Adverse Effect, (d) made any change in the accounting
methods or practices it follows, whether for general financial or tax purposes,
(e) incurred any liabilities (other than in the ordinary course of business or
contractual liabilities) which, individually or in the aggregate, have had a
Material Adverse Effect, (f) incurred, created or suffered to exist any
Encumbrances (other than non-material Encumbrances) on its assets, (g) increased
the compensation payable or to become payable to any of its officers or
employees or increased any bonus, severance, accrued vacation, insurance,
pension or other employee benefit plan, payment or arrangement made by the
Company or any of its Subsidiaries for or with any such officers or employees
out of the ordinary course of business, (h) suffered any labor dispute, strike,
or other work stoppage, (i) made or obligated itself to make any capital
expenditures in excess of $50,000 individually, (j) entered into any contract or
other agreement requiring the Company or a Subsidiary to make payments in excess
of $50,000 individually, other than in the ordinary course of business
consistent with past practices, (k) paid any dividends, whether in cash or
property, on account of, or repurchased any of, the Common Stock, or (l) entered
into any agreement to do any of the foregoing.
5.20 No Undisclosed Material Liabilities. Schedule 5.20 sets forth an
accurate list of (a) all liabilities of the Company and its Subsidiaries in
excess of $50,000 individually that are not reflected on the Financial
Statements of those entities that became Subsidiaries of the Company after the
date of the Financial Statements, or in the SEC Documents (other than trade
payables in the ordinary course of business), and (b) all loan agreements,
indemnity or guaranty agreements, bonds, mortgages, liens, pledges or other
security agreements to which the Company or any Subsidiary is a party. Except as
set forth on Schedule 5.20, since the date of the Financial Statements, neither
the Company nor any Subsidiary has incurred any
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liabilities of any kind, character and description, whether accrued, absolute,
secured or unsecured, contingent or otherwise other than (i) liabilities
incurred in the ordinary course of business subsequent to the date of the
Financial Statements and (ii) obligations under contracts and commitments
incurred in the ordinary course of business and not required under generally
accepted accounting principles to be reflected in the Financial Statements.
5.21 Litigation. Except as set forth on Schedule 5.21, as of the date
hereof, there is no claim, action, proceeding, lawsuit, inquiry, arbitration or
investigation before or by any court, public board, arbitrator, governmental
body, agency or official, self-regulatory organization or body including,
without limitation, the SEC or the National Association of Securities Dealers
Automated Quotation System, pending or, to the knowledge of the Company or any
Subsidiary, threatened against or affecting the Company, any Subsidiary, or
their respective properties or their respective directors or officers in their
capacities as such. To the knowledge of the Company, there are no facts which,
if known by a potential claimant or governmental authority, could reasonably be
expected to give rise to a claim or proceeding which, if asserted or conducted
with results unfavorable to the Company or any Subsidiary, could have a Material
Adverse Effect or could prevent or materially delay the consummation of the
transactions contemplated hereby. Neither the Company nor any Subsidiary is
subject to any outstanding order, ruling, judgment or decree that would have a
Material Adverse Effect or could prevent or materially delay the consummation of
the transactions contemplated hereby.
5.22 Compliance with Laws. Neither the Company nor any Subsidiary has
received notification from any Governmental Entity (a) asserting a violation of
any law, statute, ordinance or regulation or the terms of any judgments, orders,
decrees, injunctions or writs applicable to the conduct of its business, (b)
threatening to revoke any license, franchise, permit or government
authorization, or (c) restricting or in any way limiting its operations as
currently conducted or proposed to be conducted.
5.23 Taxes. The Company and each Subsidiary has made or filed all
federal and all state, local and foreign income tax returns required to be filed
with respect to the Company and each Subsidiary in a timely manner (taking into
account all extensions of due dates). The Company and each Subsidiary has paid
all taxes and other governmental assessments and charges, shown or determined to
be due on such returns, reports and declarations, except those being contested
in good faith and for which adequate reserves have been made, and has set aside
on its books provisions reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. There are no unpaid
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taxes 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. Neither the Company
or any Subsidiary has executed a waiver with respect to any statute of
limitations relating to the assessment or collection of any federal, state or
local tax. None of the Company's or any Subsidiary's tax returns has been or is
being audited by any taxing authority.
5.24 Employee Relations. (a) All bonus, deferred compensation, pension,
retirement, profit-sharing, thrift, savings, employee stock ownership, stock
bonus, stock purchase, restricted stock and Existing Stock Option Plan,
employment or severance contracts, health and medical insurance plans, life
insurance and disability insurance plans, other material employee benefit plans,
contracts or arrangements which cover employees or former employees of the
Company or the Subsidiaries including, but not limited to, "employee benefit
plans" within the meaning of Section 3(3) of ERISA (the "Employee Benefit
Plans"), are listed on Schedule 5.24. No Employee Benefit Plans are or were
collectively bargained for or have terms requiring assumption or any guarantee
by the Purchaser.
(b) There have been no violations of ERISA or the Code that could
reasonably be expected to have a Material Adverse Effect relating to any
Employee Benefit Plan. The Company has timely filed all documents, notes and
reports (including IRS Form 5500) for each such Employee Benefit Plan with all
applicable governmental authorities and has timely furnished all required
documents to the participants or beneficiaries of each such Employee Benefit
Plans.
(c) The Company and its Subsidiaries have entered into
individualized written employment agreements with its officers and key employees
of the Company and its Subsidiaries listed on Schedule 5.24, true and complete
copies of which have been delivered to Purchaser. To the knowledge of the
Company, no employee of or consultant to the Company or any Subsidiary is in
violation of any term of any employment contract or any other contract or
agreement relating to the relationship of any such employee or consultant with
the Company or any Subsidiary. The Company and each Subsidiary have operated and
administered all plans, programs and arrangements providing compensation and
benefits to employees in accordance with their terms and with all applicable
laws. To the Company's knowledge, no key employee has any plans to terminate his
or her employment with the Company or any Subsidiary, nor does the Company or
any Subsidiary have any present intention to terminate the employment of any key
employee.
(d) The Company and its Subsidiaries are not delinquent in
payments to any of their employees for any wages, salaries, commissions, bonuses
or other direct compensation for any services performed through the date hereof
or
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amounts required to be reimbursed to them to the date hereof. The Company and
its Subsidiaries are in compliance with all applicable federal, state and local
laws, rules and regulations respecting employment, employment practices, labor,
terms and conditions of employment and wages and hours, except for either
immaterial instances of noncompliance or instances of noncompliance of which the
Company is unaware which may be reasonably cured without the incurrence by the
Company or the Subsidiary of any material cost or liability. Neither the Company
nor any Subsidiary is bound by or subject to (and none of its assets or
properties is bound by or subject to) any written or oral, express or implied,
commitment or arrangement with any labor union, and, to the knowledge of the
Company, no labor union has requested or has sought to represent any of the
employees, representatives or agents of the Company or any Subsidiary. There is
no labor strike, dispute, slowdown or stoppage actually pending or, to the
knowledge of the Company, threatened against or involving the Company or any
Subsidiary. There are no suits, actions, disputes, claims (other than routine
claims for benefits), investigations or audits pending or, to the knowledge of
the Company, threatened in connection with any Employee Benefit Plan, but
excluding any of the foregoing which would not have a Material Adverse Effect on
the Company or any Subsidiary.
(e) No director or officer or other employee of the Company or any
Subsidiary will become entitled to any retirement, severance or similar benefit
or enhanced or accelerated benefit (including any acceleration of vesting or
lapse of repurchase rights or obligations with respect to any Employee Benefit
Plan) solely as a result of the transactions contemplated in this Agreement; and
(ii) no payment made or to be made to any current or former employee of director
of the Company or any of its Affiliates by reason of the transactions
contemplated hereby (whether alone or in connection with any other event,
including, but not limited to, a termination of employment) will constitute an
"excess parachute payment" within the meaning of Section 280G of the Code.
5.25 Acknowledgment Regarding Securities. The Company acknowledges that
its obligation to issue Conversion Shares upon conversion of the Series B
Preferred Shares, in accordance with the terms of this Agreement and the
Certificate of Designation, is absolute and unconditional, regardless of the
dilution that such issuance may have on the ownership interests of other
stockholders of the Company. Taking the foregoing into account, the Company's
Board of Directors has determined in its good faith business judgment that the
issuance of the Securities hereunder and the consummation of the other
transactions contemplated hereby are (a) in the best interests of the Company
and its stockholders and (b) do not breach (with or without the passage of time
or the giving of notice) any obligations of the Company or any Subsidiary the
result of which would have a Material Adverse
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Effect. The Company's Board of Directors has approved the terms of this
Agreement and the Certificate of Designation and the transactions contemplated
hereby and thereby. Schedule 5.25 sets forth any adjustments, Encumbrances or
rights that would be triggered by the issuance of the Securities pursuant to
agreements between the Company or any Subsidiary and any lender or holder of an
equity interest or other securities of the Company or any Subsidiary.
5.26 Brokers. There is no investment banker, broker, finder, financial
advisor or other Person which has been retained by or is authorized to act on
behalf of the Company who might be entitled to any fee or commission in
connection with the transactions contemplated by this Agreement payable by
Purchaser.
5.27 Environmental Matters. (a) (i) No written notice, notification,
demand, request for information, citation, summons, complaint or order has been
received by, and no investigation, action, claim, suit, proceeding or review is
pending or, to the knowledge of the Company, threatened by any Person against,
the Company or any Subsidiary, and no penalty has been assessed against the
Company or any Subsidiary, in each case, with respect to any matters relating to
or arising out of any Environmental Law; (ii) the Company and its Subsidiaries
are in compliance with all Environmental Laws; and (iii) to the knowledge of the
Company there are no liabilities of or relating to the Company or any Subsidiary
relating to or arising out of any Environmental Law, and there is no existing
condition, situation or set of circumstances which could reasonably be expected
to result in such a liability.
(b) For purposes of this Agreement, the term "Environmental Laws"
means federal, state, local and foreign statutes, laws, judicial decisions,
regulations, ordinances, rules, judgments, orders, codes, injunctions, permits
and governmental agreements relating to human health and the environment,
including, but not limited to, Hazardous Materials; and the term "Hazardous
Material" means all substances or materials regulated as hazardous, toxic,
explosive, dangerous, flammable or radioactive under any Environmental Law
including, but not limited to: (i) petroleum, asbestos, or polychlorinated
biphenyls and (ii) in the United States, all substances defined as Hazardous
Substances, Oils, Pollutants or Contaminants in the National Oil and Hazardous
Substances Pollution Contingency Plan.
5.28 Related-Party Transactions. Except as set forth on Schedule 5.28
hereto, no employee, officer, director, stockholder or Affiliate of the Company
or any of its Subsidiaries or member of his or her immediate family is currently
indebted to the Company or any of its Subsidiaries, nor is the Company or any of
its
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Subsidiaries indebted (or committed to make loans or extend or guarantee credit)
to any of such individuals. Except as set forth on Schedule 5.28 hereto, as of
the date hereof none of such Persons has any direct or indirect ownership
interest in any firm or corporation with which the Company is affiliated or with
which the Company has a business relationship, or any firm or corporation that
competes with the Company except that employees, officers, or directors of the
Company and members of their immediate families may own stock in an amount not
to exceed 1% of the outstanding capital stock of publicly traded companies that
may compete with the Company. As of the date hereof, except as set forth on
Schedule 5.28 hereto no employee, director, officer or stockholder of the
Company and no member of the immediate family of any employee, officer, director
or stockholder of the Company is directly or indirectly interested in any
Material Contract with the Company.
5.29 Insurance. The Company and each Subsidiary has in force fire,
casualty, product liability and other insurance policies, with extended
coverage, sufficient in amount to allow it to replace any of its material
properties or assets which might be damaged or destroyed or sufficient to cover
liabilities to which the Company or any Subsidiary may reasonably become
subject. The Company has a directors' and officers' liability insurance policy
that is in full force and effect. Schedule 5.29 sets forth a list of all
insurance policies currently in effect that insure the business, operations,
assets, directors, officers or employees of the Company and the Subsidiaries,
the name of the carrier and the terms and amount of coverage. No default or
event has occurred that could give rise to a default under any such policy.
5.30 Acknowledgment Regarding the Purchaser's Purchase of the
Securities. The Company acknowledges and agrees that the Purchaser is not acting
as a financial advisor or fiduciary of the Company (or in any similar capacity)
with respect to this Agreement or the transactions contemplated hereby, and the
relationship between the Company and the Purchaser is "arms length" and that,
except for the representations and warranties of the Purchaser under this
Agreement, any statement made by the Purchaser or any of its representatives or
agents in connection with this Agreement and the transactions contemplated
hereby is not advice or a recommendation and is merely incidental to the
Purchaser's purchase of Securities and has not been relied upon by the Company,
its officers or directors in any way. The Company further represents to the
Purchaser that the Company's decision to enter into this Agreement has been
based solely on an independent evaluation by the Company and its
representatives.
5.31 Disclosure. No representation or warranty by the Company contained
in this Agreement, and no representation, warranty or statement by the Company
contained in any certificate or schedule furnished or to be furnished at the
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Closing to the Purchaser pursuant to this Agreement, contains any untrue
statement by the Company of a material fact or omits to state any material fact
necessary to make any statement herein or therein not misleading.
All information relating to or concerning the Company and the
Subsidiaries set forth in this Agreement, including, without limitation, in the
Schedules hereto, or provided to the Purchaser and otherwise in connection with
the transactions contemplated hereby is true and correct in all material
respects and the Company has not omitted to state any material fact necessary in
order to make the statements made herein or therein, in light of the
circumstances under which they were made, not misleading. No event or
circumstance has occurred or exists with respect to the Company or any
Subsidiary or their respective businesses, properties, operations or financial
conditions, which has not been publicly disclosed or which has not been
disclosed to the Purchaser but, under applicable law, rule or regulation, would
be required to be disclosed by the Company in a registration statement filed on
the date hereof by the Company under the Securities Act with respect to an
issuance of the Company's securities.
5.32 Corporate Records. Copies of the respective Certificates of
Incorporation of the Company, certified by the Secretary of State of the State
of Nevada, and of the By-laws of the Company, certified by the Secretary of the
Company, heretofore delivered to the Purchaser are true and complete copies of
such instruments as amended to the date of this Agreement. Such Certificates of
Incorporation and By-laws are in full force and effect. The Company is not in
violation of any provision of its Certificate of Incorporation or By-laws. The
corporate records of the Company are correct and complete in all material
respects.
5.33 Approvals. Neither any declaration, filing or registration with,
notice to, nor license, consent or approval of, any Governmental Entity is
required to be made, obtained or given by or with respect to the Company in
connection with the execution, delivery or performance by the Company of this
Agreement, the performance by it of its obligations hereunder or the
consummation by it of the transactions contemplated hereby.
6. Conditions of Parties' Obligations.
6.1 Conditions of the Purchaser's Obligations. The obligations of the
Purchaser under Section 2 hereof are subject to the fulfillment prior to or on
the Closing Date of all of the following conditions, any of which may be waived
in whole or in part by the Purchaser.
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(a) Covenants; Representations and Warranties. (i) The Company
shall have performed in all material respects its obligations hereunder required
to be performed by it at or prior to the Closing Date, and shall have obtained
all consents and approvals required for the consummation of the transactions
contemplated hereby, and (ii) the representations and warranties of the Company
contained in this Agreement and in any certificate or other writing delivered by
the Company pursuant hereto shall be true and correct (without giving effect to
any limitation as to "materiality" or "Material Adverse Effect" set forth
therein) at and as of the Closing Date as if made at and as of the Closing Date,
except where the failure of such representations and warranties to be true and
correct (without giving effect to any limitation as to "materiality" or
"Material Adverse Effect" set forth therein) would not, individually or in the
aggregate, have a Material Adverse Effect on the Company;
(b) Laws; Injunctions. There shall not be any statute, rule,
regulation, injunction, order or decree, enacted, enforced, promulgated,
entered, issued or deemed applicable to this Agreement or the transactions
contemplated hereby (or in the case of any statute, rule or regulation, awaiting
signature or reasonably expected to become law), by any court, government or
governmental authority or agency or legislative body, domestic, foreign or
supranational, that would, or would reasonably be expected to, have a Material
Adverse Effect at or after the Closing Date.
(c) Certificate of Designation and Articles of Incorporation. The
Certificate of Designation and the Articles of Incorporation, amended to provide
for the limitation of the liability of the Company's directors to the full
extent permitted by law, shall have been filed with the Secretary of State of
the State of Nevada, and the Purchaser shall have received confirmation
satisfactory to it that each such filing has occurred.
(d) Qualification Under State Securities Laws. All registrations,
qualifications, permits and approvals required under applicable state securities
laws shall have been obtained for the lawful execution, delivery and performance
of this Agreement and each other Transaction Document, including, without
limitation, the offer and sale of the Securities.
(e) Certificate of Officer. The Company shall have delivered to
the Purchaser a certificate dated the Closing Date, executed by its Chief
Executive Officer, certifying the satisfaction of the conditions specified in
paragraphs (a) and (b) of this Section 6.1.
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(f) Registration Rights Agreement. The Purchaser and the Company
shall have executed and delivered the Registration Rights Agreement.
(g) Other Transaction Documents.
(i) LLC Acquisition. The Company and Purchaser shall have
consummated the transactions contemplated by the Share Purchase
Agreement.
(ii) Advertising Agreement. The Company and the Purchaser
shall have entered into the Advertising Agreement.
(h) Supporting Documents. The Purchaser shall have received the
following:
(i) A favorable opinion (the "Company Opinion") from Martin,
Lucas & Chioffi, LLP, or Woodburn and Wedge, as appropriate,
counsel to the Company, dated the Closing Date, that:
1. The Company is duly incorporated, validly existing and in
good standing under the laws of the State of Nevada;
2. The Company has taken all required company action to
approve and adopt this Agreement, and this Agreement is a valid
and binding obligation of the Company enforceable against the
Company in accordance with its terms, subject as to enforcement
to bankruptcy, insolvency, reorganization, moratorium, insolvency
and other laws of general applicability relating to or affecting
creditors' rights and to general equity principles; and
3. The execution and delivery of this Agreement by the
Company does not, and the consummation of the transactions
contemplated by this Agreement by the Company will not,
constitute a breach or violation of, or a default under, the
Company's organizational documents or By-laws, or a breach,
violation or impairment of, or a default under, any judgment,
decree, order, statute, law, ordinance, rule or regulation now in
effect applicable to the Company or its properties known to such
counsel, or any
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agreement, indenture, mortgage, lease or other instrument of the
Company;
4. The Company's capitalization (including that all
outstanding securities, including the Series B Preferred Shares
and the shares of Common Stock to be delivered pursuant to this
Agreement, are validly issued, fully paid and non-assessable);
5. The Conversion Shares have been duly authorized and upon
issuance thereof such shares will be validly issued, fully paid
and nonassessable;
6. The issuance and sale of the Series B Preferred Shares
and the shares of Common Stock to be delivered pursuant to this
Agreement and issuance of shares of Common Stock upon conversion
of the Series B Preferred Shares are exempt transactions under
the Securities Act; and
7. When issued, the Conversion Shares will be exempt from
registration under the Securities Act.
In rendering the Company Opinion, such counsel may rely on
certificates of officers and other agents of the Company and public
officials as to matters of fact and, as to matters relating to the law of
jurisdictions other than Nevada, upon opinions of counsel of such other
jurisdictions reasonably satisfactory to the Company and its counsel,
provided such reliance is expressly noted in the Company Opinion and the
opinions of such other counsel and the certificates of such officers,
agents and public officials relied on are attached to the Company Opinion.
(ii) Copies of resolutions of the Board of Directors of the
Company, certified by the Secretary or other authorized officer
of the Company, authorizing and approving the filing of the
Certificate of Designation, the execution, delivery and
performance of the Transaction Documents and all other documents
and instruments to be delivered pursuant hereto and thereto;
(iii) A certificate of incumbency executed by the Secretary
of the Company (A) certifying the names, titles and signatures of
the officers authorized to execute the Transaction
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Documents to be executed by the Company and (B) further
certifying that the Articles of Incorporation and By-laws of the
Company delivered to the Purchaser at the time of the execution
of this Agreement have been validly adopted and have not been
amended or modified, except to the extent provided in the
Certificate of Designation; and
(iv) Such additional supporting documentation and other
information with respect to the transactions contemplated by this
Agreement as the Purchaser or its counsel, Skadden, Arps, Slate,
Meagher & Flom LLP, may reasonably request.
(i) Composition of Board of Directors. On the Closing Date, the
Company's Board of Directors shall be composed of Brad D. Greenspan, Brett C.
Brewer, Ryan A. Brant, Daniel Mosher and one individual elected by the Holders
of a majority of the Series B Preferred Shares.
(j) Consents and Waivers. The Company shall have obtained all
consents or waivers necessary to execute and perform its obligations under this
Agreement and the other Transaction Documents, to issue the Series B Preferred
Shares and the shares of Common Stock to be delivered pursuant to this Agreement
and the Conversion Shares, and to carry out the transactions contemplated hereby
and thereby, including, without limitation, the stockholder consent referenced
in Section 7.13. All corporate and other action and governmental filings
necessary to effectuate the terms of this Agreement, the other Transaction
Documents, the Series B Preferred Shares, the Conversion Shares, and other
agreements and instruments executed and delivered by the Company in connection
herewith shall have been made or taken.
(k) No Material Adverse Change. There shall have been no material
adverse change in the business, properties, assets, prospects or condition
(financial or otherwise) of the Company from and after the date of this
Agreement.
(l) Domain Name Transfer. The Company shall have obtained
ownership of "gotlaughs.com" from Brandon Tran.
(m) Financial Statements. The Purchaser shall have received an
unqualified audit opinion of Merdinger, Fruchter, Rosen & Corso & P.C. with
respect to the Company's consolidated financial statements as of and for the
years ended March 31, 2000 and 2001 and such audited financial statements as of
and for the year ended March 31, 2001 shall not differ materially from, or be
materially
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inconsistent with, the draft March 31, 2001 financials previously provided to
the Purchaser.
6.2 Conditions of the Company's Obligations. The obligations of the
Company under Section 2 hereof are subject to the fulfillment prior to or on the
Closing Date of all of the following conditions, any of which may be waived in
whole or in part by the Company.
(a) Covenants; Representations and Warranties. (i) The Purchaser
shall have performed in all material respects its obligations hereunder required
to be performed by it at or prior to the Closing Date, and shall have obtained
all consents and approvals required for the consummation of the transactions
contemplated hereby, and (ii) the representations and warranties of the
Purchaser contained in this Agreement and in any certificate or other writing
delivered by the Purchaser pursuant hereto shall be true and correct (without
giving effect to any limitation as to "materiality" or "Material Adverse Effect"
set forth therein) at and as of the Closing Date as if made at and as of the
Closing Date, except where the failure of such representations and warranties to
be true and correct (without giving effect to any limitation as to "materiality"
or "Material Adverse Effect" set forth therein) would not, individually or in
the aggregate, have a Material Adverse Effect on the Purchaser.
(b) Laws; Injunctions. There shall not be any statute, rule,
regulation, injunction, order or decree, enacted, enforced, promulgated,
entered, issued or deemed applicable to this Agreement or the transactions
contemplated hereby (or in the case of any statute, rule or regulation, awaiting
signature or reasonably expected to become law), by any court, government or
governmental authority or agency or legislative body, domestic, foreign or
supranational, that would, or would reasonably be expected to, have a Material
Adverse Effect at or after the Closing Date.
(c) Registration Rights Agreement. The Purchaser and the Company
shall have executed and delivered the Registration Rights Agreement.
(d) Legal Opinion. The Company shall have received a favorable
opinion from Skadden, Arps, Slate, Meagher & Flom LLP, counsel to the Purchaser,
dated the Closing Date, with respect to: (A) the Purchaser's corporate
existence, power, authority and good standing; (B) the due authorization,
execution and delivery of this Agreement and each of the Transaction Documents;
(C) the validity and enforceability of the Transaction Documents; and (D) no
conflicts of the Transaction Documents with the charter or bylaws of the Company
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6.3 Conditions of Each Party's Obligations. The respective
obligations of each party to consummate the transactions contemplated hereunder
are subject to the parties being reasonably satisfied as to the absence of (a)
litigation challenging or seeking damages in connection with the transactions
contemplated by this Agreement and (b) any provision of any applicable law or
regulation, or any judgment, injunction, order or decree prohibiting or
enjoining the transactions contemplated by this Agreement or by the Transaction
Documents.
7. Covenants of the Company. The Company agrees that the Company (and each of
its Subsidiaries unless the context otherwise requires) will do the following:
7.1 Maintain Corporate Rights and Facilities. From the date
hereof through the Closing, and thereafter for so long as the Purchaser owns 50%
of Series B Preferred Shares issued hereunder (or the equivalent thereof in
Common Stock if such Series B Preferred Shares are converted) maintain and
preserve its corporate existence and all rights, franchises, licenses,
trademarks, service marks, trade names, copyrights and other authority
reasonably deemed adequate by the Company for the conduct of its business;
maintain its properties, equipment and facilities in good order and repair; and
conduct its business in an orderly manner without voluntary interruption.
7.2 Maintain Insurance. From the date hereof through the
Closing, and thereafter for so long as the Purchaser owns 50% of Series B
Preferred Shares issued hereunder (or the equivalent thereof in Common Stock if
such Series B Preferred Shares are converted) maintain in full force and effect
a policy or policies of insurance issued by insurers of recognized
responsibility, insuring it and its properties and business against such losses
and risks, and in such amounts, as are customary in the case of corporations of
established reputation engaged in the same or a similar business.
7.3 Information Rights.(a) Access to Records. From the date
hereof through the Closing, and thereafter for so long as the Purchaser owns 50%
of Series B Preferred Shares issued hereunder (or the equivalent thereof in
Common Stock if such Series B Preferred Shares are converted) the Company shall,
and shall cause each Subsidiary to, afford to the Purchaser, the Affiliates of
the Purchaser and each of their respective officers, employees, advisors,
counsel and other authorized representatives (collectively with the affiliates
of the Purchaser, the "Representatives"), during normal business hours,
reasonable access, upon reasonable advance notice, to all of the books, records
and properties of the Company and its Subsidiaries and all officers and
employees of the Company and such Subsidiaries. The Purchaser shall keep
confidential information obtained by it
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in connection with any such inspection, except that the Purchaser shall be
permitted to disclose the information relating to the Company's business (i) to
such of its representatives as need to know such information relating to the
Company's business for the sole purpose of evaluating the business of the
Company, provided such Persons are informed of the confidential nature of the
information relating to the Company's business and the restrictions imposed
hereby; (ii) to the extent required by law, rule or regulation or legal process;
(iii) to the extent such information relating to the Company's or any of its
Subsidiaries' business is or becomes publicly available other than as a result
of a breach of this Section 7.3(a); or (iv) to the extent the Company shall have
consented to such disclosure.
(b) Financial Reports. From the date hereof through the
Closing, and thereafter for so long as the Purchaser owns 50% of Series B
Preferred Shares issued hereunder (or the equivalent thereof in Common Stock if
such Series B Preferred Shares are converted), the Company shall furnish to the
Purchaser the following:
(i) Bi-Monthly Reports. As soon as available, but not
later than 30 days after the end of each bi-monthly period beginning
with the report for the months of June and July, 2001, a consolidated
balance sheet of the Company as of the end of such period and
consolidated statements of income of the Company for such period and
for the period commencing at the end of the previous fiscal year and
ending with the end of such period, setting forth in each case in
comparative form the corresponding figures for the corresponding period
of the preceding fiscal year, and including comparisons to the budget
or business plan and an analysis of the variances from the budget or
plan, all prepared in accordance with generally accepted accounting
principles consistently applied (except for the absence of footnotes,
and quarter-end and year-end adjustments).
(ii) Quarterly Reports. As soon as available, but not
later than the date of filing of the Company's Form 10-Q with the SEC
beginning with the report for the quarter ended June 30, 2001, (A) a
consolidated balance sheet of the Company as of the end of such period
and consolidated statements of income, cash flows and changes in
stockholders' equity for such quarterly accounting period and for the
period commencing at the end of the previous fiscal year and ending
with the end of such period, setting forth in each case in comparative
form the corresponding figures for the corresponding
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period of the preceding fiscal year, and including comparisons to the
budget or business plan, all prepared in accordance with generally
accepted accounting principles consistently applied, subject to normal
year-end adjustments and the absence of footnote disclosure, and (B) a
report or presentation by management of the Company of the operating
and financial highlights of the Company and its Subsidiaries for such
period, which shall include (x) a comparison between operating and
financial results and budget and (y) an analysis of the operations of
the Company and its Subsidiaries for such period.
(iii) Annual Audit. Beginning with the fiscal year
ended March 31, 2002, as soon as available, but not later than 120 days
after the end of each fiscal year of the Company, audited consolidated
financial statements of the Company, which shall include statements of
income, cash flows and changes in stockholders' equity for such fiscal
year and a balance sheet as of the last day thereof, each prepared in
accordance with GAAP, and accompanied by the report of nationally-
recognized independent certified public accountants selected by the
Company's Board of Directors (the "Accountants"). The Company and its
Subsidiaries shall maintain a system of accounting sufficient to enable
its Accountants to render the report referred to in this Section
7.3(b)(iii).
(iv) Miscellaneous. Promptly upon becoming available,
each of the following:
(A) copies of all financial statements, reports,
press releases, notices, proxy statements and other documents
sent by the Company or its Subsidiaries to its stockholders
generally or released to the public and copies of all regular
and periodic reports, if any, filed by the Company or its
Subsidiaries with the SEC, any securities exchange or the
NASD;
(B) notification in writing of the existence of
any default under any material agreement or instrument to
which the Company or any of its Subsidiaries is a party or by
which any of their assets are bound;
(C) upon specific request, copies of all reports
prepared for or delivered to the management of the Company or
its Subsidiaries by its accountants; and
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(D) upon specific request, any other routinely
collected financial or other information available to
management of the Company or its Subsidiaries (including,
without limitation, routinely collected statistical data).
7.4 Notice of Litigation, Disputes and Adverse Changes; Other
Information. (a) From the date hereof through the Closing, and thereafter for so
long as the Purchaser owns 50% of Series B Preferred Shares issued hereunder (or
the equivalent thereof in Common Stock if such Series B Preferred Shares are
converted) promptly notify the Purchaser of (i) each legal action, suit,
arbitration or other administrative or governmental investigation or proceeding
(whether federal, state, local or foreign) instituted or, to the Company's
knowledge, threatened against the Company (or of any occurrence or dispute which
involves a reasonable likelihood of any such action, suit, arbitration,
investigation or proceeding being instituted), or (ii) any other occurrence or
change of circumstance relating to the Company which, in either such case, could
reasonably be expected to materially and adversely affect the Company's
condition (financial or otherwise), properties, assets, liabilities, business,
prospects or operations (except for any changes that are the effect or result of
economic factors generally affecting the economy as a whole).
(b) From the date hereof through the Closing, and
thereafter for so long as the Purchaser owns 50% of Series B Preferred Shares
issued hereunder (or the equivalent thereof in Common Stock if such Series B
Preferred Shares are converted) promptly provide the Purchaser with such other
information relating to the Company as reasonably requested by the Purchaser on
an item by item basis.
7.5 Internal Accounting Controls. From the date hereof through
the Closing, and thereafter for so long as the Purchaser owns 50% of Series B
Preferred Shares issued hereunder (or the equivalent thereof in Common Stock if
such Series B Preferred Shares are converted) maintain a system of internal
accounting controls administered in accordance with Section 13(b)(2) of the
Exchange Act.
7.6 Conduct of Business. From the date hereof through the
Closing, and thereafter for so long as the Purchaser owns 50% of Series B
Preferred Shares issued hereunder (or the equivalent thereof in Common Stock if
such Series B Preferred Shares are converted) conduct its business in accordance
with all applicable provisions of federal, state, local and foreign law,
including without limitation, those pertaining to intellectual and proprietary
property rights.
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7.7 Compliance with Articles of Incorporation and By-laws.
From the date hereof through the Closing, and thereafter for so long as the
Purchaser owns 50% of Series B Preferred Shares issued hereunder (or the
equivalent thereof in Common Stock if such Series B Preferred Shares are
converted) perform and observe all of its obligations to the holders of all of
its securities set forth in the Company's Articles of Incorporation and By-laws.
7.8 Indemnification of the Board of Directors; Directors and
Officers Insurance Policy.7.9 (a) From the date hereof through the Closing, and
thereafter reimburse all directors of the Company for their reasonable
out-of-pocket expenses in connection with attending meetings of the Company's
Board of Directors and all committees thereof and all reasonable out-of-pocket
expenses otherwise incurred in fulfilling their duties as directors. The
Company, the Company's Articles of Incorporation, or the Company's By-Laws if no
provisions in the Articles of Incorporation relate to directors' liability or
indemnification, shall at all times (i) eliminate the liabilities of directors
to the maximum extent permitted by the law, and (ii) require the indemnification
of all of the Company's directors against liability for actions and omissions to
act in their capacity as directors of the Company to the maximum extent that
such individuals may lawfully be so indemnified by the Company.
(b) From the date hereof through the Closing, and
thereafter for so long as the Purchaser owns 50% of Series B Preferred Shares
issued hereunder (or the equivalent thereof in Common Stock if such Series B
Preferred Shares are converted) maintain in full force and effect a directors
and officers liability insurance policy issued by an insurer or insurers of
recognized responsibility, insuring its directors and officers against such
losses and risks, and in such amounts, as are customary in the case of
corporations of established reputation in the same or similar business in the
amount of $5,000,000 per director. From the date hereof through the Closing, and
thereafter for so long as the Purchaser owns 50% of Series B Preferred Shares
issued hereunder (or the equivalent thereof in Common Stock if such Series B
Preferred Shares are converted) at least one of the members of the Board of
Directors appointed by the Purchaser pursuant to the Certificate of Designation
shall be appointed by the Board of Directors to serve on each committee of the
Board of Directors.
7.10 Use of Proceeds. The Company will use the proceeds from
the sale of the Series B Preferred Shares for the purposes summarized on
Schedule 7.9 hereto.
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7.11 Reservation of Common Stock. The Company shall reserve
and keep available out of its authorized but unissued Common Stock the number of
shares required for issuance upon the conversion of all of the Series B
Preferred Shares (including any additional shares which may become so issuable
by reason of the operation of anti-dilution provisions of the Certificate of
Designation).
7.12 Non-Disclosure and Non-Competition Agreement. The Company
shall aggressively enforce and protect, to the fullest extent permitted by the
applicable law, the Company's rights with respect to all non-disclosure and
non-competition agreements it has with third parties, including, without
limitation, employees.
7.13 Advice of Changes; Filings. From the date hereof through
the Closing, and thereafter for so long as the Purchaser owns 50% of Series B
Preferred Shares issued hereunder (or the equivalent thereof in Common Stock if
such Series B Preferred Shares are converted) the Company shall confer with the
Purchaser on a regular and frequent basis as reasonably requested by the
Purchaser, orally and, if requested by the Purchaser, in writing, with regard to
any change that has had a Material Adverse Effect with respect to the Company or
its Affiliates. From the date hereof through the Closing, and thereafter for so
long as the Purchaser owns 50% of Series B Preferred Shares issued hereunder (or
the equivalent thereof in Common Stock if such Series B Preferred Shares are
converted) the Company shall promptly provide to the Purchaser (or its counsel)
copies of all filings made by the Company or any Affiliate with any Governmental
Entity in connection with this Agreement and the transactions contemplated
hereby.
7.14 Special Stockholders Meeting. To the extent required by
any applicable law or requirements of Nasdaq Small Cap Market or any stock
exchange, as soon as practicable after the date hereof, the Company shall
prepare and file with the SEC one or more proxy statements in connection with
the transactions contemplated by this Agreement and the other Transaction
Documents (each such proxy statement, together with any amendments or
supplements thereto, in each case in the form mailed to the Company
stockholders, being a "Proxy Statement"). Each Proxy Statement shall not, at the
date such Proxy Statement is first mailed to the Company's stockholders, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. All documents that the Company will file with the SEC in connection
with the transactions contemplated herein will comply as to form and substance
in all material respects with the applicable requirements of the Exchange Act
and the rules and regulations thereunder. The Company shall promptly after the
date hereof take
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all action necessary in accordance with the General Corporation Law of Nevada
and the Articles of Incorporation and By-laws to convene a stockholders meeting
to vote on the issuance of the Securities to the Purchaser as promptly as
practicable after the date hereof. The Company shall use its best efforts to
solicit from stockholders of the Company proxies in favor of the aggregate
transactions to be voted on at the stockholders meeting. The Company shall use
its best efforts to ensure that the Proxy Statement includes the unconditional
recommendation of the Board, subject to its fiduciary duties, in favor of the
transactions to be voted on at each of the stockholders meetings. The Company
shall provide to the Purchaser drafts of any materials to be filed with the SEC
or mailed to the Company's stockholders and, prior to submitting or filing such
materials with the SEC, shall accept reasonable comments from the Purchaser and
its Representatives.
7.15 Liability Limitation and Indemnification of Directors.
Prior to Closing the Company shall amend its charter to: (i) eliminate the
liabilities of directors to the maximum extent permitted by the law, and (ii)
require the indemnification of all of the Company's directors against liability
for actions and omissions to act in their capacity as directors of the Company
to the maximum extent that such individuals may lawfully be so indemnified by
the Company.
7.16 Voting Agreement. Within five business days of the date
of this Agreement, deliver to Purchaser the Voting Agreement attached as Exhibit
C hereto duly executed by the Company and holders of more than 50% of the
Company's outstanding Common Stock.
8. Negative Covenants of the Company.
8.1 No Solicitation. (a) From the date hereof through the
Closing Date, the Company shall and shall cause each Subsidiary and its
Subsidiaries' officers and directors to, and each of the foregoing shall cause
their respective agents, representatives, advisors or subsidiaries, to cease any
discussions or negotiations with any parties (other than the Purchaser) that may
be ongoing with respect to (A) any acquisition or purchase of assets of the
Company and its Subsidiaries other than in the ordinary course of business
consistent with past practice, (B) the purchase of any equity security of the
Company or any Subsidiary (including a self tender offer) or any security that
is convertible, exchangeable or exercisable for any such equity security, (C)
any merger, consolidation, business combination, sale of substantially all
assets, recapitalization, Liquidation, or similar transaction involving the
Company or any Subsidiary (other than a Permitted Acquisition), or (D) any other
transaction the consummation of which would, or could reasonably be expected to,
impede, interfere with, prevent or materially delay the transactions
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contemplated by this Agreement or which would, or could reasonably be expected
to, materially dilute the benefits to the Purchaser of the transactions
contemplated hereby (each of the foregoing items set forth in (A) through (D),
an "Alternative Transaction"). From the date hereof through the Closing Date,
the Company shall not, shall cause each Affiliate not to and shall not authorize
or permit any of its or any such Person's officers, directors or employees or
any investment banker, financial advisor, attorney, accountant or other
representative representing any such Person to, directly or indirectly, (i)
solicit, initiate or encourage (including by way of furnishing information), or
take any other action to facilitate, any inquiries or the making of any proposal
that may lead to an Alternative Transaction or (ii) participate in any
discussions or negotiations with any third party regarding any proposed
Alternative Transaction.
(b) From the date hereof through the Closing Date,
neither the Board of Directors of the Company nor any committee thereof shall
(i) withdraw or modify the approval or recommendation by such Board of Directors
or such committee of this Agreement, the Transaction Documents or any of the
transactions contemplated hereby or thereby, (ii) approve or recommend any
Alternative Transaction or (iii) cause or permit the Company or any Affiliate to
enter to any letter of intent, agreement in principle or other agreement with
respect to an Alternative Transaction.
(c) In addition to the obligations of the Company set
forth in paragraphs (a) and (b) of this Section 8.1, the Company shall promptly
advise the Purchaser orally and in writing of any request for information or of
any proposal or any inquiry regarding any Alternative Transaction, the material
terms and conditions of such request, proposal or inquiry and the identity of
the Person making such request, proposal or inquiry. The Company will keep the
Purchaser fully informed of the status and details (including amendments or
proposed amendments) of any such request, proposal or inquiry.
9. Restrictive Legend. The Purchaser acknowledges that each certificate
evidencing the Securities shall be stamped or otherwise imprinted with a legend
in substantially the following form, unless prior to conversion of any Series B
Preferred Shares, the Common Stock issuable upon conversion or exercise thereof
shall have been registered under the Securities Act:
"The shares represented by this Certificate have not been
registered under the Securities Act of 1933 and may not be transferred
in the absence of such registration or an exemption therefrom under
such Act. The shares represented by this Certificate are subject to
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restrictions on transfer set forth in that certain Registration Rights
Agreement dated as of July , 2001."
10. Registration, Transfer and Substitution of Certificates for Shares.
10.1 Stock Register; Ownership of Securities. The Company will
keep at its principal office a register in which the Company will provide for
the registration of transfers of the Securities. The Company may treat the
Person in whose name any of the Securities are registered on such register as
the owner thereof and the Company shall not be affected by any notice to the
contrary. All references in this Agreement to a "holder" of any Securities shall
mean the Person in whose name such Securities are at the time registered on such
register.
10.2 Replacement of Certificates. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any certificate representing Securities, and, in the case of any
such loss, theft or destruction, upon delivery of indemnity reasonably
satisfactory to the Company in form and amount or, in the case of any such
mutilation, upon surrender of such certificate for cancellation at the office of
the Company maintained pursuant to Section 10.1 hereof, the Company at its
expense will execute and deliver, in lieu thereof, a new certificate
representing Securities of like tenor.
11. Definitions. Unless the context otherwise requires, the terms defined in
this Section 11 shall have the meanings specified for all purposes of this
Agreement.
Except as otherwise expressly provided, all accounting terms
used in this Agreement, whether or not defined in this Section 11, shall be
construed in accordance with United States generally accepted accounting
principles. If and so long as the Company has one or more Subsidiaries, such
accounting terms shall be determined on a consolidated basis for the Company and
each of its Subsidiaries, and the financial statements and other financial
information to be furnished by the Company pursuant to this Agreement shall be
consolidated and presented with consolidating financial statements of the
Company and each of its Subsidiaries.
"Affiliate" and "Associate" have the respective meanings
assigned to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act.
"Agreement" means this Agreement.
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"Approved Option Plan" means a stock option plan providing for
the grant of options to employees and directors of the Company to purchase not
more than 9,000,000 shares of Common Stock at an exercise price not less than
the greater of (i) Fair Market Value or (ii) the then applicable conversion
price of the Series B Preferred Shares at the date of the grant (such share
number and exercise price to be appropriately adjusted in the event of any
subdivision, combination or similar action with respect to the Common Stock),
which options shall vest in five or more equal annual installments.
"Alternative Transaction" has the meaning assigned to it in
Section 8.1 hereof.
"Certificate of Designation" has the meaning assigned to it in
Section 1 hereof.
"Closing" has the meaning assigned to it in Section 3 hereof.
"Closing Date" has the meaning assigned to it in Section 3
hereof.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" has the meaning assigned to it in Section 1
hereof.
"Company Intellectual Property" shall have the meaning
assigned to it in Section 5.12 hereof.
"Conversion Shares" means the shares of Common Stock issuable
upon conversion of the Series B Preferred Shares.
"Employee Benefit Plans" has the meaning assigned to it in
Section 5.24 hereof.
"Encumbrances" has the meaning assigned to it in Section 5.2
hereof.
"Environmental Law" has the meaning assigned to it in Section
5.27 hereof.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
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"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Existing Stock Option Plans" means the eUniverse, Inc. 1999
Stock Awards Plan.
"Existing Warrants" has the meaning assigned to it in the
second Whereas clause.
"Fair Market Value" has the meaning assigned to it in the
Certificate of Designation.
"GAAP" means U.S. generally accepted accounting principles
consistently applied.
"Governmental Entity" means any national, federal, state,
municipal, local, territorial, foreign or other government or any department,
commission, board, bureau, agency, regulatory authority or instrumentality
thereof, or any court, judicial, administrative or arbitral body or public or
private tribunal.
"Hazardous Material" has the meaning assigned to it in Section
5.27 hereof.
"Intellectual Property "has the meaning assigned to it in
Section 5.12 hereof.
"Liquidation" means any voluntary or involuntary liquidation,
dissolution, or winding up of the affairs of the Company.
"Material Adverse Effect" has the meaning assigned to it in
Section 5.3 hereof.
"Material Contract" means any contract, the absence of which
would have an Material Adverse Effect on the Company or any Subsidiary.
"Permitted Acquisition" means any acquisition by the Company
or any Subsidiary of (i) any business or assets with a purchase price of
$350,000 or less (including all assumed debt, all cash payments, and the fair
market value of all securities or other property issued as consideration) or
(ii) any business or assets for which the consent or approval of the Purchaser
has been given.
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"Person" means and includes all natural persons, corporations,
business trusts, associations, companies, partnerships, joint ventures, limited
liability companies and other entities and governments and agencies and
political subdivisions.
"Purchase Price" has the meaning assigned it in Section 2
hereof.
"Purchaser" has the meaning assigned it in the introductory
paragraph of this Agreement.
"Real Property" shall have the meaning assigned to it in
Section 5.7 hereof.
"Registration Rights Agreement" means the Registration Rights
Agreement substantially in the form attached hereto as Exhibit D.
"SEC" means the Securities and Exchange Commission.
"SEC Documents" has the meaning assigned to it in Section 5.8
hereof.
"Securities" has the meaning assigned to it in Section 1
hereof.
"Securities Act" or "Act" means the Securities Act of 1933, as
amended.
"Series B Preferred Shares" has the meaning assigned to it in
Section 1 hereof.
"Subsidiary" means any corporation, association trust, limited
liability company, partnership, joint venture or other business association or
entity (i) at least 50% of the outstanding voting securities of which are at the
time owned or controlled directly or indirectly by the Company or (ii) with
respect to which the Company possesses, directly or indirectly, the power to
direct or cause the direction of the affairs or management of such Person.
"Transaction Documents" has the meaning assigned to it in
Section 5.3 hereof.
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12. Enforcement.
12.1 Remedies at Law or in Equity. If any representation or
warranty made by or on behalf of any party hereto, in this Agreement or in any
certificate, report or other instrument delivered under or pursuant to any term
hereof shall be untrue or misleading as of the date of this Agreement or as of
the Closing Date or as of the date it was made, furnished or delivered, or any
covenant made by a party hereto shall be breached by such party, the other party
or parties may proceed to protect and enforce its rights by suit in equity or
action at law, whether for the specific performance of any term contained in
this Agreement, the Certificate of Designation or any other Transaction Document
or for an injunction against the breach of any such term or in aid of the
exercise of any power granted in this Agreement, any other Transaction Document
or the Certificate of Designation, or to enforce any other legal or equitable
right of such party, or to take any one or more of such actions.
In the event the Purchaser brings such an action against the
Company, or the Company brings an action against the Purchaser arising under
this Agreement, the prevailing party in such dispute shall be entitled to
recover from the losing party all fees, costs and expenses of enforcing any
right of such prevailing party under or with respect to this Agreement or any
other Transaction Document including without limitation such reasonable fees and
expenses of attorneys and accountants, which shall include, without limitation,
all fees, costs and expenses of appeals.
12.2 Cumulative Remedies. None of the rights, powers or
remedies conferred upon the Purchaser on the one hand, or the Company, on the
other hand, shall be mutually exclusive, and each such right, power or remedy
shall be cumulative and in addition to every other right, power or remedy,
whether conferred hereby or by the Transaction Documents or now or hereafter
available at law, in equity, by statute or otherwise.
13. Miscellaneous.
13.1 Waivers and Amendments. Upon the approval of the Company
and the written consent of the Purchaser (a) the obligations of the Company and
the rights of the Purchaser under this Agreement may be waived (either generally
or in a particular instance, either retroactively or prospectively and either
for a specified period of time or indefinitely), and (b) the Company may enter
into a supplementary agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement,
or of any supplemental agree-
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ment or modifying in any manner the rights and obligations hereunder or
thereunder of the Purchaser and the Company.
The foregoing notwithstanding, no such waiver or supplemental
agreement shall affect any of the rights of any holder of a Security created by
the Certificate of Designation or by the Nevada Revised Statutes without
compliance with all applicable provisions of the Certificate of Designation and
the Nevada Revised Statutes
Neither this Agreement, nor any provision hereof, may be
changed, waived, discharged or terminated orally or by course of dealing, but
only by a statement in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought, except to the extent
provided in this Section 13.1.
13.2 Notices. All notices, requests, consents and other
communications required or permitted hereunder shall be in writing and shall be
hand delivered or mailed postage prepaid by registered or certified mail or
transmitted by facsimile transmission (with immediate telephonic confirmation
thereafter),
(a) If to the Purchaser:
550 Digital Media Ventures Inc.
c/o Sony Music Entertainment, Inc.
550 Madison Avenue
New York, NY 10022
Attention: Senior Vice President and General
Counsel of 550 DMV; and Senior Vice
President and General Counsel - Sony Music
Facsimile No.: (212) 833-7844
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, NY 10036-6522
Attention: David J. Goldschmidt, Esq.
Facsimile No.: (212) 735-2000
or (b) If to the Company:
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eUniverse, Inc.
6300 Wilshire Blvd., Suite 1700
Los Angeles, CA 90048
Attention: Brad Greenspan
Facsimile No.: (323) 658-9098
with a copy to:
Martin, Lucas & Chioffi, LLP
1177 Summer Street
Stamford, CT 06905
Attention: Christopher Martin, Esq.
Facsimile No.: (203) 324-8646
or at such other address as the Company or the Purchaser may specify by written
notice to the others, and each such notice, request, consent and other
communication shall for all purposes of the Agreement be treated as being
effective or having been given when delivered if delivered personally, upon
receipt of facsimile confirmation if transmitted by facsimile, or, if sent by
mail, at the earlier of its receipt or 72 hours after the same has been
deposited in a regularly maintained receptacle for the deposit of United States
mail, addressed and postage prepaid as aforesaid.
13.3 Termination of Agreement. This Agreement may be
terminated prior to the Closing as follows:
(a) by mutual consent of the Purchaser and the
Company;
(b) at the election of either party, if the Closing
has not been consummated as of November 1, 2001; provided that the right to
terminate this Agreement under this Section 13.3(b) shall not be available to
either party whose material misrepresentations, material breach of warranty or
failure to fulfill any material obligation under this Agreement has been the
cause of, or resulted in, the failure of the Closing to occur on or before such
date;
(c) at the election of the Purchaser, if the Company
has materially breached any representation, warranty, covenant or agreement
contained in this Agreement;
(d) at the election of the Purchaser or the Company
within three (3) days of last day of 15 trading day(s) immediately following the
date of this Agreement in the event that the Adjusted Share Price is less than
or equal to $2.00
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(as adjusted for a stock split, reverse split, stock dividend, merger,
consolidation, exchange of shares, recapitalization, reorganization or other
similar event );
(e) By either the Company or the Purchaser if either
of them has terminated the Share Purchase Agreement in accordance with the terms
thereof.
13.4 Indemnification The Company shall indemnify, save and
hold harmless the Purchaser, its directors, officers, employees, partners,
representatives and agents from and against (and shall promptly reimburse such
indemnified Persons for) any and all liabilities, losses, costs, damages,
reasonable attorneys' and accountants' fees and expenses, court costs and all
other out-of-pocket expenses incurred in connection with or arising from any
claim, suit, action or similar claim by any Person (other than the Purchaser)
related to (i) the status or conduct of the Company, (ii) the execution,
delivery and performance of this Agreement or the Transaction Documents or the
transactions contemplated hereby or thereby, (iii) any breach of any
representation of the Company, or (iv) the Purchaser's role with the Company or
such transactions. This indemnification provision shall be in addition to the
rights of the Purchaser to bring an action against the Company for breach of any
term of this Agreement and the Transaction Documents.
In the event that the Purchaser elects to terminate this
Agreement pursuant to clause (b) or (c) of Section 13.3, it shall give written
notice of such termination to the Company in accordance with the provisions of
Section 13.2.
If this Agreement is terminated pursuant to Section 13.3, this
Agreement shall become void and of no effect with no liability on the part of
any party hereto, except that the agreements contained in this Section 13.4, and
in Section 13.10, shall survive the termination hereof.
13.5 Survival of Representations and Warranties, etc. All
representations and warranties made in, pursuant to or in connection with this
Agreement shall survive the Closing Date, notwithstanding any investigation at
any time made by or on behalf of the Purchaser, and the sale and purchase of the
Securities and payment therefor; and all statements contained in any certificate
or schedule delivered or to be delivered to the Purchaser by or on behalf of the
Company at the Closing pursuant to this Agreement or in connection with or
contemplation of the transactions herein contemplated shall constitute
representations and warranties by the Company hereunder.
13.6 No Implied Waivers. No failure or delay by any party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof
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nor shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies herein provided shall be cumulative and not exclusive of any
rights or remedies provided by law.
13.7 Successors and Assigns. All the terms and provisions of
this Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective parties hereto, the successors and assigns of the
Purchaser and the successors of the Company, whether so expressed or not. None
of the parties hereto may assign any of its rights or obligations hereunder
without the prior written consent of the other parties hereto.
13.8 Headings. The headings of the Sections and paragraphs of
this Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
13.9 Governing Law. The internal laws, and not the laws of
conflicts (other than Section 5-1401 General Obligations Law of the State of New
York), of New York shall govern the enforceability and validity of this
Agreement, the construction of its terms and the interpretation of the rights
and duties of the parties.
13.10 Expenses. Each party shall be solely responsible for all
costs and fees (including attorneys' fees) that each party incurred in
connection with the consummation of the transactions contemplated hereunder.
13.11 Jurisdiction. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in connection
with, this Agreement or the transactions contemplated hereby may be brought in
any federal or state court located in the State of California, and each of the
parties hereby consents to the jurisdiction of such courts (and of the
appropriate appellate courts therefrom) in any such suit, action or proceeding
and irrevocably waives, to the fullest extent permitted by law, any objection
which it may now or hereafter have to the laying of the venue of any such suit,
action or proceeding in any such court or that any such suit, action or
proceeding which is brought in any such court has been brought in an
inconvenient forum. Process in any such suit, action or proceeding may be served
on any party anywhere in the world, whether within or without the jurisdiction
of any such court. Without limiting the foregoing, each party agrees that
service of process on such party as provided in Section 13.2 shall be deemed
effective service of process on such party.
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<PAGE>
13.12 Waiver of Jury Trial.
EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT
TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
13.13 Counterparts; Effectiveness. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, with the same effect as if all parties had signed the
same document. All such counterparts shall be deemed an original, shall be
construed together and shall constitute one and the same instrument. This
Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by all of the other parties hereto.
13.14 Entire Agreement. This Agreement and the other
Transaction Documents contain the entire agreement among the parties hereto with
respect to the subject matter hereof and such Agreement supersedes and replaces
all other prior agreements, written or oral, among the parties hereto with
respect to the subject matter hereof.
13.15 Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner materially adverse to any party. Upon such
a determination, the parties shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner in order that the transactions contemplated
hereby be consummated as originally contemplated to the fullest extent possible.
13.16 Best Efforts. The Company and the Purchaser shall each
cooperate with the other and use (and shall cause their respective Subsidiaries
to use) their respective commercially reasonable best efforts to promptly (i)
take or cause to be taken all necessary actions, and do or cause to be done all
things, necessary, proper or advisable under this Agreement and applicable laws
to consummate and make effective all the transactions contemplated by this
Agreement as soon as practicable, including, without limitation, preparing and
filing promptly and fully all documentation to effect all necessary filings,
notices, petitions, statements, registra-
45
<PAGE>
tions, submissions of information, applications and other documents and (ii)
obtain all approvals required to be obtained from any third party necessary,
proper or advisable to the transactions contemplated by this Agreement.
13.17 Interim Loan. The Purchaser hereby covenants and agrees
upon: (i) satisfaction of the conditions contained in Section 6.1(a)(ii), (b),
(e) (with respect to (a)(ii) and (b) only), (h)(ii), (iii), and (iv), (k), and
(m); and (ii) the delivery of a duly executed promissory note substantially in
the form attached as Exhibit E hereto (the "Promissory Note") to lend to the
Company Two Million Five Hundred Thousand Dollars ($2,500,000) pursuant to the
terms of the Promissory Note.
13.18 Publicity. The Company hereby covenants and agrees (i)
to issue the Press Release (as defined in the Share Purchase Agreement) by open
of business on the date hereof, (ii) notwithstanding anything contained herein,
to describe the transactions contemplated hereby and by the Transaction
Documents in the Company's annual report for its fiscal year ended March 21,
2001 solely as set forth that certain disclosure contained in Schedule A hereto
(the "10-K Disclosure"); or (iii) not to otherwise disclose the transactions
contemplated hereby or by the Transaction Documents in any manner inconsistent
with the 10-K Disclosure or Press Release unless required by law.
[Execution Page Follows]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Stock
Purchase Agreement to be duly executed as of the day and year first above
written.
eUniverse, Inc
By: /s/ Brad D. Greenspan
--------------------------------------
Name: Brad D. Greenspan
Title: Chairman
550 Digital Media Ventures, Inc.
By: /s/ Mark R. Eisenberg
--------------------------------------
Name: Mark R. Eisenberg
Title: Senior Vice President & General
Counsel
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<PAGE>
Exhibit A
CERTIFICATE OF DESIGNATION
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
eUNIVERSE, INC.
(Pursuant to Sections 78.035, 78.195, 78.196
of the Nevada Revised Statutes)
eUniverse, Inc., a Nevada corporation (the "Company"), hereby certifies
that the following resolution was adopted by the Board of Directors of the
Company:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Company (the "Board of Directors") by
the provisions of the Articles of Incorporation of the Company (the "Articles of
Incorporation"), there is hereby created, out of the 40,000,000 shares of
preferred stock, par value $.10 per share, of the Company authorized in Article
Fourth of the Articles of Incorporation (the "Preferred Stock"), a series of the
Preferred Stock consisting of 4,098,335 shares, which series shall have the
following powers, designations, preferences and relative, participating,
optional or other rights, and the following qualifications, limitations and
restrictions (in addition to any powers, designations, preferences and relative,
participating, optional or other rights, and any qualifications, limitations and
restrictions, set forth in the Articles of Incorporation which are applicable to
the Preferred Stock):
Section 1. Designation of Amount.
The shares of Preferred Stock created hereby shall be designated the
"Series B Convertible Preferred Stock" (the "Series B Preferred Stock") and the
authorized number of shares constituting such series shall be 4,098,335. The
Series B Preferred Stock shall rank senior to the Series A 6% Convertible
Preferred Stock as to dividends, distributions or as to distributions of assets
upon liquidation, dissolution, or winding up of the Company, whether voluntary
or involuntary.
Section 2. Dividends.
(a) The holders of the then outstanding shares of Series B Preferred
Stock will be entitled to receive, when, as and if declared by the Board of
Directors out of funds of the Company legally available therefor, non-cumulative
cash dividends,
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<PAGE>
accruing on a daily basis from the Original Issuance Date (as hereinafter
defined) through and including the date on which such dividends are paid at the
annual rate of 8% (the "Applicable Rate") of the Liquidation Preference (as
hereinafter defined) per share of the Series B Preferred Stock. The term
"Original Issuance Date" means July__, 2001. The cash dividends provided for in
this Section 2(a) are hereinafter referred to as "Base Dividends."
(b) In addition to Base Dividends, in the event any dividends are
declared or paid or any other distribution is made on or with respect to the
common stock, par value $.001 per share ("Common Stock"), the holders of the
Series B Preferred Stock as of the record date established by the Board of
Directors for such dividend or distribution on the Common Stock shall be
entitled to receive as additional dividends (the "Additional Dividends") an
amount (whether in the form of cash, securities or other property) equal to the
amount (and in the form) of the dividends or distribution that such holder would
have received had the Series B Preferred Stock been converted into Common Stock
as of the date immediately prior to the record date of such dividend or
distribution on the Common Stock, such Additional Dividends to be payable on the
same payment date as the payment date for the dividend on the Common Stock
established by the Board of Directors (the "Additional Dividend Payment Date");
provided, however, that if the Company declares and pays a dividend or makes a
distribution on the Common Stock consisting in whole or in part of Common Stock,
then no such dividend or distribution shall be payable in respect of the Series
B Preferred Stock on account of the portion of such dividend or distribution on
the Common Stock payable in Common Stock and in lieu thereof the anti-dilution
adjustment in Section 5(e) below shall apply. The record date for any such
Additional Dividends shall be the record date for the applicable dividend or
distribution on the Common Stock, and any such Additional Dividends shall be
payable to the individual, entity or group (a "Person") in whose name the Series
B Preferred Stock is registered at the close of business on the applicable
record date.
(c) No dividend shall be paid or declared on any share of Common Stock
(other than dividends payable in Common Stock for which an adjustment is made
pursuant to Section 5(e)(iv) hereof), unless a dividend, payable in the same
consideration and manner, is simultaneously paid or declared, as the case may
be, on each share of Series B Preferred Stock in an amount determined as set
forth in paragraph (b) above. For purposes hereof, the term "dividends" shall
include any pro rata distribution by the Company, out of funds of the Company
legally available therefor, of cash, property, securities (including, but not
limited to, rights, warrants or options) or other property or assets to the
holders of the Common Stock, whether or not paid out of capital, surplus or
earnings.
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(d) Prior to declaring any dividend or making any distribution on or
with respect to shares of Common Stock, the Company shall take all prior
corporate action necessary to authorize the issuance of any securities payable
as a dividend in respect of the Series B Preferred Stock.
Section 3. Liquidation Preference.
In the event of a liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary (a "Liquidation"), the holders of the
Series B Preferred Stock then outstanding shall be entitled to receive out of
the available assets of the Company, whether such assets are stated capital or
surplus of any nature, an amount on such date equal to $[insert original per
share purchase price] per share of Series B Preferred Stock plus the amount of
any accrued and unpaid Base Dividends as of such date, calculated pursuant to
Section 2 and any declared but unpaid Additional Dividends as of such date
(collectively, the "Liquidation Preference"). Such payment shall be made before
any payment shall be made or any assets distributed to the holders of any class
or series of the Common Stock, the holders of the Series A 6% Convertible
Preferred Stock or any other class or series of the Company's capital stock
ranking junior as to liquidation rights to the Series B Preferred Stock. After
the Liquidation Preference has been paid in full pursuant to this Section 3, the
holders of the Series A 6% Convertible Preferred Stock shall be entitled to
receive their liquidation preference as set forth in the First Amendment to the
Certificate of Designation of the Series A 6% Convertible Preferred Stock.
Following payment, first, to the holders of the Series B Preferred Stock of the
full preferential amounts described in the first sentence of this Section 3 and,
second, to the holders of the Series A 6% Convertible Preferred Stock of the
full preferential amounts described in the First Amendment to the Certificate of
Designation of the Series A 6% Convertible Preferred Stock, the remaining assets
(if any) of the Company available for distribution to stockholders of the
Company shall be distributed, subject to the rights of the holders of shares of
any other series of Preferred Stock ranking prior to the Common Stock as to
distributions upon Liquidation, pro rata among (i) the holders of the then
outstanding shares of Series B Preferred Stock (as if the Series B Preferred
Stock had been converted into Common Stock as of the date immediately prior to
the date fixed for determination of stockholders entitled to receive such
distribution) and (ii) the holders of the Common Stock and any other shares of
capital stock of the Company ranking on a parity with the Common Stock as to
distributions upon Liquidation. If upon any Liquidation the assets available for
payment of the Liquidation Preference are insufficient to permit the payment to
the holders of the Series B Preferred Stock of the full preferential amounts
described in this paragraph, then all the remaining available assets shall be
distributed among the holders of the then outstanding Series B Preferred Stock
pro
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<PAGE>
rata according to the number of then outstanding shares of Series B Preferred
Stock held by each holder thereof. A Corporate Transaction (as hereinafter
defined), shall at the election of the holders of a majority of the Series B
Preferred Stock outstanding at the time constitute a Liquidation for purposes of
this Section 3, other than an Excluded Corporate Transaction.
Section 4. Voting Rights.
(a) Except as otherwise provided by applicable law and in addition to
any voting rights provided by law, the holders of outstanding shares of the
Series B Preferred Stock:
(i) shall be entitled to vote together with the holders of the
Common Stock as a single class on all matters submitted for a vote
of holders of Common Stock;
(ii) shall have such other voting rights as are specified in the
Articles of Incorporation or as otherwise provided by Nevada law;
and
(iii) shall be entitled to receive notice of any stockholders'
meeting in accordance with the Articles of Incorporation and By-laws
of the Company.
For purposes of the voting rights set forth in this Section 4(a), each
share of Series B Preferred Stock shall entitle the holder thereof to cast one
vote for each whole vote that such holder would be entitled to cast had such
holder converted its Series B Preferred Stock into shares of Common Stock as of
the date immediately prior to the record date for determining the stockholders
of the Company eligible to vote on any such matter.
(b) The holders of Series B Preferred Stock shall have the exclusive
right, voting separately as a single class, to elect the following number of
members of the Board of Directors: one (1) member in the event the Board of
Directors consists of one (1) to five (5) members; two (2) members in the event
the Board of Directors consists of six (6) to eight (8) members; and three (3)
members in the event the Board of Directors consists of nine (9) to eleven (11)
members (each such member elected by the Series B Preferred Stockholders, a
"Preferred Stock Director"). Except as permitted by Section 4(c) below in no
event shall the total number of members of the Board of Directors exceed eleven
(11). In any such election the holders of Series B Preferred Stock shall be
entitled to cast one vote per share of Series B Preferred Stock held of record
on the record date for the determination of
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<PAGE>
the holders of Series B Preferred Stock entitled to vote on such election. The
initial Preferred Stock Directors shall be ________ and are elected to serve
until their successors are duly elected; and thereafter the Preferred Stock
Directors shall be elected at the same time as other members of the Board of
Directors. A Preferred Stock Director may only be removed by the written consent
or affirmative vote of at least a majority of the Series B Preferred Stock. If
for any reason a Preferred Stock Director shall resign or otherwise be removed
from the Board of Directors, then his or her replacement shall be a person
elected by the holders of the Series B Preferred Stock, in accordance with the
voting procedures set forth in this Section 4(b). The Preferred Stock Directors
shall be appointed by the Board of Directors to serve on each committee of the
Board of Directors at least in the same proportions that the number of Preferred
Stock Directors bears to the total number of directors then comprising the
entire Board of Directors.
(c) So long as any shares of Series B Preferred Stock remain
outstanding, the Company shall not, without the written consent or affirmative
vote of the holders of at least two-thirds of the outstanding shares of Series B
Preferred Stock, (i) amend, alter, waive or repeal, whether by merger,
consolidation, combination, reclassification or otherwise, the Articles of
Incorporation, including this Certificate of Designation, or By-laws of the
Company or any provisions thereof (including the adoption of a new provision
thereof), (ii) create, authorize or issue any class, series or shares of
Preferred Stock or any other class of capital stock ranking either as to payment
of dividends, distributions or as to distributions of assets upon Liquidation
(x) prior to the Series B Preferred Stock, or (y) on a parity with the Series B
Preferred Stock or (iii) increase the size of the Board or Directors beyond
eleven (11) members. The vote of the holders of at least two-thirds of the
outstanding shares of Series B Preferred Stock, voting separately as one class,
shall be necessary to adopt any alteration, amendment or repeal of any provision
of this Resolution, in addition to any other vote of stockholders required by
law.
(d) So long as 550 Digital Media Ventures Inc. or any of its affiliates
owns at least [75% of original purchase - to filled in at filing] shares of
Series B Preferred Stock or Common Stock (as appropriately adjusted for any
stock split, combination, reorganization, reclassification, stock dividend,
stock distribution or similar event), the Company shall not, without the written
consent or affirmative vote of at least two-thirds of the Board of Directors (i)
enter into an agreement to, or consummate, a Corporate Transaction, (ii) enter
into transactions which result in or require the Company to issue shares of its
capital stock in excess of 5% (in any one transaction) or 12.5% (in the
aggregate, in a series of transactions commencing on or after the Original
Issuance Date) of the Company's issued and outstanding shares of capital stock,
(iii) enter into transactions which result in or require the Company to
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<PAGE>
pay (whether in cash, stock or a combination thereof) in excess of 5% (in any
one transaction) or 12.5% (in the aggregate, in a series of transactions
commencing on or after the Original Issuance Date) of the Company's then-current
market capitalization, (iv) increase or decrease the number of authorized shares
of capital stock, (v) directly or indirectly declare or pay any dividend or make
any other distribution in respect thereof, or directly or indirectly purchase,
redeem, repurchase or otherwise acquire any shares of capital stock of the
Company or any subsidiary, whether in cash or property or in obligations of the
Company or any subsidiary, other than repurchases pursuant to an employee's
employment or incentive agreement and upon an employee's termination and at a
price not to exceed such employee's cost, (vi) increase or decrease the size of
the Company's Board of Directors; provided that in no event shall the total
number of members of the Board of Directors exceed (11).
Section 5. Conversion Rights.
(a) General. Subject to and upon compliance with the provisions of this
Section 5, the holders of the shares of Series B Preferred Stock shall be
entitled, at their option, at any time to convert all or any such shares of
Series B Preferred Stock into a number of fully paid and non-assessable shares
(calculated as to each conversion to the nearest 1/100,000th of a share) of
Common Stock. The number of shares of Common Stock to which a holder of Series B
Preferred Stock shall be entitled upon conversion shall be determined by
dividing (x) the Liquidation Preference of such Series B Preferred Stock as of
the Conversion Date (as hereinafter defined) by (y) the Conversion Price in
effect at the close of business on the Conversion Date (determined as provided
in this Section 5).
(b) Automatic Conversion. Each share of Series B Preferred Stock shall
automatically convert, immediately upon the earlier of (1) the written consent
of holders of more than 50% of issued and outstanding Series B Preferred Stock,
and (2) the Company Election (each, an "Automatic Conversion Date") into fully
paid and non-assessable shares of Common Stock. The number of shares of Common
Stock (calculated as to each conversion to the nearest 1/100,000th of a share)
to which a holder of Series B Preferred Stock shall be entitled upon such
automatic conversion shall be determined by dividing (x) the Liquidation
Preference of such Series B Preferred Stock as of the Automatic Conversion Date
by (y) the Conversion Price in effect at the close of business on the Business
Day immediately preceding such closing date. Such conversion shall occur
automatically and without any further action by the holders of such shares and
whether or not the certificates representing such
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<PAGE>
shares are surrendered to the Company or its transfer agent. Upon the occurrence
of such automatic conversion of the Series B Preferred Stock, the holders of
Series B Preferred Stock shall surrender the certificates representing such
shares at the office of the Company or any transfer agent for the Series B
Preferred Stock. Thereupon, there shall be issued and delivered to such holder
promptly at such office and in its name as shown on such surrendered certificate
or certificates, a certificate or certificates for the number of shares of
Common Stock into which the shares of Series B Preferred Stock surrendered were
convertible on the date on which such automatic conversion occurred.
(c) Conversion Price. The conversion price (the "Conversion Price")
shall initially be $[_____], subject to adjustment from time to time in
accordance with Section 5(e).
(d) Fractions of Shares. Unless the holder of shares of Series B
Preferred Stock being converted specifies otherwise, the Company shall issue
fractional shares of Common Stock (carried out to seven decimal places) upon
conversion of shares of Series B Preferred Stock. If more than one share of
Series B Preferred Stock shall be surrendered for conversion at one time by the
same holder, the number of full shares of Common Stock to be issued shall be
computed on the basis of the aggregate number of shares of Series B Preferred
Stock so surrendered. Instead of any fractional shares of Common Stock which
would otherwise be issuable upon conversion of any shares of Series B Preferred
Stock, the Company shall pay a cash adjustment in respect of such fractional
share in an amount equal to the product of such fraction multiplied by the Fair
Market Value (as hereinafter defined) of one share of Common Stock on the
Conversion Date.
(e) Adjustments to Conversion Price. The Conversion Price shall be
subject to adjustment from time to time as follows:
(i) Upon Issuance of Common Stock. If the Company shall, at any
time or from time to time after the Original Issuance Date, issue any
shares of Common Stock (other than an issuance of Common Stock as a
dividend or in a split of or subdivision in respect of which the
adjustment provided for in Section 5(e)(iv) applies), options to
purchase or rights to subscribe for Common Stock, securities by their
terms convertible into or exchangeable for Common Stock, or options
to purchase or rights to subscribe for such convertible or
exchangeable securities (other than Excluded Stock (as defined
below)) without consideration or for consideration per share less
than the Conversion Price in effect immediately prior to such
issuance, then such Conversion Price shall forthwith be lowered to a
price equal to the price obtained by multiplying:
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(A) the Conversion Price in effect immediately prior to the
issuance of such Common Stock, options, rights or
securities by
(B) a fraction of which (x) the denominator shall be the
number of shares of Common Stock outstanding on a
fully-diluted basis immediately after such issuance and
(y) the numerator shall be the sum of (i) the number of
shares of Common Stock outstanding on a fully-diluted
basis immediately prior to such issuance and (ii) the
number of additional shares of Common Stock which the
aggregate consideration for the number of shares of
Common Stock so offered would purchase at the
Conversion Price.
For purposes of this Section 5(e), "fully diluted basis" shall be
determined in accordance with the treasury stock method of computing fully
diluted earnings per share in accordance with GAAP.
(ii) Upon Acquisition of Common Stock. If the Company or any subsidiary
shall, at any time or from time to time after the Original Issuance Date,
directly or indirectly, redeem, purchase or otherwise acquire any shares of
Common Stock, options to purchase or rights to subscribe for Common Stock,
securities by their terms convertible into or exchangeable for Common Stock
(other than shares of Series B Preferred Stock that are redeemed according
to their terms), or options to purchase or rights to subscribe for such
convertible or exchangeable securities, for a consideration per share
greater than the Fair Market Value (plus, in the case of such options,
rights, or securities, the additional consideration required to be paid to
the Company upon exercise, conversion or exchange) per share of Common
Stock immediately prior to such event, then the Conversion Price shall
forthwith be lowered to a price equal to the price obtained by multiplying:
(A) the Conversion Price in effect immediately prior to
such event by
(B) a fraction of which (x) the denominator shall be
the Fair Market Value per share of Common
8
<PAGE>
Stock immediately prior to such event and (y) the numerator
shall be the result of dividing:
a) (1) the product of (A) the number of shares of Common
Stock outstanding on a fully-diluted basis and (B) the Fair
Market Value per share of Common Stock, in each case immediately
prior to such event, minus (2) the aggregate consideration paid
by the Company in such event (plus, in the case of such options,
rights, or convertible or exchangeable securities, the aggregate
additional consideration to be paid by the Company upon exercise,
conversion or exchange), by
b) the number of shares of Common Stock outstanding on a
fully-diluted basis immediately after such event.
(iii) For the purposes of any adjustment of a Conversion Price pursuant
to paragraphs (1) of this Section 5(e), the following provisions shall be
applicable:
(1) In the case of the issuance of Common Stock for cash in a
public offering or private placement, the consideration shall be
deemed to be the amount of cash paid therefor before deducting
therefrom any discounts, commissions or placement fees payable by the
Company to any underwriter or placement agent in connection with the
issuance and sale thereof.
(2) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the Fair Market Value thereof.
(3) In the case of the issuance of options to purchase or rights
to subscribe for Common Stock, securities by their terms convertible
into or exchangeable for Common Stock, or options to purchase or
rights to subscribe for such convertible or exchangeable securities
(except for options to acquire Excluded Stock):
(A) the aggregate maximum number of shares of Common Stock
deliverable upon exercise of
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<PAGE>
such options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at the
time such options or rights were issued and for a
consideration equal to the consideration (determined in
the manner provided in subparagraphs (i) and (ii)
above), if any, received by the Company upon the
issuance of such options or rights plus the minimum
purchase price provided in such options or rights for
the Common Stock covered thereby;
(B) the aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any
such convertible or exchangeable securities or upon the
exercise of options to purchase or rights to subscribe
for such convertible or exchangeable securities and
subsequent conversion or exchange thereof shall be
deemed to have been issued at the time such securities,
options, or rights were issued and for a consideration
equal to the consideration received by the Company for
any such securities and related options or rights
(excluding any cash received on account of accrued
interest or accrued dividends), plus the additional
consideration, if any, to be received by the Company
upon the conversion or exchange of such securities or
the exercise of any related options or rights (the
consideration in each case to be determined in the
manner provided in paragraphs (i) and (ii) above);
(C) on any change in the number of shares or exercise price
of Common Stock deliverable upon exercise of any such
options or rights or conversions of or exchanges for
such securities, other than a change resulting from the
anti-dilution provisions thereof, the applicable
Conversion Price shall forthwith be readjusted to such
Conversion Price as would have been
10
<PAGE>
obtained had the adjustment made upon the issuance of
such options, rights or securities not converted prior
to such change or options or rights related to such
securities not converted prior to such change been made
upon the basis of such change; and
(D) no further adjustment of the Conversion Price adjusted
upon the issuance of any such options, rights,
convertible securities or exchangeable securities shall
be made as a result of the actual issuance of Common
Stock on the exercise of any such rights or options or
any conversion or exchange of any such securities.
(iv) Upon Stock Dividends, Subdivisions or Splits. If, at any time
after the Original Issuance Date, the number of shares of Common Stock
outstanding is increased by a stock dividend payable in shares of Common
Stock or by a subdivision or split-up of shares of Common Stock, then,
following the record date for the determination of holders of Common Stock
entitled to receive such stock dividend, or to be affected by such
subdivision or split-up, the Conversion Price shall be appropriately
decreased so that the number of shares of Common Stock issuable on
conversion of Series B Preferred Stock shall be increased in proportion to
such increase in outstanding shares.
(v) Upon Combinations. If, at any time after the Original Issuance
Date, the number of shares of Common Stock outstanding is decreased by a
combination of the outstanding shares of Common Stock into a smaller
number of shares of Common Stock, then, following the record date to
determine shares affected by such combination, the Conversion Price shall
be appropriately increased so that the number of shares of Common Stock
issuable on conversion of each share of Series B Preferred Stock shall be
decreased in proportion to such decrease in outstanding shares.
(vi) Upon Reclassifications, Reorganizations, Consolidations or
Mergers. In the event of any capital reorganization of the Company, any
reclassification of the stock of the Company (other than a change in par
value or from par value to no par value or from no par value to par value
or as a result of a stock dividend or subdivision, split-up or combination
11
<PAGE>
of shares), or any consolidation or merger of the Company with or into
another corporation (where the Company is not the surviving corporation or
where there is a change in or distribution with respect to the Common
Stock), each share of Series B Preferred Stock shall after such
reorganization, reclassification, consolidation, or merger be convertible
into the kind and number of shares of stock or other securities or
property of the Company or of the successor corporation resulting from
such consolidation or surviving such merger, if any, to which the holder
of the number of shares of Common Stock deliverable (immediately prior to
the time of such reorganization, reclassification, consolidation or
merger) upon conversion of such Series B Preferred Stock would have been
entitled upon such reorganization, reclassification, consolidation or
merger. The provisions of this clause shall similarly apply to successive
reorganizations, reclassifications, consolidations, or mergers. The
Company shall not effect any such reorganization, reclassification,
consolidation or merger unless, prior to the consummation thereof, the
successor corporation (if other than the Company) resulting from such
reorganization, reclassification, consolidation, shall assume, by written
instrument, the obligation to deliver to the holders of the Series B
Preferred Stock such shares of stock, securities or assets, which, in
accordance with the foregoing provisions, such holders shall be entitled
to receive upon such conversion.
(vii) Deferral in Certain Circumstances. In any case in which the
provisions of this Section 5(e) shall require that an adjustment shall
become effective immediately after a record date of an event, the Company
may defer until the occurrence of such event:
(1) issuing to the holder of any Series B Preferred Stock
converted after such record date and before the occurrence of such
event the shares of capital stock issuable upon such conversion by
reason of the adjustment required by such event and issuing to such
holder only the shares of capital stock issuable upon such conversion
before giving effect to such adjustments, and
(2) paying to such holder any amount in cash in lieu of
fractional share of capital stock pursuant to Section 5(d) above;
provided, however, that the Company shall deliver to such holder an
appropriate instrument or due bills evidencing such holder's right to
receive such additional shares and such cash.
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<PAGE>
(viii) Other Anti-Dilution Provisions. If the Company has issued or
issues any securities on or after the Original Issuance Date containing
provisions protecting the holder or holders thereof against dilution in
any manner more favorable to such holder or holders thereof than those set
forth in this Section 5, such provisions (or any more favorable portion
thereof) shall be deemed to be incorporated herein as if fully set forth
herein and, to the extent inconsistent with any provision herein, shall be
deemed to be substituted therefor.
(ix) Appraisal Procedure. In any case in which the provisions of this
Section 5(e) shall necessitate that the Appraisal Procedure be utilized
for purposes of determining an adjustment to the Conversion Price, the
Company may defer until the completion of the Appraisal Procedure and the
determination of the adjustment:
(1) issuing to the holder of any share of Series B Preferred
Stock converted after the date of the event that requires the
adjustment and before completion of the Appraisal Procedure and the
determination of the adjustment, the shares of capital stock issuable
upon such conversion by reason of the adjustment required by such event
and issuing to such holder only the shares of capital stock issuable
upon such conversion before giving effect to such adjustment and
(2) paying to such holder any amount in cash in lieu of a
fractional share of capital stock pursuant to Section 5(d) above
; provided, however, that the Company shall deliver to such holder an
appropriate instrument or due bills evidencing such holder's right to
receive such additional shares and such cash.
(x) Exceptions. Section 5(e) shall not apply to (i) any issuance of
Common Stock upon any grant or exercise of any warrants or options awarded
to employees or directors of the Company pursuant to an employee stock
option plan or stock incentive plan approved by the Board of Directors,
(ii) any issuance of Common Stock upon conversion of the Preferred Stock,
(iii) upon approval by the Preferred Stockholder, (x) any issuance of
Common Stock or any grant of any warrants or options to purchase Common
Stock as payment for services or
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<PAGE>
compensation or (y) in connection with an asset or stock acquisition
(collectively, the "Excluded Stock").
(f) Exercise of Conversion Privilege.
(i) Except in the case of an automatic conversion pursuant to
Section 5(b), in order to convert shares of Series B Preferred Stock, a
holder must (A) surrender the certificate or certificates evidencing
such holder's shares of Series B Preferred Stock to be converted, duly
endorsed in a form satisfactory to the Company, at the office of the
Company and (B) notify the Company at such office that such holder
elects to convert Series B Preferred Stock and the number of shares
such holder wishes to convert. Such notice referred to in clause (B)
above shall be delivered substantially in the following form:
"NOTICE TO EXERCISE CONVERSION RIGHT
The undersigned, being a holder of the Series B Convertible Preferred
Stock of eUniverse, Inc. (the "Convertible Preferred Stock") irrevocably
exercises the right to convert ____________ outstanding shares of Convertible
Preferred Stock on ___________, ____, into shares of Common Stock of eUniverse,
Inc. In accordance with the terms of the shares of Convertible Preferred Stock,
and directs that the shares issuable and deliverable upon the conversion be
issued and delivered in the denominations indicated below to the registered
holder hereof unless a different name has been indicated below. Dated: [At least
one Business Day prior to the date fixed for conversion]
Fill in for registration of
shares of Common Stock
if to be issued otherwise
than to the registered
holder:
Name
Address
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<PAGE>
Please print name and (Signature)
address, including postal
code number
Denominations:_________"
(ii) Series B Preferred Stock shall be deemed to have been
converted immediately prior to the close of business on the day (the
"Conversion Date") of surrender of such shares of Series B Preferred
Stock for conversion in accordance with the foregoing provisions (or,
in the case of an automatic conversion pursuant to Section 5(b), the
Automatic Conversion Date, and at such time the rights of the holders
of such shares of Series B Preferred Stock as holder shall cease, and
the Person or Persons entitled to receive the Common Stock issuable
upon conversion shall be treated for all purposes as the record holder
or holders of such Common Stock as and after such time. As promptly as
practicable on or after the Conversion Date, the Company shall issue
and shall deliver at any office or agency of the Company maintained for
the surrender of Series B Preferred Stock a certificate or certificates
for the number of full shares of Common Stock issuable upon conversion,
together with payment in lieu of any fraction of a share, as provided
in Section 5(d).
(iii) In the case of any certificate evidencing shares of Series
B Preferred Stock which is converted in part only, upon such conversion
the Company shall execute and deliver a new certificate representing an
aggregate number of shares of Series B Preferred Stock equal to the
unconverted portion of such certificate.
(g) Notice of Adjustment of Conversion Price. Whenever the Conversion
Price is adjusted as herein provided: (i) the Company shall compute the adjusted
Conversion Price in accordance with Section 5(e) and shall prepare a certificate
signed by the Treasurer or Chief Financial Officer of the Company setting forth
the adjusted Conversion Price and showing in reasonable detail the facts upon
which such adjustment is based, and such certificate shall forthwith be filed at
each office or agency maintained for such purpose or conversion of shares of
Series B Preferred Stock; and (ii) a notice stating that the Conversion Price
has been adjusted and setting forth the adjusted Conversion Price shall
forthwith be prepared by the Company, and as soon as practicable after it is
prepared, such notice shall be mailed
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<PAGE>
by the Company at its expense to all holders at their last addresses as they
shall appear in the stock register.
(h) Notice of Certain Corporate Action. In case: (i) the Company shall
take an action or an event shall occur, that would require a Conversion Price
adjustment pursuant to Section 5(e); or (ii) the Company shall grant to the
holders of its Common Stock rights or warrants to subscribe for or purchase any
shares of capital stock of any class; or (iii) of any reclassification of the
Common Stock (other than a subdivision or combination of the outstanding shares
of Common Stock), or of any consolidation, merger or share exchange to which the
Company is a party and for which approval of any stockholders of the Company is
required, or of the sale or transfer of all or substantially all of the assets
of the Company; or (iv) of the voluntary or involuntary dissolution, liquidation
or winding up of the Company; or (v) the Company or any subsidiary shall
commence a tender offer for all or a portion of the outstanding shares of Common
Stock (or shall amend any such tender offer to change the maximum number of
shares being sought or the amount or type of consideration being offered
therefor); then the Company shall cause to be filed at each office or agency
maintained for such purpose, and shall cause to be mailed to all holders at
their last addresses as they shall appear in the stock register, at least 30
days prior to the applicable record, effective or expiration date hereinafter
specified, a notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution or granting of rights or warrants,
or, if a record is not to be taken, the date as of which the holders of Common
Stock of record who will be entitled to such dividend, distribution, rights or
warrants are to be determined, (y) the date on which such reclassification,
consolidation, merger, share exchange, sale, transfer, dissolution, liquidation
or winding up is expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, share exchange, sale,
transfer, dissolution, liquidation or winding up, or (z) the date on which such
tender offer commenced, the date on which such tender offer is scheduled to
expire unless extended, the consideration offered and the other material terms
thereof (or the material terms of the amendment thereto). Such notice shall also
set forth such facts with respect thereto as shall be reasonably necessary to
indicate the effect of such action on the Conversion Price and the number, kind
or class of shares or other securities or property which shall be deliverable or
purchasable upon the occurrence of such action or deliverable upon conversion of
the Series B Preferred Stock. Neither the failure to give any such notice nor
any defect therein shall affect the legality or validity of any action described
in clauses (i) through (v) of this Section 5(h).
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<PAGE>
(i) Company to Reserve Common Stock. The Company shall at all times
reserve and keep available, free from preemptive rights, out of the authorized
but unissued Common Stock or out of the Common Stock held in treasury, for the
purpose of effecting the conversion of Series B Preferred Stock, the full number
of shares of Common Stock then issuable upon the conversion of all outstanding
shares of Series B Preferred Stock.
Before taking any action that would cause an adjustment reducing the
Conversion Price below the then par value (if any) of the shares of Common Stock
deliverable upon conversion of the Series B Preferred Stock or that would cause
the number of shares of Common Stock deliverable upon conversion of the Series B
Preferred Stock to exceed (when taken together with all other outstanding shares
of Common Stock) the number of shares of Common Stock that the Company is
authorized to issue, the Company will take any corporate action that, in the
opinion of its counsel, is necessary in order that the Company may validly and
legally issue the full number of fully paid and non-assessable shares of Common
Stock issuable upon conversion at such adjusted conversion price.
(j) Taxes on Conversions. The Company will pay any and all original
issuance, transfer, stamp and other similar taxes that may be payable in respect
of the issue or delivery of shares of Common Stock on conversion of Series B
Preferred Stock pursuant hereto. The Company shall not, however, be required to
pay any tax which may be payable in respect of any transfer involved in the
issue and delivery of shares of Common Stock in a name other than that of the
holder of the share(s) of Series B Preferred Stock to be converted, and no such
issue or delivery shall be made unless and until the Person requesting such
issue has paid to the Company the amount of any such tax, or has established to
the reasonable satisfaction of the Company that such tax has been or will be
paid.
(k) Cancellation of Converted Series B Preferred Stock. All Series B
Preferred Stock delivered for conversion shall be delivered to the Company to be
canceled.
(l) Certain Definitions. The following terms shall have the following
respective meanings herein:
"Appraisal Procedure" if applicable, means the following
procedure to determine the fair market value, as to any security, for
purposes of the definition of "Fair Market Value" or the fair market
value, as to any other property (in either case, the "Valuation
Amount"). The Valuation Amount shall be determined in good faith
jointly by the Board of Directors and the
17
<PAGE>
holders of more than 50% of the issued and outstanding shares of Series
B Preferred Stock (the "Majority Holder"); provided, however, that if
such parties are not able to agree on the Valuation Amount within a
reasonable period of time (not to exceed twenty (20) days), the
Valuation Amount shall be determined by an investment banking firm of
national recognition, which firm shall be reasonably acceptable to the
Board of Directors and the Majority Holder. If the Board of Directors
and the Majority Holder are unable to agree upon an acceptable
investment banking firm within ten (10) days after the date either
party proposed that one be selected, the investment banking firm will
be selected by an arbitrator located in New York City, New York,
selected by the American Arbitration Association (or if such
organization ceases to exist, the arbitrator shall be chosen by a court
of competent jurisdiction). The arbitrator shall select the investment
banking firm (within ten (10) days of his appointment) from a list,
jointly prepared by the Board of Directors and the Majority Holder, of
not more than six investment banking firms of national standing in the
United States, of which no more than three may be named by the Board of
Directors and no more than three may be named by the Majority Holder.
The arbitrator may consider, within the ten-day period allotted,
arguments from the parties regarding which investment banking firm to
choose, but the selection by the arbitrator shall be made in its sole
discretion from the list of six. The Board of Directors and the
Majority Holder shall submit their respective valuations and other
relevant data to the investment banking firm, and the investment
banking firm shall, within thirty days of its appointment, make its own
determination of the Valuation Amount. The final Valuation Amount for
purposes hereof shall be the average of the two Valuation Amounts
closest together, as determined by the investment banking firm, from
among the Valuation Amounts submitted by the Company and the Majority
Holder and the Valuation Amount calculated by the investment banking
firm. The determination of the final Valuation Amount by such
investment-banking firm shall be final and binding upon the parties.
The Company shall pay the fees and expenses of the investment banking
firm and arbitrator (if any) used to determine the Valuation Amount. If
required by any such investment banking firm or arbitrator, the Company
shall execute a retainer and engagement letter containing reasonable
terms and conditions, including, without limitation, customary
provisions concerning the rights of indemnification and contribution by
the Company in favor of such investment banking firm or arbitrator and
its officers, directors, partners, employees, agents and affiliates.
18
<PAGE>
"Business Day" means a day other than a Saturday, Sunday or
day on which banking institutions in New York are authorized or
required to remain closed.
"Company Election" means the election by the Company to
exercise its right to convert the Series B Preferred Stock into Common
Stock within 60 days of the public filing by the Company on Form 10-K
or 10-Q, as applicable, evidencing the Company's achievement of four
(4) consecutive quarters (commencing after the Original Issuance Date)
of individual quarterly Operating Profits equal to or greater than
$750,000 in each of the four (4) consecutive quarters.
"Corporate Transaction" means a reorganization, merger, change
of control or consolidation of the Company or sale or other disposition
of all or substantially all of the assets of the Company.
"Excluded Corporate Transaction" means a Corporate Transaction
pursuant to which the individuals or entities who are the beneficial
owners, respectively, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities immediately prior to such
Corporate Transaction will beneficially own, directly or indirectly,
more than 50% of, respectively, the outstanding shares of common stock,
and the combined voting power of the outstanding securities entitled to
vote generally in the election of directors, as the case may be, of the
corporation resulting from, or the transferee Person, in such Corporate
Transaction (including, without limitation, a corporation which as a
result of such transaction owns 100% of the Outstanding Company Common
Stock or all or substantially all of the Company's assets either
directly or indirectly) in substantially the same proportions relative
to each other as their ownership, immediately prior to such Corporate
Transaction, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities, as the case may be.
"Fair Market Value" means, as to any security, the Twenty Day
Average of the average closing prices of such security's sales on all
domestic securities exchanges on which such security may at the time be
listed, or, if there have been no sales on any such exchange on any
day, the average of the highest bid and lowest asked prices on all such
exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices
quoted in the NASDAQ National Market System
19
<PAGE>
as of 4:00 P.M., New York City time, on such day, or, if on any day
such security is not quoted in the NASDAQ National Market System, the
average of the highest bid and lowest asked prices on such day in the
domestic over-the-counter market as reported by the National Quotation
Bureau, Incorporated, or any similar or successor organization (and in
each such case excluding any trades that are not bona fide, arm's
length transactions). If at any time such security is not listed on any
domestic securities exchange or quoted in the NASDAQ National Market
System or the domestic over-the-counter market, the "Fair Market Value"
of such security shall be the fair market value thereof as determined
in accordance with the Appraisal Procedure, using any appropriate
valuation method, assuming an arms-length sale to an independent party.
In determining the Fair Market Value of any class or series of Common
Stock, a sale of all of the issued and outstanding Common Stock will be
assumed, without giving regard to the lack of liquidity of such stock
due to any restrictions (contractual or otherwise) applicable thereto
or any discount for minority interests and assuming the conversion or
exchange of all securities then outstanding that are convertible into
or exchangeable for Common Stock and the exercise of all rights and
warrants then outstanding and exercisable to purchase shares of such
stock or securities convertible into or exchangeable for shares of such
stock; provided, however that such assumption will not include those
securities, rights and warrants convertible into Common Stock where the
conversion, exchange or exercise price per share is greater than the
Fair Market Value; provided, further, however, that Fair Market Value
shall be determined with regard to the relative priority of each class
or series of Common Stock (if more than one class or series exists).
"Fair Market Value" means with respect to property other than
securities, the "fair market value" determined in accordance with the
Appraisal Procedure.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards
Board, which are in effect from time to time.
"Operating Profits" means earnings before interest, taxes and
purchase price amortization, adjusted to exclude non-recurring items,
equity earnings/losses and minority interests.
"Outstanding Company Common Stock" means the then outstanding
shares of Common Stock.
20
<PAGE>
"Outstanding Company Voting Securities" means the combined
voting power of the then outstanding securities of the Company entitled
to vote generally in the election of directors.
"Twenty Day Average" means, with respect to any prices and in
connection with the calculation of Fair Market Value, the average of
such prices over the twenty Business Days ending on the Business Day
immediately prior to the day as of which "Fair Market Value" is being
determined.
"Voting Stock" shall mean shares of Common Stock, Preferred
Stock and any other class of securities of the Company having the power
to elect directors to the Board of Directors and any other general
voting power (and shall include any shares of Voting Stock issuable
upon exercise, exchange or conversion of securities exercisable or
exchangeable for or convertible into shares of Voting Stock). Each
share of Common Stock shall count as one share of Voting Stock, each
share of Preferred Stock shall count as a number of shares of Voting
Stock equal to the number of shares of Common Stock into which such
share of Preferred Stock is then convertible and each share of any
other class of securities of the Company constituting Voting Stock
shall count as a number of shares of Voting Stock equal to the number
of shares of Common Stock into which such share of Voting Stock is then
convertible, exchangeable or exercisable, as the case may be.
"Voting Stock Equivalents" means any right, warrant, option or
security of the Company which is exercisable or exchangeable for or
convertible into, or represents the right to otherwise acquire,
directly or indirectly, Voting Stock, whether at the time of issuance
or upon the passage of time or the occurrence of some future event.
Each Voting Stock Equivalent shall count as a number of shares of
Voting Stock equal to the number of shares of Common Stock into which
such Voting Stock Equivalent is then convertible, exchangeable or
exercisable.
Section 6. Dividend Received Deduction.
For federal income tax purposes, the Company shall report distributions
on the Series B Preferred Stock as dividends, to the extent of the Company's
current and accumulated earnings and profits (as determined for federal income
tax purposes).
Section 7. Preemptive Rights.
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<PAGE>
In case the Company proposes at any time to issue or sell any
Voting Stock, options, rights or warrants to purchase Voting Stock or Voting
Stock Equivalents or any other securities (whether debt or equity) of the
Company, other than Excluded Stock (collectively, the "Company Offered
Securities"), the Company shall, no later than twenty-five (25) days prior to
the consummation of such transaction (a "Preemptive Rights Transaction"), give
notice in writing (the "Preemptive Rights Offer Notice") to each holder of
Series B Preferred Stock of such Preemptive Rights Transaction. The Preemptive
Rights Offer Notice shall describe the proposed Preemptive Rights Transaction,
identify the proposed purchaser, and contain an offer (the "Preemptive Rights
Offer") to sell to each holder of Series B Preferred Stock, at the same price
and for the same consideration to be paid by the proposed purchaser (provided,
that, in the event any of such consideration is non-cash consideration, at the
election of such holder of Series B Preferred Stock to whom the Preemptive
Rights Offer is made, such holder of Series B Preferred Stock may pay cash equal
to the value of such non-cash consideration), all or any part of such holder of
Series B Preferred Stock's pro rata portion of the Company Offered Securities
(which shall be a fraction of the Company Offered Securities determined by
dividing the number of shares of outstanding Voting Stock owned by such holder
of Series B Preferred Stock by the sum of (i) the number of shares of
outstanding Voting Stock owned by such holder of Series B Preferred Stock and
(ii) the number of outstanding shares of Voting Stock not held by such holder of
Series B Preferred Stock). If any holder of Series B Preferred Stock to whom a
Preemptive Rights Offer is made fails to accept (a "Non-Responding Holder") in
writing the Preemptive Rights Offer by the tenth (10th) day after the Company's
delivery of the Preemptive Rights Offer Notice, such Non-Responding Holders
shall have no further rights with respect to the proposed Preemptive Rights
Transaction.
[Execution Page Follows]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of
Designations to be signed by ___________, its _____________, and attested by
________________, its Secretary, this, ____ day of July, 2001.
By:
-------------------------------------
Name:
Title:
Signed by:
By:
-----------------------------------
Name:
Title: Secretary
23
<PAGE>
STATE OF )
) ss:
COUNTY OF )
On July ____, 2001, before me, the undersigned officer,
personally appeared _____________, known to me (or satisfactorily proven) to be
the person(s) whose name(s) is/are subscribed to the within instrument, and
acknowledged that he/she/they executed the same for the purposes therein
contained.
24